Senco Electronics Company

Case Paper 3:2

Senco Electronics Company

By:  Albi Mathew (E01712425)

1. If you were Skip Grenoble, which alternative would you advise Jim Beierlein to implement? What criteria would you use to arrive at your decision?

Currently we can see that the transportation costs for air is 290,000 and for ocean is 150,000 but at the same time the total costs involved in transportation for air is 800,000 and for ocean is 823,000, here we are not considering the annual growth rate of 5%. So if I were skip Grenoble I will advise Jim to take the air transportation mode as the total cost involved in it is comparatively less than ocean transportation.

2.  At what level of demand (in pounds) per year would these two alternatives be equal?

a. Find the variable cost

Total cost - Fixed cost (ocean)

823,000 - 600,000= 223,000

Variable cost per unit of pound= 223,000 /2,500,000=0.0892 / lb.

For air

800,000 - 450,000=350,000

Variable cost per unit of pound=350,000/2,500,000=0.14 / lb.

The level of demand equation= fixed cost + (variable cost per pound * x) (x= demand in pounds)

For ocean= 600,000+ (0.0892x)

For air= 450,000+ (0.14x)

600,000 - 450,000=0.14x -0.0892x

150,000= 0.0508x

x= 150,000/0.0508=2,952,755.91 million pounds

At 2,952,755.91 mil pounds the level of demands for ocean and air will be equal and the cost of trade off point

Ocean, 600,000+ (0.0892*2,952,755.91) =863,385.827

Air, 450,000+ (0.14*2,952,755.91) =863,385.827

3. Graphically represent these two alternatives and their trade off point.

[pic 1]

4. Which alternative would you recommend be in place to accommodate future demand growth? What additional factors should be considered?

When we consider the future growth by 5% then the graph shows us that the total cost involved in ocean transportation is getting reduced after three years and the total cost involved in air transportation is increasing after three years. If we are considering other factors such as faster transport, safety etc. then we need to analyze again. But now we can use air transport for 3 years and then switch to ocean transport due to lower total cost of transportation, when the predicted 5% increase in demand / year is becoming reality. .

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