Reference no: EM132308162
American Sports, an outdoor sports retailer, is planning to add a website for online sales. The estimated costs of the 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
American Sports has asked you to evaluate two alternative cost approaches for its new Web site. It would like you to calculate fixed and variable costs at different numbers of orders. Create an Excel spreadsheet to calculate fixed and variable cost data for evaluating alternative approaches (ignore taxes, investment cost, and the time value of money). Use the results to answer questions about your findings.
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 orders?
At what number of orders are the total costs for the two approaches the same? What does this mean?
Which alternative should be selected if the expected number of orders is less than the break-even level of orders?
Which alternative should be selected if the expected number of orders is greater than the break-even level of orders?
What conclusion regarding cost predictions can be drawn from your analysis?