Question

A company is exploring 2 options for packaging and material handling of a single product. This product has a standing yearly order from a customer of 100,000 units. Therefore, each year, the company will produce, package and load 100,000 units onto delivery trucks.

Option A

Under option A, the item can be packaged with 10 to a box. This box costs $5 (including all packaging materials). The material handling of this product will result in 2% of items being damaged and in need of replacement. It costs $3 to replace an item (this includes ALL costs to replace).

Option B

Under option B, the item can be packaged with 20 to a box. This box costs $7 (including all packaging materials). The material handling of this product will result in 3.5% of items being damaged and in need of replacement. It costs $3 to replace an item (this includes ALL costs to replace).

Which option provides the lowest cost for the company?

o

Option A

o

Option B

Answer 1

Answer: Option B

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Explanation:

annual capacity=100,000 units

Option A:

No. of boxes required= annual capacity/no. of units per box= 10,000

Total cost of boxes= Cost of box*no. of boxes=$5*10,000=$50,000

Loss item= 2% of 100,000= 2,000 units

Cost of replacement= loss item*Replacement cost= 2000 units*$3= $6000

Total cost= 6000+50000= $ 56,000

Option B:

No. of boxes required= annual capacity/no. of units per box= 5,000

Total cost of boxes= Cost of box*no. of boxes=$7*5,000=$35,000

Loss item= 3.5% of 100,000= 3,500 units

Cost of replacement= loss item*Replacement cost= 3500 units*$3= $10500

Total cost= 10500+35000= $ 45,500