9. Astro Industries of Minneapolis, MN makes weekly shipments to 20 customers in

Question

9. Astro Industries of Minneapolis, MN makes weekly shipments to 20 customers in the Dallas, TX area. Each customer's order weighs, on average, 1500 pounds. A direct truck shipment from MSP to DFW costs $1,800. The maximum truck load per truck is 40,000 pounds. Part a: How much would it cost Astro to make direct, single-order shipments to all of its customers each week? What would the average utilization levels per truck be? Part b: Suppose a Dallas based warehousing firm has agreed to run a break-bulk warehousing operation for Astro at a cost of $75 per hundred-weight. Local deliveries would tack on an additional $100 per customer per week. How much could Astro save by going with this option? Part c: How high would warehousing costs have to rise to for the break-bulk warehouse option to be no cheaper than direct shipments?

Explanation / Answer

Total order per week = Average order size X Number of customers

= 1500 X 20

= 30000 pounds

Part a:

Cost of direct single-order shipments per week = Cost of one order X Number of customers

= 1800 X 20

= $ 36000

Utilization level per truck = Capacity used / Total capacity

= 1500 / 40000

= 0.0375

In percent terms, 3.75% of the truck capacity is utilized

Part b:

Assuming that we are using warehousing for 1 truck load capacity of 30000 pounds which costs

$1800 for transport from MSP to DFW ------------------- (1)

Cost of storing 30000 pounds in the warehouse = (75 /112 ) X 30000 = $ 20089 -------------- (2)

( 1 hundred weight = 112 pounds)

Total local delivery cost = Local delivery cost per customer X Number of customers

= 100 X 20

= $ 2000 ------------------------------ (3)

Therefore, warehousing option would cost (1) + (2) + (3)

= 1800 + 20089 + 2000

= 23889 $

Cost saving using warehouse = 36000 - 23889

= 12111 $

Part c:

The warehousing cost must increase in total by 12111$ to make that option no cheaper than direct shipments

20089 + 12111 = (C / 112) X 30000

or

C = (32200 / 30000) X 112

= 120.21 $

Thus the warehousing cost must rise by 120.21 - 75 = 45$ to make that option no cheaper than direct shipments

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