4 Safeway motor carrier has a contract with Byte Computer Co

4. Safeway motor carrier has a contract with Byte Computer Company, which corresponds to 0.24 million tons of freight per annum. Safeway operates a fleet of trucks with 12-m trailers, each providing a capacity of 80 m3. The total cost per kilometer for each tractor-trailer unii is $2. Safeway charges Byte 25t/ton-km. The typical shipment from Byte is a full truckload transported over 500 ki. Recenitly Byte requestéd a rate decrease from 25 to 224. Safeway has agreed to lower the rate. Given that the freight density of Byte\'s shipments is 120 kg/n should Safeway keep its current fleet or upgrade to a fleet of 15-m trailers with a capacity of 95 m each and a tota! cost equal to $2.10/km, which includes the cost of upgradc?

Solution

PRESENT CONDITION

Capacity of one truck = 80 m³

Weight of freight that can be taken in one truck = 120*80 = 9600 kg = 9.6 ton

No: of trucks required annually = (0.24 x 10⁶) / 9.6 = 25000

For one truck,

for a distance of 500 km,

Byte has to pay = 25*9.6*500 = $ 1,20,000

Safeway incurs a cost = $2*500 = $ 1000

For 25000 trucks,

Byte has to pay = 1,20,000*25000 = $3000000000 = $ 3 x 10⁹

Safeway incurs a cost = 1000*25000 = $25000000

For Safeway, profit = 3000000000-25000000 = $2.975*10⁹

PROPOSED CONDITION

Capacity of one truck = 95 m³

Weight of freight that can be taken in one truck = 120*95 = 11400 kg = 11.4 ton

No: of trucks required annually = (0.24 x 10⁶) / 11.4 = 21052.63 = 21053

For one truck,

for a distance of 500 km,

Byte has to pay = 22*11.4*500 = $ 1,25,400

Safeway incurs a cost = $2.1*500 = $ 1050

For 21053 trucks,

Byte has to pay = 1,25,400*21053 = $2640046200 = $ 2.640062x 10⁹

Safeway incurs a cost = 1050*21053 = $22105650

For Safeway, profit = $2640046200- $22105650 = $2.6179*10⁹

Thus, the proposed upgrading along with a reduction in rate will reduce the profit of Safeway by $357.1 million.

REDUCING COST WITHOUT UPGRADING

For one truck,

for a distance of 500 km,

Byte has to pay = 22*9.6*500 = $ 1,05,600

Safeway incurs a cost = $2*500 = $ 1000

For 25000 trucks,

Byte has to pay = 1,05,600*25000 = $2640000000 = $ 2.64 x 10⁹

Safeway incurs a cost = 1000*25000 = $25000000

For Safeway, profit = 2640000000-25000000 = $2.615*10⁹

Thus, for safeway, the reduction in rate will reduce their profit by $360 million.

Thus, since safeway has agreed to decrease the rate, it is better they upgrade to minimise the reduction in profit.