Calculate the total cost per unit of purchasing from Happy Lucky Assemblies.

| March 31, 2017

Question
Question 1

Calculate the total cost per unit of purchasing from Happy Lucky Assemblies.

Solution

HLA (China) Quote is given as:

· Unit Price = $19.50

· Shipping Lead Time = 8 Weeks

· Tooling: $3,000

· Inland Transportation (China) = $200 per container

· Freight Forwarder’s fee = $100 per shipment

· Ocean Transportation1 = $4,000 per container

· Marine Insurance = $0.50 per $100 shipment

· U.S. Port handling1 = $1,200 per container

· Duty 5% of Unit Cost

· Customs broker fees $300 per shipment

· Inland Transportation (US) $18.60 per hundred pounds

· Warehousing costs2 = $1.00 per cu ft

· Currency hedging (broker) = $400 per shipment

· Admin (Intl shipping) 4hrs x $25 per hour

· Two 5-day visits to China $20,000 per year

Based on the quotation, the total cost per unit of purchasing from HLA can be obtained as given in the table below:

Type

Basis

Calculation

Per Unit

Unit Price

$19.50

Tooling

$3,000 one-time fixed cost

Spreading cost over 180,000 units produced in 3 years ($3000/180,000)

$ 0.02

Packing costs

$2 per unit

$ 2.00

Inland Transportation

$200 per container

Per unit = ($200 x 3)/5000

$ 0.12

Freight Forwarder’s fees

$100 per shipment

Per unit = $100/5000

$ 0.02

Ocean Transport

$4000 per container

Per unit = ($4000 x 3)/5000

$ 2.40

Marine Insurance

$0.50 per $100 shipment

Per unit = 0.5% of unit cost

$ 0.10

US Port Handling

$1200 per container

Per unit = ($1200 x 3)/5000

$ 0.72

Custom duty

5% of unit cost

Per unit = 0.05 x Unit cost

$ 0.98

Customs Broker fees

$300 per shipment

Per unit = $300/5000

$ 0.06

Transportation (Seattle to Detroit)

$18.60 per hundred pounds

Per unit = $18.60/10

$ 1.86

Warehousing

$1 per cubic foot

Unit Dimension = 24 x 12 x 6-inch = 1728 cu inches = 1 cu ft

Per unit cost = $1

$ 1.00

Cost of capital (interest lost at 15% annually for 4 weeks) = $1 x (0.15/52) x 4

$ 1.00

Hedging currency

$400 per shipment

Per unit = ($400 x 3)/5000

$ 0.24

Admin Time

4 hours x $25/hour per shipment

Per unit = $100/5000

$ 0.02

Travel to China

$20,000 annually

Per unit = $20,000/60,000

$ 0.33

Total Cost per Unit Purchasing

$29.37

Sheila must alsofigure the costs associated with committing corporate capital for holdinginventory. She has spoken to some accountants, who typically use a corporatecost of capital rate of 15%.

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