Question

Dawmart is an international retail store. Dawmart​'s managers are considering implementing a new​ business-to-business (B2B) information system for processing merchandise orders. The current system costs Dawmart $2,000,000 per month and $45 per order. Dawmart has two​ options, a partially automated B2B and a fully automated B2B system. The partially automated B2B system will have a fixed cost of $12,000,000 per month and a variable cost of $25 per order. The fully automated B2B system has a fixed cost of $26,400,000 per month and $15 per order. Based on data from the past two​years, Dawmart has determined the following distribution on monthly​ orders:

i Data Table Monthly Number of Orders Probability 250,000 orders 0.05 450,000 orders 0.20 650,000 orders 0.35 Print Done

Requirements 1​ & 2. Prepare a table showing the cost of each plan for each quantity of monthly orders. What is the expected cost of each​ plan?

Determine the monthly cost of each order level under the current plan and then compute the expected cost.

Answer 1

	CURRENT PLAN
	A	B	C	D=A*C	T=B+D	P	E=T*P
	Order Level	Fixed Cost	Variable Cost/Order	Total Variable Cost	Total Cost	Probability	Expected Cost
	250,000	$2,000,000	$45	$11,250,000	$13,250,000	0.05	$662,500
	450,000	$2,000,000	$45	$20,250,000	$22,250,000	0.20	$4,450,000
	650,000	$2,000,000	$45	$29,250,000	$31,250,000	0.50	$15,625,000
						SUM	$20,737,500
	EXPECTED COST OF THE PLAN	$20,737,500
	PARTIALLY AUTOMATED SYSTEM
	A	B	C	D=A*C	T=B+D	P	E=T*P
	Order Level	Fixed Cost	Variable Cost/Order	Total Variable Cost	Total Cost	Probability	Expected Cost
	250,000	$12,000,000	$25	$6,250,000	$18,250,000	0.05	$912,500
	450,000	$12,000,000	$25	$11,250,000	$23,250,000	0.20	$4,650,000
	650,000	$12,000,000	$25	$16,250,000	$28,250,000	0.50	$14,125,000
						SUM	$19,687,500
	EXPECTED COST OF THE PLAN	$19,687,500
	FULLY AUTOMATED SYSTEM
	A	B	C	D=A*C	T=B+D	P	E=T*P
	Order Level	Fixed Cost	Variable Cost/Order	Total Variable Cost	Total Cost	Probability	Expected Cost
	250,000	$26,400,000	$15	$3,750,000	$30,150,000	0.05	$1,507,500
	450,000	$26,400,000	$15	$6,750,000	$33,150,000	0.20	$6,630,000
	650,000	$26,400,000	$15	$9,750,000	$36,150,000	0.50	$18,075,000
						SUM	$26,212,500
	EXPECTED COST OF THE PLAN	$26,212,500