Home Grocery (HG) provides home delivery of groceries. Customers submit orders to the HG website by selecting the needed items from a menu. Currently, HG has employees who deliver the groceries, but the company is considering the option of contracting out deliveries. The fixed cost of the grocery delivery operation is $500,000 per year, of which, $200,000 is avoidable if grocery deliveries are contracted out. A statistical study suggests delivery costs vary with both the number of customers and the number of items purchased. On average, the fixed annual delivery cost per customer is $250 and the average variable delivery cost of each grocery item delivered is $0.50. On average, each customer purchases 1,000 grocery items per year. Therefore, if there are 2,000 customers budgeted, the number of grocery item deliveries will be 2 million. Custom delivery (CD) has offered to deliver groceries for HG as a flat rate of $850 per customer per year irrespective of the number of grocery items each customer requires. (A) If HG projects having 1,800 customers in the upcoming year and cost is the only consideration, should HG continue to deliver groceries to its customer, or should it contract grocery deliveries to CD? (B) Assume that, on average, each customer will order 1,000 grocery items each year. What is the number of customers that will cause HG to be indifferent between self-delivery and contracting out delivery?
Make or Buy - Home Grocery (HG) provides home delivery of groceries. Customers submit orders to the HG website by selecting the needed items from a menu. Currently, HG has employees who deliver the groceries, but the company is considering the option of contracting out deliveries. The fixed cost of the grocery delivery operation is $500,000 per year, of which, $200,000 is avoidable if grocery deliveries are contracted out. A statistical study suggests delivery costs vary with both the number of customers and the number of items purchased. On average, the fixed annual delivery cost per customer is $250 and the
(A) If HG projects having 1,800 customers in the upcoming year and cost is the only consideration, should HG continue to deliver groceries to its customer, or should it contract grocery deliveries to CD?
(B) Assume that, on average, each customer will order 1,000 grocery items each year. What is the number of customers that will cause HG to be indifferent between self-delivery and contracting out delivery?
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