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3 Case Studies In Cost-Benefit Analysis

1. Pricing ATM Machines:

A bank in a medium-sized Midwestern city, Firm X, currently charges $1 per transaction at its ATMs. To determine whether to raise price, the bank managers experimented with a number of higher prices (in 25 cent increments) at selected ATMs:

Fee # of Transactions
$2.00 1000
$1.75 1500
$1.50 2000
$1.25 2500
$1.00 3000

The marginal cost of an ATM transaction is $0.50. What ATM fees should the bank charge?

2. Learning Curves:

Suppose you have a production technology that can be characterized by a learning curve. Every time you increase production by one unit, your costs decrease by $6. The first unit costs you $64 to produce. If you receive a request for proposal (RFP) on a project for four units, what is your break-even price? Suppose that if you get the contract. You estimate that you can win another project for two more units. Now what is your break-even price for those two units?

3. Multi-concept Restaurants Are a Growing Trend:

A multiconcept restaurant incorporates two or more restaurants, typically chains, under one roof. Sharing facilities reduces costs of both real estate and labor. The multiconcept restaurants typically offer a limited menu, compared with full-sized, stand-alone restaurant. For example, KMAC operates a combination Kentucky Fried Chicken (KFC)/Taco Bell restaurant. The food preparation areas are separate, but orders are taken at shared point-of- sale (POS) stations. If Taco Bell and KFC share facilities, they reduce fixed cost by 30%; however, sales in joint facilities are 20% lower than sales in two separate fatalities. What do these numbers imply for the decision of when to open a shared facility versus two separate facilities?

Solution Preview

1. See the attached file "ATM Profits". The bank should calculate its Marginal Revenue (MR) by dividing the change in Total Revenue by the change in usage. Profit increases as long as MR>MC. ...

Solution Summary

This solution applies cost-benefit analysis to three situations: Pricing ATM machines, Learning curves, and multi-concept restaurants. Illustrative tables are provided.