Transportation Costs and MES

Transportation costs include terminal, line-haul, and inventory charges associated with moving output from production facilities to customers. Terminal charges consist of handling expenses necessary for loading and unloading shipped materials. Because terminal charges do not vary with the distance of shipment, they are as high for short hauls as for long hauls.

Line-haul expenses include equipment, labor, and fuel costs associated with moving products a specified distance. They vary directly with the distance shipped. Although line-haul expenses are relatively constant on a per-mile basis, they vary widely from one commodity to another. It costs more to ship a ton of fresh fruit 500 miles than to ship a ton of coal a similar distance. Fresh fruit comes in odd shapes and sizes and requires more container space per pound than a product like coal. Any product that is perishable, fragile, or particularly susceptible to theft (e.g., consumer electronics, cigarettes, liquor) has high line-haul expenses because of greater equipment, insurance, and handling costs.

Finally, there is an inventory cost component to transportation costs related to the time element involved in shipping goods. The time required in transit is extremely important because slower modes such as railroads and barges delay the receipt of sale proceeds from customers. Even though out-of-pocket expenses are greater, air cargo or motor carrier shipments speed delivery and can reduce the total economic costs of transporting goods to market.

As more output is produced at a given plant, it becomes necessary to reach out to more distant customers. This can lead to increased transportation costs per unit sold. Figure 8.5 illustrates an L-shaped long-run average cost curve reflecting average production costs that first decline and then become nearly constant. Assuming relatively modest terminal and inventory costs, greater line-haul expenses cause transportation costs per unit to increase at a relatively constant

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