I am asking this question again. It was answered previously, but the # of days i
ID: 429741 • Letter: I
Question
I am asking this question again. It was answered previously, but the # of days it takes to transport was taken into consideration when it was answered; maybe it doesn't need to be but if someone could clarify and answer again, that would be great.
An appliance manufactuer has a plant near Toronto that receives small electric motors from a manufacturer located in Winnipeg. The demand for the motors is 120,000 units per year. The cost of each motor is $120. The motors are purchased in lots of 3,000 nits. The ownership of motor transfers to the appliance manufactuer in Winnipeg. The question is which mode of transportation, truck or train, the appliance manufactuer should use to bring the motors from Winnipeg to Toronto. The railroad company charges $2 per motor, and it takes approximately seven days by train. The trucking company charges $4 per motor, but it takes only three days. The appliance manufacturer will keep 1,000 units as safety stock if a truck is used and 3,000 units as safety stock if a train is used for transportation. If the holding cost rate is 25 percent of unit cost per uear, which mode of transportation will minimize total transportation and in-transit and safety holding cost?
Explanation / Answer
Annual demand for motors = 120000 units
Units in one lot per transportation = 3000 units
Cost of each motor = $120
Holding cost = 25% of unit cost per year
Case of transportation by train
Transportation cost = $2 / motor
Total transportation cost = 3000*2 = $6000
In transit cost = holding cost for 7 days of 3000 units
Holding cost = 25% of unit cost per year
In transit cost = 3000*120*7/365 = $6904.11
Safety holding cost = holding cost for 7 days of 3000 units
Safety holding cost =3000*120*7/365 = $6904.11
Overall cost / transportation = transportation cost + in transit cost + Safety holding cost
Overall cost / transportation = $6000 + $6904.11 + $6904.11 = $19808.22
Case of transportation by truck
Transportation cost = $4 / motor
Total transportation cost = 3000*4 = $12000
In transit cost = holding cost for 3 days of 3000 units
In transit cost = 3000*120*3/365 = $2958.21
Safety holding cost = holding cost for 3 days of 1000 units = 1000*120*3/365 = $986.31
Overall cost / transportation = transportation cost + in transit cost + Safety holding cost
Overall cost / transportation = $12000 + $2958.21 + $986.31
Overall cost / transportation = $15944.52
Difference between train and truck cost / transportation = $19808.22 - $15944.52
Difference between train and truck cost / transportation =$3863.7
Thus, per trip of transportation, truck mode is cheaper by $3863.7 in comparison to train mode so, truck mode of transportation is to be used.
Even on individual basis, safety holding cost and in transit holding cost is also smaller in case of truck transportation in comparison to train mode.
No. of trips in one year = 120000/3000 = 40
Annual savings through truck in comparison to train = 40*3863.7 = $154548
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