Question

Bike Friday is a small manufacturer of high-end folding travel bicycles. The bikes can be folded and carried in a Travelcase. The controller of Bike Friday is looking into ways to cut costs. The company purchases the Travelcases in lot sizes of 100, at a unit price of $65 plus $4.50 for shipping expense. A lot would last a little more than one month. The purchase lead time is six to eight weeks. The controller has discovered that if the company ordered a full truckload of 500 Travelcases at a time, the unit price will be $50 plus $2.50 for shipping expense. However, Bike Friday would need a bigger storage space (350 square feet) which was not available in-house. Assuming that a nearby storage space could be leased for $400 a month, holding cost rate of 20 percent per unit per year, and ordering cost of $50 per order, determine if buying a truckload of Travelcases would have a lower total cost.

Answer 1

Ans: while calculating the cost unit price for Bike Friday we need assume that the stock of 500 Travel case will last for around six months and we need to calculate the following

• Lease cost per unit= $400* 6(6 months)=$2400 and per unit it will be $ 4.80
• Holding cost is 20% for which we will total all the cost incur till now i.e

=$28,700*20%*1/2

=2870 in total for 6 months and $5.74 per unit.

• Yes,buying a truck load of travelcases will reduce the total cost from $70 per unit to $ 63.14 saving the company $ 6.86 per unit.Its calculation is given below

BIKE FRIDAY PER UNIT PRICE FOR 100 UNIT OVERHEAD PRICE PER UNIT TOTAL PRICE 65.00 $ UNIT PRICE 6,500.00 $ 4.50 $ SHIPPING EXPENSES PER UNIT 450.00 0.50 $ ORDERING COST 50.00 $ 70.00 $ 7,000.00 TOTAL COST BIKE FRIDAY PER UNIT PRICE FOR 500 UNIT FOR 6 MONTH OVERHEAD UNIT PURCHASE PRICE PER UN TOTAL PRICE 500.00 $ 50.00 $ UNIT PRICE 25,000.00 2.50 $ 500.00 $ SHIPPING EXPENSES PER UNIT 1,250.00 500.00 $ 0.10 $ ORDERING COST 50.00 STORAGE SPACE LEASE@ 6* $400 HOLDING COST @ 57.40*20 %/1/2 4.80 $ 2,400.00 $ 5.74 $ 2,870.00 $ 63.14 $ TOTAL COST 31,570.00