Case Study: Premier Oil Company

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OBJECTIVE: Evaluate the technical and economic feasibility of using locally produced hydrogenated castor wax as a substitute for imported stearic acid

GIVEN:
Demand: 1,000 bags per month of Stearic Acid (25kg per bag)
Thickening agent – 12% of the weight of the final product (30% of product cost) Stearic acid Cost:
Price - $1,600/1000 kgs. FOB USA
Sea Freight Cost - $1,800 per container van (1,000 bags @ 25kg. per bag) Fixed Ordering Cost – Php 3,000 per shipment
Custom Duty – 10% based on C&F cost
Land transport cost from port to company – Php 5,000 per container van Exchange rate – Php 26/ 1$
Order Size : 3,000 bags
Ave. Shipping time: 30 days
Release from Customs: 30 days

Substitute: Hydrogenated Castor Wax
15% by weight required to produce the same quantity of grease Hydrogenated Castor Wax Cost:
Price – Php 40,000 /1000 kgs, DDP
MOQ – 500 bags
If order is less than MOQ – with charge of Php 1,000 per order

ANALYSIS:
Cost Computation
Stearic Acid:
Total Cost for order size of 3,000 bags or 75,000 kgs (3,000 x 25kg/bag)
FOB Cost – ($1,600/1,000 kgs ) x (75,000 kgs) x (Php 26/1$) = Php 3,120,000
Sea Freight Cost – ($1,800/25,000 kgs) x (3) x (Php 26/1$) = Php 140,000
Custom Duty Cost – 0.10 x Php 3,260,400 = Php 326,040
Land Transport Cost from port to plant – Php 5,000 x 3 containers = Php 15,000
Fixed Ordering Cost – Php 3,000 / shipment = Php 3,000

Total Cost = Php 3,604,440 for 75,000 kgs or Php 48.06 / kg
Effective cost = (Php 48.06 / kg) x (0.12kg req’d / 1 kg product) = Php 5.77

Hydrogenated Castor Wax:
DDP Cost – Php 40,000 / 1,000 kgs = Php 40 per kg of product Effective Cost - (Php 40 / kg) x (0.15kg req’d / 1 kg product) = Php 6 per kg of product Criteria| Stearic Acid| Hydrogenated Castor Wax|

Effective Cost per 1kg product | Php 5.77| Php 6.00|
Order Size| 3,000 bags| 500 bags|
Lead-time| 60 days| Not indicated, but could be available anytime| Min. Inventory Level| 2 months...
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