Please show all work. Donegal Footwear is an international supplier of outdoor f

Question

Please show all work.

Donegal Footwear is an international supplier of outdoor footwear for adventurous 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 providers overhead and warehouse costs, and variable costs of $15.00 per package shipped. Recently, Donegal Footwear found a warehouse it could lease at a cost of S15 million per year, which includes lease costs, labor, and management oversight. Furthermore, the company found another provider who would deliver packages from the warehouse for $11.00 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 I packages to make the vertical integration into warehouse operations beneficial. (Enter your response as an integer)

Explanation / Answer

option-1 has fixed cost of 7 million and variable cost of 15 per package

option2 has fixed cost of 15 million and variable cost of 11 per package

a)

let assume Q is the quantity shipped

total cost of option 1 = 7000000 + Q * 15

total cost of option 2 = 15000000 + Q * 11

so the break even point

TC1 = TC2

7000000 + Q * 15 = 15000000 + Q * 11

=>

Q = (15000000 -7000000)/(15-11)

= 2000000 units

the firm must ship more than 2000000 packages to make the vertical integration beneficial

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