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Scenario 6.1 - the Big Box

question 34

Multiple Choice

Scenario 6.1 - The Big Box
Bahouth Ltd. is planning for the next two years of production and debating whether to construct a large cross-dock facility with 40 truck bays or a smaller one with 20 truck bays. The cost to build the large facility is $2 million and the cost to build the small one is $1.2 million. If they construct a large facility and demand is as high as they hope, then operating costs are $450,000 annually. If they construct a large facility and demand is low, then operating costs are $300,000. If they construct a small facility and demand is low, the operating costs are $275,000 but if they experience high demand, the operating cost of a small facility increases to $600,000. After having conducted some market research, they feel that the likelihood of high demand is 0.7 and the likelihood of small demand is 0.3.
-Use the information from Scenario 6.1 to determine the cost of the best alternative for a two year period.

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Definitions:

Variable Production Costs

Costs that vary directly with the volume of production, including direct labor and materials.

Traceable Fixed Expense

Fixed costs that can be directly linked to a specific segment of the business, and would disappear if the segment did.

Fixed Manufacturing Overhead

The portion of manufacturing overhead costs that remains constant regardless of the level of production.

Variable Costing

An accounting method that considers only variable production costs (costs that change with the level of output) in the calculation of product costs.