Using relevant information to make a decision Three years ago Benbrook Company signed a contract for production of specialized machine tools in a neighboring state. Prior to obtaining the contract the company operated a single plant next to its corporate headquarters, but the new contract required construction of a plant in the other state. The new plant sends production reports to headquarters three times a week. Because the reports must be timely, the company uses Presto Delivery Service to deliver the reports overnight for $7.50 per delivery. At the time the company chose Presto it also had an offer from Largo Delivery Service for overnight delivery at the same price. Both delivery services recently announced a price increase to $8.00 per overnight delivery, but Largo indicated that it would not raise prices to existing customers.

Benbrook Company operates a number of computers in both locations. Each cost $12,000 when they were acquired two years ago. The computer manufacturer has equipment available which would enable the company's computers to communicate by telephone. Benbrook Com- pany is considering acquiring the equipment and using it to transmit the reports. The communication equipment costs $4,000 and would last 5 years at which time it is expected to be obsolete and have no value. The new communications equipment requires maintenance which varies with use and is estimated at $.02 per transmission. Electric power used to operate the equipment is estimated at $.01 per transmission. The length of the report is fairly uniform, and given the speed of the equipment, a long distance telephone cost of $2.27 per report would be required, plus $1.50 per report for a person to input the information into the computer. The new equipment would have to be insured at a cost of $70 per year. The manager of the out-of-state plant notes that similar communication for a different type of computer costs only $3,500 but cannot be used with the company's computers.

The company operates 50 weeks per year. With operations increasing it is likely that the number of weekly reports from the new plant to headquarters will have to be increased to five from three within a year.

REQUIRED

a. Determine the cost of sending each report using the communication equipment.

b. Should the company buy the equipment and give up the overnight delivery service?

c. What will be the cost of transmitting each report when the number of reports increases?

d. What information did you choose to ignore in your analysis of parts a through c? Why? If you had the opportunity what qualitative items would you consider?