Question

A last-mile delivery service is looking into increasing capacity by purchasing new delivery vans. Two vans are being considered. Van A costs $50,000 with a variable cost of $12.00 per average delivery, all inclusive of gasoline, insurance, etc. Van B costs $70,000 with a variable cost of $11.00 per average delivery. The company is also considering a courier service which requires a $60,000 non-refundable joiner fee and a variable cost of $13.00 per average delivery. Last but not least the company is also considering a new drone delivery option that requires an investment in infrastructure of $100,000 and a delivery cost of $15.00 per delivery, but costs are expected to drop sharply in the foreseeable future.
a. What of the following is NOT true?
A. In the long run, Option B with its $11.00 variable cost is the best option
B. The drone option should be chosen because it is the least expensive in terms of both fixed and variable cost.
C. Option A requires the smallest initial cash outlay, followed by using the courier service, followed by Option B.
D. There is no point of indifference/break even between Option A and using the courier service
b. ________ is preferred at volumes below_______ while_______ is preferred at volume above_______
A. B and 30,000, A and 20,000
B. B and 5,000, C and 5,000
C. C is always preferred to A at every volume
D. A and 20,000, B and 20,000

Answer 1

Answer: a. The drone option should be chosen because it is the least expensive in terms of both fixed cost and variable cost.

b. A and 20000, B and 20000

Explanation:

a. From the information provided, the correct option is option B "The drone option should be chosen because it is the least expensive in terms of both fixed cost and variable cost".

This statement is wrong has the drone has the largest fixed cost and variable cost. It's fixed cost of $100,000 is more than that of $70,000 and $60,000 for others.

b. A and 20000, B and 20000

A is preferred at volumes below 20000 while B is preferred at volume above 20000.