transportation costs and pricing transportation costs fob vs delivered pricing value of...

Transportation Costs and Pricing

Transportation Costs

FOB vs Delivered Pricing

Value of Service/Differential Pricing

Optimal Pricing

Factors that Affect Rates

Weight Breaks

Rate Negotiation


Types of CostsFixed Costs

Variable CostsCommon CostsJoint Costs

Sources of Costs

The WayTerminalsVehicles

Transportation Costs


Free on BoardFOB 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 TransitSeller Arranges TransportationSeller Files Freight ClaimsAverage Transportation Market ExpansionPhantom FreightFreight Absorption



.C1C2

Delivered Price to all = $13/cwt


FOB Plant= $10/cwt

Rate to C2 = $4/cwtRate to C1 = $2/cwt

C1 pays more than fobC2 is subsidized


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.

Forms of FOB Pricing


What is it?Why Use it?

High Fixed CostsExcess CapacityOpportunityCompetition

When is it Profitable?

When Above Full CostWhen Below Full Cost If:

Above Variable CostExcess CapacityElastic Demand

Value of Service/Differential Pricing


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.


Should any routes be eliminated?

Revenue Variable Over-Route per Run Cost/Run Gross head Net

1 1,440 (500) 940 (300) 640.002 1,120 (500) 620 (300) 320.003 960 (500) 460 (300) 160.004 800 (500) 300 (300) 0.005 640 (500) 140 (300) (160.00)


Eliminate Route 5


1 1,440 (500) 940 (362.50) 577.502 1,120 (500) 620 (362.50) 257.503 960 (500) 460 (362.50) 97.504 800 (500) 300 (362.50) (62.50)


Eliminate Route 4

Revenue Variable Over-Route per Run Cost/Run Gross head

Net 1 1,440 (500) 940 (466.67) 473.332 1,120 (500) 620 (466.67) 153.333 960 (500) 460 (466.67) (6.67)


Eliminate Route 3


1 1,440 (500) 940 (675.00) 265.002 1,120 (500) 620 (675.00) (55.00)

Eliminate Route 2


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

Eliminate Route 1


Price Elasticity of Demand

Elasticity = Response in Quantity Sold to a Change in Price

Q%

P%E =

Q%

P%E =

Q%

P%E =

= 1 = Unitary Elasticity

> 1 = Elastic

< 1 = Inelastic


Elastic

Inelastic

Unitary

P

Q




Changing Prices

Increase price in an elastic market and decrease revenue

Decrease in price in an elastic market andincrease revenue

Increase in price in an inelastic market andincrease revenue

Decrease in price in an inelastic market anddecrease revenue


Optimal Pricing

Maximize Profit Where: Marginal Cost Equals Marginal Revenue

Which Financial Statement has Marginal Cost?

Which Financial Statement has Marginal Revenue?


Optimal PricingMaximizing Revenue

Optimal Pricing

Revenue Curve

Price*

$

Zero Price, Large Q, 0* = 0

High Price, Zero Q, P*0 = 0

8

Inelastic Range Elastic Range


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)

Optimal Pricing


Y

X

Y = a + bX

a

b (Slope)Intercept

General Form of a Straight Line

Optimal Pricing


Q

P

Q = a + bP

a

b (Slope)Intercept

Optimal Pricing

General Form of a Straight Line(Quantity Sold is Dependent upon Price)


Optimal Pricing

Q = a + bP

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

General Form of a Straight Line(Quantity Sold is Dependent upon Price)


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

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

-a V+

2b 2P* =

Optimal Pricing


Price

Slope Positive Slope Negative

Slope = Zero

*

Profit = aP + bP2 - F - aV - bVP

Optimal Pricing

$ Profit Curve


Cost Related Commodity Factors

Route Factors Demand Related Commodity Factors

Route Factors

Factors that Affect Rates


Commodity Factors Loading CharacteristicsSusceptibility to Loss and DamageVolume of TrafficRegularity of MovementEquipment Requirements

Route FactorsDistanceOperating ConditionsTraffic DensityBackhaul

Factors that Affect RatesCost Related


Commodity FactorsValue of CommodityEconomic Conditions of User IndustryCompeting Rates

Route Factors

Competition with Other CarriersCompetition in Shipper Industry Competition in Receiver Industry Traffic Density

Factors that Affect RatesDemand Related


Weight Breaks

A point of indifference between a given rate and a rate charged for a larger volume

TL

LTL

Volume

$


TL * MW = LTL * X

Example:TL = $8.00/cwtMW = 40,000LTL = $20.00

8*400 = 20* X3200/20 = XX = 160 or 16,000 lbs

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

Weight Breaks


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

Rate Negotiation


Determining PricesLTL vs TLTapering RatesClass RatesTariff Example

transportation costs and pricing transportation costs fob vs delivered pricing value of...

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