Recently, Abercrombie & F itch (A&F) began shiftinga large portion of its Asian deliveries to the U.S. from air freightto slower but cheaper ocean fre ight. Shipping costs have been cutdramatically, but shipment times have gone from days to weeks.In addition to having Jess control over inventory and being lessresponsive to fashjon changes, the holding costs have risen for thegoods in transport. Meanwhile, Central America might offer aninexpensive manufacturing a lternative that could reduce shippingtime through the Panama Canal to, say, 6 days, compared to, say,27 days from Asia. Suppose that A&F uses an annual holdingrate of 30%. Suppose further that the product costs $20 to producein Asia. Assume that the transportation cost via ocean linerwould be approximately the same whether coming from Asia orCentral America.a) What is the product cost plus holding cost per unit from Asia?b) Tf the product cost in Central America is x, wha t is the holdingcost per unit when shipping from Central America (as a functionof x)?c) Given a) and b), what is the break-even point for x? In otherwords, what would the maximum production cost in CentralAmerica need to be in order for that to be a competi tive sourcecompared to the Asian producer?

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Recently, Abercrombie & F itch (A&F) began shifting
a large portion of its Asian deliveries to the U.S. from air freight
to slower but cheaper ocean fre ight. Shipping costs have been cut
dramatically, but shipment times have gone from days to weeks.
In addition to having Jess control over inventory and being less
responsive to fashjon changes, the holding costs have risen for the
goods in transport. Meanwhile, Central America might offer an
inexpensive manufacturing a lternative that could reduce shipping
time through the Panama Canal to, say, 6 days, compared to, say,
27 days from Asia. Suppose that A&F uses an annual holding
rate of 30%. Suppose further that the product costs $20 to produce
in Asia. Assume that the transportation cost via ocean liner
would be approximately the same whether coming from Asia or
Central America.
a) What is the product cost plus holding cost per unit from Asia?
b) Tf the product cost in Central America is x, wha t is the holding
cost per unit when shipping from Central America (as a function
of x)?
c) Given a) and b), what is the break-even point for x? In other
words, what would the maximum production cost in Central
America need to be in order for that to be a competi tive source
compared to the Asian producer?

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