Determine the most cost effective option for ATC Travel Agency.

Having run a successful travel agency in Aspen, Jersey Isle, Ashley Hall has decided to open a branch in ATC, Jersey Isle. She must decide where to locate her office and which and how many employees to hire.

Ashley 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. Ashley estimates that the agency can attract an average of 13 customers per day at this location. Rent for this office is $1,200 per month. Utilities, insurance and other expenses should average an additional $520 per month.

The second choice for an office is on Back Lane  Street, approximately two blocks off 7th 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.

Ashley 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 Back Lane  Street office, however, she will hire either Wendy Green, an experienced travel agent form the ATC area, or a local employee to staff the office. Ashley would have to pay Wendy a monthly salary (including benefits) of $2,100, whereas she could hire local employees for $1,200 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.

Ashley estimates that each customer served by the ATC Travel Agency will result in an average commission of $35. She also estimates a goodwill 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 Back Lane  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 ATC Travel Agency.