Chapter 14, Problem 11P

Acadia Logistics anticipates that it will need more distribution center space to accommodate what it believes will be a significant increase in demand for its final—mile services. Acadia could either lease public warehouse space to cover all levels of demand or construct its own distribution center to meet a specified level of demand, and then use public warehousing to cover the rest. The yearly cost of building and operating its own facility, including the amortized cost of construction, is $12.00 pa” square foot. The yearly cost of leasing public ware house space is $20.00 per square foot. The expected demand requirements follow:

1. Calculate the expected value of leasing public warehouse space as required by demand.
2. Calculate the expected value of building a 200,000-square-foot distribution center and leasing public warehouse space as required if demand exceeds the need for 200,000 square feet of space.
3. Calculate the expected value of building a 300,000-square-foot distribution center and leasing public warehouse space as required if demand exceeds the need for 300,000 square feet of space.
4. Calculate the expected value of building a 400,000-square-foot distribution center and leasing public warehouse space as required if demand exceeds the need for 400,000 square feet of space.
5. Calculate the expected value of building a 500,000-square-foot distribution.
6. Which of these decisions provides the minimized expected value?