Question

In: Operations Management

Please answer: It costs $15 per unit per year to hold a product in inventory. The...

Please answer:

It costs $15 per unit per year to hold a product in inventory. The forecasted demand for this product is 10,000 units per year. The total amount of inventory is made up of two types of inventory: safety stock and in-transit. Calculations for determining the average amount of inventory for each type are given below.  

Safety Stock Cost = 2 x Average Demand during Lead Time * Holding Cost per Unit per Year

In-Transit Inventory Cost = Total Annual Demand x (Lead Time / 365) * Holding Cost per Unit per Year

Total Cost = Safety Stock Cost + In-Transit Inventory Cost + Transportation Cost

The following is data related to your transportation options.

Transportation Mode

Lead Time (Days)

Cost/Unit

Air

2

$6

Truck

7

$3.50

Rail

21

$2.75

  1. Build a spreadsheet model that calculates the total cost of transportation for Air, Truck, and Rail transportation. Based on your total cost calculations, what mode of transportation would you recommend? What is the total cost of your recommendation?
  1. How much would the cost per unit of the other two modes have to change in order to make you change your recommendation?

Solutions

Expert Solution

(a)

Model:

Result:

So,

based on the minimum total cost, 'Truck' seems to be the best option with a total cost = $43,630.14

(b)

The difference in total cost between 'Truck' and 'Air = 62,465.75 - 43,630.14 = 18835.61

So, the reduction in the cost of units for 'Air should be = 18835.61 / 10000 = $1.89

Similarly, the reduction in the cost per unit for 'Rail' in order to compete with 'Truck' should be = (53,390.41 - 43,630.14) / 10000 = $0.98


Related Solutions

Hill & Scott Company sells a product for $20. Variable costs are $15 per unit, and...
Hill & Scott Company sells a product for $20. Variable costs are $15 per unit, and total fixed costs are $7,000. How many units must be sold by Hill & Scott to earn a profit of $1,000?
Y enterprises sells is product at Rs. 20 per unit. Variable costs are Pa 15 per...
Y enterprises sells is product at Rs. 20 per unit. Variable costs are Pa 15 per st (2/3 manufacturing and 1/3non manufacturing). Fxed costs are incurred uniformly throughout the year and amount to Rs.750,000 (2/3 mamufacturing and 1/3 non-mammfactaring Required: a) The number of units that must be sold to carn an after-tax income of Ra. 100,000 assume income tax rate of 20%). Prove your answer by prepaning imcome statement to that effect b) Illustrate the role of changes in...
Sara's company manufactures a product with the following costs: Per Unit Per Year Direct materials $...
Sara's company manufactures a product with the following costs: Per Unit Per Year Direct materials $ 25.30 Direct labor $ 14.30 Variable manufacturing overhead $ 2.50 Fixed manufacturing overhead $ 1,275,000 Variable selling and administrative expenses $ 2.40 Fixed selling and administrative expenses $ 1,249,500 The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 85,000 units per year. The company has invested $260,000 in...
Dickson Corporation makes a product with the following costs: Per Unit Per Year Direct materials $...
Dickson Corporation makes a product with the following costs: Per Unit Per Year Direct materials $ 18.20 Direct labor $ 22.30 Variable manufacturing overhead $ 2.90 Fixed manufacturing overhead $ 1,296,000 Variable selling and administrative expenses $ 1.10 Fixed selling and administrative expenses $ 1,104,000 The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 60,000 units per year. The company has invested $320,000 in...
Joeston Corporation makes a product with the following costs: Per Unit Per Year Direct materials $...
Joeston Corporation makes a product with the following costs: Per Unit Per Year Direct materials $ 18.10 Direct labor $ 15.80 Variable manufacturing overhead $ 5.40 Fixed manufacturing overhead $ 473,200 Variable selling and administrative expenses $ 4.70 Fixed selling and administrative expenses $ 301,600 The company uses the absorption costing approach to cost-plus pricing described in the text. The pricing calculations are based on budgeted production and sales of 26,000 units per year. The company has invested $616,000 in...
Cantor Products sells a product for $75. DM costs per unit and DL costs per unit...
Cantor Products sells a product for $75. DM costs per unit and DL costs per unit are $45. Depreciation Expenses costs and Production supervisor’s salary are $75,000. Answer the following questions: a. What is the break-even point in units? b. What unit sales would be required to earn a target profit of $200,000? c. Assume they achieve the level of sales required in part b, what is the degree of operating leverage? d. If sales decrease by 30% from that...
A manufacturer produces a product that sells for $10 per unit. Variable costs per unit are...
A manufacturer produces a product that sells for $10 per unit. Variable costs per unit are $6 and total fixed costs are $12,000. At this selling price, the company earns a profit equal to 10% of total dollar sales. By reducing its selling price to $9 per unit, the manufacturer can increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed costs and variable costs per unit remain unchanged. If the selling price...
XYZ, Inc. produces a product that will sell this year for $200 per unit. Fixed costs...
XYZ, Inc. produces a product that will sell this year for $200 per unit. Fixed costs are expected to total $10,000 this year and remain constant for the following four years. Variable costs are expected to be $75 per unit this year and increase at a rate of 5% in each of the following four years. XYZ, Inc. expects to sell 2,000 units this year and in each of the following four years. To earn an equivalent uniform annual gross...
Our company sells a product for $150 per unit. Variable costs are $90 per unit and...
Our company sells a product for $150 per unit. Variable costs are $90 per unit and fixed costs are $18,000. The company expects to sell 800 units this year. How many units must we sell to break even? a) 300 b) 320 c) 360 d) 400 Our company has reviewed the utilities bills for our company. We have determined that the highest and lowest bills were $5,600 and $3,200 for the months of January and September. If we produced 1,200...
Sales price per unit for product X is $90. The variable costs per unit and total...
Sales price per unit for product X is $90. The variable costs per unit and total fixed costs are as follows:          Variable costs per unit:                                  Fixed costs:                Machining                                  $25               Depreciation                   $ 40,000                Packaging                                    15               Maintenance                       31,000                Total variable                             $40               Cleaning                              9,000 Real estate tax                     5,000 Total fixed                   $85,000 Using Contribution Margin technique, calculate Sales Revenue and Sales Units at Break-Even point. (b)   If the current level of sales is 2,300 units, by what percentage can sales decrease before the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT