Question

Question is on Case Problem 1, Solution Plus. Its from the textbook "Quantitative Methods for Business, 13th Edition".

Solutions Plus is an industrial chemicals company that produces specialized cleaning fluids 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 fluid for locomotives. Great North American needs the cleaning fluid at 11 locations (railway stations); it provided the following information to Solutions Plus regarding the number of gallons of cleaning fluid required at each location (see Table 10.8).

Solutions Plus can produce the cleaning fluid 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 500,000 gallons of the locomotive cleaning fluid to selected Solutions Plus customer locations. The Oakland company will charge Solutions Plus $1.65 per gallon to produce the cleaning fluid, but Solutions Plus thinks that the lower shipping costs from Oakland to some customer locations may offset the added cost to produce the product.

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 10.9 shows the quotes received in terms of dollars per gallon. The “—” entries in Table 10.9 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 it will charge. Solutions Plus usually sells its cleaning fluids 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 profit margin. In addition, to ensure that if Solutions Plus wins the bid, it 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 fluid produced in the Cincinnati plant to 500,000 gallons at most.

Table 10.8
GALLONS OF CLEANING FLUID REQUIRED AT EACH LOCATION
Santa Ana		22,418
El Paso		6,800
Pendleton		80,290
Houston		100,447
Kansas City		24,570
Los Angeles		64,761
Glendale		33,689
Jacksonville		68,486
Little Rock		148,586
Bridgeport		111,475
Sacramento		112,000
Table 10.9
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

Questions:

1. If Solutions Plus wins the bid, which production facility (Cincinnati or Oakland) should supply the cleaning fluid 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?

4. Freight costs are significantly affected by the price of oil. The contract on which Solutions Plus is bidding is for two years. Discuss how fluctuation in freight costs might affect the bid Solutions Plus submits.