A company imports parts from Taiwan through the Port of Seattle on the West Coas

Question

A company imports parts from Taiwan through the Port of Seattle on the West Coast. The parts are destined for its assembly operations on the East Coast. Rail shipments are made, and the cross-country trip requires 21 days. The parts are worth $250 each at the port, and 40,000 of them are used annually in assembly operations. Inventory carrying costs are 25 percent per year. The rail rate to the East Coast is $6 per 100 lb., and crated parts weigh 125 lb. each. As an alternative, trucking can be used to cross the country in seven days. Truck rates are $11 per 100 lb. Do the savings in rail from reduced in-transit inventories justify the higher cost of trucking?

Explanation / Answer

Total Demand       40,000 Cost / Part $250 Total Cost $40,250 Inventory Carrying Cost $10,063 Weight per part (Lbs) 125 Total Parts weight (Lbs) 5,000,000 Rate Through Rail / 100 lbs $6 Annual cost through rail $300,000 Truck Rate / 100 Lbs 11 Annual cost through Truck     550,000 Incremental rate through truck     250,000

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