Comfy Mattresses, Inc., is opening a new plant in Orlando, Florida. Ron Lane, distribution manager, has been asked to find the lowest cost outbound logistics system. Given an annual sales volume of 24,000 mattresses, determine the costs associated with each option below

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Comfy Mattresses, Inc., is opening a new plant in Orlando, Florida. Ron Lane, distribution manager, has been asked to find the lowest cost outbound logistics system. Given an annual sales volume of 24,000 mattresses, determine the costs associated with each option below.

a. Build a private warehouse near the plant for $300,000. The variable cost, including warehouse maintenance and labor, is estimated at $5 per unit. Contract carrier transportation costs $12.50 per unit on average. No external transportation services are necessary for shipment of mattresses from the plant to the warehouse in this scenario. The fixed warehouse investment can be depreciated evenly over 10 years.

b. Rent space in a public warehouse 10 miles from the plant. The public warehouse requires no fixed investment but has variable costs of $8 per unit. Outbound contract carrier transportation would cost $12.50 per unit on average. The carrier at charges $5 per unit to deliver the mattresses to the warehouse from the plant.

c. Contract the warehousing and transportation services to the Freeflow Logistic Company, an integrated logistics firm with a warehouse location 25 miles from the plan. Freeflow requires a fixed investment of $150,000 and charges $20 per unit for all services originating at the plant. The fixed investment covers a 10-year agreement with Freeflow.

d. Name a few advantages aside from cost that the low-cost alternative above may have over the other alternatives.

Explanation:

Let us weigh different options for Comfy Mattresses:

Option A

building cost for a private warehouse near the plant (one time fixed cost) = $300,000

maintenance warehouse of $ 5 per unit = (24000 X5) = $120,000

cost of contract carrier $12.50 per unit = (24000X12.50) = $300,000

Total cost = $420,000 $ (120000+300000)

Depreciation @ 10% = $30,000

Total cost in a year = $450,000 (Total cost + Depreciation = $ (420000 + 30000))

Option 2

Variable cost = (24000 X8) $192000

Transportation of outbound carrier = (24000X12.50) $300,000

Carrier charges from warehouse to plant = (24000 X5) $120,000

Total = $612,000 (192000+300000+120000)

Option 3

Company's freeflow Logistic - Fixed investment = $150,000

Other charges = (24000 X20) = $480,000

Total = $630,000 = $ (150000 + 480000)

The best option is the first option. The investment in the first is more, but after deducting a depreciation of 10% every year the cost would be much less. The total cost in the first year would be $750,000 if we take depreciation which is more than the 2nd and 3rd option.

The cost will be drastically reduced for the second year. It will be $450,000, which covers the extra investment done in the warehouse during the first year. From the third year onward, the benefit of going with the first option will start showing.

If we are to rate all the options, Option 3 would be second in order, after the first option. Here Comfy Mattresses Inc outsources all the services to a private vendor by paying little extra amount than Option 2. Ina way all the risk as well as tension of transportation and running the plant is passed on the the vendor (Freeflow Logistic Company).