Question 1: Terry Burton, a college sophomore, is opening a small computer upgrade business in an empty bedroom of the house he rents. His plan is to limit his business to installing second hard drives, larger hard drives, and new media devices like CD and DVD burners. He believes his volume will be small enough to promise a 24-hour turnaround. He plans to limit options on each possible upgrade to 2 or 3 popular alternatives. Terry’s dad has loaned him $8,000 and he has another $4,000 of his own money. He has all of the tools he needs and a work table. His only investment will be in the hard drives, CD burners, and DVD burners. By buying in quantity, he will be able to reduce his costs and make a sizable profit on each upgrade. Terry has investigated DVD burners and has identified two alternatives. Both are purchased from U.S. suppliers.
- Alternative 1 sells DVD burners in cases of 24 at $1,145 per case. Insured shipping is $38 per case. Handling and processing fees charged by the distributor total $28 per case.
- Alternative 2 sells only through eBay at a fixed “Buy It Now” price of $970 for a case of 20. Insured shipping is $33. A handling charge of $18 is added to every case. Alternative 2 only takes Paypal payments and passes the Paypal fee on to the buyer. The Paypal fee for a $970 purchase is 2.9 percent plus $.30.
Compute the landed cost for each alternative.
Question 2: Andrew’s Castings imports plastic pellets from a South American supplier. Andrews incurs the following costs under its current contract:
Cost per ton $645
Transport to U.S. port $165/ton
Broker fees $28/ton
Insurance, security, handling $19/ton
Shipping from port to plant $68/ton
Andrew’s current contract is about to expire. If Andrew’s renews this contract, the only change is expected to be an increase in shipping from the port from $68 to $76 per ton. Andrew’s is also considering an alternative supplier who is offering the following:
Cost per ton $618
Transport to U.S. port $172/ton
Broker fees $31/ton
Insurance, security, handling $21/ton
Shipping from port to plant $76/ton
Compare the landed costs of the new supplier to those of the current supplier if the contract is renewed.