manufacturer is considering the cost of establishing a warehouse for a market in

Question

manufacturer is considering the cost of establishing a warehouse for a market in which it currently ships all products directly to the customer. The current cost for an average direct-to- customer shipment of 1000 lbs. is $7.00 per cwt (hundredweight). The cost for volume shipments (10,000+ lbs.) to the market warehouse is $3.00 per cwt, and the cost for local delivery within the market from the warehouse is $2.50 per cwt. Can the manufacturer justify the use of a warehouse in this situation? Please show all work to arrive at your decision. Assumptions and alternatives are summarized below: Manufacturer direct ship to customer o Average shipment 1000 lbs o Freight rate to customer $7.00 per cwt OR Ship to warehouse market at Volume transport rate-$3.00 per cwt For shipments 10,000+ lbs -Local delivery within market-$2.50 per cwt

Explanation / Answer

Alternative 1: Manufacturer direct ship to customer

Transportation cost of average shipment of 1000 lbs = (1000/100)*7 = $ 70

Alternative 2: Ship to warehouse market

Transportation cost to warehouse per shipment = (10000/100)*3 = $ 300

Transportation cost per 1000 lbs = 300/10000*1000 = $ 30

Local delivery cost per 1000 lbs = (1000/100)*2.5 = $ 25

Total transportation cost per 1000 lbs = 30+25 = $ 55

Alternative 2 is more economical as compared to alternative. It results in savings = 70 - 55 = $ 15 per 1000 lbs

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