G. Demopoulos & Son Inc. (GDS), a wholesale food distributor, is planning to expand...

G. Demopoulos & Son Inc. (GDS), a wholesale food distributor, is planning to expand its present operation by increasing its fleet of trucks. GDS now has eight trucks distributing products from a warehouse to various restaurants, hotels, and food markets.

Each truck driver is able to sell and distribute an average of 250 items per load once a day, five days a week. All trucks are operating at full capacity. GDS charges its customers $2 per item over the cost of goods for its service.

GDS is reviewing a plan to use an idle truck that is kept in case one of the other eight breaks down. If two or more trucks break down in any given day, the cost of renting a replacement truck is $90 per day. The company was offered $10,000 for the truck (estimated life of five years) and wants to know if it would be more profitable to use the truck to expand its existing business. The warehouse is at only 40 percent of capacity. The increase in administrative expenses from adding the route would be small. The company’s current monthly costs for eight trucks are as follows:

The new route will increase sales by 115 items per day and will be a wide-variety, low-volume route with a geographically dispersed customer base. If the new route is undertaken, the estimated salary expense of the driver will be $21,000 per year. Management is hesitant to use the idle truck because the existing fleet of trucks is getting old and each truck is expected to be inoperable an average of 20 days per year. If the truck is sold, the proceeds will be lent to a customer for five years at 12 percent interest.

Required:

Critically evaluate the alternatives facing GDS.