Question

A manager must make a decision on shipping. There are two shippers, A and B. Both offer a two-day rate: A for $526 and B for $532. In addition, A offers a three-day rate of $470 and a nine-day rate of $411, and B offers a four-day rate of $459 and a seven-day rate of $412. Annual holding costs are 34 percent of unit price. Three hundred and fourty boxes are to be shipped, and each box has a price of $148.
Required:
1. Which shipping alternative would you recommend? (Round your intermediate calculations to 3 decimal places and final answers to 2 decimal places. Omit the "$" sign in your response.)

Answer 1

Answer:The answer is 2,719.17 since EOQ is achieved when the total ordering cost and holding cost is at the lowest, Alternative B will be the best alternative

Explanation:

Using the formula EOQ = √2DS/H where D = Demand in unit, S = Ordering cost, H = Holding Cost

Demand = 340 × 148 = 50,320, Ordering cost = Alternative A two day lead time $526, Alternative B two day lead time $532, Alternative A three days lead time $470, Alternative B nine days lead time $411, Alternative A four-day lead time $459, Alternative B seven days lead time $412, Holding Cost = 34% of unit cost = 34/100 × 148 = $50.32

Alternative A

EOQ =√2×50,320 × 526/50.32

√52,936,460/50.32

√1,051,996.42

= 1,025.67

√2×50,320×532/50.32

√53,540,840/53.32

√1,064,000

= 1,031.50

√2×50,320×470/50.32

√47,300,800/50.32

√940,000

=969.54

AlternativeB

√2×50,320×411/50.32

√41,363,040/50.32

√822,000

=906.64

√2×50,320×459/50.32

√46,193,760/50.32

√818,635.93

=904.79

√2×50,320×412/50.32

√41,463,680/50.32

√824,000

=907.74

Total Alternative A = 1,025.67 + 1,031.50 + 969.54

= 3,026.71

Total Alternative B = 906.64 + 904.79 + 097.74

= 2,719.17

Since EOQ is achieved when the total ordering cost and holding cost are at the lowest point. Therefore, shipping alternative B will be the best alternative

Answer 2

Answer: Shipper A with 100.50 rate per day

Explanation: To find the best shipping option, we have to calculate the average cost per shipper.

Shipper A:                                                   Shipper B:

2-day rate = $526                                      2-day rate = $532

3-day rate = $470                                       4-day rate = $459

9-day rate=$411                                           7-day rate = $412

Average rate per day                                  Average rate per day

= 526+470+411                                             =532+459+412

=1407/14days                                                 =1403/13days

=100.50                                                             =107.92

From the above calculation, holding cost for shipper A= 100.50*0.34=34.17 while holding cost for shipper B= 107.92*0.34 = 36.69

From the above calculation shipper A will be preferred as it has the lowest price per unit and holding cost.