A firm is trying to decide whether to have a centralized warehouse or regional w

Question

A firm is trying to decide whether to have a centralized warehouse or
regional warehouses. A centralized warehouse would be cheaper than four regional
warehouses, but the expenses for shipping would be higher with a centralized warehouse.
The cost of a centralized warehouse is $1,700,000 and the per-unit shipping cost is
$5/unit. If the firm decided to use the regional warehouse model, each of the four warehouses
would cost $500,000 and the per-unit shipping cost would be $3.50/unit.
a. If the firm ships 150,000 units, should the firm use the centralized warehouse or the
regional warehouses?
b. If the firm ships 300,000 units, should the firm use the centralized warehouse or the
regional warehouses?
c. What number of shipments would make the cost the same for the two plans?

Explanation / Answer

a. If the firm ships 150,000 units, should the firm use the centralized warehouse or the
regional warehouses?

Cost of CW= (150000*5) + 1700000 = 2450000

Cost of RW = (150000*3.5) + (500000*4) = 2525000

Therefore, firm will use CW.

b. If the firm ships 300,000 units, should the firm use the centralized warehouse or the
regional warehouses?

Cost of CW = (300000 *5) + 1700000 = 3200000

Cost of RW = (300000 *3.5) + (500000*4) = 3050000

Therefore, RW is beneficial to use.

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