Question

1. Calculate the inventory carrying costs per day given the following information:

Average value per ocean container: $300,000 USD

Company's cost of capital: 8%

2. Using your answer from question number 1, answer the following questions.

1. If your average transit time for an ocean route is 30 days, what is your inventory carrying cost?

b. If you can shorten the transit time by 5 days, how much will you save?

3. There is another ocean carrier that can shorten the transit time by 5 days but will cost $500 more per container. Looking only at the cost from the previous questions, should you make the change?

Answer 1

Option 1: value per container $ 300,000, transit time 30 days
Average value per ocean container	$ 300,000.00
Company cost of capital, 8%, $ 300,000x.08	$    24,000.00
Days in a year	365
Inventory carrying cost per day(value per container x cost of capital/365=$300,000x8%/365)	$            65.75	Ans 1
Average transit time 30 days, hence Inventory carrying cost=inventory carrying cost per day x30
=$ 65.75 x30	$      1,972.60	Ans 2 a
Average transit time is reduce by five days so it is 25 days=inventory carrying cost per day x 25
$      1,643.84
net saving'=$ 65.75 x(30-25)=$65.75x5 days	$          328.77	Ans 2 b
Option 2: value per container $ 300,500, transit time 25 days
Using another ocean carrier, transit time 25 days, average value per container $ 300,500
Average value per ocean container	$ 300,500.00
Company cost of capital, 8%, $ 300,500x.08	$    24,040.00
Days in a year	365
Cost per day, $24,040/362	$            65.86
Cost per shipment $65.86x25	$      1,646.58
Ans 3
The change should not be made if the transit time is 25 days for both the containers. As the inventory carrying cost per day will increase from $ 65.75 (Option 1) to $ 65.86 (Option 2). In case transit time is 30 days and Average value per ocean container: $300,000 as in option 1 and $ 300,500 in option 2, then option 2 will cost $ 1646.58 instead of $ 1972.50 so a net saving of $326.02 per container