Question

Volvo (Sweden) has always enjoyed an excellent reputation for the engineering, quality, and safety of their vehicles; their heavy manufacturing is no exception. A firm named Everest based in the USA wishes to purchase some of their heavy equipment for construction such as dozers, cranes, excavators, and telescopic handlers. However, Everest has another supplier in mind: Liebherr in Germany. Liebherr and Volvo are neck-to-neck market share and sales. The US manufacturer determines that they are both acceptable suppliers and each meet the firm's specifications. The only differences the sales cost and modal transportation. Thus, Everest has three options: a) Buy from Volvo with delivery via Maritime-Rail (Volvo M-R); buy from Volvo via Maritime-Truck (Volvo M-T); and, buy from Liebherr via Maritime-Rail (Liebherr M-R). Assuming currency is in Euros. Volvo M-R will take 63 days at a cost of 20,043 Euros per piece of equipment; Volvo M-T will take 56 days at a cost of 20,752 Euros per Piece if equipment; and, Liebherr M-T will take 57 days at a cost of 19,990 Euros per piece. Everest is buying 15 pieces of equipment at an average cost per piece of equipment of 319,703 Euros if from Volvo and an average cost of 321,008 Euros if procured from Liebherr. The firm's cost of capital is 11.1% annually. Everest's goal is to minimize total costs. 1. Write the generic algebraic formulae including identifying all variables: (formula 3 ; variables 4): 2. Calculate cost for Volvo M-R: (6) Circle if this is the best choice 3. Calculate cost for Liebherr M-R: (6) Circle if this is the best choice 4. Calculate cost for Volvo M-T: (6) Circle if this is the best choice

Answer 1

Step-by-step explanation:

Generic Algebraic Formulae:

Let:

V_MR: Cost for buying from Volvo with delivery via Maritime-Rail

V_MT: Cost for buying from Volvo via Maritime-Truck

L_MR: Cost for buying from Liebherr via Maritime-Rail

N: Number of pieces of equipment to be purchased (N = 15 in this case)

C: Average cost per piece of equipment if purchased from Volvo (C = 319,703 Euros)

C_L: Average cost per piece of equipment if purchased from Liebherr (C_L = 321,008 Euros)

R: Cost of capital rate (R = 11.1% annually)

Calculate cost for Volvo M-R:

V_MR = (N * V_MR) + (N * C * (1 + R)^(63/365))

V_MR = (15 * 20,043) + (15 * 319,703 * (1 + 0.111)^(63/365))

V_MR = 300,645 + 4,746,310.63

V_MR ≈ 5,046,955.63 Euros

Calculate cost for Liebherr M-R:

L_MR = (N * L_MR) + (N * C_L * (1 + R)^(57/365))

L_MR = (15 * 19,990) + (15 * 321,008 * (1 + 0.111)^(57/365))

L_MR = 299,850 + 4,776,018.44

L_MR ≈ 5,075,868.44 Euros

Calculate cost for Volvo M-T:

V_MT = (N * V_MT) + (N * C * (1 + R)^(56/365))

V_MT = (15 * 20,752) + (15 * 319,703 * (1 + 0.111)^(56/365))

V_MT = 311,280 + 4,732,336.16

V_MT ≈ 5,043,616.16 Euros

Circle if this is the best choice: (V_MR) (L_MR) (V_MT)

Based on the calculations:

Cost for Volvo M-R (V_MR) ≈ 5,046,955.63 Euros

Cost for Liebherr M-R (L_MR) ≈ 5,075,868.44 Euros

Cost for Volvo M-T (V_MT) ≈ 5,043,616.16 Euros

The best choice based on minimizing total costs would be Volvo M-T (V_MT), as it has the lowest total cost among the three options.