1. Projected annual demand from the new facility is 175,000 pounds. However, we
ID: 329881 • Letter: 1
Question
1. Projected annual demand from the new facility is 175,000 pounds. However, we expect this demand to grow by 10 percent annually over the next five years. Although the air transportation system appears to be the more expensive option right now, we need to take into consideration our growth and how each mode will help us achieve our profit and servjce goals" The relevant cost information for each altermative is presented in the following table Ocean s 50,000 Air $190,000 Transportation costs Inventory costs Carrying Handling Ordering 40,000 15,000 5,000 410,000 350,000 S520,000 $580,000 14,000 19,000 7,000 Fixed cost Total costs At what level of demand (in pounds) per year would these two altematives be equal? What would be the new total cost of using Ocean and Air transportation in year 2 (demand will increase by 10% to 198,000 pounds)? (20 Points) (Hint: Total Cost Fixed Cost + x*Annual Demand, Where x- Variable cost per unit; variable cost per unit variable cost/annual demand)Explanation / Answer
Projected demand = 175,000 pounds
Variable cost per unit for transportation by Ocean = ($520,000-$410,000)/175000 = $0.63
Variable cost per unit for transportation by Ocean = ($580,000-$350,000)/175000 = $1.31
Let at D pounds annual demand,the two alternatives are equal
Total cost for transportation by Ocean = 410,000 + 0.63*D
Total cost for transportation by Air =350,000 + 1.31*D
Hence, 410,000 + 0.63*D = 350,000 + 1.31*D
D = 88,235.29 pounds
In year 2,
Total cost for Ocean transportation = $410,000 + $0.63*198,000 = $534,740
Total cost for Air transportation = $350,000 + $1.31*198,000 = $609,380
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