Question

warehouse inventory turns at the rate of two times per month. the price of merchandise is $5 per lb. on average, merchandise occupies 0.8 cubic feet of warehouse space per lb and can be stacked 10 ft. high. given aisles, administrative space, and normal operating efficiency, only 60 percent of the total warehouse is actually used for storage. a private warehouse can be constructed and equipped for $45 per sq. ft. and can be amortized over 25 years. the cost of operations is $0.05 per lb of throughput. annual fixed costs amount to $15 per sq. ft. of total space. space may also be rented for a storage charge on inventory of $0.07 per lb per month and a handling charge of $0.07 per lb of throughput. suppose the company is struggling about building a large (64,000 sq. ft), median (32,000 sq. ft), or small (16,000 sq. ft) warehouse. what size of private warehouse should be constructed? what amount of public warehouse space should be rented?

Answer 1

Determining the right warehouse size involves analyzing inventory turnover, construction and operational costs, and comparing them with the public warehouse expenses. Without specific volume and financial data, an exact warehouse size can't be recommended. A cost-benefit analysis should guide the decision, taking into account the business's ability to cover fixed and variable costs.

Step-by-step explanation:

To determine the appropriate size for a private warehouse construction, a company must analyze its inventory turnover, costs of construction and operation, and compare these to the costs of renting public warehouse space. The turnover rate of two times per month implies that there is a significant amount of product movement, which could justify the investment in a private warehouse.

However, constructing a warehouse involves various costs, including amortization over a 25-year period at $45 per square foot and annual fixed costs at $15 per square foot. Furthermore, at $0.05 per lb of throughput, operational costs must also be taken into consideration.

To decide on the warehouse size, we need to estimate the volume of inventory managed per month and the space needed for efficient operation, while taking into account that only 60 percent of the space is usable due to aisles and administrative areas. Public warehouse costs should be calculated based on the $0.07 per lb per month storage charge and $0.07 per lb of throughput handling charge, and compared to the equivalent costs in a private warehouse scenario.

Without detailed inventory volume and financial data to perform a thorough cost-benefit analysis, we cannot recommend a specific warehouse size. Factors such as whether price is above average variable cost and the firm's ability to cover its fixed and variable costs must be analyzed. Drawing parallels to the provided examples, if renting incurs lower costs than the additional losses from variable costs in a private warehouse, the firm should prioritize renting over building. The decision will depend on the capacity utilization, forecasted future needs, and financial analysis of projected costs and revenues.