KLM Company is expanding its supply chain to include a new distribution hub in Miami. A key decision involves the number of trucks for the facility. The particular model of truck KLM is considering can be used 8,000 miles a month and will cost $1,500 a month in capital costs. In addition, each mile a truck is used costs $0.90 for maintenance. A local truck rental firm will rent trucks at a cost of $1.40 per mile. GIven the distribution of likely requirements for trucks, management has come up with three alternatives to consider as shown in the table:
|
Monthly requirements (miles)
|
40,000
|
80,000
|
120,000
|
|
Probability
|
0.30
|
0.40
|
0.30
|
|
Fleet size (trucks)
|
5
|
10
|
15
|
What is the expected cost for each option? Which fleet size will yield the lowest expected monthly costs for KLM and what is that cost?