Question

You manage a lawnmower business in Washington. You purchase the components from various suppliers and assemble the complete lawnmowers in your Seattle plant. You then ship the lawnmowers to retail outlets so they can be sold to consumers.

1. You’re current supply contract for the mower engines has just expired. You have the following two options when securing a new supplier. Which option gets you the engines at the lowest cost? Assume the USD-MEX exchange rate is 1 USD = 18.78 MEX.
   1. A supplier in Detroit will sell you 2,000 engines at a cost of $180/unit. It will cost $25,000 in transportation fees to ship the entire shipment from Detroit to Seattle.
   2. A supplier in Hermosillo Mexico will sell you 2,000 engines at a cost of 2,600 MEX. It will cost 93,000 MEX to ship the engines from Hermosillo to Nogales (Arizona) then an additional $15,000 to ship the engines from Nogales to Seattle.
2. You’re Portland retail outlet can sell the lawnmowers at $1200 each. Your Vancouver retail outlet can sell the lawnmowers at 1900 CAD. Which market is more lucrative when the USD-CAD exchange rate is 1 USD = 1.37 CAD? (Assume shipping costs, taxes and duties are equivalent.)  

Answer 1

Question 1

You’re current supply contract for the mower engines has just expired. You have the following two options when securing a new supplier. Which option gets you the engines at the lowest cost? Assume the USD-MEX exchange rate is 1 USD = 18.78 MEX.

A supplier in Detroit will sell you 2,000 engines at a cost of $180/unit. It will cost $25,000 in transportation fees to ship the entire shipment from Detroit to Seattle.

Landed cost ($) = Purchase cost + transportation cost = 2,000 x $ 180 / unit + $ 25,000 = $  385,000.00

A supplier in Hermosillo Mexico will sell you 2,000 engines at a cost of 2,600 MEX. It will cost 93,000 MEX to ship the engines from Hermosillo to Nogales (Arizona) then an additional $15,000 to ship the engines from Nogales to Seattle.

Purchase price in $ / unit = MEX 2,600 / MEX 18.78 per $ = $138.4451544

Transportation cost in the first leg ($) = MEX 93,000 / MEX 18.78 per $ = $ 4,952.0767

Landed cost ($) = Purchase cost + transportation cost = 2,000 x $ 138.4452 / unit + $ 4,952.0767 + $ 15,000 = $  296,842.39

The landed cost in $ terms is lower in case of second option. Hence the cheapest cost is achieved by the second option: Buy in Hermosillo Mexico and ship it to Seattle through through Nogales (Arizona).

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You’re Portland retail outlet can sell the lawnmowers at $1200 each. Your Vancouver retail outlet can sell the lawnmowers at 1900 CAD. Which market is more lucrative when the USD-CAD exchange rate is 1 USD = 1.37 CAD? (Assume shipping costs, taxes and duties are equivalent.)

Sale price ($) = $ 1,200 / unit

Sale price ($) = CAD 1,900 / CAD 1.37 per $ = $1,386.86

The sale price per unit is higher in case of Vancouver retail outlet. Hence, the Vancouver retail outlet market is more attractive.