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Holding Costs

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Your options for shipping #100,000 of machine parts from Baltimore to Kuala Lumpur, Malaysia are (1) use a ship that will take 30 days at a cost of $3,800, or (2) truck the parts to Los Angeles and then ship at a total cost of $4,800. The second option will take only 20 days. You are paid via a letter of credit the day the parts arrive. Your holding cost is estimated at 30% of the value per year.

a. Which option is more economical?
b. What customer issues are not included in the data presented.

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Solution Summary

The solution picks the better option based on holding costs.

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Option 1

30 days = holding cost of 20.5% of value of shipment

Plus $3,800 shipping

30 days wait for letter of credit.

Option 2

20 days = holding time of 13.6% of value of shipment

Plus $4,800 shipping

20 days wait for letter of credit

Summary

20.5 ...

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