(GDS) is a wholesale food distributor. GDS now has eight active trucks distributing products from a warehouse to various restaurants, hotels, and food markets. Each truck driver is able to sell and distribute an average of 250 items per load once a day. The trucks are expected to operate 250 business days per year. GDS charges its customers a price equal to GDS's cost of the item (i.e., the price paid by GDS to its suppliers for food, beverages, supplies, etc.) plus $2 per item.

GDS has an idle truck that is kept in case one of the other eight breaks down. If two or more trucks break down in any given day, the cost of renting a replacement truck is $90 per day.

Another company, ACME, has offered to rent the truck from GDS for $100 per month. This "low-ball" offer has prompted GDS to consider whether it should use the truck to expand its existing business by adding a new route. The warehouse is at only 40 percent of capacity. The increase in utilities, insurance, general and administrative (G&A), and truck maintenance expenses from adding the new route would be insignificant. The company's current annual costs for eight operating trucks and one idle truck are as follows:

Warehouse rental

$72,000

Utilities

3,900

Driver's compensation

168,000

Insurance

2,400

G&A expenses

44,400

Gasoline expense

28,800

Truck maintenance

48,000

Days Number of Inoperable Trucks

105 0

100 1

40 2

5 3

Renting out the truck to ACME would have no impact on the annual costs in the table above.

The new route will increase sales by 115 items per day and will be a wide-variety, low-volume route with a geographically dispersed customer base. If the new route is undertaken, the estimated salary of the driver will be $21,000 per year, and incremental gasoline costs will be $3,600 per year.

Management is hesitant to use the idle truck because the existing fleet of trucks is getting old.Over the 250-day year, management expects the number of trucks that are inoperable on any given day to be based on the following estimates. (Assume these estimates hold for both a fleet of 8 active trucks and a fleet of 9 active trucks.)

Required:

(15 points) From a (short-term) economic decision-making perspective, which of the three alternatives [i.e., (i) continue in the same conditions; (ii) rent the idle truck to ACME; or (iii) start a new route using the idle truck], should be chosen? Show your calculations.

(3 points) If you could easily acquire more information, what information would you ask for to improve the decision? Explain.