Question

Ping-Aye Tropical Fruits Company must choose between two transportation options: a contractual arrangement with a local carrier that costs $4,500 upfront plus $250 for each shipment, or leasing its own refrigerated trucks which will cost $20,000 plus $45 for each shipment. What is the indifference point

Answer 1

The indifference point is the point at which the cost of the contractual arrangement with the local carrier is equal to the cost of leasing the own refrigerated trucks. The indifference point is around 75 shipments.

Step-by-step explanation:

The indifference point is the point at which two options have the same cost. In this case, we need to find the point at which the cost of the contractual arrangement with the local carrier is equal to the cost of leasing the own refrigerated trucks. Let's set up an equation to solve for the indifference point:

Cost of contractual arrangement = Cost of leasing trucks

$4,500 + $250 * x = $20,000 + $45 * x

Simplifying the equation, we get:

$250 * x - $45 * x = $20,000 - $4,500

$205 * x = $15,500

x = $15,500 / $205

x ≈ 75.61

Therefore, the indifference point is around 75 shipments. At this point, both options will cost the same amount.

Answer 2

The indifference point is 68 shipments.

Step-by-step explanation:

First, we need to establish the total cost formula:

Local carrier:

Total cost= 4,500 + 250*x

Leasing:

Total cost= 20,000 + 20*x

x= number of shipments

Now, we equal both formulas and isolate x:

4,500 + 250x = 20,000 + 20x

230x = 15,500

x= 67.39 = 68

The indifference point is 68 shipments.