The Nature of Costs 67

P 2–22: Australian Shipping

In the 1800s, Australia was a colony of England and most of its trade was with England. Australia
primarily exported agricultural products such as wheat and imported manufactured goods such as
steel, machinery, and textiles. The volume of trade measured in British pounds (£) was roughly
equal in the sense that exports equaled imports. (Imports were slightly larger as there were net
positive investments being made in Australia.) However, in cubic feet of cargo being shipped,
exports to England exceeded imports. A British pound (£) of wheat required more cubic feet than
£1 of manufactured goods. Hence, an imbalance of shipping existed. Numerous ships would carry
agricultural products to England but return to Australia empty because no cargo of manufactured
goods existed.
Large sail-powered ships required substantial ballast (weight) in the hold to keep the ship sail-
ing properly, especially in rough seas. Before leaving England empty, the ships would purchase
stone from local quarries for ballast. However, once in Australia, the stone had no market value,
and in fact had to be hauled from the harbor area.
Consider the following facts for a particular ship in England with a shipment of Australian
cargo for England.
1. The ship has contracted to sail to Australia and return with a cargo of Australian wheat.
The ship has no cargo scheduled for London to Sydney.
2. The wheat-shipping contract calls for paying the captain and crew £4,900 for the round
trip. The wheat seller will arrange for and pay Australian dock hands £250 to load the
wheat in Sydney, and the wheat purchaser will arrange for and pay English dock hands to
unload the wheat in London. The ship’s crew does not load or unload the cargo.
3. To sail to Australia, the ship requires 10 tons of ballast. (1 ton = 2,000 pounds)
4. Stone can be quarried in England, transported to the docks, and loaded as ballast for
£40 per ton. In Sydney, the stone can be unloaded and hauled away for £15 per ton.
5. Wrought iron bars of 10-foot lengths can also be used as ship ballast. Wrought iron bars can
be purchased in England at £1.20 per bar. Each bar weighs 20 pounds. Wrought iron bars
sell for
£0.90 per bar in Sydney. The cost of loading the wrought iron in London is £15 per ton, and
the cost of unloading it and transporting it to the Sydney market is £10 per ton.

Required
:
a. Write a memo to the ship’s captain describing what actions he should take with respect to
using stone or wrought iron as ballast. Assume that interest rates are zero and all prices and
quantities are known with certainty. Support your recommendation with a clearly labeled
financial analysis.
b. Why do you think the price of wrought iron is lower in Sydney than in London?

P 2–23: iGen3
The Xerox DocuColor iGen3 digital production press is a high-volume, on-demand, full-color
printer capable of producing up to 6,000 impressions (pages) per hour. It weighs nearly 3 tons,
stretches
30 feet long, and holds more than 40 pounds of dry ink. It sells for over $500,000, and its principal
market is print shops that produce mail order catalogs (e.g., L.L.Bean). Xerox offers two leasing
options for the iGen3. Option A requires a three-year agreement with a monthly lease fee of
$10,000 plus $0.01 per impression. Option B (also a three-year agreement) does not include a
monthly lease fee but requires a charge of $0.03 per impression.
ColorGrafix is a print shop considering leasing the iGen3 to begin producing customized mail-
order catalogs. Besides leasing the iGen3, ColorGrafix estimates that it will have to buy ink for the
iGen3 at a cost of $0.02 per impression and hire an operator to run the iGen3 to produce the cus-
tomized catalogs at a cost of $5,000 per month. ColorGrafix estimates that it can charge $0.08 per
impression for customized color catalogs. (Note: The customer provides the paper stock on which
the color impressions are printed.)