Question: Total Distribution Cost I'mao Company has been producing various Items made of plastic. It recently added a line of plain, plastic cards that other buns (such as banks and retail stores) will imprint co produce credit cards. Prom offers its customers the plastic cards in different colors. but they all sell for 540 per box of 1,000. Tom Phillips, Proto's product man-ager for this line. is considering two possible physical dismbution systems. He estimates that if Now uses air freight, transportation costs will be $7.50 a box, and its cost of carrying inventory will be 5 percent of total annual sales dollars Alternatively. Pyoto could ship by rail for $2 a box. But rail transport will require renting space at four regional warehouses-at 526.000 a year each. Inventory carrying cost with this system 14111 be IC percent of total annual saki dollars. Phillips prepared a spreadsheet to compare the cost of the two alternative physical chstribu-non systems.
a. If Prato Company expects to sell 20,000 boxes a year, what are the total physical disttibutica costs for each of the systems?
b. If Phillips can negotiate cheaper warehouse space for the rail option so that each warehouse costs only 320,000 per year. which physical distribution system has the knots( overall cost?
c. Prom's finance manager predicts that interest rates are likely to be lower thump the next mar-keting plan year and suggests that Tom Phillips use inventory carrying costs of 4 percent for air freight and 7.5 percent for railroads (with ware-house cost at 320.0)0 each). If interest rates are in fact Iowa, which alternative would you sag. gest! Why! For additional questions related to this problem. see Exercise 12-3 in the Lonning Aid Jon toe with Basic Ma-i/rung I Ith edition.