Question

1. K. Holman operates a newspaper kiosk in Grand Central Station in New York City, a major commuter rail terminus in downtown Manhattan. The kiosk is 300 cubic feet (length x width x height) and Holman uses every cubic inch of it to stock newspapers, magazines, and snack foods.

Holman estimates that the contribution margin ratios on newspapers, magazine, and snack food items are 10%, 25% and 20%, respectively. In addition, for equivalent sales in dollars, newspapers take up 5 times as much space as magazine and 10 times as much space for snacks. However, because newspapers are the primary draw for the kiosk’s customers, Holman believes that at least 50% of the space (i.e., 150 cubic feet) must be allocated to newspapers. Holman also thinks that the 10% of her available space is the maximum she’d want to devote to snacks—that is, she wouldn’t sell more than what she could cram into 10% of the space, but she is willing to sell less.

1a) What is the optimal allocation of space to newspapers, magazine, and snack food items?

1b) Assume that Holman allocates space according to your recommendation. For Holman to breakeven on the kiosk rental charge of $2,700 per month, how much revenue must the kiosk generate per cubic foot each month?

Answer 1

1a.) Optimum allocation of space to :
	Newspapers	50% of 300 cubic feet =	150 cubic feet
	Magazines	Balance space (300-150-15) =	30 cubic feet
	Snacks	10% of 150 cubic feet =	15 cubic feet

1.a.) Optimum allocation of space to :
	Newspapers	50% of 300 cubic feet =	150 cubic feet
	Magazines	Balance space (300-150-15) =	35 cubic feet
	Snacks	10% of 150 cubic feet =	15 cubic feet
1.b.) For Holman to breakeven on the kiosk rental charge of $2,700 per month,
how much revenue must the kiosk generate per cubic foot each month?
		Newspapers	Magazines	Snacks	Total
	Contribution Margin Ratios    (A)	10%	25%	20%	0.09
	Fixed Rental Cost                        (B)	1350	315	135	2700
	Rent Per Cubic Foot
	= 2700/300 = $ 9/cubic foot
	Weighted Contribution Margin	= ((10%*150)+(25%*35)+(20%*15))/300		0.09
	Break even sales Revenue=				30280
	fixed cost / Contribution Margin
	Revenue the kiosk should generate per cubic foot each month is		30280/(300)	= $	101