The Fancy Stuff, Inc

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The Fancy Stuff, Inc. furniture store has been in business for two years. Currently, they retain their own delivery department, which has a small fleet of trucks and was designed to handle substantially more deliveries than the company currently requires.

Now, in an effort to reduce operating costs, the company is considering a proposal to allow a delivery company to handle all of their delivery requirements for a flat fee of $30 per delivery. If they accept the 3^rd party delivery service, they will completely shut-down the in-house delivery department and eliminate the total cost of that unit.

Following is the delivery cost for years 1 and 2:

	Year 1	Year 2
Number of deliveries	600	700
Cost of operating the delivery department	$25,480	$26,480
Average cost per delivery	$42.47	$37.82

Given the average cost per delivery above, the store manager is considering eliminating the in-house delivery department for the $30 delivery service.

In the future, the company is anticipating increases in sales activity and, therefore, increased deliveries. Their on-site delivery department can handle about 3,000 deliveries per year without additional employees or equipment.

Estimated deliveries for the next two years are: Year 3 – 1,250 deliveries and Year 4 – 1,775 deliveries.

Required (Show your computations for all parts of this question)

1. Prepare a schedule comparing the cost of in-house delivery to the proposed 3^rd party delivery for years 1 and 2. Based on that analysis, is the store manager correct in considering the elimination of the company’s delivery department and accepting the outside delivery service of $30 per delivery.
2. Using the high-low method and the company’s in-house delivery and cost information for years 1 and 2, develop a cost estimation equation for the company’s in-house delivery department.
3. Using your cost estimation equation developed in b. above, estimate the company’s in-house cost for deliveries for years 3 and 4. Given those estimates, should the company accept the 3^rd party delivery service and eliminate their in-house service? (Please explain your answer)
4. At what level of deliveries would management be indifferent between the in-house cost of delivery and accepting the 3^rd party delivery service?
5. What is your final recommendation to the store manager regarding accepting or rejecting the 3^rd party delivery proposal?