Question

Q- 6. Ellison Seafood Company ships fresh seafood to customers in a nearby city. The logistics manager has identified three shipping alternatives; common carrier, Contract carrier, and Leasing. Suppose the manager wants to know the expected cost of one of the options, contracting. Total Cost equation of contract carrier is estimated as [ 10 Marks]

TC=$6,580 + $227X

The management has estimated different demand levels and assigns a probability to each.

Demand Level SHIPMENTS/year Probability

Low Demand 40 Shipments per year 15%

Medium Demand 50 Shipments per year 50%

High Demand 70 Shipments per year 35%

Calculate expected cost of contracting at different demand levels.

Answer 1

Total cost = 6,580 + 227X

where X is number of shipments

FOR LOW DEMAND

Number of shipments (X) = 40

Total cost = 6,580 + (227 × 40)

Total Cost = $ 15,660

FOR MEDIUM DEMAND

Number of shipments (X) = 50

Total Cost = 6,580 + (227 × 50)

Total Cost = $ 17,930

FOR HIGH DEMAND

Number of shipments (X) = 70

Total Cost = 6,580 + (227 × 70)

Total Cost = $ 22,470

Probability for low demand = 0.15

Probability for medium demand = 0.50

Probability for high demand = 0.35

Expected Cost = (0.15 × 15,660) + (0.50 × 17,930) + (0.35 × 22,470)

Expected Cost = $ 19,178.5