Reference no: EM131732083
The company is opening a plant in this area with the production capacity of 24,000 units annually. All units are expected to be sold every year at the average price of $300. The cost to produce one unit as the mattress leaves the plant is $120. Additionally, S&A (sales and administrative) expenses, R&D (research and development) and all other overhead costs are $80 per unit. The time window for which the operation is evaluated is 10 years; all initial investments will need to be depreciated to zero over 10 years using the straight-line method. The company has operating cash but will borrow money for any initial capital investment from a private lender at the annual interest rate of 10% paid annually with the loan principal repayment terms as a lump sum for the full amount of the loan at the end of the 10-year period.
Option A. Build a private warehouse right next to the plant for $300,000 so that there is no need for external transportation services between the plant and the warehouse. The variable cost of operating the warehouse, including maintenance and labor, is estimated to be $5 per unit. Contract carrier transportation costs from the warehouse are projected to be $14 per unit on the average.
Option B. Rent space in an available public warehouse 10 miles away from the plant. No fixed investment required; the variable cost of operation is $8 per unit. Same transportation cost to ship mattresses from the warehouse as in Option A. The transportation cost from the plant to the warehouse is $4 per unit.
Option C. Use a contract warehouse of a 3PL provider that will set up dedicated warehousing and transportation services for LRM based on a 10-year contract. The initial $300,000 investment is to be shared equally between the two partners. The 3 PL company will charge $20 per unit for all its services (i.e. all transportation and warehousing services are included in the $20 per unit price).
Question : Calculate the annual depreciation, interest, total fixed costs, plant to warehouse transfer, warehousing costs, transportation from warehouse, total variable costs, and total costs for each option. (numbers may be arrange in a table)