Reference no: EM131904111

The Acme Manufacturing Company is concerned about its warehouse needs and how they can be best met. The company produces a line of spare parts for appliances. Due to the combination of production policies and demand patterns, warehousing space requirements vary considerably throughout the year. Space requirements are known with a great deal of certainty because the product line satisfies a replacement market. Growth, or decline, in production and sales is not anticipated in the near future. Warehouse inventory turns at the rate of two times per month. A dollar's worth of merchandise occupies 0.1 cubic feet of warehouse space and can be stacked 10 ft. high. The product density is $5 per lb. Given aisles, administrative space, and normal operating efficiency, only 40 percent of the total warehouse space is actually used for storage.

A private warehouse can be constructed and equipped for $35 per sq. ft. and can be amortized over 20 years. The cost of operation is $0.04 per lb of throughput. Annual fixed costs amount to $10 per sq. ft. of total space. Space may also be rented for a storage charge on inventory of $0.06 per lb per month and a handling charge of $0.05 per lb of throughput. Monthly sales rates for a typical year are as follows:

Month Sales ($)

Jan 5,000,000

Feb 4,000,000

Mar 3,000,000

Apr 2,000,000

May 1,000,000

June 250,000

July 1,250,000

Aug 2,250,000

Sept 3,000,000

Oct 3,500,000

Nov 4,000,000

Dec 4,500,000

Total 33,750,000

Consider the following two options: (1) Construct a 10,000 sq. ft. of private warehouse and rent public warehouse as needed. (2) Do not construct a private warehouse,, and use only public warehouse. What are the annual costs for each option, and which one has a lower annual cost?