We can approach the problem by examining a specific situation. Consider the cost of shipping from Bloomington,

Question:

We can approach the problem by examining a specific situation. Consider the cost of shipping from Bloomington, Indiana, to Littleton, Massachusetts. Assume that the inventory carrying cost rate is 30 percent per year of the product value. This cost rate captures the cost of capital, insurance, warehouse cost, and so on. We use this cost rate to determine the actual cost to carry an item in inventory for a year given the value of an item, For example, an item that costs $100 would cost $30 to carry in inventory for a year if the carrying cost rate were 30 percent. Our alternative transportation modes are highway service provided by United Parcel Service (UPS), which takes eight days to ship from Bloomington to Littleton, and Federal Express, which offers a two-day air service. Exhibit 10.9 indicates the cost to ship 1 to 10 pounds from Bloomington to Littleton using the alternative services.

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