The traffic manager of the Monarch Electric Company has just received a rate-reduction offer from a trucking company for the shipment of fractional horsepower motors to the company's field warehouse. The proposal is a rate of $3 per hundredweight (cwt.) if a minimum of 40,000 pounds is moved in each shipment. Currently, shipments of 20,000 pounds or more are moved at a rate of $5 per cwt. If the shipment size falls below 20,000 pounds, a rate of $9 per cwt. applies.
To help the traffic manager make a decision, the following additional information has been gathered:
Annual demand on warehouse ............................................... 5,000 motors per year
Warehouse replenishment orders............................................ 43 orders per year
Weight of each motor, crated ............................................... 175 lb per motor
Standard cost of motor in warehouse ...................................... $200 per motor
Stock replenishment order handling costs................................. $15 per order
Inventory carrying costs as a percentage of average
value of inventory on hand for a year...................................... 25 percent per year
Handling cost at warehouse................................................ $0.30 per cwt.
Warehouse space............................................................. unlimited
Should the company implement the new rate?