Hints for DWS Case

Hints for DWS Case

Contribution Margin

The contribution margin for an activity is equal to the added revenue minus the added variable cost, for one unit of the activity. For instance, to find the contribution margin for producing one more unit of a good, take the revenue generated by the purchase (usually the price) and subtract the variable cost of the unit. Essentially, the contribution margin is added net revenue. It shows the increase in profit (or decrease in loss) attributable to doing one more of something.

Although contribution margin is typically applied to production of a good or service, it can be applied to other activities as well. In this case, Janice Wilton makes use of the contribution margin per customer -- that is, the added net revenue from one more customer sale.

Accountants usually use the average variable cost to calculate the contribution margin, but it can also be calculated using the marginal cost. When you use average variable cost instead of marginal cost, you are effectively assuming that the contribution margin is constant. That assumption may or may not be justified. For this case, you may assume that it is justified. Marginal analysis is applied elsewhere in the case (to the question of how late to stay open).

Statistical Difference-of-Means Test

This is a test used by statisticians to decide if two populations are significantly different from each other. For instance, you might take a random sample of men’s heights and random sample of women’s heights, and then use a difference-of-means test to find out if men’s and women’s heights are really different from each other. In this case, you are trying to find out if the day customers’ and evening customers’ purchasing choices are really different from each other.

You don’t need to know much about statistics, because Excel can do a difference-of-means test for you. In Excel, go to Tools à Data Analysis. (If you don’t have Data Analysis in your list, go to Add-Ins, check Analysis Tool Pack, and click OK to put Data Analysis in your Tools list.) Choose “t-Test: Two-Sample Assuming Equal Variances.” For Variable 1, highlight the data from your day customers. For Variable 2, highlight the data from your evening customers. Fill in zero for the hypothesized difference, and click OK.

The result will be a table. The key line in the table is “P(T<=t) two-tail.” The value there is (essentially – this is a simplified explanation) the probability that the difference between your two populations resulted from an unusual sample, rather than from an actual difference in the populations. For example, if P(T<=t) two-tail = .03, there is a 97% chance that the populations really are different (i.e., that one group of customers tends to purchase more than the other), and a 3% chance that your sample was just strange. You will have to decide how to use that information.

Present Value Analysis

You may discount on a yearly basis (not monthly or daily or continuous). Use the formula for present value given in class. Remember that the security upgrade only lasts seven years. Be sure to clearly state your assumptions about when different costs and revenues are incurred (i.e., at the beginning or end of the year?), and then implement those assumptions when doing your calculations.