11-56 Minimization of Transportation Costs W/o Income Taxes:

Green Lighting Company produces industrial and residential lighting fixtures at its manufacturing facility located in Scottsdale, Arizona. The company currently ships products to an eastern warehouse via common carriers at a rate of $.27 per pound of fixtures. The warehouse is located in Atlanta, 1,900 miles from Scottsdale. Alexis Azra, the treasurer of Green Lighting, is considering whether to purchase a truck for transporting products to the eastern warehouse. The following data on the truck are available:

Azra feels that an investment in this truck is particularly attractive because of her successful negotia- tion with Jetson to back-haul Jetsons products from Atlanta to Scottsdale on every return trip from the warehouse. Jetson has agreed to pay Green Lighting $2,300 per load of Jetsons products hauled from Atlanta to Scottsdale up to and including 100 loads per year. Green Lightings marketing manager has estimated that the company will ship 385,000 pounds of fixtures to the eastern warehouse each year for the next 4 years. The truck will be fully loaded on each round trip.Ignore income taxes.

1. Assume that Green Lighting requires a rate of return of 18%. Should it purchase the truck? Show computations to support your answer.
2. What is the minimum number of trips that Jetson must guarantee to make the deal acceptable to Green Lighting, based on the preceding numbers alone?
3. What qualitative factors might influence your decision? Be specific.

\begin{tabular}{ll} \hline Purchase price & $75,000 \\ Useful life & 4 years \\ Salvage value after 4 years & 0 \\ Capacity of truck & 7,000lb \\ Cash costs of operating truck & $.95 per mile \\ \hline \end{tabular}