Question:
Uncertainty and expected costs. Foodmart Corp, an international retail giant, is considering implementing a new business to business (B2B) information system for processing purchase orders. The current system costs Foodmart $2,500,000 per month and $50 per order. Foodmart has two options, a partially automated B2B and a fully automated B2B system. The partially automated B2B system will have a fixed cost of $10,000,000 per month and a variable cost of $40 per order. The fully automated B2B system has a fixed cost of $20,000,000 per month and $25 per order.
Based on data from the last two years, Foodmart has determined the following distribution on monthly orders:
|
Monthly Number of Orders
|
Probability
|
|
350,000
|
0.15
|
|
450,000
|
0.20
|
|
550,000
|
0.35
|
|
650,000
|
0.20
|
|
750,000
|
0.10
|
1. Prepare a table showing the cost of each plan for each quantity of monthly orders.
2. What is the expected cost of each plan?
3. In addition to the information systems costs, what other factors should Foodmart consider before deciding to implement a new B2B system?