Question

Your options for shipping $100 000 of machine parts from Hamilton to Kuala Lumpur, Malaysia, are (1) use a ship that will take 30 days at a cost of $3800, or (2) truck the parts to Vancouver and then ship at a total cost of $4800. The second option will take only 20 days. You are paid via a letter of credit the day the parts arrive. Your holding cost is estimated at 30% of the value per year.

a. Which option is more economical?

b. What customer issues are not included in the data presented?

Answer 1

Option 1, using a ship that takes 30 days and costs $3,800, is more economical than option 2, trucking the parts to Vancouver and then shipping, which takes 20 days and costs $4,800. The holding costs for both options are assumed to be the same, at 30% of the value of the parts per year. The customer issues not included in the data presented are reliability, speed, and potential risks or delays.

Step-by-step explanation:

To determine which option is more economical, we need to compare the total costs and the holding costs of both options. Option 1, using a ship, costs $3,800 and takes 30 days. Option 2, trucking the parts to Vancouver and then shipping, costs $4,800 and takes 20 days. To calculate the holding costs, we need to know the holding period, which is not provided in the question. However, assuming a holding period of one year, the holding cost for option 1 would be $30,000 (30% of $100,000) and for option 2 would be $30,000 (30% of $100,000).

Therefore, the total cost for option 1 would be $33,800 ($3,800 + $30,000) and for option 2 would be $34,800 ($4,800 + $30,000). Option 1 is more economical as it has a lower total cost.

The customer issues not included in the data presented are the reliability and speed of each option, as well as any potential risks or delays associated with shipping by ship or trucking to Vancouver.