Having run a successful travel agency in Denver, Colorado, Jan Hall has decided to
open a branch in Boone, Colorado. She must decide where to locate her office and
which and how many employees to hire.
Jan has narrowed her choice of office to two locations. The one on Main Street is a
large office with space for virtually any number of employees and customers. Jan
estimates that the agency can attract an average of 12 customers per day at this
location. Rent for this office is $1300 per month. Utilities, insurance and other
expenses should average an additional $500 per month.
The second choice for an office is on Frontier Street, approximately two blocks off
Main Street, This is a much smaller office that can effectively only hold one worker
and at most four customers (including the one being served). It rents for $400 per
month. Utilities, insurance, and other expenses should average an additional $200 per
month. The out-of-the-way location would reduce the number of potential customers
by 20% and any arriving customer finding the office full will presumably take his or
her business to the other travel agency in town.
Jan has decided that if she opens the Main Street office, she will hire one or more
local employees to staff the office. IF she opens the Frontier Street office, however,
she will hire either Wendy Brown, an experienced travel agent form the Denver area,
or a local employee to staff the office. Jan would have to pay Wendy a monthly
salary (including benefits) of $2100, whereas she could hire local employees for
$1200 per month (including benefits). Because of her experience, Wendy’s average
customer service time is approximately 20 minutes, compared to 48 minutes for local
employees.
Jan estimates that each customer served by the Boone Travel Agency will result in an
average commission of $35. She also estimates a good will cost to the firm of $15 per
hour for the time a customer spends waiting in the office for service to begin. In
addition, goodwill costs of $50 are associated with any customers who find the
Frontier Street location full and leave to go to another travel agency.
The travel agency will be open an average of 20 days per month, eight hours each
day. Customers arrive according to a Poisson process, and customer service times
follow an exponential distribution.
Determine the most cost effective option for Boone Travel Agency.