Case Problem: SOLUTIONS PLUS

Solutions Plus is an industrial chemicals company that produces specialized cleaning flu- ids and solvents for a wide variety of applications. Solutions Plus just received an invita- tion 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 sta- tions); it provided the following information to Solutions Plus regarding the number of gal- lons of cleaning fluid required at each location (see Table 6.8):

Solutions Plus can produce the cleaning fluid at its Cincinnati plant for $1.20 per gal- lon. 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 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.

TABLE 6.8: GALLONS OF CLEANING FLUID REQUIRED AT EACH LOCATION

TABLE 6.9: FREIGHT COST ($ PER GALLON)

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 ship- ping 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 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, they will have adequate capacity to satisfy existing orders as well as accept orders for other new business, the man- agement team decided to limit the number of gallons of the locomotive cleaning fluid pro- duced 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 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.