Mitchell Beverage Company produces Cactus Juice, a popular alcoholic beverage. Recently the firm has experienced problems of product pilferage at the warehouse. In one month, 3,200 bottles of Cactus Juice, representing 0.4 percent of the month's volume, could not be located for shipping. Should the problem go unresolved, it is anticipated that it will continue at this rate. The forecasted annual sales volume for Cactus Juice is 9.6 million bottles. Each bottle sells for $4.50. Steve Davis, vice president of distribution, has asked you to look into the following security options to reduce the pilferage problem.
a. Hire four security guards to patrol the warehouse floor all hours of the day, 7 days a week. The firm would offer a wage of $14.50/hour to the guards as well as a benefits package expected to be worth $2,000 per employee per year. The presence of security guards should lower pilferage to 0.2 percent of volume. Only one guard would be on duty at any one time.
b. Implement an electronic detection system based on bar code technology. This would require purchasing bar code equipment for the packaging facility and warehouse. Electronic scanning devices must also be purchased and placed at warehouse entrances. Alarms sound whenever a bar-coded item passes through a warehouse entrance without clearance. The electronic detection package, including bar code printers and readers, will cost $120,000. In addition, employees at the plant and warehouse will be trained to use the new equipment at a one-time cost of $8000. Monthly maintenance of the system is expected to cost $800. Also, a bar code specialist must be hired. The specialist would earn a salary of $49,000 per year. Product pilferage is expected to be lowered to 0.1 percent of volume with the electronic security system. The system has an estimated life of 8 years. Accrue all costs evenly over the life of the equipment.
c. Install security cameras in key locations throughout the warehouse. It has been determined that six cameras could adequately record warehouse operations. Each camera costs $1200. The support devices and installation will cost $36,000. Four security guards would be hired for the purpose of viewing the security monitors for suspicious activity.
One guard would be on duty at all times. The guards each earn $12/hour, in a 42-hour workweek, and receive a benefits package worth $1000 per year. Pilferage under this system would be 0.05 percent of volume. The monitoring equipment is expected to have a life of 12 years. Accrue all fixed costs evenly over the life of the equipment. Should the firm implement any of the options above, or make no investment and allow the pilferage to continue at the rate of 0.4 percent of volume? Compare the costs and benefits of each option on an annual basis.