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Solutions Plus is an industrial chemicals company that produces specialized cleaning ?uids and solvents for a wide variety of applications. Solutions Plus just received an invitation to submit a bid to supply Great North American railroad with a cleaning ?uid for locomotives. Great North American needs the cleaning ?uid at 11 locations (railway stations); it provided the following information to Solutions Plus regarding the number of gallons of cleaning ?uid required at each location (see Table 6.8): Solutions Plus can produce the cleaning ?uid at its Cincinnati plant for $1.20 per gallon. Even though the Cincinnati location is its only plant, Solutions Plus has negotiated with an industrial chemicals company located in Oakland, California, to produce and ship up to 50,000 gallons of the locomotive cleaning ?uid to selected Solutions Plus customer locations. The Oakland company will charge Solutions Plus $1.65 per gallon to produce the cleaning ?uid, but Solutions Plus thinks that the lower shipping costs from Oakland to some customer locations may offset the added cost to produce the product.
TABLE 6.8 Location Gallons Required Location Gallons Required
Santa Ana 22,418 Glendale 33,689 El Paso 6,800 Jacksonville 68,486 Pendleton 80,290 Little Rock 148,586 Houston 100,447 Bridgeport 111,475 Kansas City 241,570 Sacramento 112,000 Los Angeles 64,761 TABLE 6.9 FREIGHT COST ($ PER GALLON) Cincinnati Oakland Santa Ana 0.22 El Paso 0.84 0.74 Pendleton 0.83 0.49 Houston 0.45 Kansas City 0.36 Los Angeles 0.22 Glendale 0.22 Jacksonville 0.34 Little Rock 0.34 Bridgeport 0.34 Sacramento 0.15 The president of Solutions Plus, Charlie Weaver, contacted several trucking companies to negotiate shipping rates between the two production facilities (Cincinnati and Oakland) and the locations where the railroad locomotives are cleaned. Table 6.9 shows the quotes received in terms of dollars per gallon. The entries in Table 6.9 identify shipping routes that will not be considered because of the large distances involved. These quotes for shipping rates are guaranteed for one year. To submit a bid to the railroad company, Solutions Plus must determine the price per gallon they will charge. Solutions Plus usually sells its cleaning ?uids for 15% more than its cost to produce and deliver the product. For this big contract, however, Fred Roedel, the director of marketing, suggested that maybe the company should consider a smaller pro?t margin. In addition, to ensure that if Solutions Plus wins the bid, they will have adequate capacity to satisfy existing orders as well as accept orders for other new business, the management team decided to limit the number of gallons of the locomotive cleaning ?uid produced in the Cincinnati plant to 500,000 gallons at most. Managerial Report You are asked to make recommendations that will help Solutions Plus prepare a bid. Your report should address, but not be limited to, the following issues: 1. If Solutions Plus wins the bid, which production facility (Cincinnati or Oakland) should supply the cleaning ?uid to the locations where the railroad locomotives are cleaned? How much should be shipped from each facility to each location? 2. What is the breakeven point for Solutions Plus? That is, how low can the company go on its bid without losing money? 3. If Solutions Plus wants to use its standard 15% markup, how much should it bid?
Explanation / Answer
Soln:
Cost of supplying from Cincinnati location to selected solution plus customer locations: The management has decided to supply only to the following selected locations thereby limiting the total quantity supplied to 500,000 gallons
Location
Gallons Required
Cost of supplying from Cincinnati
Location
Gallons required
Cost of supplying from Oakland
El Paso
6800
0.84X6800 = $5712
Santa Ana
22,418
0.22X22418 =
Pendelton
80,290
0.83X80,290 = $ 66640.7
El Paso
6800
0.74X6800 = 5032
Houston
100, 447
0.45X100,447 = $ 45201.15
Pendelton
80,290
0.74X80,290= 59414.6
Kansas city
24, 570
0.36X24,570 = 8845.2
Los Angeles
64, 761
0.22X64761=14247.42
Jacksonville
68,486
0.34X68,486 =$23285.24
Glendale
33,689
0.22X33689= 7411.58
Little Rock
148,586
0.34X148586= $ 50519.24
Sacramento
112,000
0.15X112000=16,800
Total = 429,179 gallons
$ 200,203.53
Total = 319,958 gallons
Cost= 107,837.56
Cost incurred for producing 429,179 gallons from Cincinnati = $1.20X429,179 = $515,014.80
Sales from Cincinnati plant = $ 1.38X429,179 = $ 592,267.02
Profit made from Cincinnati plant =$ 77,252.22
Location
Gallons Required
Cost of supplying from Cincinnati
Location
Gallons required
Cost of supplying from Oakland
El Paso
6800
0.84X6800 = $5712
Santa Ana
22,418
0.22X22418 =
Pendelton
80,290
0.83X80,290 = $ 66640.7
El Paso
6800
0.74X6800 = 5032
Houston
100, 447
0.45X100,447 = $ 45201.15
Pendelton
80,290
0.74X80,290= 59414.6
Kansas city
24, 570
0.36X24,570 = 8845.2
Los Angeles
64, 761
0.22X64761=14247.42
Jacksonville
68,486
0.34X68,486 =$23285.24
Glendale
33,689
0.22X33689= 7411.58
Little Rock
148,586
0.34X148586= $ 50519.24
Sacramento
112,000
0.15X112000=16,800
Total = 429,179 gallons
$ 200,203.53
Total = 319,958 gallons
Cost= 107,837.56
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