Question: A local authority operates over a large geographical area. The Education Department is responsible for ensuring that stocks of a certain item are kept for distribution to schools through the area on request. In order to try to ensure supplies reach the schools promptly, the department currently operates two store warehouses, which operate independently of each other. The department is trying to assess the pros and cons of merging the two store warehouses and offering a centralised facility. For one item under consideration demand is 250 items per annum via Store A and 100 items per annum via Store B. Order costs are £10 at Store A and £11 at Store B, with holding costs 20 per cent of stock value. The item costs £4 per unit.
(a) Calculate the impact on costs if the two stores merge and place combined orders for this item.
(b) What other factors would you want to take into account before making a decision as to whether or not to merge the two stores?