Great Falls Export Company has 30 employees and handles 1500

Great Falls Export Company has 30 employees and handles 1500 loads per year of grain from a North Dakota warehouse. The firm has fixed costs of $70,000 per year and variable costs of $170 per load. The operations manager is considering installing an $80,000 automated material handling system that will increase fixed costs by $20,000 per year. It will also increase the per unit contribution of each load by $20. The firm operates 250 days per year, and they receive an average of $300 revenue for each load passed through the warehouse.

Solution

I guess the question is whether to install the automated material handling system or not.

Present total expenses per year= fixed cost+variable cost = $70,000+1500*$170 = $325,000

Total revenue generated per year = 1500*$300 = $450,000

Present profit per year = $450,000-$352,000 = $125,000

Cost of installing and operating automated material handling system = $80,000+$20,000 =$100,000

Total running expenses during first year = $325,000+$100,000= $425,000

Total revenue generated during first year = $450,000+1500*$20= $480,000

Profit during first year = $480,000-$425,000 =$55,000

Total expenses in subsequent year = $70,000+$20,000+1500*$170 = $345,000

Total revenue generated during subsequent year = ($300+$20)*1500 = $480,000

Total profit during subsequent year = $480,000-$345,000 = $135,000

Conclusion: Although profit margin during the first year would reduce substantially, but in the long run installing automated material handling system would prove profitable.