A manager at Strateline Manufacturing must choose between two shipping alternati

Question

A manager at Strateline Manufacturing must choose between two shipping alternatives: two-day freight and five-day freight. Using five-day freight would cost $140 less than using two-day freight. The primary consideration is holding cost, which is $10 per unit a year. 2,040 items are to be shipped.

Which alternative would you recommend? (Round your intermediate calculations to 2 decimal places.)

A manager at Strateline Manufacturing must choose between two shipping alternatives: two-day freight and five-day freight. Using five-day freight would cost $140 less than using two-day freight. The primary consideration is holding cost, which is $10 per unit a year. 2,040 items are to be shipped.

Explanation / Answer

Difference between the 5 day freight and the 2 day freight = $140

Holding cost = $10

Items to be shipped = 2,040 items.

Incremental holding cost = number of items*holding cost*(5 days - 2 days)/365 days

= 2040*10*3/365

= $167.67

Savings = $140.

As the incremental cost of 5 day freight > the savings of using a 2 day freight [$167.67>$140], using the 5-day freight will not be viable.

Hence the 2-day freight should be used.

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