Transworld Deliveries is expanding its contract home delivery service into the Northeastern United States. The company anticipates that to accommodate this expansion it will need between 35 and 80 staffed delivery vehicles. Transworld is currently moving 35 of its own vehicles, with drivers, into the Northeast. The daily cost of operating its own fleet is $730 per vehicle, while the daily cost of leasing a vehicle and driver is expected to be $1,300 per vehicle. Using an expected value approach, should Transworld purchase additional vehicles and hire additional drivers? If so, how many would you recommend?

Question Completion:

Demand Requirements (in vehicles)

Requirements          20     35     50    80

Probability              0.35   0.15    0.1   0.4

Transworld Deliveries

1. Transworld Deliveries should purchase additional vehicles and hire additional drivers.

2. I recommend 14 new vehicles with drivers to bring the number from 35 vehicles to 49 vehicles.

Explanation:

a) Data and Calculations:

Vehicles requirements (Range) 35 and 80

Own Vehicles being moved = 35

Cost of own fleet = $730 per vehicle

Cost of leasing = $1,300 per vehicle

Decision: Purchase additional vehicles or

               Lease additional vehicles

Expected Vehicles Required:

Requirements          20     35     50    80

Probability              0.35   0.15    0.1   0.4

Expected value        7        5       5     32

Total expected number of vehicles required = 49

Additional vehicles required = 49 - 35 = 14

Cost of leasing additional vehicle = 14 * $1,300 = $18,200

Cost of purchasing vehicles and hiring additional drivers = $730 * 14 = $10,220

Difference in costs = $18,200 - $10,220 = $7,980

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