Reference no: EM133448624

Question

Happ Railcar Corporation is one of the premier builders of railroad cars. As a matter of fact, Happ's covered-hopper grain cars are the envy of the business, and the transportation equipment that Happ manufactures is the finest available anywhere. In an attempt to modernize its procurement and ordering practices, Happ's vice president of logistics, Bob Newby, is incorporating trade-off analysis into his next purchase of journal bearings.

Before his analysis, Newby had been purchasing high-quality journal bearings monthly. Usage rates are fairly consistent for this needed part, and so Happ's policy was to order sixty cases every month. Each case contains eight individual bearings: each bearing weighs 32.5 pounds and costs $40. Current freight bill information shows that the transportation cost for each sixty-case shipment is $814. According to Lisa Happ, the company's chief financial officer, the best figure for inventory carrying cost is 12 percent per year.

As an alternative, Newby is considering ordering only once every three months, at which time he would obtain 180 cases of bearings. This idea seems interesting, particularly because Newby projects the inbound transportation expense to be $1,300 for each 180-case shipment, rather than $814 for each 60-case monthly shipment.

Calculate the annual inventory carrying cost and annual transportation cost to determine which alternative would you prefer?