Lecture Assignment 2

IET 342

Paula Mora

Q1: A company is considering two options for their warehousing needs. Cost structure:

Public:

Fixed cost: $20 000

Variable cost: $25 per unit

Private:

Fixed cost: $150 000

Variable cost: $5 per unit

Which option would be cheaper for the company if the expected volume is:

a) 5 000 units

Public = $20 000 + $25 * 5000 = $145 000

Private = $150 000 + $5 * 5000 = $175 000

The better option for the company, if the volume is 5 000 units, is a public company which is cheaper.

b) 10 000 units

Public = $20 000 + $25 * 10 000 = $270 000

Private = $150 000 + $5 * 10 000 = $200 000

The better option for the company, if the volume is 10 000 units, is a private company which is cheaper.

Crossover point:

150 000 + 5V = 20 000 +2.5V

V = 6 500 units

Conclusion: before the crossover point, the better option is to have a public company. However, after
the crossover point, a private company would have fewer costs.