Use This Information for Question That Refer to the United

question 66

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:
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.
United ships to the regional distribution centers of one of the retail hardware chains that it serves. The main advantage of the distribution centers for the retailer is likely to be that they
$\begin{array}{lrl}\text { Main feature of system: }&\text { Total Cost }&\text { Distribution Service Level }\\1.\text { Airfreight } & \$ 1,000,000 & 95 \text { percent } \\2.\text { Inland waterways } & \$ 300,000 & 60 \text { percent } \\3.\text { Trucks } & \$ 500,000 & 70 \text { percent } \\4.\text { Rail and regional } & \$ 650,000 & 80 \text { percent } \\\text { warehouses } & &\end{array}$

• A) can store a larger inventory than traditional warehouses.
• B) eliminate the need for electronic communications between the distribution centers and the individual stores.
• C) speed the flow of tools from the factory to the stores.
• D) none of these is an advantage of distribution centers.

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Definitions:

Variable Costing

An accounting strategy that only accounts for variable production expenditures (direct materials, direct labor, and variable manufacturing overhead) in product pricing.

Unit Product Cost

The total cost (both direct and indirect) to produce a single unit of product, often used to set selling prices and assess profitability.

Absorption Costing

A method of costing that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed overhead - as part of the cost of a product.

Variable Costing

A costing method that includes only variable production costs (direct material, direct labor, and variable manufacturing overhead) in product costs.