Scenario 6.1 - The Big Box
Bahouth Ltd. is planning for the next two years of production and debating whether to construct a large cross-dock facility with 40 truck bays or a smaller one with 20 truck bays. The cost to build the large facility is $2 million and the cost to build the small one is $1.2 million. If they construct a large facility and demand is as high as they hope, then operating costs are $450,000 annually. If they construct a large facility and demand is low, then operating costs are $300,000. If they construct a small facility and demand is low, the operating costs are $275,000 but if they experience high demand, the operating cost of a small facility increases to $600,000. After having conducted some market research, they feel that the likelihood of high demand is 0.7 and the likelihood of small demand is 0.3.
-Use the information from Scenario 6.1 to determine the cost of the best alternative for a two year period.

Question

Quizplus · Accepted Answer

The expected cost for the large facility is $2,000,000 + (0.7 * $450,000 + 0.3 * $300,000) * 2 = $2,810,000. The expected cost for the small facility is $1,200,000 + (0.7 * $600,000 + 0.3 * $275,000) * 2 = $2,205,000. The best alternative is the small facility with an expected cost of $2,205,000.

Scenario 6.1 - the Big Box