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Question 11.S11.4: A French car company ships 120,000 cars annually to the Unit...

A French car company ships 120,000 cars annually to the United Kingdom. The current method of shipment uses ferries to cross the English Channel and averages 10 days. The firm is considering shipping by rail through the Chunnel (the tunnel that goes through the English Channel) instead. That transport method would average approximately 2 days. Shipping through the Chunnel costs $80 more per vehicle. The firm has a holding cost of 25% per year. The average value of each car shipped is $20,000. Which transportation method should be selected?

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Daily cost of holding the product = (.25 × $20,000)/365 = $13.70
Total holding cost savings by using the Chunnel = (10 – 2) × $13.70 = $110 (rounded)
Since the $110 savings exceeds the $80 higher shipping cost, the Chunnel option appears best.
This switch would save the firm (120,000)($110 − $80) = $3,600,000 per year.

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