Question

To alleviate the strained distribution system, BeeRUS is considering the opening of an additional distribution center. The consideration is for a large (maximum capacity 30,000 bottles), medium (maximum capacity 25,000 bottles) or small (maximum capacity 20,000 bottles) distribution center. The Operations Management team estimated that the predicted demand may change depending on the economic development. At the moment the economy is stagnant. If the economy improves, the team estimates an increase in sales of 15%, however a decrease in sales of 25% if the economy deteriorates even more. There is a probability of 50% that the economy remains as is, while it is 30% likely that it will improve and 20% likely it will get worse. Beer is sold at an average price of $1.80. The operating costs (per bottle) of the additional distribution center are estimated to be $0.70 for the large facility, $0.50 for the medium, and $0.35 for the small facility, respectively (the initial investment is covered by available funds). Furthermore, a marketing firm has offered to run a large promotional campaign, which would cost $2000. The firm promises that the campaign would result in an increase in sale of 25%, regardless of economic situation. For this problem, assume a total predicted demand under the stagnant economy of 23,000 bottles.

Answer 1

	Probability	Demand	Estimated Demand
Stagnant	50%	23,000	11,500
Improve	30%	26,450	7,935
Deteriorate	20%	17,250	3,450
		Total estimated demand	22,885

Thus as per probability of economic scenarion average demand comes to 22,885 units. For this capacity, medium capacity distribution center is required.

However, if promotional campaign is run sales will increase by 25% at an additional cost of $2,000. Revised Demand will be 28,606 Units (22,885+25%). For this capacity, large capacity distribution center is required.

	Medium Distribution Center	Large Distribution Center
Units Sold	22885	28606
Selling Price	1.8	1.8
Operating Cost	0.5	0.7
Contribution Margin per unit	1.3	1.1
Total Contribution Margin	29,751	31,467
Promotion Cost	-	2,000
Net Gain	29,751	29,467

Since net gain is more in case of medium distribution center, the company should start a medium capacity distribution center.