Mode Mix Problem (Show your calculations for all questions)

ABC Power Tools is currently making shipments from its plant in New Jersey to a customer location in California. ABC currently uses a mix of motor carriers and rail to move its products to its customer. ABC is contemplating using an all-motor option for this move.

Use the following information to answer the questions at the end:

Price per unit = $1100

Net cost per unit = $750

Daily demand = 500 units

Inventory carrying cost = 30%

Rail cost = 3.5% of the price of the product

Motor carrier cost = 10% of the price of the product

ABC owns the inventory up

Questions 1. For the current mode mix, what is the percent days in transit compared to the days that ABC owns the inventory? 2. What is the percent change in the percent of days in transit from the current mode mix to the proposed mode mix for when ABC owns the inventory? Which of the two mode mix reduces the risks due to ownership? 3. What is the difference in inventory carrying cost between the current and proposed mode mixes? What is the percent change in inventory carrying cost between the two mode mixes? 4. What is the difference in freight cost (transportation cost) between the two mode mixes? What is the percent change in freight cost between the two mode mixes? 5. What is the total change in cash flow between the two mode mixes? Hint: When transportation costs are based on the product price, you need to calculate Revenue before you get the cost. Revenue = Price Per Unit * Daily demand * Days.

Current Mode Mix Proposed Mode Mix