Business Finance Homework Help

You are the distribution manager with ABC Incorporated. ABC manufactures and sells car
batteries. The business is seeing growth, and you have been asked to revisit the warehousing
strategy. Your research has provided you with the following data:
The public warehouse will charge a $5 flat rate to handle each battery unit.
The contract warehouse will charge a $20,010 fixed charge per year and has offered $3.5 as
the variable cost for each unit handled in their warehouse.
Owning and operating a private warehouse will cost $200,010 recurring fixed costs per annum.
The variable cost is expected to stabilize at around $2 per unit of batteries handled. The
majority of the variable cost comprises the labour cost.

a) Calculate the cost point of indifference when comparing the Public warehouse to the
Contract warehouse (2 mark)

b) Calculate the cost point of indifference when comparing the Contract warehouse to the
Private warehouse (2 mark)

c) The latest strategic plan of ABC Inc. has forecasted a projection of 50,000 batteries for
each year for the next five years. What shall be your warehousing strategy, considering
the annual cost point of indifference? Give reasons. (4 marks)

d) The long-term (10 years) projection is to handle around 100,000 batteries each year
from year 6 to 10. Considering the cost alone, will you change your strategy from
scenario c)? Give reasons. (4 marks)

e) For the situation given in scenario d), what additional qualitative factors (other than the
cost point of indifference) might tilt the decision or strengthen the decision in favour of
investing in a private warehouse? Give at least two qualitative reasons. (4 marks)

f) Assume that after five years, your management decides to invest in a private
warehouse, and you have been assigned the responsibility to choose a good location for
the warehouse. Briefly explain the two most important factors that you will consider in
selecting the location for the private warehouse. (4 marks)