Question

3-33: Cost Effects of Technology

American Sports, an outdoor sports retailer, is planning to add a Web site for online sales. The estimated costs of two alternative approaches are as follows:

	Alternative 1	Alternative 2
Annual fixed cost	$155,000	$315,000
Variable cost per order	$           9	$           7
Expected number of orders	45,000	45,000

At the expected level of orders, which online approach has the lower cost? What is the indifference level of orders, or the “break-even” level of orders? What is the meaning of this level of orders?

Answer 1

1)

Alternative 1:

= (45,000 X $9) + $155,000

= $560,000

Alternative 2:

= (45,000 X $7) + $315,000

= $630,000

Alternative 1 has lower cost.

2)

Let S be the number of units sold:

(S X $9) + $155,000 = (S X $7) + $315,000

S = 80,000 units

At 80,000 units the cost of both the orders will be the same