Donegal Footwear is an international supplier of outdoor footwear for adventurcu

Question

Donegal Footwear is an international supplier of outdoor footwear for adventurcus families. Currently, the company uses a logistical provider to provide warehouse services and handle packages destined for ground delivery. The contract calls for $7 million in annual fixed charges, which covers the provider's overhead and warehouse costs, and variable costs of $13.00 per package shipped. Recently, Donegal Footwear found a warehouse it could lease at a cost of $14 million per year which includes lease costs, labor, and management oversight. Furthermore, the company found another provider who woukd deliver packages from the warehouse for S9.00 per package. Considering only costs, how many packages must Donegal Footware ship to make the vertical integration into warehouse operations beneficial? Donegal Footwear must ship packages to make the vertical integration into warehouse operations beneficial. (Enter your response as an integer) more than less than

Explanation / Answer

Given:

Alternative 1:

Present Annual costs = $7 million = $7,000,000

Present Variable costs = $13.00 per package

Alternative 2:

New Annual costs = $14 million = $14,000,000

New Variable costs = $9.00 per package

Solution:

Let the number of packages delivered in a year = x units

Using the break-even analysis method;

At x-units, both the alternatives will have equal costs. Therefore,

$7,000,000 + $13x = $14,000,000 + $9x

13x - 9x = $14,000,000 - $7,000,000

4x = $7,000,000

x = 1,750,000 packages

In order to make the vertical integration into warehouse beneficial, Donegal Footwear must ship more than 1,750,000 packages.

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