Cru Computers

Topics: Variable cost, Renting, Costs Pages: 3 (1188 words) Published: September 18, 2011
The focus of the CRU Computer Rentals case is the declining profitability of the business. Richard Sarkis, the company’s general manager, first noticed a problem at the beginning of this year when demand fell from 1,000 rentals per week to only 600 units per week, a 40% decline. Obviously, less demand means less revenue and profit unless action is taken. His challenge was to find a way to keep the company profitable despite the changing environment. With this in mind, Mr. Sarkis developed a marketing plan to generate more sales from the 4 week (shorter rental time) market. This increased sales but somehow managed to decrease profitability even further. To understand how this is possible we have to understand what generates the company’s profit besides sales, also known as the company’s operations. The driving force behind all companies is sales. Without sales, there is no incoming money and therefore no company at all. Thus, the first aspect of operations is understanding sales. Sales for CRU are generated by renting computers to companies or individuals for a specified period of time for them to return the units afterward. Last year, an average week generated 1,000 unit rentals at $30 per unit. The average rental time was 8 weeks. This means that at any given time there were 8,000 units rented out to customers, generating around $240,000 per week (fig. 1). Comparing this to the decreased demand of 600 units per week generating $144,000 (fig. 2) in revenue, Richard Sarkis’ concern is understandable. Not as clear is how the new weekly demand of 1,400 units generating $256,000 per week in revenue (fig.3) was hurting profitability even further. The answer lies in the other half of operations, known as costs. Variable costs are expenses that are directly associated with the sale of a good. When variable costs are subtracted from sales what is left is known as the contribution margin which gives an idea of how profitable your sales are. CRU’s variable...
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