Chapter 11.S, Problem 17P

Question

••• S11.16 Recently, Abercrombie & Fitch (A&F) began shifting a large portion of its Asian deliveries to the U.S. from air freight to slower but cheaper ocean freight. Shipping costs have been cut dramatically, but shipment times have gone from days to weeks. In addition to having less control over inventory and being less responsive to fashion changes, the holding costs have risen for the goods in transport. Meanwhile, Central America might offer an inexpensive manufacturing alternative 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. Assuming that the transportation cost via ocean liner would be approximately the same whether coming from Asia or Central America, what would the maximum production cost in Central America need to be in order for that to be a competitive source compared to the Asian producer?