The following phone call took place between H$.$ W$.$ Smith, Traffic and Distribution Manager of the Roscoe Corporation, and G$.$ M$.$ Taylor, Sales Representative of the L&M Railroad Company:

Taylor: Hal, I've got good news for you. The rate bureau has approved a new scale of incentive

rates on widgets. We don$$t anticipate any protests by other carriers, so the rates should go into effect at the beginning of next month. You will be able to save $25\%$ or more on your widget transportation costs. The new rates are going to be $$3$ per cwt $($or hundredweight$),$ carload minimum weight $60,000$ pounds; or$,$ $$3$ per hundredweight for the first $60,000$ pounds and $$2$ per hundredweight for the next $65,000$ pounds, carload minimum $100,000$ pounds and carload maximum $125,000$ pounds. So$,$ if you ship $100,000$ pounds per car, the average cost per hundredweight will be $$2\mathrm{.}60.$ Quite a saving on your present rate of $$4$ per hundredweight, isn$$t it$?$

Smith: Well, it sounds fine. Let me do some pencil pushing on those numbers. I$$ll let you know

in a few days if we can use the incentive rates.

Preparations for the Analysis

Following the conversation, Smith checked his rate sheet and found that the widgets in question were being shipped by the Roscoe Corporation from a supplier in Oakland at the $$4$ per cwt rate carload minimum $25,000$ pounds. Inasmuch as the widgets were purchased f$.$o$.$b$.$ Oakland, Roscoe paid the freight.

After talking with officials in several other departments, Smith summarized the information on Roscoe$$s purchases of widgets, as shown in Exhibit $1.$

Smith also learned that there was sufficient space in the warehouse to store up to $500$ units of widgets at one time without incurring additional costs of public warehousing. The transportation and requisitioning lead time averaged $14$ days per requisition cycle. Roscoe used to order about one carload a month because the company believed that railroad LCL rates were too high to justify less than carload shipments. Following a slight dip in annual demand, the existing schedule of $10$ requisitions a year was established. The present LCL rate on widgets was $$7$ per cwt$.$

Exhibit $1.$ Summary of Purchase Information

Nature of Statistics Statistic Source of Information

Total Annual Usage $1,000$ units Purchasing

Requisitions per Year $10$ Purchasing

Units Per Requisition $100$ Purchasing

Weight per Unit $250$ lbs Traffic

Transportation Cost per ctw $$4$ Traffic

Purchase Price $($excluding Transportation Cost$)$ per Unit $$250$ Purchasing

Clerical Cost per Requisition $$6$ Purchasing

Expediting, etc. Cost per requisition $$4$ Traffic

Inventory Carrying Cost as percentage of average value of inventory on hand for a year $($includes interest $10\%,$ obsolescence $6\%,$ taxes $2\%$ and insurance $2\%20\%$ Controller

Cost of Unloading into Warehouse $0\mathrm{.}10$ per ctw Warehousing Manager

Questions

$1.$ What questions should Smith pose to his Staff Assistant to provide further information on which to base a decision?

$2.$ As Smith's Staff Assistant, based on information presented in the case, would you recommend the use of the new rate? Why?

$3.$ Another widget supplier in Oakland is offering the same product but with volume discounts. The price, as a function of the volume $($Q$)$ purchased, is as follows:

P$=$$$250$ per unit for $0<$ Quantity $($Q$)<=100$ units

P$=$$$240$ per unit for $100<$ Q $<=240$ units

P$=$$$230$ per unit for $240<$ Q $<=500$ units

Would you advise Roscoe Corp to switch to the new widget supplier?