Question

Your options for shipping $100,000 worth of fridges from China to Mexico, are (1) use a ship that will take 20 days at a cost of $5,000 or (2) ship them to Los Angeles and then truck the fridges to Mexico at a total cost of $7,800. The second option will take only 13 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.Which option is more economical?

Answer 1

The more economical option is to use a ship to transport the fridges directly from China to Mexico.

Step-by-step explanation:

The more economical option would be to use a ship to transport the fridges directly from China to Mexico. Although it takes longer at 20 days, the cost is lower at $5,000. To determine the total cost of holding the fridges, we need to calculate the holding cost for a year. Given that the value of the fridges is $100,000 and the holding cost is 30% of the value per year, the holding cost would be $30,000. Adding the cost of shipping, the total cost for this option would be $35,000. On the other hand, shipping the fridges to Los Angeles and then trucking them to Mexico would cost $7,800, but the total time would be shorter at 13 days. However, the holding cost would still be $30,000, resulting in a total cost of $37,800. Therefore, the option with the ship is more economical.