Freight Economics, Costing, Pricing and Procurement

Introduction

Freight decisions determine how efficiently goods move through a supply chain and how much value is created or destroyed during that movement. A transport manager must do more than compare quoted rates. The relevant decision may involve demand forecasting, shipment consolidation, modal selection, cost-to-serve analysis, tariff interpretation, tender design, negotiation, carrier governance and the choice between internal and outsourced transport.

Freight economics examines the relationship between shipment demand, transport capacity, cost and price. Freight costing identifies the resources consumed by a movement; pricing converts cost, market conditions and service commitments into a charge; procurement creates a controlled process for acquiring transport capacity and related services. These activities are connected but not identical. A carrier’s price may differ from its incremental cost, while a shipper’s lowest quoted rate may not represent its lowest total logistics cost.

This chapter develops an integrated managerial framework for freight economics, costing, pricing and procurement in multimodal logistics.

Learning objectives

After studying this chapter, the learner should be able to:

1. Explain freight demand, shipment characteristics and their effect on transport choices.
2. Analyse economies of scale, density, distance and network effects.
3. Classify fixed, variable, direct, indirect and activity-based freight costs.
4. Construct freight rates using tariffs, accessorial charges and surcharges.
5. Compare pricing models and evaluate total landed and total logistics cost.
6. Design a transport tender and evaluate bids using cost and service criteria.
7. Conduct principled rate negotiations and manage procurement risk.
8. Apply make-or-buy and multimodal allocation decisions.

1. Freight demand and the economics of movement

Freight demand is derived demand: firms move goods because production, distribution or consumption requires spatial and temporal repositioning. Unlike passenger travel, freight demand is strongly influenced by shipment size, inventory policies, product value, reliability requirements, packaging, trade regulations and the location of facilities.

A useful shipment description includes:

• origin and destination;
• distance and route constraints;
• commodity type, value and liability characteristics;
• weight, volume, dimensions and density;
• shipment frequency and time window;
• required transit time and reliability;
• handling, security and temperature requirements; and
• customs, documentation and regulatory obligations.

The physical quantity of freight is often expressed in tonnes, cubic metres, pallets, containers, vehicleloads, parcel units or revenue ton-kilometres. For a shipment of weight w tonnes moved d kilometres, tonne-kilometres are:

where TK is tonne-kilometres. This measure is useful for comparing transport work, but it does not by itself determine cost. Two shipments with equal tonne-kilometres may have very different costs because one is dense and easily handled while the other is fragile, low-density or subject to special controls.

Demand characteristics and modal choice

Road transport generally offers geographical reach and flexible scheduling. Rail and water often offer lower unit costs for high-volume, less time-sensitive flows. Air transport provides speed but usually at a high price and with tighter dimensional constraints. Multimodal transport combines these strengths, but introduces transfer, coordination and interface risks.

The relevant managerial question is not “Which mode has the lowest rate?” but “Which transport solution provides the required service at the lowest total cost and acceptable risk?” Total cost may include freight, inventory in transit, handling, packaging, insurance, loss and damage, administrative effort, stockout exposure and emissions-related costs.

2. Economies of scale, density and network structure

Economies of scale

Economies of scale occur when average cost falls as shipment or operating volume increases. They may arise because a larger vehicle, vessel, train or container spreads costs over more units; because fixed terminal and dispatch costs are shared; or because high-volume operations justify better equipment and dedicated routes.

If total cost for a movement is C(Q) and quantity is Q, average cost is:

The formula is meaningful only when C(Q) and Q use compatible units, such as currency per shipment divided by tonnes per shipment, producing currency per tonne. Economies of scale exist over a range where AC(Q) decreases as Q increases. They do not imply that unlimited volume is always efficient; congestion, handling complexity and service deterioration can create diseconomies at high volumes.

A simple cost model is:

where F is shipment-level fixed cost in currency, v is variable cost per unit, and Q is the quantity moved. Average cost is therefore:

The term F ÷ Q declines as quantity increases. This is a simplified model: real freight costs may include step-fixed vehicle costs, minimum charges, nonlinear handling costs and capacity constraints.

Density and cube utilisation

Freight density is commonly expressed as weight per unit volume:

where ρ is density, w is weight and V is volume. If weight is measured in kilograms and volume in cubic metres, density is kilograms per cubic metre.

Low-density freight may fill a vehicle by volume before reaching its legal or structural weight limit. High-density freight may reach the weight limit while leaving unused cubic capacity. Carriers therefore use dimensional or volumetric weight rules. If a carrier’s dimensional divisor is [[MATH;k]] cubic centimetres per kilogram, dimensional weight is:

where V_c is volume in cubic centimetres and W_d is kilograms. The chargeable weight may be the greater of actual and dimensional weight:

This rule must be applied using the carrier’s stated divisor and measurement conventions. It is especially important in airfreight, parcel networks and other cube-constrained operations.

Consolidation and break-even shipment size

Consolidation combines several smaller shipments into a larger movement. Suppose direct shipment cost is F_d + v_dQ, while a consolidated alternative costs F_c + v_cQ, including any additional handling. The consolidated option is cheaper when:

If v_d > v_c, the break-even quantity is:

This expression applies only when the denominator is positive and both alternatives provide comparable service. It does not capture inventory effects caused by waiting for consolidation, nor does it justify consolidation if damage or delay risk rises beyond acceptable levels.

Network effects and empty running

Transport networks create economies of density when increased freight volume improves vehicle utilisation, route frequency and backhaul opportunities. The opposite problem is empty running: a vehicle carries little or no revenue freight on part of its route. A round-trip decision should therefore assess the economics of the complete cycle rather than only the loaded leg.

For a vehicle cycle with loaded distance d_L, empty distance d_E, operating cost per kilometre c_k and other cycle cost F, total cost is:

If revenue is earned only on the loaded leg, the empty distance reduces effective utilisation and raises the cost attributable to each loaded unit. Backhaul procurement, collaborative transport and network redesign can materially reduce this problem.

3. Freight cost structures

A credible cost analysis separates costs according to behaviour, traceability and decision relevance.

Fixed and variable costs

Fixed costs do not change immediately with the number of units moved during a relevant planning period. Examples include vehicle lease payments, terminal rent, salaried supervision, information systems and insurance premiums. Variable costs change with kilometres, weight, fuel consumption, handling events or shipment count. Examples include fuel, tolls, driver overtime, line-haul subcontracting and per-package handling.

Many costs are semi-variable or step-fixed. A fleet may operate with one vehicle until a capacity threshold is exceeded, then require another vehicle. Treating this as a smooth variable cost can produce an incorrect tender price or make-or-buy conclusion.

Direct and indirect costs

Direct costs can be assigned to a shipment, route or customer with reasonable accuracy. A dedicated vehicle’s fuel and driver time are examples. Indirect costs support multiple activities and require allocation, such as dispatch management, IT, finance and general administration. Allocation bases should reflect causation where possible; allocating all overhead by shipment count may unfairly burden small shipments or high-complexity customers.

Activity-based costing

Activity-based costing assigns resource costs through activities and cost drivers. Relevant activities may include pickup, line-haul movement, cross-docking, customs processing, delivery appointment management, returns and claims handling. A general activity cost is:

where Rate_i is the cost per unit of driver for activity i, and Driver_i is the quantity consumed. For example, customs cost may be driven by declarations rather than tonnes, while warehouse handling may be driven by pallet touches.

Activity-based costing is valuable when customers or lanes consume resources very differently. Its limitations include data requirements, possible double counting and the risk that allocations appear precise while relying on uncertain assumptions.

Relevant cost and avoidable cost

For a specific decision, relevant cost is the future cost that changes between alternatives. Sunk costs are not relevant. Allocated fixed overhead may be irrelevant if it will continue under either choice, whereas avoidable supervision or vehicle costs may be relevant. Managers should distinguish:

• incremental cost: additional cost caused by the decision;
• avoidable cost: cost eliminated if an activity is stopped;
• opportunity cost: contribution lost by using scarce capacity for one option; and
• sunk cost: past cost that cannot be recovered.

This distinction prevents the common error of rejecting an apparently profitable backhaul because it is compared with a fully allocated average cost rather than its incremental cost.

4. Building freight rates

A freight rate is the charge applied to a defined movement and service specification. It may be expressed per shipment, pallet, kilogram, tonne, container, kilometre, cubic metre, vehicleload or lane. A robust rate sheet defines the unit, inclusions, exclusions, validity period, service level, liability, payment terms and adjustment mechanism.

A simplified shipment charge can be represented as:

where:

• P = total price charged;
• B = base freight rate;
• S_f = fuel surcharge;
• S_t = other transport surcharge, such as toll or security surcharge;
• A = accessorial charges;
• H = special handling charges; and
• D = duties, taxes or third-party charges where contractually passed through.

The terms must not overlap. For example, if tolls are already embedded in the base rate, they should not also appear as a separate surcharge.

Tariffs, contracts and spot prices

A tariff is a published or structured schedule of rates and conditions. Contract rates are negotiated for specified lanes, volumes and service commitments. Spot prices are quotations for immediate or short-term capacity and are strongly affected by current supply-demand conditions. A low spot rate may not be sustainable, while a contract rate may include capacity assurance and performance commitments.

Common rating methods include:

• actual weight pricing;
• dimensional or chargeable-weight pricing;
• flat container or vehicleload pricing;
• zone-based pricing;
• distance-band pricing;
• rate per kilometre plus fixed charges;
• minimum charge pricing; and
• tiered rates based on volume or commitment.

Surcharges and indexation

Fuel and other volatile inputs are frequently handled through an index-linked surcharge. If the base fuel price is p₀, the current index price is p_t, and the agreed fuel sensitivity is α, a simple surcharge rate may be:

This is a contractual model, not a universal industry formula. The parties must specify the index, review frequency, baseline, lag, cap, floor, currency and whether the surcharge applies to the whole invoice or only line-haul cost. An index-linked mechanism improves transparency but does not automatically reflect a carrier’s actual fuel purchase price.

Total logistics cost

The transport rate is only one component of decision cost. A useful comparison is:

where TLC is total logistics cost, F_r is freight cost, I_t is inventory carrying cost during transit, H is handling and terminal cost, P_k is packaging cost, R is expected loss, damage and claims cost, and A_d is administrative and coordination cost. The terms must be estimated over the same shipment or planning-period basis.

Inventory in transit can be approximated when average goods value, annual carrying-rate and transit time are known:

where V is the value of goods in transit, r is the annual carrying rate as a decimal, and t is transit time in days. This approximation assumes a constant value in transit and a simple proportional carrying cost; it excludes stockout and service-failure consequences.

5. Pricing models and strategic interpretation

Pricing should reflect cost, customer value, competitive conditions, capacity scarcity and risk. Cost-plus pricing adds a margin to estimated cost, but can reward inefficiency if the cost base is uncontrolled. Market-based pricing uses prevailing rates, but may be unsustainable in a capacity shortage or destructive in a price war. Value-based pricing charges according to the customer’s willingness to pay for speed, reliability, visibility or risk reduction.

A margin expressed as a percentage of selling price is:

A markup expressed as a percentage of cost is:

These measures are not interchangeable. For example, a 20% markup produces a margin of 16.67%, because 1.20C price less C cost equals 0.20C, divided by 1.20C.

Yield management is relevant when transport capacity is perishable. An empty vehicle seat, container slot or aircraft capacity cannot be stored for future sale. Pricing may therefore vary by booking time, service flexibility, lane imbalance and probability of displacement. Such pricing requires governance to prevent discrimination, hidden charges and breach of contractual commitments.

6. Freight procurement process

Freight procurement is a structured process for acquiring transport capacity and services at an acceptable total cost and risk. A professional process normally includes:

1. Requirements definition: lanes, volumes, seasonality, equipment, service windows, tracking, liability and compliance requirements.
2. Data preparation: historical shipments, weights, dimensions, accessorials, claims, delays and forecast scenarios.
3. Market analysis: carrier capacity, modal alternatives, benchmark rates, fuel conditions and regulatory constraints.
4. Sourcing strategy: spot, contract, dedicated, multi-carrier, multimodal or hybrid sourcing.
5. Request for quotation or proposal: a standardised bid pack with clear assumptions and response templates.
6. Bid evaluation: normalisation, feasibility screening, total-cost modelling and risk assessment.
7. Negotiation and award: documented concessions, allocation rules, governance and transition plan.
8. Implementation: master data, tender acceptance, booking, invoicing, tracking and escalation.
9. Performance management: scorecards, audits, corrective actions and periodic rebids.

Tender design

A tender should specify forecast volumes but also identify uncertainty. A carrier should know whether volumes are committed, indicative or subject to allocation. The tender should state the expected shipment profile, loading and delivery rules, equipment requirements, detention and demurrage policy, claims process, insurance, subcontracting conditions, data requirements, sustainability expectations and termination rights.

Poor tender design produces non-comparable bids. For instance, one carrier may include tolls and waiting time while another excludes them. Bid forms should therefore require separate base rates, fuel formulas, accessorial schedules and assumptions.

Bid normalisation and evaluation

Suppose a bid has line-haul cost L, expected accessorial cost A, implementation cost I, expected claims cost R and a service-risk adjustment K. A normalised economic score may be:

The risk adjustment is not a licence to invent arbitrary numbers. It should be based on historical performance, scenario analysis, insurance exposure or a formally approved scoring method.

A multi-criteria evaluation can use weighted scores:

where w_i is the weight assigned to criterion i, s_ij is carrier j’s normalised score on that criterion, and the weights sum to 1. Criteria may include cost, on-time performance, capacity, safety, technology, financial resilience and sustainability. The scoring direction must be consistent: higher should always mean better, or lower should always mean better after normalisation.

Lowest price should not automatically win. A carrier unable to meet peak capacity or regulatory requirements may create greater total cost through expedites, production disruption and customer penalties.

7. Rate negotiation and supplier governance

Effective negotiation begins with a fact base. The buyer should understand shipment density, lane balance, expected utilisation, market capacity, fuel exposure, alternative modes and the supplier’s likely cost drivers. Negotiation should focus on the total commercial package rather than only the headline rate.

Potential negotiation variables include:

• volume commitment in exchange for rate reduction;
• flexible pickup windows in exchange for lower cost;
• guaranteed capacity and minimum tender acceptance;
• payment terms and electronic invoicing;
• detention, demurrage and redelivery rules;
• index-based fuel adjustment;
• gain-sharing from consolidation or route redesign;
• performance credits and service-level remedies; and
• contract duration, review points and termination rights.

A buyer should avoid demanding rates below sustainable operating cost without understanding the consequences. Financially distressed carriers may reduce maintenance, subcontract without control or exit the lane. Ethical procurement therefore considers fair competition, worker safety, lawful employment, environmental compliance and responsible payment practices.

Supplier governance should include a scorecard covering cost, tender acceptance, on-time pickup and delivery, claims, safety, invoice accuracy, emissions data and responsiveness. Performance metrics require precise definitions. “On-time delivery,” for example, should identify the agreed appointment window, exclusions, data source and treatment of customer-caused delay.

8. Make-or-buy and multimodal decisions

Make-or-buy analysis compares internal transport with outsourcing. Internal operations may provide control, asset specificity, service responsiveness and data visibility. Outsourcing may provide scale, specialist capability, flexible capacity and lower capital commitment.

For a relevant planning period, internal cost can be written as:

where F_a is avoidable internal fixed cost, v_a is internal variable cost per unit, Q is volume and O_m is opportunity cost of using internal assets or capacity. Outsourcing cost may be:

where p_b is supplier price per unit, T_b is buyer-side transaction and management cost, and R_b is expected incremental risk cost. The lower figure is not automatically preferable: strategic control, resilience, confidentiality and regulatory obligations may justify a higher cost.

For multimodal choices, compare door-to-door alternatives rather than isolated leg rates. Include first-mile and last-mile costs, terminal handling, transfer time, documentation, inventory in transit, reliability and emissions. A rail line-haul rate can appear attractive until drayage and terminal dwell are included.

9. Worked example: comparing transport alternatives

A company must move 100 tonnes over 800 km. Alternative A is direct road at a fixed charge of 1,200 currency units plus 0.90 per tonne-kilometre. Alternative B is a consolidated multimodal service with a fixed charge of 3,000 plus 0.55 per tonne-kilometre, but it adds 2 days of transit. Handling cost for B is 1,000. Goods value is 200,000, and the annual inventory carrying rate is 18%.

Road freight is:

1,200 + (0.90 × 100 × 800) = 73,200 currency units.

Multimodal freight and handling are:

3,000 + (0.55 × 100 × 800) + 1,000 = 48,000 currency units.

Assume road transit is 2 days and multimodal transit is 4 days. The additional inventory cost of multimodal transport is:

200,000 × 0.18 × (2 ÷ 365) ≈ 197.26 currency units.

Thus, the approximate total cost is 73,200 for road and 48,197.26 for multimodal, before considering reliability, damage, emissions and stockout effects. The multimodal option is economically attractive in this scenario, but the decision should be tested against peak-season delay risk and the value of faster replenishment.

10. Illustrative case: NorthStar Components tender

Background

NorthStar Components, a fictional manufacturer, ships industrial parts from two plants to regional distributors. It uses ad hoc road bookings, has frequent accessorial invoices and lacks a consistent fuel-surcharge mechanism. Annual volume is 18,000 tonnes, but demand is seasonal and 30% of shipments are low-density.

Problem

The procurement team receives three bids. Carrier X offers the lowest base rate but excludes waiting time and uses a broad surcharge clause. Carrier Y is slightly more expensive but provides guaranteed peak capacity, electronic proof of delivery and a transparent fuel index. Carrier Z proposes a rail-road solution with lower line-haul cost but longer and more variable transit time.

Analysis

NorthStar cleans the data by lane, weight, cube, pickup window and accessorial history. It converts every bid to a common total-cost basis. Expected waiting, redelivery, claims and additional inventory costs are estimated separately. The team also identifies that low-density freight is frequently rated by cube, not actual weight. This explains why the apparent rate advantage of Carrier X is overstated.

A weighted evaluation gives cost 45%, service reliability 25%, peak capacity 15%, technology 10% and sustainability 5%. All carriers pass mandatory safety and insurance requirements. The analysis shows that X has the lowest nominal price, Y has the lowest risk-adjusted total cost, and Z is competitive only on stable high-volume lanes.

Approach and solution

NorthStar awards Y the primary contract, Z selected lanes with predictable replenishment cycles, and X a limited backup allocation subject to transparent accessorial rules. The contract includes a fuel index, defined detention free time, service credits for repeated failures, data standards and quarterly business reviews. NorthStar also consolidates compatible shipments and changes several delivery windows to improve vehicle utilisation.

Outcome

In the first six months, invoice disputes decline, peak capacity improves and total logistics cost falls despite a modest increase in the headline base rate. The main saving arises from fewer emergency shipments, better consolidation and reduced accessorial leakage.

Learning points

1. Nominal rates are not comparable unless inclusions and assumptions are standardised.
2. Service reliability has an economic value and should be included in evaluation.
3. A portfolio of carriers can balance cost, resilience and specialised capability.
4. Data quality is a prerequisite for credible procurement.

11. Technology, sustainability and governance

Transport-management systems can automate rating, tendering, shipment consolidation, carrier selection, tracking and invoice audit. Artificial intelligence can support demand forecasting, anomaly detection, ETA prediction and procurement analytics. However, algorithms require clean data and governance. A model trained on historical allocations may reproduce incumbent bias, favour easily measured cost over service equity or recommend unrealistic routes when constraints are missing.

Digital freight platforms improve price discovery and visibility, but users should verify carrier identity, insurance, financial viability, subcontracting and data security. Contractual responsibility must remain clear when a platform intermediates rather than physically transports freight.

Sustainability evaluation may include fuel consumption, load factor, modal emissions and empty running. Emissions comparisons must state the boundary, distance, payload, energy source and whether allocation is based on mass, volume or another method. Carbon claims should be auditable and should not replace direct efforts to reduce kilometres, empty movements and unnecessary handling.

Regulatory and ethical issues include competition law, cabotage and licensing rules, dangerous-goods requirements, driver working-time regulation, customs compliance, sanctions screening, data protection and anti-bribery controls. Procurement teams must maintain audit trails for bid access, scoring, approvals, conflicts of interest and contract changes.

12. Limitations and managerial cautions

Freight models simplify reality. Average costs can conceal capacity thresholds; historical rates may not represent future markets; expected claims may be unstable; and service-quality data may be incomplete. A precise spreadsheet can still produce a poor decision if the scope, assumptions or units are wrong.

Managers should therefore:

• validate weight, cube, distance and accessorial data;
• distinguish committed from forecast volume;
• test peak and disruption scenarios;
• compare door-to-door total cost;
• document all surcharge formulas;
• use sensitivity analysis for fuel, volume and transit assumptions;
• separate mandatory requirements from weighted preferences; and
• review outcomes after implementation rather than treating award as the end of procurement.

Chapter Summary

Freight economics links derived demand, shipment characteristics, capacity and network structure to transport cost and price. Economies of scale arise when fixed or step-fixed costs are spread over larger movements, while density and cube utilisation determine whether weight or volume constrains capacity. Consolidation, backhaul and network density can reduce unit cost, but may increase handling and transit time.

Freight costing requires careful separation of fixed, variable, direct, indirect, activity-based, relevant, avoidable and opportunity costs. Freight prices may combine base rates, fuel and other surcharges, accessorials, handling and pass-through charges. Total logistics cost additionally includes inventory, packaging, claims, administration and service risk.

Professional procurement begins with accurate shipment data and clear requirements. Tenders must produce comparable bids, and evaluation should combine normalised total cost with service, capacity, technology, resilience, sustainability and compliance. Negotiation should address the complete commercial package, not only the headline rate. Make-or-buy and multimodal decisions should use relevant costs and door-to-door comparisons. Technology supports rating, forecasting and visibility, but requires data governance, transparency and ethical oversight.

Key Terms

Freight demand: Demand for transport created by production, distribution or consumption requirements.

Tonne-kilometre: One tonne moved through one kilometre; a measure of transport work.

Economies of scale: Declining average cost as movement volume increases over a relevant range.

Freight density: Weight per unit of freight volume.

Dimensional weight: A calculated weight based on volume for rating cube-constrained freight.

Consolidation: Combining shipments to obtain more efficient transport utilisation.

Empty running: Vehicle movement without, or with very little, revenue freight.

Fixed cost: Cost that does not immediately vary with activity within a relevant range.

Variable cost: Cost that changes with activity, distance, weight or shipment count.

Activity-based costing: Assigning costs through activities and their causal cost drivers.

Relevant cost: Future cost that differs between decision alternatives.

Tariff: A structured schedule of transport rates and conditions.

Accessorial charge: Additional charge for a service or circumstance beyond the base movement.

Fuel surcharge: Contractual adjustment linked to fuel prices or an agreed index.

Total logistics cost: Combined cost of freight and associated inventory, handling, packaging, risk and administration.

Tender: A formal process for inviting and evaluating supplier offers.

Bid normalisation: Converting bids with different assumptions into a comparable basis.

Make-or-buy decision: Choice between performing transport internally and purchasing it externally.

Yield management: Pricing and capacity allocation for perishable transport capacity.

Service-level agreement: Contractual definition of required performance and remedies.

Review Questions

Short Answer Questions

1. Why is freight demand described as derived demand?
2. Distinguish fixed cost from variable cost in transport operations.
3. What is dimensional weight, and why is it used?
4. Name four components that may form a freight invoice.
5. Why must tender bids be normalised before comparison?

Long Answer Questions

1. Explain how economies of scale, density and consolidation influence freight cost and service design.
2. Discuss the differences between tariff pricing, contract pricing and spot pricing.
3. Explain how activity-based costing can improve freight cost-to-serve analysis, including its limitations.
4. Design a comprehensive freight procurement process for a multinational shipper.
5. Discuss the strategic, financial and ethical considerations in a make-or-buy transport decision.

Analytical / Application Questions

1. A carrier quotes a low line-haul rate but excludes fuel, waiting time and terminal handling. Construct a method for comparing this bid with an all-inclusive competing bid.
2. A company must choose between a faster road service and a slower rail-road service. Develop a total logistics cost model that includes freight, inventory in transit, reliability and handling.
3. Design a weighted carrier scorecard for a seasonal transport tender. Justify the criteria, weights, data sources and governance controls.

Multiple Choice Questions with Answers

Question 1

Which statement best describes freight demand?

A. It is demand generated independently of production and consumption.

B. It is derived from the need to move goods for production, distribution or consumption.

C. It exists only when transport prices are zero.

D. It is determined exclusively by vehicle capacity.

Correct Answer: B. It is derived from the need to move goods for production, distribution or consumption.

Question 2

A shipment weighs 100 tonnes and moves 500 km. What is its transport work in tonne-kilometres?

A. 5,000 tonne-kilometres

B. 50,000 tonne-kilometres

C. 500,000 tonne-kilometres

D. 600 tonne-kilometres

Correct Answer: B. 50,000 tonne-kilometres

Question 3

In the model C(Q) = F + vQ, what happens to the fixed-cost component of average cost as volume increases?

A. It increases proportionally.

B. It remains constant per unit.

C. It decreases because the fixed cost is spread over more units.

D. It becomes a sunk cost and is removed from total cost.

Correct Answer: C. It decreases because the fixed cost is spread over more units.

Question 4

Which situation most directly indicates a cube-constrained shipment?

A. The vehicle reaches its weight limit while much cubic space remains.

B. The shipment fills available volume before reaching the vehicle’s weight limit.

C. The shipment has no packaging requirement.

D. The shipment travels only by rail.

Correct Answer: B. The shipment fills available volume before reaching the vehicle’s weight limit.

Question 5

Which charge is normally an accessorial charge?

A. The agreed base line-haul rate

B. A charge for an additional redelivery caused by a failed delivery attempt

C. The annual salary of the procurement director

D. The book value of a warehouse

Correct Answer: B. A charge for an additional redelivery caused by a failed delivery attempt

Question 6

Why is total logistics cost often more useful than the freight rate alone?

A. It excludes inventory and handling costs.

B. It compares only carrier profit margins.

C. It includes related costs such as inventory, handling, packaging and risk.

D. It is always lower than the freight rate.

Correct Answer: C. It includes related costs such as inventory, handling, packaging and risk.

Question 7

Which cost is generally relevant to a short-term decision if it can be avoided by outsourcing?

A. A historical sunk cost

B. An unavoidable corporate allocation

C. An avoidable internal vehicle operating cost

D. A previously paid registration fee

Correct Answer: C. An avoidable internal vehicle operating cost

Question 8

What is the main purpose of bid normalisation?

A. To ensure every carrier receives the same award

B. To convert bids with different inclusions and assumptions into a comparable basis

C. To eliminate service criteria from evaluation

D. To select the carrier with the highest nominal rate

Correct Answer: B. To convert bids with different inclusions and assumptions into a comparable basis

Question 9

Which practice improves fuel-surcharge transparency?

A. Changing the surcharge without a stated basis

B. Using an agreed index, baseline, review frequency and formula

C. Including fuel in both the base rate and surcharge without disclosure

D. Applying a different formula to every shipment without notice

Correct Answer: B. Using an agreed index, baseline, review frequency and formula

Question 10

In a make-or-buy analysis, which item represents opportunity cost?

A. The value of an alternative use of scarce internal fleet capacity

B. A cost already incurred and unrecoverable

C. A supplier’s published rate

D. A customs document number

Correct Answer: A. The value of an alternative use of scarce internal fleet capacity