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Transportation Costs FOB vs Delivered Pricing Value of Service/Differential Pricing Optimal Pricing Factors that Affect Rates Weight Breaks Rate Negotiation. Transportation Costs. Types of Costs Fixed Costs Variable Costs Common Costs Joint Costs Sources of Costs The Way

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Presentation Transcript
slide1

Transportation Costs

FOB vs Delivered Pricing

Value of Service/Differential Pricing

Optimal Pricing

Factors that Affect Rates

Weight Breaks

Rate Negotiation

slide2

Transportation Costs

Types of Costs

Fixed Costs

Variable Costs

Common Costs

Joint Costs

Sources of Costs

The Way

Terminals

Vehicles

slide3

FOB vs Delivered Pricing

Free on Board

FOB Origin (Buyer Owns Goods in Transit)

FOB Destination (Seller Owns Goods in Transit)

Prepaid vs Collect/Allowed vs Charged Back

Delivered Pricing

Seller Retains Ownership in Transit

Seller Arranges Transportation

Seller Files Freight Claims

Average Transportation

Market Expansion

Phantom Freight

Freight Absorption

slide4

.

C2

C1

FOB vs Delivered Pricing

Delivered Price

to all = $13/cwt

FOB Plant= $10/cwt

C1 pays more than fob

Rate to C1= $2/cwt

C2 is subsidized

Rate to C2 = $4/cwt

slide5

Forms of FOB Pricing

FOB Destination, Freight Allowed:

Buyer is allowed to deduct the freight charges from the invoice.

FOB Origin, Charged Back:

Seller is allowed to add freight charges to the invoice.

FOB Destination, Collect and Allowed:

Buyer pays freight but deducts it from the invoice.

FOB Origin, Prepaid and Charged Back:

Seller pays the fright but adds it to the invoice.

slide6

Value of Service/Differential Pricing

What is it?

Why Use it?

High Fixed Costs

Excess Capacity

Opportunity

Competition

When is it Profitable?

When Above Full Cost

When Below Full Cost If:

Above Variable Cost

Excess Capacity

Elastic Demand

slide7

Unwise Truck Lines

The Unwise Truck Lines Company operates five pieces of equipment daily over five routes with end points in common. The company just hired a new comptroller who is studying the profitability in order to determine which, if any, of the routes are not covering full costs, and, thus, not contributing to profits. He found that each route incurred $500 per day in variable operating expenses and earned the following revenue per day: Route 1 = $1,440; Route 2 = 1,220; Route 3 = 960; Route 4 = 800; Route 5 = 640.

The new comptroller has stated that any route showing a loss after variable costs and a prorated share of overhead will be eliminated. Presently, the daily overhead is $1,500, or $300 per route. If any run is eliminated, overhead will decline by $50. Equipment will be sold to payoff any outstanding debt.

slide8

Should any routes be eliminated?

Revenue Variable Over-

Route per Run Cost/Run Gross head Net

1 1,440 (500) 940 (300) 640.00

2 1,120 (500) 620 (300) 320.00

3 960 (500) 460 (300) 160.00

4 800 (500) 300 (300) 0.00

5 640 (500) 140 (300) (160.00)

slide9

Eliminate Route 5

Revenue Variable Over-

Route per Run Cost/Run Gross head Net

1 1,440 (500) 940 (362.50) 577.50

2 1,120 (500) 620 (362.50) 257.50

3 960 (500) 460 (362.50) 97.50

4 800 (500) 300 (362.50) (62.50)

slide10

Eliminate Route 4

Revenue Variable Over-

Route per Run Cost/Run Gross head Net

1 1,440 (500) 940 (466.67) 473.33

2 1,120 (500) 620 (466.67) 153.33

3 960 (500) 460 (466.67) (6.67)

slide11

Eliminate Route 3

Revenue Variable Over-

Route per Run Cost/Run Gross head Net

1 1,440 (500) 940 (675.00) 265.00

2 1,120 (500) 620 (675.00) (55.00)

Eliminate Route 2

Revenue Variable Over-

Route per Run Cost/Run Gross head Net

1 1,440 (500) 940 (1,300) (360.00)

Eliminate Route 1

slide12

= 1 = Unitary Elasticity

%

%

%

Q

Q

Q

E =

E =

E =

%

%

%

P

P

P

> 1 = Elastic

< 1 = Inelastic

Price Elasticity of Demand

Elasticity = Response in Quantity Sold to a Change in Price

slide13

P

Elastic

Unitary

Inelastic

Q

Price Elasticity of Demand

slide14

Price Elasticity of Demand

Changing Prices

Increase price in an elastic market and

decrease revenue

Decrease in price in an elastic market and

increase revenue

Increase in price in an inelastic market and

increase revenue

Decrease in price in an inelastic market and

decrease revenue

slide15

Optimal Pricing

Maximize Profit Where:

Marginal Cost Equals Marginal Revenue

Which Financial Statement has Marginal Cost?

Which Financial Statement has Marginal Revenue?

slide16

8

Zero Price, Large Q, 0* = 0

High Price, Zero Q, P*0 = 0

*

Optimal Pricing

Optimal Pricing

Maximizing Revenue

$

Inelastic Range

Elastic Range

Revenue Curve

Price

slide17

Optimal Pricing

Profit = Revenue - Cost (p = R - C)

Revenue = Price * Quantity (R = P * Q)

Cost = Fixed Cost + Variable Cost * Q (C = F + VQ)

Quantity = a + bP (Q = a + bP)

(p = R - C)

(R = P * Q)

(C = F + VQ)

(Q = a + bP)

slide18

Optimal Pricing

General Form of a Straight Line

Y

Y = a + bX

b (Slope)

Intercept

a

X

slide19

Optimal Pricing

General Form of a Straight Line

(Quantity Sold is Dependent upon Price)

Q

Q = a + bP

b (Slope)

Intercept

a

P

slide20

Optimal Pricing

General Form of a Straight Line

(Quantity Sold is Dependent upon Price)

Q = a + bP

However, the slope (b) is probably negative, but that must be determined)

slide21

Optimal Pricing

p = [PQ - (F + VQ)]

Q = a + bP

p = [P(a + bP) - (F + V(a + bP))]

p = [aP + bP2 - (F + aV + bVP)]

p = aP + bP2 - F - aV - bVP

To maximize Profit, set 1st derivative = zero, solve for P

slide22

-a

V

P* =

+

2b

2

Optimal Pricing

p = aP + bP2 - F - aV - bVP

First Derivative =

p' = [aP + bP2 - F - aV - bVP]

To maximize Profit, set 1st derivative = zero, solve for P

p' = a + 2bP - bV = 0

2bP = -a + bV

slide23

Slope = Zero

Slope Negative

*

Optimal Pricing

Profit = aP + bP2 - F - aV - bVP

$

Profit Curve

Slope Positive

Price

slide24

Factors that Affect Rates

Cost Related

  Commodity Factors

Route Factors

Demand Related

  Commodity Factors

Route Factors

slide25

Factors that Affect Rates

Cost Related

Commodity Factors

Loading Characteristics

Susceptibility to Loss and Damage

Volume of Traffic

Regularity of Movement

Equipment Requirements

Route Factors

Distance

Operating Conditions

Traffic Density

Backhaul

slide26

Factors that Affect Rates

Demand Related

Commodity Factors

Value of Commodity

Economic Conditions of User Industry

Competing Rates

Route Factors

Competition with Other Carriers

Competition in Shipper Industry

Competition in Receiver Industry

Traffic Density

slide27

LTL

$

TL

Volume

Weight Breaks

A point of indifference between a given rate

and a rate charged for a larger volume

slide28

Weight Breaks

TL * MW = LTL * X

Example:

TL = $8.00/cwt

MW = 40,000

LTL = $20.00

8*400 = 20* X

3200/20 = X

X = 160 or 16,000 lbs

If shipment is less than 16,000 lbs, ship LTL

If shipment is over 16,000 lbs, ship TL as full TL (40,000lbs)

slide29

Rate Negotiation

New Business

Threat of Loss of Old Business

Rule of Analogy (Protests)

Bases of Power

Reward

Coercive

Legitimate

Referent

Expert

Know the Cost of Your Next Best Alternative

slide30

Determining Prices

LTL vs TL

Tapering Rates

Class Rates

Tariff Example