A manager at a manufacturing factory must choose between two shipping alternatives: 2 day freight and 5 day freight. Using 5 day freight would cost $120 less than using 2 day freight. The primary consideration is the holding cost which is $12 per unit per year. 2000 items are to be shipped. Which alternative would you recommend? EXPLAIN
I would recommend the 2-day freight.
Reason:
Holding cost per unit per year= $12
No of items to be shipped = 2000
Hence total holding cost per year, H = 2000 x 12 = $24000
Difference in days between two day and five day freight = 3 days
Incremental holding cost incurred by using slower alternative= H(d)/365
= 24000(3)/365
= $197.26
Five day freight would cost only $120 less than the two day freight. Hence we can find that the actual savings by using five day freight is less than its incremental holding cost of $197.26. Hence use of two-day freight alternative would provide cost advantage.
A manager at a manufacturing factory must choose between two shipping alternatives: 2 day freight and...
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