The background An online retailing company (Nozoma) is considering adding a fulfillment center in the Twin Cities. Currently, the company operates two other fulfillment centers in the Upper Midwest: Wisconsin and Iowa. It sends all packages by United State Postal Service, so that mailing cost is the same for all packages, but some customers have been complaining about the time it takes to receive their orders. The additional fulfillment center would allow Nozoma to shorten the time that it takes for many of their customers to receive their packages. Each package on average sells for $10.23. The average profit per package is $0.55. (The costs include the cost of the product itself as well as the cost to ship.) Currently, the size of the market is 100 million packages per year for all online retail packages. Nozoma has 8% of this market now. The company estimates that the market size (as a whole) will grow 10% per year in the next 5 years, and 5% per year after that. It will cost the company $6 million to build and outfit the fulfillment center, which will be completed by the end of the year (December 31). The new fulfillment center will increase its market share by 100 basis points (because more time-sensitive customers will buy from them), but this is a rough estimate. (A basis point is one one-hundredth of a percent. 100 basis points equals one percentage point, but we use this terminology to imply an absolute increase. For instance, a 50 basis point increase in market share of 8% would be 8.5%.) This increase will be realized as soon as the FC is built. Additionally, the bill for the fulfillment center will come due immediately following completion of the FC (January 1).

The sensitivity analysis Remember the 100 basis point increase you weren't so sure about. Given a 10-year planning horizon, for what basis point increase amounts is it profitable to build the fulfillment center? (i.e., how much does the market share have to increase by for "building the FC" to be a profitable decision?) To what inputs is the output (profitability of building a new FC) most sensitive? Show graphically how you came to this conclusion and discuss what key variables you decided to view in your sensitivity analysis.