Total Landed Cost Exercise Suppose you are trying to decide whether to make carb
ID: 412306 • Letter: T
Question
Total Landed Cost Exercise Suppose you are trying to decide whether to make carburetors in Michigan next to the Ford plant where they will be used, in Mexico in Chihuahua, or in coastal China. A truckload of carburetors from Chihuahua takes 5 days to reach Michigan, while a similar sized container of carburetors takes 23 days to reach Michigan from Guangzhou. There are 2000 carburetors in the truckload or container. 104,000 carburetors Estimated annual demand The price of the carburetors from each of the three locations China: Chihuahua: $5.00 F.O.B. Chihuahua Michigan: $6.50 delivered to the plant $3.50 F.O.B. the port of Yantian Shipping cost Yantian to Michigan: Chihuahua to Michigan: Local supplier $2,300 per cont $ 800 per load $.15 per carburetor Customs China: Chihuahua Local Supplier Nafta origiin Not applicable Risk Inventory cost (includes insurance) at 10% per year, or .000274% per dayExplanation / Answer
Number of truckload or containers required
= Estimated demand/ Number of carburettors in truckload or container
= 104000 / 2000
= 52 numbers
Shipping cost for full consignment of Carburettor :
Yantian to Michigan = $2300 / container x 52 containers = $ 119600
Chihuahua to Michigan = $800 / truckload x 52 trucks = $41600
For local supplier = $0.15 per Carburettor x 104,000Carburetor = $15600
Price plus shipping cost for each option :
From China = $3.50 x 104,000 + $119600 = $364,000 + $119,600 = $483,600
From Chihuahua = $5 x 104000 + $41600 = $520,000 + $41,600 = $561,600
For local supply = $6.5 x 104,000 + $15600 = $676,000 + $15,600 = $691,600
Total Customs duty payable :
From China = 7% of $483,000 = $33810
From Chihuahua = NIL ( since covered under NAFTA )
From local supplier = NIL ( no customs duty is applicable for local supply)
Inventory cost :
From China = 23 days x 0.000274/100 per day per $ x $483,600 ( Price plus shipping cost ) = $30.48
From Chihuahua = 5 days x 0.000274/ 100 per day per $ x $561,600 = $7.69
Local supply = NIL
Overhead cost :
From China = Cost for Carburetor buyer + Travel cost = $50,000 + $8,000 = $58,000
From Mexico = Cost for Carburetor buyer + Travel cost = $50,000 + $2000 = $52,000
From local supplier = Cost for Carburetor buyer = $50,000
Total Landed cost will be determined as :
Total landed cost = Price plus shipping cost + Total custom duty payable + Inventory cost + Overhead cost
Total landed cost from China = $483600 + $33810 + $30.48 + $58,000 = $575440.48
Total landed cost from Mexico = $561,600 + 0 + $7.69 + $52,000 = $613607.69
Total landed cost from local supplier = $691600 + 0 + 0 + 50,000 = $741,600
Since total landed cost for import from China is least, we shall choose the option of importing from China
WE WOULD CHOOSE THE OPTION OF IMPORTING FROM CHINA
WE WOULD CHOOSE THE OPTION OF IMPORTING FROM CHINA