Question

a container of ball-bearings valued at $25,000, currently located in brandon, manitoba, needs to be delivered to the brampton, ontario, plant. the standard shipment method takes two days. however, for an additional charge of $500, the container can be sent overnight. the annual holding cost rate for this type of item has been estimated at 28%. what must be the best decision that minimizes the total cost?

Answer 1

To minimize cost, calculate the daily holding cost from the annual rate and compare it to the overnight shipping charge. The daily holding cost for the ball-bearings is far less than the additional cost for overnight shipping, thus the standard two-day shipping is the most cost-effective option.

Step-by-step explanation:

The student is asking about a business decision regarding the shipping method that minimizes the total cost of delivering a container of ball-bearings from Brandon, Manitoba, to Brampton, Ontario. To make the best decision, we must consider the additional shipping cost for overnight delivery versus the carrying cost of an extra day in transit. Since the annual holding cost rate is 28%, we need to calculate the holding cost for one day to compare it with the overnight shipping charge of $500.

To calculate the daily holding cost, we use the formula:

Annual holding cost

= Value of the item x Holding cost rate

For the daily holding cost, we divide the annual holding cost by the number of days in a year (365 days).

Daily holding cost = ($25,000 x 28%) / 365
Daily holding cost = $19.18

Therefore, since the daily holding cost of $19.18 is significantly less than the $500 charge for overnight shipping, the most cost-effective option would be to use the standard two-day shipment method.