Honfleur Corp.
Honfleur Corporation’s Traffic Manager, Archie Edwards, sat down to review proposals that he
had recently received from competing carriers. These quotes were for the inbound shipment of motors
to the York, PA plant operated by the Honfleur Corporation, a manufacturer of major appliances.
Among these was a proposal from the Northeastern Railroad to haul motors in intermodal
containers from Honfleur’s supplier American Electric, located in St. Louis, MO, to York at a rate of $7.50
per hundredweight with a 20,000‐pound minimum on each shipment. A second offer was received from
Trans‐Eastern Trucking Company to provide transportation service on the basis of a 10,000‐pound
shipment minimum at a rate of $8.50 per hundredweight. Both of these offers could be compared with
Honfleur’s current practice of shipping motors via Banner Freightways on a sliding rate basis of $9.00
per hundredweight for shipments totaling less than 25,000 pounds and $7.00 per hundredweight for
weights from 25,000 to 40,000 pounds.
Honfleur’s motors were purchased FOB St. Louis on the basis of an annual agreement calling for
a minimum volume of 100,000 motors at a price of $120 per motor. Currently, Honfleur’s annual
requirements were for approximately 120,000 motors, averaging about 10 pounds each in weight.
Demand had been relatively stable for several years. During the past year, Honfleur’s shipments had
averaged 3,000 motors each.
It was estimated that unloading costs for the various carriers would be roughly the same.
Honfleur’s warehouse in York could accommodate as many as 5,000 motors. The company’s purchasing
department estimated that the cost to process an order to American Electric was approximately $40
each, including clerical and expediting costs. The Controller had estimated that the company’s annual
cost of carrying inventory, figured on the average value of product in inventory, was 25% (including 15%
for the average cost of money and the remaining 10% for the costs of insurance, taxes and product
obsolescence).
Question:
If Honfleur continues to order motors from American Electric at the current average quantity,
which carrier should Mr. Edwards select and what is the associated cost? If Honfleur’s buyers can adjust
the order quantity to minimize total costs, what should the order quantity be, which carrier should Mr.
Edwards select, and how much would be saved when compared to current practice?
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