A company located in Hartford, Connecticut, has agreed to purchase an item from a manufacturer in Vancouver, Canada. The purchasing agent in Hartford has identified 2 methods of shipping the item: truck or cargo ship. If the item is shipped by truck, it will take 14 days at a cost of $3 per unit to cross the continent and clear customs. A cargo ship will take 45 days through the Panama canal. But the transportation cost will only be $1.50 per unit. The company expect to buy 2000 units per year at a cost of $150 per unit. The in-transit carrying cost is of inventory is estimated to be 20% per year. Which mode of transport should agent select?
# OF DAYS IN TRANSIT: FOR MODE 1 (TRUCK) 14 DAYS FOR MODE 2(SHIP) 45 DAYS
Transportation cost per unit: FOR MODE 1 (TRUCK) $3.00 FOR MODE 2(SHIP) $1.50
In transit carrying cost 20% per year
Annual demand 2000 units
Unit cost $1,500