Reference no: EM131755784
Compare and contrast the effects of three main transportation cost factors on how those factors influence the choice of air transport versus the use of truck or rail transport.
Reading from the textbook regarding Transportation costs
Costing Freight
The second dimension of transport economics and pricing concerns the criteria used to allocate cost. Cost allocation is primarily a carrier concern, but since cost structure influences negotiating ability, the shipper's perspective is important as well. Transportation costs are classified into a number of categories.
Variable
Costs that change in a predictable, direct manner in relation to some level of activity are labeled variable costs. Variable costs include direct carrier costs associated with movement of each load. These expenses are generally measured as a cost per mile or per unit of weight. Typical variable cost components include labor, fuel, and maintenance.
Fixed
Expenses that do not change in the short run and must be paid even when a company is not operating, such as during a holiday or a strike, are fixed costs. The fixed category includes costs not directly influenced by shipment volume. For transportation firms, fixed components include vehicles, terminals, rights-of-way, information systems, and support equipment. In the short term, expenses associated with fixed assets must be covered by contribution above variable costs on a per shipment basis.
Joint
Expenses created by the decision to provide a particular service are called joint costs. For example, when a carrier elects to haul a truckload from point A to point B, there is an implicit decision to incur a joint cost for the back-haul from point B to point A. Either the joint cost must be covered by the original shipper from A to B or a back-haul shipper must be found. Joint costs have significant impact on transportation charges because carrier quotations must include implied joint costs based on assessment of back-haul recovery.
Common
This category includes carrier costs that are incurred on behalf of all or selected shippers. Common costs, such as terminal or management expenses, are characterized as overhead. These are often allocated to a shipper according to a level of activity like the number of shipments or delivery appointments handled.