Tashtego Should the motor vessel Tashtego be used as a freight tender between Dar-es- Salaam and Zanzibar in East Africa or as a tapioca ship between Balik Papan and Singapore in the East Indies? Or, is this too narrow a view of the management issue involved? Macedonian Shipping (MS) typically purchased one or two ships each year. In 1963 MS bought only the Tashtego. She was launched in October. The ship was named for the Wampanoag Indian from Martha's Vineyard who was second harpooner on the whaling ship Pequod in Melville's novel, Moby Dick. In contrast to the other 27 vessels of the fleet which were all of about 12,500 tons burden, the Tashtego was a small ship of only 4,500 tons (the burden of a freighter is the weight of freight of standard bulk it can carry). It had been acquired to allow Macedonian Shipping to compete on the tapioca trade between Balik Papan in South Borneo and Singapore. There was essentially unlimited tapioca for export out of Balik Papan, but the harbor channel was such that only small vessels like the Tashtego could get in. Tashtego was making 50 round trips a year on this route. The operating cost per dollar of revenue for a small vessel, fully laden, was higher than would be the case for a large ship. But the larger ships were not able to navigate the channel. Operating costs for the two sizes of vessel owned by Macedonian are shown in Exhibit 1. Less than a year after MS put the Tashtego into service, the port authority of Balik Papan obtained a grant to deepen the harbor channel. Ships of up to 15,000 tons would be able to use the port after the deepening project, which was expected to be completed in September or October of 1965. It would then be possible for the larger vessels of the MS line to serve Balik Papan. The greater carrying capacity of the larger ships should, it was thought, more than compensate for the higher total operating costs of such a vessel. The larger vessels would have to call at Balik Papan at least as frequently as Tashtego in order to fulfill shippers' requirements. If the big ships called at Balik Papan, they would have to stop twice at Singapore, once before Balik Papan and once after. This was because (1) the tapioca had to be transshipped at Singapore, (2) the large vessels were usually too full of cargo on the castward run to get the tapioca in as well before calling at Singapore, and (3) the cargo to be moved from Singapore to Balik Papan had to be loaded. Whether the company dedicated one large ship to this route or used different ships as necessary as they passed Singapore was not deemed critical to the analysis. The round trip between Singapore and Balik Papan by the best navigable route was 960 sea miles. At the normal sailing speed of the larger vessels in these waters-16 knotsthey required approximately 2 1/2 steaming days. This compares with slightly less than 3 1/2 steaming days for Tashtego The larger vessels could carry 6,850 tons of tapioca on each voyage from Balik Papan to Singapore versus 3,950 tons for Tashtego. It was thought that the bookings of manufactured goods that were currently being taken from Singapore to Balik Papan by Tashtego would be the same for the larger vessels. This quantity was based on demand, not capacity. Tashtego was carrying 3,150 tons of manufactured goods on a typical voyage from Singapore to Balik Papan, at an average revenue of $2.70 per ton. 244 Tashtego The current freight rate for tapioca was $5.10 per If Tashtego were to be used as a "shuttle," it would be ton for the trip from Balik Papan to Singapore. There necessary for scheduling purposes to have the larger ships appeared to be a stable or increasing demand for the call at the same port each time. Exhibit 4 evaluates which commodity. While the freight rate might go up in the port to eliminate for the large vessels. future, it was reasonable to assume that it would not go Mr. Georgopoulis was anxious to arrive at a down. decision about whether or not to move Tashtego. An The turn around time (the period between the opportunity had arisen to move the ship from Singapore to ship's arrival at a port and departure from it) at Balik Zanzibar with a cargo which would cover the cost of Papan was relatively slow. Because of the inadequacy of moving the ship. As this was a very unusual cargo, it was the cranage facilities, it would take 3 days to turn one of not thought likely that a similar opportunity would arise the large vessels versus 2 1/2 days to turn Tashtego. This before autumn difference was caused by the greater amount of cargo to He was anxious to keep all the ships as active as be moved in the larger vessels. possible. The company had a very good reputation among Because of the extensive modern facilities at shippers and had therefore been able to fill its ships all the Singapore, all ships of the size being considered could be time. In fact, Macedonian was one of very few fully tumed around in 1 day, regardless of the amounts being booked shipping lines in the business. loaded or discharged The most recent income statement of the company is shown in Exhibit 5. The year ended ALTERNATIVE USE OF TASHTEGO December 31, 1963 was considered a typical year for the Peter Georgopoulis, President of Macedonian, felt he company needed to find a new use for Tashtego. The best alternative seemed to be using it as a freight tender QUESTIONS between Dar-es-Salaam (in East Africa) and the island of The issue in this case is very exotic-should the motor Zanzibar. At present, the large vessels of the line called at vessel Tashtego be used on the tapioca run between both of these ports, incurring port charges as detailed in Singapore and Balik Papan in East Asia or as a freight Exhibit 2. The Macedonian ships used lighters in place of tender between Zanzibar and Dar-es-Salaam in East docking in all the ports listed here because it was less Africa? This decision hinges on a cost analysis as to expensive and often quicker for the small amounts of which option is more profitable. One issue we will cargo involved. The cargo, which consisted of dates and discuss in class is what constitutes a "variable cost when ground nuts from Dar-es-Salaam, and coconuts, copra, some costs vary per ton, some per day, some per mile, and and special timbers from Zanzibar, was usually carried to some per stop. Other issues we will discuss include the the United States. The freight normally collected on each importance of defining the alternatives precisely, the trip at the two ports amounted to about 1350 tons in Dar concept of profit contribution per unit of capacity, and the es-Salaam and 2500 tons in Zanzibar. The large vessels role of cost analysis in helping management to ask the were calling 80 times a year at the two ports. right questions. If Tashtego were to be used on this alternative In order to help you work through this difficult route, it would shuttle the cargo from one of the two ports but also valuable case, the following specific questions to the other, so that the large vessel need make only one should be answered in order. These questions help you stop in the area on a given run, thereby saving time and develop. piece by piece, an overall analysis of the portage dues. The incremental costs which would be decision. Try to imagine tackling the case with no incurred by Tashtego at the two ports are summarized in specific questions as a guide! Exhibit 3. The sailing time between the two ports was very 1. How much profit contribution can be eamed by short, and this distance (72 miles) was such that only! carrying 1 ton of tapioca from Balik Papan to day (2 days round trip) was involved no matter which Singapore, dock to dock, considering revenue and vessel is being used. The higher speed of the larger cargo costs? How much can be earned by carrying 1 vessels had no noticeable effect over such a short trip. It ton of general merchandise from Singapore to Balik was thought that an overall savings of 3 days per voyage Papan? would be attained by the large vessels (one port call (2 days in either port) and a day of steaming in transit) if 2. Given the contribution ton figures arrived at in Tashtego were used on the Zanzibar Dar-es-Salaam run. question I, what is the total contribution which can be Tashtego 245 earned on one round trip by Tashtego between 5. What is the overall profit impact if Tashtego is Singapore and Balik Papan and return? By one of the moved and large vessels are used on the tapioca run? large vessels? (Hint: Pull your answer to question 4 together with the information in Exhibits 3 and 4.) 3. Independent of the amount and type of cargo carried, what are the incremental trip costs of sending 6. What actions should Mr. Georgopoulis take? Why? Tashtego on a round trip between Singapore and (Hints: 1) What is Macedonian's average profit Balik Papan? One of the large vessels? contribution per shipping day for 1963? 2) Was buying Tashtego to use as a tapioca ship a good 4. Considering revenue, trip costs, and cargo costs what investment decision, based on information available is the total contribution per round trip for each of the at that time?) vessel types? What is the total contribution per year for each of the vessel types? EXHIBIT 1 Annual Operating costs of Vessels Costs Typical for Size of Vessel Item 4,500 Tons 12.500 Tons Payroll $143,594 $210,877 Depreciation (straight line, 15 yr. life) 222,956 363,226 Repairs 40,000 47,500 Stores and Provisions 32,657 39,283 Insurance 36,030 46,750 Miscellaneous 12.975 22.525 Total Annual Cost* $488,212 $730.163 On average, there were 345 operating days in a year, so the cost per operating day was $1,415 $2,116 In addition, bunkering costs (fuel costs) were incurred amounting to $0.73 per mile $1.27 per mile In general, these costs were committed one year at a time if a vessel was in use. The costs did not vary depending on cargo or route Typically, 2/3 of the cost of a ship could be financed over its depreciable life at rates averaging 5% in 1963. 73.0 EXHIBIT 2 Cost of Port calls Cost Item Varies with: Unit Balik Papan Singapore Zanzibar Dar es Salaam Trip Costs Portage dues Tonnage of burden s/day in port 0.14 0.20 0.13 0.31 ton burden Lighthouse Per trip S/visit 126.0 62.0 Special Assessment Per stop $/visit Cargo Costs Lighterageb Freight moved Ston of freight 0.25 0.16 0.14 0.15 moved Stevedoring Freight moved Siton of freight 0.56 0.32 0.32 0.32 moved Cranage Freight moved Siton of freight 0.14 0.13 0.13 * All ships exceeding 8,000 tons burden were to be assessed $2,000 for each port call (in addition to portage dues). This assessment was intended to contribute to the investment in and maintenance of the new deep channel that these ships required Lighterage expense is the cost of having small barges called "lighters" come alongside the vessel anchored in the harbor to facilitate loading and unloading of cargo. There is no cranage charge at Balik Papan because the freight is manhandled. This considerably increases the charge for stevedoring relative to other ports. Total $1,395 EXHIBIT 3 Costs of Using the Tashtego in East Africa Dar-es-Salaam Zanzibar 1. Trip Costs Portage S1.170 Lighthouse $1.457 $1,170 $ 2,627 Sea Bunkering (.73/mile x 144 mile round trip) 105 Total 2.732/trip Times 69 trips $188,508/year 2. Additional Cargo Costs on the Dar-es-Salaam Cargo Total tons/year - (1,350/trip x 80 trips) - 108,000 tons Unloading costs a Zanzibar (.14 + 32 + 13) - 59 1.18 x 108K tons $127.440/year Reloading costs @ Zanzibar (.14 + 32 +.13) = 59 Total = $315948/year * 4,500 tons x 31/day/ton x 1 day = $1,395 $4,500 tons x 13/day/ton x 2 days - S1,170 345 days (from Exhibit 15 days per trip (2 in Zanzibar + 2 at sea + 1 in Dar-es-Salaam). It is assumed in the case that the decline in customer service in Dar-es-Salaam involved in cutting back from 80 pickups per year to 69 is not a binding consideration The same tonnage must be loaded at Dar-es-Salaam per year as now, so the only additional charges are for unloading this Dar-es-Salaam cargo in Zanzibar and for reloading it in Zanzibar onto a large vessel. Tashtego 247 EXHIBIT 4 Why the Large Vessels Should Eliminate the Stop at Dar-es-Salaam Inspection of Exhibit 2 shows that Zanzibar has far cheaper portage dues than Dar-es-Salaam, is at least as cheap in all other cost categories, and has no lighthouse charge. Therefore, at first glance it appears that the Dar-es-Salaam port call should be eliminated for the large vessels. We must be careful, however, because cargo at the eliminated port will have to be doubled handled. If Dar-es-Salaam generates more cargo, total cost might be lower if Zanzibar were eliminated. But Zanzibar generates more cargo (2,500 tons per call vs. 1,350 tons). Therefore, without detailed calculation, we can conclude that the large vessels should call at Zanzibar. Cost savings by having large vessels avoid Dar-es Salaam Portage dues (2 day port call) $7,7503 Lighthouse fee 62 7,812 Bunkerage 916 Total per trip $7,903 Times 80 trips $632,240 per year 12,500 tons * $.31/day/ton x 2 days - 97,750 b $1.27/mile x 72 miles - 591 No stevedoring, lighterage or cranage will be saved as the cargo will still have to be loaded onto a ship at Dar-es- Salaam eventually. EXHIBIT 5 MACEDONIAN SHIPPING COMPANY Income Statement for the Year Ended December 31, 1963 Voyage Revenues for the Year Voyage Expenses Gross Margin Shore Support and Administrative Expenses Net Income before Taxes Income Tax Expense (52%) Net Income $49,661,000 33.480,000 16,181,000 10.234.000 5,947,000 3.088,000 $2,859,000 *Ship costs, trip costs, and cargo costs. Some notes on the Tashtego case This case highlights how unpacking a complex" cost structure facilitates decision making. The questions at the end of the case are useful in structuring your analysis, and help you in analyzing the case in a logical sequence Here are some (hopefully) useful additional thoughts: 1. CM per ton does not depend on the type of ship. And, cargo (either Taploca or general merchandise) involves costs for both loading and unloading, 2. CM per trip does vary with the type of ship. Note that portage dues depend on the overall tonnage of a ship and not just on the cargo weight. The first real question is what kind of capacity - large or small ship - does the company want to put in place for the BP.S route. That is, is it more profitable to deploy a LV or Tashtego on the BP-S route? Is the cost of the ship itself (acquisition or annual operating costs) relevant for this decision, if the (freed) ship could be used elsewhere in Macedonia? Assume that a LV will make will the same number of round trips per year on the BP-S route as Tashtego. 3. Now, think about moving the T to the DES-Z route. What is the cost (see exhibit 3)? What are the cost savings from not having a large vessel call at both ports (see exhibit 4)? Does it make sense to move the T to the alternate route? 4. Next, think about the capacity used in the S-BP route for a LV and for Tashtego, as well as in the Z-DES route. For each type of vessel, compare the amount of capacity used up in the two routes. If one route takes more capacity than the other, is there an opportunity cost for the extra capacity used? How can you estimate the OC for this capacity? (hint: For this last step, use the income statement and try to back out Contribution Margin from total Gross Margin and divide by the total number of ship days available). 5. You can then start exploring options not explicitly presented in the case. Overall, this case emphasizes how cost analysis is really a way to structure your thought process, and how it might open up new lines of enquiry. The answers from cost analyses are only as good as the question posed and the assumptions that underlie the analysis! Tashtego Should the motor vessel Tashtego be used as a freight tender between Dar-es- Salaam and Zanzibar in East Africa or as a tapioca ship between Balik Papan and Singapore in the East Indies? Or, is this too narrow a view of the management issue involved? Macedonian Shipping (MS) typically purchased one or two ships each year. In 1963 MS bought only the Tashtego. She was launched in October. The ship was named for the Wampanoag Indian from Martha's Vineyard who was second harpooner on the whaling ship Pequod in Melville's novel, Moby Dick. In contrast to the other 27 vessels of the fleet which were all of about 12,500 tons burden, the Tashtego was a small ship of only 4,500 tons (the burden of a freighter is the weight of freight of standard bulk it can carry). It had been acquired to allow Macedonian Shipping to compete on the tapioca trade between Balik Papan in South Borneo and Singapore. There was essentially unlimited tapioca for export out of Balik Papan, but the harbor channel was such that only small vessels like the Tashtego could get in. Tashtego was making 50 round trips a year on this route. The operating cost per dollar of revenue for a small vessel, fully laden, was higher than would be the case for a large ship. But the larger ships were not able to navigate the channel. Operating costs for the two sizes of vessel owned by Macedonian are shown in Exhibit 1. Less than a year after MS put the Tashtego into service, the port authority of Balik Papan obtained a grant to deepen the harbor channel. Ships of up to 15,000 tons would be able to use the port after the deepening project, which was expected to be completed in September or October of 1965. It would then be possible for the larger vessels of the MS line to serve Balik Papan. The greater carrying capacity of the larger ships should, it was thought, more than compensate for the higher total operating costs of such a vessel. The larger vessels would have to call at Balik Papan at least as frequently as Tashtego in order to fulfill shippers' requirements. If the big ships called at Balik Papan, they would have to stop twice at Singapore, once before Balik Papan and once after. This was because (1) the tapioca had to be transshipped at Singapore, (2) the large vessels were usually too full of cargo on the castward run to get the tapioca in as well before calling at Singapore, and (3) the cargo to be moved from Singapore to Balik Papan had to be loaded. Whether the company dedicated one large ship to this route or used different ships as necessary as they passed Singapore was not deemed critical to the analysis. The round trip between Singapore and Balik Papan by the best navigable route was 960 sea miles. At the normal sailing speed of the larger vessels in these waters-16 knotsthey required approximately 2 1/2 steaming days. This compares with slightly less than 3 1/2 steaming days for Tashtego The larger vessels could carry 6,850 tons of tapioca on each voyage from Balik Papan to Singapore versus 3,950 tons for Tashtego. It was thought that the bookings of manufactured goods that were currently being taken from Singapore to Balik Papan by Tashtego would be the same for the larger vessels. This quantity was based on demand, not capacity. Tashtego was carrying 3,150 tons of manufactured goods on a typical voyage from Singapore to Balik Papan, at an average revenue of $2.70 per ton. 244 Tashtego The current freight rate for tapioca was $5.10 per If Tashtego were to be used as a "shuttle," it would be ton for the trip from Balik Papan to Singapore. There necessary for scheduling purposes to have the larger ships appeared to be a stable or increasing demand for the call at the same port each time. Exhibit 4 evaluates which commodity. While the freight rate might go up in the port to eliminate for the large vessels. future, it was reasonable to assume that it would not go Mr. Georgopoulis was anxious to arrive at a down. decision about whether or not to move Tashtego. An The turn around time (the period between the opportunity had arisen to move the ship from Singapore to ship's arrival at a port and departure from it) at Balik Zanzibar with a cargo which would cover the cost of Papan was relatively slow. Because of the inadequacy of moving the ship. As this was a very unusual cargo, it was the cranage facilities, it would take 3 days to turn one of not thought likely that a similar opportunity would arise the large vessels versus 2 1/2 days to turn Tashtego. This before autumn difference was caused by the greater amount of cargo to He was anxious to keep all the ships as active as be moved in the larger vessels. possible. The company had a very good reputation among Because of the extensive modern facilities at shippers and had therefore been able to fill its ships all the Singapore, all ships of the size being considered could be time. In fact, Macedonian was one of very few fully tumed around in 1 day, regardless of the amounts being booked shipping lines in the business. loaded or discharged The most recent income statement of the company is shown in Exhibit 5. The year ended ALTERNATIVE USE OF TASHTEGO December 31, 1963 was considered a typical year for the Peter Georgopoulis, President of Macedonian, felt he company needed to find a new use for Tashtego. The best alternative seemed to be using it as a freight tender QUESTIONS between Dar-es-Salaam (in East Africa) and the island of The issue in this case is very exotic-should the motor Zanzibar. At present, the large vessels of the line called at vessel Tashtego be used on the tapioca run between both of these ports, incurring port charges as detailed in Singapore and Balik Papan in East Asia or as a freight Exhibit 2. The Macedonian ships used lighters in place of tender between Zanzibar and Dar-es-Salaam in East docking in all the ports listed here because it was less Africa? This decision hinges on a cost analysis as to expensive and often quicker for the small amounts of which option is more profitable. One issue we will cargo involved. The cargo, which consisted of dates and discuss in class is what constitutes a "variable cost when ground nuts from Dar-es-Salaam, and coconuts, copra, some costs vary per ton, some per day, some per mile, and and special timbers from Zanzibar, was usually carried to some per stop. Other issues we will discuss include the the United States. The freight normally collected on each importance of defining the alternatives precisely, the trip at the two ports amounted to about 1350 tons in Dar concept of profit contribution per unit of capacity, and the es-Salaam and 2500 tons in Zanzibar. The large vessels role of cost analysis in helping management to ask the were calling 80 times a year at the two ports. right questions. If Tashtego were to be used on this alternative In order to help you work through this difficult route, it would shuttle the cargo from one of the two ports but also valuable case, the following specific questions to the other, so that the large vessel need make only one should be answered in order. These questions help you stop in the area on a given run, thereby saving time and develop. piece by piece, an overall analysis of the portage dues. The incremental costs which would be decision. Try to imagine tackling the case with no incurred by Tashtego at the two ports are summarized in specific questions as a guide! Exhibit 3. The sailing time between the two ports was very 1. How much profit contribution can be eamed by short, and this distance (72 miles) was such that only! carrying 1 ton of tapioca from Balik Papan to day (2 days round trip) was involved no matter which Singapore, dock to dock, considering revenue and vessel is being used. The higher speed of the larger cargo costs? How much can be earned by carrying 1 vessels had no noticeable effect over such a short trip. It ton of general merchandise from Singapore to Balik was thought that an overall savings of 3 days per voyage Papan? would be attained by the large vessels (one port call (2 days in either port) and a day of steaming in transit) if 2. Given the contribution ton figures arrived at in Tashtego were used on the Zanzibar Dar-es-Salaam run. question I, what is the total contribution which can be Tashtego 245 earned on one round trip by Tashtego between 5. What is the overall profit impact if Tashtego is Singapore and Balik Papan and return? By one of the moved and large vessels are used on the tapioca run? large vessels? (Hint: Pull your answer to question 4 together with the information in Exhibits 3 and 4.) 3. Independent of the amount and type of cargo carried, what are the incremental trip costs of sending 6. What actions should Mr. Georgopoulis take? Why? Tashtego on a round trip between Singapore and (Hints: 1) What is Macedonian's average profit Balik Papan? One of the large vessels? contribution per shipping day for 1963? 2) Was buying Tashtego to use as a tapioca ship a good 4. Considering revenue, trip costs, and cargo costs what investment decision, based on information available is the total contribution per round trip for each of the at that time?) vessel types? What is the total contribution per year for each of the vessel types? EXHIBIT 1 Annual Operating costs of Vessels Costs Typical for Size of Vessel Item 4,500 Tons 12.500 Tons Payroll $143,594 $210,877 Depreciation (straight line, 15 yr. life) 222,956 363,226 Repairs 40,000 47,500 Stores and Provisions 32,657 39,283 Insurance 36,030 46,750 Miscellaneous 12.975 22.525 Total Annual Cost* $488,212 $730.163 On average, there were 345 operating days in a year, so the cost per operating day was $1,415 $2,116 In addition, bunkering costs (fuel costs) were incurred amounting to $0.73 per mile $1.27 per mile In general, these costs were committed one year at a time if a vessel was in use. The costs did not vary depending on cargo or route Typically, 2/3 of the cost of a ship could be financed over its depreciable life at rates averaging 5% in 1963. 73.0 EXHIBIT 2 Cost of Port calls Cost Item Varies with: Unit Balik Papan Singapore Zanzibar Dar es Salaam Trip Costs Portage dues Tonnage of burden s/day in port 0.14 0.20 0.13 0.31 ton burden Lighthouse Per trip S/visit 126.0 62.0 Special Assessment Per stop $/visit Cargo Costs Lighterageb Freight moved Ston of freight 0.25 0.16 0.14 0.15 moved Stevedoring Freight moved Siton of freight 0.56 0.32 0.32 0.32 moved Cranage Freight moved Siton of freight 0.14 0.13 0.13 * All ships exceeding 8,000 tons burden were to be assessed $2,000 for each port call (in addition to portage dues). This assessment was intended to contribute to the investment in and maintenance of the new deep channel that these ships required Lighterage expense is the cost of having small barges called "lighters" come alongside the vessel anchored in the harbor to facilitate loading and unloading of cargo. There is no cranage charge at Balik Papan because the freight is manhandled. This considerably increases the charge for stevedoring relative to other ports. Total $1,395 EXHIBIT 3 Costs of Using the Tashtego in East Africa Dar-es-Salaam Zanzibar 1. Trip Costs Portage S1.170 Lighthouse $1.457 $1,170 $ 2,627 Sea Bunkering (.73/mile x 144 mile round trip) 105 Total 2.732/trip Times 69 trips $188,508/year 2. Additional Cargo Costs on the Dar-es-Salaam Cargo Total tons/year - (1,350/trip x 80 trips) - 108,000 tons Unloading costs a Zanzibar (.14 + 32 + 13) - 59 1.18 x 108K tons $127.440/year Reloading costs @ Zanzibar (.14 + 32 +.13) = 59 Total = $315948/year * 4,500 tons x 31/day/ton x 1 day = $1,395 $4,500 tons x 13/day/ton x 2 days - S1,170 345 days (from Exhibit 15 days per trip (2 in Zanzibar + 2 at sea + 1 in Dar-es-Salaam). It is assumed in the case that the decline in customer service in Dar-es-Salaam involved in cutting back from 80 pickups per year to 69 is not a binding consideration The same tonnage must be loaded at Dar-es-Salaam per year as now, so the only additional charges are for unloading this Dar-es-Salaam cargo in Zanzibar and for reloading it in Zanzibar onto a large vessel. Tashtego 247 EXHIBIT 4 Why the Large Vessels Should Eliminate the Stop at Dar-es-Salaam Inspection of Exhibit 2 shows that Zanzibar has far cheaper portage dues than Dar-es-Salaam, is at least as cheap in all other cost categories, and has no lighthouse charge. Therefore, at first glance it appears that the Dar-es-Salaam port call should be eliminated for the large vessels. We must be careful, however, because cargo at the eliminated port will have to be doubled handled. If Dar-es-Salaam generates more cargo, total cost might be lower if Zanzibar were eliminated. But Zanzibar generates more cargo (2,500 tons per call vs. 1,350 tons). Therefore, without detailed calculation, we can conclude that the large vessels should call at Zanzibar. Cost savings by having large vessels avoid Dar-es Salaam Portage dues (2 day port call) $7,7503 Lighthouse fee 62 7,812 Bunkerage 916 Total per trip $7,903 Times 80 trips $632,240 per year 12,500 tons * $.31/day/ton x 2 days - 97,750 b $1.27/mile x 72 miles - 591 No stevedoring, lighterage or cranage will be saved as the cargo will still have to be loaded onto a ship at Dar-es- Salaam eventually. EXHIBIT 5 MACEDONIAN SHIPPING COMPANY Income Statement for the Year Ended December 31, 1963 Voyage Revenues for the Year Voyage Expenses Gross Margin Shore Support and Administrative Expenses Net Income before Taxes Income Tax Expense (52%) Net Income $49,661,000 33.480,000 16,181,000 10.234.000 5,947,000 3.088,000 $2,859,000 *Ship costs, trip costs, and cargo costs. Some notes on the Tashtego case This case highlights how unpacking a complex" cost structure facilitates decision making. The questions at the end of the case are useful in structuring your analysis, and help you in analyzing the case in a logical sequence Here are some (hopefully) useful additional thoughts: 1. CM per ton does not depend on the type of ship. And, cargo (either Taploca or general merchandise) involves costs for both loading and unloading, 2. CM per trip does vary with the type of ship. Note that portage dues depend on the overall tonnage of a ship and not just on the cargo weight. The first real question is what kind of capacity - large or small ship - does the company want to put in place for the BP.S route. That is, is it more profitable to deploy a LV or Tashtego on the BP-S route? Is the cost of the ship itself (acquisition or annual operating costs) relevant for this decision, if the (freed) ship could be used elsewhere in Macedonia? Assume that a LV will make will the same number of round trips per year on the BP-S route as Tashtego. 3. Now, think about moving the T to the DES-Z route. What is the cost (see exhibit 3)? What are the cost savings from not having a large vessel call at both ports (see exhibit 4)? Does it make sense to move the T to the alternate route? 4. Next, think about the capacity used in the S-BP route for a LV and for Tashtego, as well as in the Z-DES route. For each type of vessel, compare the amount of capacity used up in the two routes. If one route takes more capacity than the other, is there an opportunity cost for the extra capacity used? How can you estimate the OC for this capacity? (hint: For this last step, use the income statement and try to back out Contribution Margin from total Gross Margin and divide by the total number of ship days available). 5. You can then start exploring options not explicitly presented in the case. Overall, this case emphasizes how cost analysis is really a way to structure your thought process, and how it might open up new lines of enquiry. The answers from cost analyses are only as good as the question posed and the assumptions that underlie the analysis