Dave Flatch, CEO of Flatch’es Latches Hardware Distributors, is trying to decide
ID: 359076 • Letter: D
Question
Dave Flatch, CEO of Flatch’es Latches Hardware Distributors, is trying to decide if it makes sense to outsource their warehouse order picking activity. Currently, Dave employs three order pickers each with an annual salary of $29,000. In addition, Chris estimates the cost per order picked is around $5 each (for packing supplies and other incremental expenses). Pickers Unlimited claims that they will pick orders for a fixed (one time) fee of $150,000 and will charge only $3.25 per order picked. Last year, a total of 34,000 orders were picked in Dave’s warehouse.
Answer the following four questions (1 through 4) and show your answer and your work in the space below the question.
1. What was the total cost Flatch experienced last year due to the order picking function? (25%)
2. What would the cost have been if Flatch’es Latches would have used Pickers Unlimited last year? (25%)
3. What is the indifference quantity between the two alternatives? (25%)
4. If Flatch expects the picking volume to be 37,500 orders next year, should he use Pickers Unlimited? In doing this, how much would he save over the alternative? (25%)
Explanation / Answer
Answer to question 1 :
Total cost Flatch experienced last year due to order picking function
= Annual salary / order picker x Number of pickers + Cost / order x Number of orders picked
= 29000 x 3 + 5 x 34000
= 87000 + 170000
= $257,000
TOTAL COST FLATCH EXPERIENCED LAST YEAR DUE TO THE ORDER PICKING FUNCTION = $257,000
Answer to question 2:
Cost of using Pickers Unlimited last year <$
= Fixed one time fee + Charges per order picked x Number of orders picked
= 150,000 + 3.25 x 34000
= 150,000 + 110,500
= 260500
COST TO FLATCH’ES LATCHES FOR USING PICKER’S UNLIMITED LAST YEAR = $260,500
Answer to question 3:
Let Indifference quantity between two alternatives = N
At indifference quantity , total costs under both options are same
Therefore ,
87000 + 5.N = 150000 +3.25.N
Or, 1.75.N = 63000
Or, N = 36,000
INDIFFERENCE QUANTITY = 36,000
Answer to question 4 :
When N = 37500,
Cost incurred in house = 87000 + 5 x 37500 = 87000 + 187500 = $274500
Cost incurred through Pickers Unlimited = 150000 + 3.25 x 37500 = 150000 + 121875 =$271875
Pickers Unlimited is a cheaper option, he should use Pickers Unlimited . He would save through this alternative an amount equal to = $274500 - $271875 = $2625
FLATCH SHOULD USE PICKER’S UNLIMITED AND HE WOULD SAVE AN AMOUNT OF $2675 THROUGH THIS ALTERNATIVE
TOTAL COST FLATCH EXPERIENCED LAST YEAR DUE TO THE ORDER PICKING FUNCTION = $257,000
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