Question

A manager at Strateline Manufacturing must choose between two shipping alternatives: one-day freight and five-day freight. Using five-day freight would cost $175 less than using one-day freight. The primary consideration is holding cost, which is $10 per unit a year. One thousand items are to be shipped. Which alternative would you recommend? Explain.

Determine which shipping alternative would be most economical to ship 100 boxes of parts when each box has a price of $200 and holding costs are 40 percent of price, given this shipping information: overnight, $300, three-day, $200, six-day, $180.

Answer 1

1. Given information:

5 days freight cost =$175

Holding cost per unit= $10

No.of items to be shipped=1000

Solution:

No of additional days holding the inventory=5-1=4 days

Total Holding cost= Holding cost per unit×No.of items to be shipped×no.of days/no.of days in a year

= 10×1000×4/365

= $109.58

Since the total holding cost is much more lesser than the savings, it is suggested to go with five day freight option.

2. Given information:

No.of units=100

Unit price=$200

Total shipment= 100×200= 20000

Holding cost=40%

Total holding cost per shipment = 20000×40/100

= $8000

Holding cost per day= 8000/365

= $ 21.91

Shipping cost:

Over night=$300

Holding days= 0

Incremental cost=$ 0

Total cost= initial cost+ Incremental cost

=300+0= $300

3 days freight=$200

Holding days= 3-1=2 days

Incremental cost= 300-200

=100-(21.91×2)

= 100-43.83

= $ 56.17

Hence, total cost for 3 days freight

= 200+56.17

=$256.17

6 days freight=$180

Holding days= 6-1=5 days

Incremental cost= 300-180

=120-(21.91×5)

= 120-109.58

= $ 10.42

Hence, total cost for 6 days freight

= 180+10.42

= $190.42

It is recommended to choose 6 days freight as the total cost is cheaper when compared with other two alternatives.