A financial analyst is studying two new distribution systems, basic and deluxe. The basic system has unit-level shipping costs of $8 per unit and annual facility costs of $500,000; in contrast, the deluxe system has unit-level shipping costs of $4 per unit and annual facility costs of $780,000. The deluxe system promises greater customer service. The company sells its products for $30 per unit, less a 5 percent sales commission.

Required

a. Which of the two systems will be more profitable for the firm if sales are expected to average 50,000 units per year?

b. At what unit-volume level will management be indifferent as to the profit for the basic system and the deluxe system?

c. In requirement

(a) by how much does the company value the promised greater customer service if it selects the deluxe system? How can the company verify this level of value?