Acadia Logistics anticipates that it will need more distribution center space to

Question

Acadia Logistics anticipates that it will need more distribution center space to accommodate what it believes will bea significant increase in demand for its final-mile services. Acadia could either lease public warehouse space to cover all levels of demand or construct its own distribution center to meet a specified level of demand, and then use public warehousing to cover the rest. The yearly cost of building and operating its own facility, including the amortized cost of construction, is $12.00 per square foot. The yearly cost of leasing public warehouse space is $19.50 per square foot. More Info ponse as a Requirements (in sq. ft) 160,000 360,000 560,000 760,000 Probability 0.3 0.35 0.15 0.2 Print Done

Explanation / Answer

a) Expected value of leasing public warehouse space as per demand = (160000*0.3+360000*0.35+560000*0.15+760000*0.2)*19.5

= $ 7,995,000

b) Expected value of building a 200,000 sqft distribution center and leasing public warehouse as required = 200000*12 + (MAX(0,160000-200000)*0.3+MAX(0,360000-200000)*0.35+MAX(0,560000-200000)*0.15+MAX(0,760000-200000)*0.2)*19.5 = $ 6,729,000

c) Expected value of building a 300,000 sqft distribution center and leasing public warehouse as required = 300000*12 + (MAX(0,160000-300000)*0.3+MAX(0,360000-300000)*0.35+MAX(0,560000-300000)*0.15+MAX(0,760000-300000)*0.2)*19.5 = $ 6,564,000

d) Expected value of building a 400,000 sqft distribution center and leasing public warehouse as required = 400000*12 + (MAX(0,160000-400000)*0.3+MAX(0,360000-400000)*0.35+MAX(0,560000-400000)*0.15+MAX(0,760000-400000)*0.2)*19.5 = $ 6,627,000

e) Expected value of building a 500,000 sqft distribution center and leasing public warehouse as required = 500000*12 + (MAX(0,160000-500000)*0.3+MAX(0,360000-500000)*0.35+MAX(0,560000-500000)*0.15+MAX(0,760000-500000)*0.2)*19.5 = $ 7,189,500

f) The decision that minimizes the expected cost is to build 300,000 sqft distribution center and lease public warehouse as needed.

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