. I.XL, based in Medicine Hat, Alberta, produces clay bricks. It mixes dry ink t
ID: 348824 • Letter: #
Question
. I.XL, based in Medicine Hat, Alberta, produces clay bricks. It mixes dry ink to its bricks to make them brown. I.XL’s demand for dry ink is 70 tons per year. Currently, I.XL buys the dry ink from an import merchant who buys the ink from a Delaware manufacturer. The shipments arrive in lot size of 30 tons by rail. The current cost of dry ink is $610 per ton, including rail transport cost to I.XL location. I.XL keeps 7 tons of dry ink as safety stock. I.XL’s buyer thinks that the merchant is overcharging. Therefore, he contacted the manufacturer directly and asked if he could purchase dry ink directly from them. The answer was affirmative and the cost would be $500 per ton if picked up at the manufacturer’s shipping dock. A common carrier has quoted a price of $3,000 to haul a full truckload of dry ink (25 tons) from Delaware to Medicine Hat. The trip will take 6 days. The holding cost rate for I.XL is 12% of unit cost per year. For truck deliveries, I.XL will only hold 3 tons of safety stocks. Which alternative has lower total annual cost?
Current (Rail)
Annual purchase (& transport) cost =
Annual safety stock holding cost = ___________
Direct from manufacturer (Truck)
Annual purchase cost (in C$) =
Annual transport cost =
Annual in-transit holding cost =
Annual safety stock holding cost =
Explanation / Answer
A) Current Rail:
1) Demand for Dry Ink = 70 tons per year
The current cost of per ton ink = $610
So, Annual purchase(& transport) cost = $610 x 70 tons = $ 42,700
2) Safety stock = 7 tons
Holding cost = 12% of unit cost per year
Annual Safety stock holding cost for 1 ton = $610 *12/100 =$73.20 per unit
Annual safety stock holding cost for 7 tons = 7 tons x $73.20 = $512.40
Total Cost = $43,212.40
B) Direct from manufacturer (Truck):
1) Annual Purchase cost (in C$) = $ 35,000
Demand for Dry Ink = 70 tons per year
The current cost of per ton ink = $500
So, Annual purchase cost = $500 x 70 tons = $ 35,000
2) Annual Transport Cost = $8,800
cost = $3000 per 25 tons
Annual demand = 70 tons
Transport cost per ton = $3000 / 25 tons = $120
Annual Transport cost = $120 * 70 = $8,800
4) Annual Safety stock holding cost for 3 tons= $180
Holding cost = 12% of unit cost per year
Annual Safety stock holding cost for 1 ton = $500 *12/100 =$ 60 per unit
Annual safety stock holding cost for 3 tons = 3 tons x $60 = $180
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.