Question

A manufacturing firm has to decide whether to take a warehouse on lease or to use the services available in the stock market, for ten years. From its forecast, the firm came to understand that 5,00,000 units of sales it has to handle every year, given the assessment period. For every 1,000 units of sales, the firm needs a space of 1,000 sft and spends an amount of INR 200, if leases and INR 250, if uses the spot market facilities. If the firm receives revenue of INR 210 for each unit of sales, then what do you think would be the wise decision for the firm of the two discussed above? Do a sensitivity analysis and elicit the pros and cons of the decisions from the view point of efficiency and responsiveness considerations?

Answer 1

Based on a sensitivity analysis of the costs and considering other factors, it would be wise for the manufacturing firm to lease a warehouse rather than use the spot market facilities. Leasing provides stability and control, while the spot market facilities offer flexibility at a higher cost.

Step-by-step explanation:

Based on the provided information, the manufacturing firm needs to decide whether to lease a warehouse or use the services available in the stock market. To make this decision, a sensitivity analysis can be done by comparing the costs of leasing and using spot market facilities.

Each year, the firm needs to handle 500,000 units of sales. For every 1,000 units of sales, the firm requires 1,000 square feet of space. If the firm leases, it will spend INR 200 per 1,000 units, while using the spot market facilities will cost INR 250 per 1,000 units.

Considering the revenue of INR 210 per unit of sales, let's analyze the costs for both options:

Lease cost per year = (500,000 / 1,000) * 200 = INR 100,000

Spot market cost per year = (500,000 / 1,000) * 250 = INR 125,000

Comparing the lease cost and the spot market cost, it is more cost-effective for the firm to lease the warehouse. However, other factors such as efficiency and responsiveness need to be considered when making this decision.

The pros of leasing a warehouse include having a dedicated space for storage and operations, which can lead to better organization and control over inventory. It also provides stability in terms of cost, as the lease amount remains the same throughout the lease period. This can help the firm in long-term planning and budgeting.

On the other hand, using the spot market facilities offers flexibility in terms of space utilization. The firm can adjust the amount of space it uses based on the demand. However, the spot market cost is higher compared to leasing.

In terms of efficiency, leasing provides a fixed space dedicated to the firm's operations, which can lead to streamlined processes and increased productivity. Using the spot market facilities may require constant adjustments in space utilization, which can lead to inefficiencies and potential disruptions in operations.

From a responsiveness standpoint, leasing a warehouse offers stability and reliability. The firm can count on having the required space available for its operations. Using the spot market facilities may involve uncertainties, as availability can vary and there may be limitations in terms of space.

In conclusion, considering the cost and other factors such as efficiency and responsiveness, it would be wise for the firm to lease the warehouse rather than use the spot market facilities.