Question

Monczka-Trent Shipping is the logistics vendor for Handfield Manufacturing Co. in Ohio. Handfield has daily shipments of a power-steering pump from its Ohio plant to an auto assembly line in Alabama. The value of the standard shipment is $250,400. Monczka-Trent has two options: (1) its standard 2-day shipment or (2) a subcontractor who will team drive overnight with an effective delivery of 1 day. The extra driver costs $170. Handfield's holding cost is 35% annually for this kind of inventory. Part 2: Which option is more economical, with a daily cost of ____?

Answer 1

The more economical option for Handfield Manufacturing Co. is the subcontractor's overnight team drive which saves them $70.11 per day compared to the standard 2-day shipment.

Step-by-step explanation:

The main answer to determine which shipping option is more economical requires calculating the daily holding cost for Handfield Manufacturing Co.'s inventory and comparing it with the additional cost for expedited shipping. To calculate the daily holding cost, we use the annual holding cost rate of 35% applied to the value of the inventory. The value of the standard shipment is $250,400, and the annual holding cost is then 0.35 x $250,400, which equals $87,640 per year. To find the daily holding cost, divide the annual holding cost by 365 days, resulting in approximately $240.11 per day.Now, compare this daily holding cost with the extra cost of the expedited 1-day delivery, which adds $170 to the shipping expense. By using expedited shipping, Handfield would save one day's worth of holding costs ($240.11) at an additional shipping cost of $170. Therefore, the expedited option not only delivers the pumps faster but does so at a net savings of $70.11 per day (holding cost savings minus additional shipping cost).In conclusion, option (2), the subcontractor's overnight team drive, is more economical for Handfield Manufacturing Co., resulting in a saving and a daily cost minus the savings of $240.11 - $70.11 = $170/day.