Question

Bargainmart is an international retail store. ​'s managers are considering implementing a new​ business-to-business (B2B) information system for processing merchandise orders. The current system costs Bargainmart $2000,000 per month and $45 per order. has two​ options, a partially automated B2B and a fully automated B2B system. The partially automated B2B system will have a fixed cost of $10,000,000per month and a variable cost of $35 per order. The fully automated B2B system has a fixed cost of $22,000,000per month and a variable cost of $25per order. Based on data from the past 2​ years, has determined the following distribution on monthly​ orders:

Monthly Number of Orders Probability
300,000 orders 0.10
500,000 orders 0.20
700,000 orders 0.40
Current plan
Order level Total monthly cost of orders ×Probability= Total expected cost of orders
300,000 orders x =
500,000 orders × =
700,000 orders x =
Total expected cost of plan

Answer 1

The total expected cost of each plan can be found by multiplying the monthly cost of orders by the probability of each order level. For the current plan, partially automated B2B system, and fully automated B2B system, the total expected costs respectively are:

• $6,300,000
• $4,900,000
• $3,650,000

Step-by-step explanation:

The current system costs Bargainmart $200,000 per month plus $45 per order. The partially automated B2B system has a fixed cost of $10,000,000 per month plus $35 per order. And the fully automated B2B system has a fixed cost of $22,000,000 per month plus $25 per order.

To find the total expected cost of each plan, you need to multiply the total monthly cost of orders by the probability of each order level:

• For the current plan, the total expected cost is (300,000 orders * $45) * 0.10 + (500,000 orders * $45) * 0.20 + (700,000 orders * $45) * 0.40 = $6,300,000.
• For the partially automated B2B system, the total expected cost is (300,000 orders * $35) * 0.10 + (500,000 orders * $35) * 0.20 + (700,000 orders * $35) * 0.40 = $4,900,000.
• And for the fully automated B2B system, the total expected cost is (300,000 orders * $25) * 0.10 + (500,000 orders * $25) * 0.20 + (700,000 orders * $25) * 0.40 = $3,650,000.