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 total (operating and building)cost of the best alternative for a two year period.

Question

Quizplus · Accepted Answer

To determine the best alternative, we need to calculate the expected cost for each choice and choose the one with the lowest expected cost.

For the large facility:
Expected operating cost = (0.7 x $450,000) + (0.3 x $300,000) = $390,000
Total cost = $2,000,000 + $390,000 x 2 = $2,780,000

For the small facility:
Expected operating cost = (0.7 x $600,000) + (0.3 x $275,000) = $457,500
Total cost = $1,200,000 + $457,500 x 2 = $2,115,000

Therefore, the best choice is the small facility with a total cost of $2,115,000.

Scenario 6.1 - the Big Box