DETERMINING DAILY COST OF HOLDING. A shipment of new connectors for semiconductors needs to go from San Jose to Singapore for assembly. The value of the connectors is $1,750, and holding cost is 40% per year. One airfreight carrier can ship the connectors 1 day faster than its competitor, at an

Question

DETERMINING DAILY COST OF HOLDING. A shipment of new connectors for semiconductors needs to go from San Jose to Singapore for assembly. The value of the connectors is $1,750, and holding cost is 40% per year. One airfreight carrier can ship the connectors 1 day faster than its competitor, at an extra cost of $20.00. Which carrier should be selected?
APPROACH [latex]\blacktriangleright[/latex] First we determine the daily holding cost and then compare the daily holding cost with the cost of faster shipment.

Accepted Answer

SOLUTION [latex]\blacktriangleright[/latex] Daily cost of holding the product = (Annual holding cost × Product value)/365
= (.40 × $1,750)/365
= $1.92

Because the cost of saving one day is $20.00, which is much more than the daily holding cost of $1.92, we decide on the less costly of the carriers and take the extra day to make the shipment. This saves $18.08 ($20.00 − $1.92).

INSIGHT [latex]\blacktriangleright[/latex] The solution becomes radically different if the 1-day delay in getting the connectors to Singapore delays delivery (making a customer angry) or delays payment of a $150,000 final product. (Even 1 day’s interest on $150,000 or an angry customer makes a savings of $18.08 insignificant.)

LEARNING EXERCISE [latex]\blacktriangleright[/latex] If the holding cost is 100% per year, what is the decision? [Answer: Even with a holding cost of $4.79 per day, the less costly carrier is selected.]

RELATED PROBLEMS [latex]\blacktriangleright[/latex] S11.14, S11.15, S11.16, S11.17

Question 11.S4: DETERMINING DAILY COST OF HOLDING. A shipment of new connect...

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