Recently, Abercrombie & Fitch (A&F) began shifting a large portion of its Asian
ID: 377226 • Letter: R
Question
Recently, Abercrombie & Fitch (A&F) began shifting a large portion of its Asian deliveries to the U.S. from air freight to slower , but cheaper ocean freight. Shipping costs have been cut dramatically, but shipment times have gone from days to weeks. In addition to having less control over inventory and being less responsive to fashion changes, the holding costs have risen for the goods in transport. Meanwhile, Central America might offer an inexpensive manufacturing alternative that might reduce shipping time through the Panama Canalto, say,
88
days, compared to, say,
2525
days from Asia. Suppose that A&F uses an annual holding rate
2929%.
Suppose further that the product costs
$2323
to produce in Asia. Assuming that the transportation cost via ocean linear would be approximately the same whether coming from Asia or Central America, what would the maximum production cost in Central America need to be in order for that to be a competitive source compared to the Asian producer?
The maximum production cost in Central America should be $ (round your response to two decimal places).
Explanation / Answer
Saving in shipping time from central America vis a vis asia = 25 – 8 = 17
Given that :
Product cost = $ 23 ex asia
Annual holding cost = 29% of the product cost
Thus unit holding cost for 365 days = 29% of $23 = $ 6.67
Hence, prorated unit holding cost for 17 days = $6.67/365 x 17 = $0.3106
Therefore there is a saving of $0.3106 / unit due to saving in transit time from central America vs asia.
Hence, product from central America can be higher by $0.3106 over that of Asia
Thus maximum allowable production cost from central America = $23 + $ 0.3106 = $23.3106 ( $23.31 rounded to 2 decimal places )
THE MAXIMUM PRODUCTION COST IN CENTRAL AMERICA SHOULD BE = $23.31
THE MAXIMUM PRODUCTION COST IN CENTRAL AMERICA SHOULD BE = $23.31
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