Use This Information for Question That Refer to the United

question 127

Multiple Choice

Use this information for question that refer to the United Tools case. Terry Harter is marketing manager for United Tools and Mike O'Reilly is the firm's logistics manager. They work together to make decisions about how to get United's hand and power tools to its customers-a mix of manufacturing plants and final consumers (who buy United tools at a hardware store) . United Tools does not own its own transport facilities and it works with wholesalers to reach its business customers.
Together, Harter and O'Reilly try to coordinate transporting, storing, and product handling activities to minimize cost while still achieving the customer service level their customers and intermediaries want. This usually requires that United keep an inventory of most of its products on hand, but demand for its products is fairly consistent over time so inventory is easy to manage.
Harter has identified four options for physical distribution systems she could use to reach two of her key wholesalers, Ralston Supply and Ricotta Tool Co. The total cost for each option-and the distribution service levels that can be achieved-are as follows: $\begin{array}{c}\begin{array}{lll}\mathbf { \text {Main feature of system:}}\\ \text {1. Airfreight}\\ \text {2. Inland waterways}\\ \text {3. Trucks}\\ \text {4. Rail and regional }\\\text {warehouses}\end{array}\begin{array}{r}\text { Total Cost } \\\$ 1,000,000 \\\$ 300,000 \\\$ 500,000 \\\$ 650,000\\\\\end{array}\begin{array}{c}\text { Distribution Service Level}\\\text { 95 percent }\\\text { 60 percent }\\\text { 70 percent }\\\text { 80 percent}\\\\\end{array}\end{array}$
Ralston Supply expects a very high level (90 percent) of distribution customer service. Ricotta Tool Co. is willing to settle for a 70 percent customer service level, even if that means some products will occasionally be out of stock, if it gets products at a lower price.
For its large retail hardware customers (like Home Depot) , United regularly ships smaller orders directly to individual stores or in some cases to the retail chain's warehouses. Cross-country shipments usually go by rail while regional shipments usually go by truck.
When United Tools considers its total inventory cost, which of the following would NOT be included?

• A) Costs of damage to products while in inventory
• B) Costs of inventory becoming obsolete
• C) Cost of a storage facility
• D) Cost of capital invested in the inventory
• E) All of these should be included in total inventory cost

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Definitions:

Interest Rate

The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

Money Supply

The overall available monetary assets within an economy at a designated time.

Nominal Variables

Variables measured in monetary units.

Price Level

The average of current prices across the entire spectrum of goods and services produced in the economy, indicating the cost of living or inflation.