Compare and contrast the effects of three main transportation cost factors on ho

Question

Compare and contrast the effects of three main transportation cost factors on how those factors influence the choice of air transport versus the use of truck or rail transport.

**Reading from the textbook regarding Transportation costs**

Costing Freight

The second dimension of transport economics and pricing concerns the criteria used to allocate cost. Cost allocation is primarily a carrier concern, but since cost structure influences negotiating ability, the shipper's perspective is important as well. Transportation costs are classified into a number of categories.

Variable

Costs that change in a predictable, direct manner in relation to some level of activity are labeled variable costs. Variable costs include direct carrier costs associated with movement of each load. These expenses are generally measured as a cost per mile or per unit of weight. Typical variable cost components include labor, fuel, and maintenance.

Fixed

Expenses that do not change in the short run and must be paid even when a company is not operating, such as during a holiday or a strike, are fixed costs. The fixed category includes costs not directly influenced by shipment volume. For transportation firms, fixed components include vehicles, terminals, rights-of-way, information systems, and support equipment. In the short term, expenses associated with fixed assets must be covered by contribution above variable costs on a per shipment basis.

Joint

Expenses created by the decision to provide a particular service are called joint costs. For example, when a carrier elects to haul a truckload from point A to point B, there is an implicit decision to incur a joint cost for the back-haul from point B to point A. Either the joint cost must be covered by the original shipper from A to B or a back-haul shipper must be found. Joint costs have significant impact on transportation charges because carrier quotations must include implied joint costs based on assessment of back-haul recovery.

Common

This category includes carrier costs that are incurred on behalf of all or selected shippers. Common costs, such as terminal or management expenses, are characterized as overhead. These are often allocated to a shipper according to a level of activity like the number of shipments or delivery appointments handled.

Explanation / Answer

Ans : All three modes of transport have their own advantages and limitations. Choice of transportation mode depends upon many factors like

(a) Value and nature of cargo

(b) Urgency of shipment.

(c) Cost factors.

(d) Local conditions of infrastructure.

(e) Other regulations.

(f) Distance

(g) Frequency of transport

The air transport being the costliest of all modes of transport is suitable for the cargo that is of high value, perishable, light in weight and has to be delivered urgently at a longer distance, often internationally. Usually, it is chosen when either the destination is inaccessible through trucks and railroad, or too much time is consumed in transit, or the goods is perishable in nature. The cost associated with this mode of transport is higher because of very high cost of infrastructure, operation and maintenance.

Trucks are the most flexible of all, as they can nevigate through majority of roads and enable the goods to be delivered at the doorstep at faster rate, though at a higher cost in comparison to railways. They are less safer than railways and their movement can be restricted by weather conditions, blockages and other conditions. Their efficiency also depends upon the road infrastructure of the region. On the cost front, they are costly due to small size of cargo carried at a time and high maintenance cost.

Railways are the least expensive, safer and capable of carrying huge loads. However, they are slower due to operational restrictions and can't reach at places which are not connected by railroad. They are cheaper due to low cost of operations and maintenance.They are more suitable for longer hauls.

The air transport will be suitable for lightweight, expensive, urgent and perishable goods that need to reach at the earliest, and where cost is not an issue. Road is suitable for shorter distances, for transporting small quantities, which need to be transported quickly though at a higher cost. Rail is suitable for transporting large quantities over large distances for commodities that need to be transported at lowest cost.

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