"Heartland's Best" that had sales in 2019 of $4,350,000. Sales estimates for 2020 indicate a 15 percent increase over the 2019 level.

Heartland's Best is sold to retail outlets for $4.00 per pound and due to some planned promotions and better positioning in advertising, a 30 percent sales increase in 2021 is expected..

Consequently, the company purchases turkeys from the Clermont, Kentucky supplier in simple economic order quantities (EOQ), which represent 1800 cases per order for 2021.

Heartland Farms coordinates the remaining distribution functions. The cured and packaged turkeys are purchased from the supplier on a FOB origin basis and sold to the retail outlets and franchisees on an FOB destination basis. Approximately 40 percent of sales revenue in 2019 can be attributed to direct variable costs and 60 percent of these direct variable costs are estimated to be actual turkey costs.

Heartland's Best is shipped in a case pack size of 25 pounds and inventory carrying costs expressed as a proportion of the cost of the turkeys is 20 percent per annum. Order processing costs are estimated to be $25 per order. Heartland Farms pays $10 per hundred pounds shipped for the refrigerated railcars and another $12 per hundred pounds for the commercial truck shipments to stores on a daily basis.

Assumptions

Total costs include average inventory carrying costs, inventory order processing costs and transportation costs;

Average cycle stock equals 1/2 of EOQ plus safety stock; and

The number of order cycles equals annual demand in cases divided by the EOQ.

How to figure out the total annual logistics cost be if the company uses the private fleet option? Safety stocks under this scenario are reduced to 279 cases.