Question

A manufacturer of goods uses two factors to decide whether to use truck or rail for movement of its products to market: cost and total travel time. The manufacturer uses a utility formula that rates each mode. The utility formula is U = 5C +10T, where C is cost ($/ton) and T is time (hours). For a given shipment of goods, a trucking firm can deliver in 16 hours and charges $25/ton, whereas a railroad charges $17/ton and can deliver in 25 hours.

Required:
a. What other factors should the shipper take into account in making this decision?
b. Which mode should the shipper select?

Answer 1

(a) The utility formula is U = 5C+10T,

Where C is the cost

T is time (hours).

Calculate of the value of U by putting the values of C and T,

U = 5C+10T

For truck U = 5(25)+10(16)

For truck U = 125+160

For truck U = 285

U = 5C+10T

For rail U = 5(17)+10(25)

For rail U = 85+250

For rail U = 335

Conclusion: Then shipper should select truck mode.

(b) Other factors that the shipper should take into account in making this decision are:

1. Total landed cost

2. Nature of the product

3. Government regulations and policies