Posted: July 9th, 2016
Assume that prior to the recent rate increase, the shipping costs of the principal carrier and the other carriers were the same, and that costs of the other carriers are not expected to change.
As a second alternative, Simmons can purchase its own trucks thereby reducing its shipping costs to 85% of the original rate. The new trucks would have an expected life of 10 years, no salvage value and would be depreciated on a straight line basis. Related fixed costs excluding depreciation would be $2,000. Assume that if Simmons purchases the trucks, Simmons will replace the principal shipper and the other shippers.
Following are data from the prior year:
Variable costs (excluding shipping): 1,095,000
Shipping costs: 135,000
Fixed costs: 150,000
1. Describe what you think is the competitive strategy of Simmons Farm and Seed Company. What should be the strategy? How would the use of a new carrier affect the strategy?
2. Can Mr. Carter use value chain analysis to improve the profits of Simmons Farm and Seed Company? If so, explain how briefly.
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