Expense Categories

For The

Five Major Types of CarriersTMGT 7300 - Transportation Management

by

John Beasley

Five Types of Carriers

Ship – Water Carrier Trains AirplanesTrucks – Motor Carriers Pipelines

Defining Terms

Economies of Scale

Economies of scale applies to industries where variable costs do not rise in proportion to volume. Economies of scale results in decreasing unit costs with additional volume. These industries tend to have large sunk costs, or front loaded investments, such as pipelines and railroads. It can apply to ships when the size is doubled and the cargo area of tankers is cubed.

Accounting Costs

Accounting costs are money costs or cash outlays or operating costs of both variable and fixes costs.

Economic Costs, the costs relative to what else might have been produced with that money for the benefit of society. It also applies to an approach to doing business.

Social Costs are typically the impact the business has on the community, environment, and society.

Marginal Costs

Marginal Costs may be defined as the change in total cost resulting from a one unit change in output, or as additions to aggregate cost for given additions to output.

Fixed Costs

Fixed Costs are costs that do not fluctuate with the volume of business in the short term. Fixed costs tend not to rise in relation to the company’s volume of business. High fixed costs require a large volume, and continue to experience expenses even if they do not conduct business. Companies with high fixed operating expenses experience non-linear or multiplicative increases in profit relative to an increase in volume. p. 315

Payback

Payback, evaluating yields on a constant dollar basis.Payback is the time horizon over which an investment of capital is

paid back, or capitalized. There are a number of issues relating to payback periods. A dollar received at a future date is worth less, or has less earning potential, than a dollar received in the present. For this reason all future income streams need to reflect this loss of utility. Future income must be discounted to constant dollars, or to its nominal value. This is called the Net Present Value (NPV) of the income stream.

IRR

If one evaluates the entire investment in relation to the NPV of the cash flows this is often called the Internal Rate of Return, (IRR). The investment, or buy in cost is related to the sum of the future cash flows discounted to constant dollars. The average rate of return over the life of the investment is called the Internal Rate of Return on the investment.

Discounting Cash flows to the present (accounting for time, risk)Discount rate = risk free rate + a percentage for risk or future

receipt of the money. The question often asked to obtain the discount rate, what is a fair rate of return in the current market for a risk free or near risk free investment. This is often used as the discount rate.

Ships – Water Carriers

High cost of entry into the business High variable costs that tend to be fuel, labor, port charges

and other expenses that are directly related to operations ( 50 to 70%)

Economies of scale apply to some degreeSICFinancial statement

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Trains

Extremely high entry costs into the businessHigh fixed costs (50 to 70%). Fixed costs; land, track, gates,

hubs, stations, rolling stock, engines. variable costs; fuel, labor,Economies of scale apply SICFinancial statement or example

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Airlines

In the commercial sector - extremely high entry cost into the business

High variable costs ( 70 %)fixed costs; jets and equipmentvariable costs; fuel, labor, leases, landing feeseconomies of scale not as much of a factorSICFinancial statement or example

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Horizontal Integration

Own a stake in the entire supply chain

Trucks – Motor Carriers

Low entry cost into the transport industry - High variable costs (90 %) of total coststruck and trailer costs low. variable costs fuel, labor, repairs,

fees.economies of scale not much of a factor SICfinancial statement or example

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Pipelines

Extremely high entry costs into the businessHigh fixed costs (50 to 70 %)land costs, land clearing and prep., pipe and installation variable costs, pumps, maintenance, electricity, labor. Economies of scale apply

Bibliography Coyle, John J., Bardi, Edward J., Novack, Robert A., Transportation,West Publishing Company, St. Paul, MN. 1994

HP Quality Department, HP-12C Owner’s Handbook and Problem-Solving Guide, Hewlett-Packard Co., Corvallis, OR. 1982

Stevens, Robert E. and Sherwood, Philip K., How to Prepare a Feasibility Study, A Spectrum Book, Prentince-Hall Inc., Englewood Cliffs, N.J., 1982

Ronstadt, Robert, The Art Of Case Analysis, Lord Publishing, Dover Mass., 1980

Coffin, Chris, An Easy Course In Financial Calculations, Grapevine Productions, Corvallis, OR. 1990

D&B (Formerly Dunn & Bradstreet), Industry Ratios by SIC, NY., NY., 2008 (printed annually)

Financial Statements

Truck Costing Model for Transportation ManagersMark BerwickMohammad FarooqUpper Great Plains Transportation InstituteNorth Dakota State University