Chapter 15, Problem 2P

Summary Introduction

To determine: Which shipping alternative would be most economical.

Introduction: Supply chain defined as a sequence of associations, their offices, capacities, and actions that are engaged with manufacturing and conveying a product or administration. The chain starts with essential providers of raw materials and stretches out the distance to the last client. The supply chain fragment required with getting the completed item from the producer to the purchaser is known as distribution channel.

A supply chain is a sequence starts with essential providers or raw materials and stretches out the distance to an item or administration. No business association can exist without the two operations and supply chain.

Answer to Problem 2P

It is recommended that the six-day shipping alternative should be selected.  

Explanation of Solution

Given:

It is given that the total boxes to ship is 80 boxes with price per box is $200 and holding costs are 30% of price per box. The overnight expense of overnight alternative is $300 two-day alternative is $260 and six-day alternative is $180.

Calculate the holding cost of overnight shipping with six-day shipping:

It is calculated by multiplying the price per box with total boxes and the result is multiplied with percentage of holding costs.

$\begin{array}{c}\mathrm{Holding}\mathrm{Cost}=\left[\left(\mathrm{Total}\mathrm{Units}\times \mathrm{Price}\mathrm{per}\mathrm{box}\right)\times \mathrm{Percentage}\mathrm{of}\mathrm{Holding}\mathrm{Cost}\right]\\ =\left[\left(80\times \$200\right)\times 30\%\right]\\ =\$4,800\end{array}$

Calculate the incremental holding cost of six-day shipping with overnight shipping:

It is calculated by multiplying the holding cost with total units and subtracting the days of interval between the two alternatives and multiplying the result with the total units to be shipped and the whole result is divided by 365 days. The overnight shipping consists of one day.

$\begin{array}{c}\mathrm{Incremental}\mathrm{Holding}\mathrm{Cost}=\left[\frac{\begin{array}{l}\left(\mathrm{Days}\mathrm{of}\mathrm{Interval}\mathrm{between}\mathrm{alternatives}\right)\times \\ \mathrm{Holding}\mathrm{Cost}\end{array}}{365}\right]\\ =\left[\frac{\left(\left(6-1\right)\times \$4,800\right)}{365}\right]\\ =\left[\frac{\left(5\times \$4,800\right)}{365}\right]\\ =\left[\frac{\$24,000}{365}\right]\\ =\$\text{65}\text{.7534}\text{or}\text{\$65}\text{.75}\end{array}$

Calculate the net savings from using six-day shipping:

It is calculated by subtracting the shipping expense of overnight shipping alternative with six-day shipping alternative and the result is subtracted to incremental holding cost.

$\begin{array}{c}\text{Net}{\text{Savings}}_{\text{Six–day}\text{shipping}}=\left[\begin{array}{l}\left(\text{Shipping}{\text{Expense}}_{\text{Overnight}\text{shipping}}-\text{Shipping}{\text{Expense}}_{\text{Six–day}\text{shipping}}\right)-\\ \text{Incremental}\text{Holding}\text{Cost}\end{array}\right]\\ =\left[\left(\$300-\$180\right)-\$65.7534\right]\\ =\left[\$120-\$65.7534\right]\\ =\$54.2465or\$54.25\end{array}$

Hence, the net savings of six-day shipping alternative is $54.25.

Calculate the incremental holding cost of six-day shipping with two-day shipping:

It is calculated by multiplying the holding cost with total units and subtracting the days of interval between the two alternatives and multiplying the result with the total units to be shipped and the whole result is divided by 365 days.

$\begin{array}{c}\mathrm{Incremental}\mathrm{Holding}\mathrm{Cost}=\left[\frac{\begin{array}{l}\left(\mathrm{Days}\mathrm{of}\mathrm{Interval}\mathrm{between}\mathrm{alternatives}\right)\times \\ \mathrm{Holding}\mathrm{Cost}\end{array}}{365}\right]\\ =\left[\frac{\left(\left(6-2\right)\times \$4,800\right)}{365}\right]\\ =\left[\frac{\left(4\times \$4,800\right)}{365}\right]\\ =\left[\frac{\$19,200}{365}\right]\\ =\$\text{52}\text{.6027}\text{or}\text{\$52}\text{.60}\end{array}$

Calculate the net savings from using six-day shipping:

It is calculated by subtracting the shipping expense of two-day shipping alternative with six-day shipping alternative and the result is subtracted to incremental holding cost.

$\begin{array}{c}\text{Net}{\text{Savings}}_{\text{Six}-\text{day}\text{shipping}}=\left[\begin{array}{l}\left(\text{Shipping}{\text{Expense}}_{\text{Two}-\text{day}\text{shipping}}-\text{Shipping}{\text{Expense}}_{\text{Six}-\text{day}\text{shipping}}\right)-\\ \text{Incremental}\text{Holding}\text{Cost}\end{array}\right]\\ =\left[\left(\$260-\$180\right)-\$52.6027\right]\\ =\left[\$80-\$52.6027\right]\\ =\$\text{27}\text{.3973}or\$27.40\end{array}$

The net savings of six-day shipping alternative is higher than the two-day and overnight shipping alternatives.

Hence it is recommended that the six-day shipping alternative should be selected.