Question

Solutions Plus is an industrial chemicals company that produces specialized cleaning fluids and solvents for a wide variety of applications. Solutions Plus has received an invitation to submit a bid to supply Great North American Railroad with a cleaning fluid for locomotives. Great North American Railroad needs the cleaning fluid at 11 locations (railway stations), and it has provided the following information to Solutions Plus regarding the number of gallons of cleaning fluid required at each location (see the following table).

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.



Gallons of Cleaning Fluid Required at Each Location

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

24,570

Sacramento

112,000

Los Angeles

64,761

The president of Solutions Plus, Chanda 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. The following table shows the quotes received in terms of dollars per gallon. The “—” entries in the table identify shipping routes that will not be considered because of the large distances involved. These quotes for shipping rates are guaranteed for one year.

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

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 Solutions Plus will have adequate capacity to satisfy existing orders as well as accept orders for other new business if it wins the bid, the management team decided to limit the number of gallons of the locomotive cleaning fluid produced in the Cincinnati plant to at most 500,000 gallons. LO 1, 2, 3

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:

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?

What is the breakeven point for Solutions Plus? That is, what is the lowest bid Solutions Plus can submit without losing money?

If Solutions Plus wants to use its standard 15% markup, how much should it bid?

Freight costs are significantly affected by the price of fuel. 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.

Answer 1

Solutions Plus should compare production costs between Cincinnati and Oakland, considering shipping rates. Determine optimal shipment quantities, calculate the breakeven point, and assess bid pricing with flexibility for fuel price fluctuations over the two-year contract.

Managerial Report: Solutions Plus Bid Analysis

1. Production Facility Decision:

- Compare production costs between Cincinnati ($1.20/gallon) and Oakland ($1.65/gallon).

- Evaluate shipping costs from both facilities to each location, factoring in distance and rates.

- Choose the facility that minimizes total costs for the required gallons.

2. Optimal Shipment Quantities:

- Determine the optimal shipment quantities from the selected facility to each location, considering capacity constraints.

3. Breakeven Point:

- Calculate the breakeven point by summing production and shipping costs for the maximum 500,000 gallons.

- Identify the lowest bid Solutions Plus can submit without incurring losses.

4. Markup Strategy:

- Assess the impact of a standard 15% markup on the bid price.

- Consider Director Roedel's suggestion of a smaller profit margin for a competitive edge.

5. Freight Cost Fluctuations:

- Analyze potential fuel price fluctuations and their impact on shipping costs over the two-year contract.

- Develop a strategy to mitigate risks associated with variable freight costs.

6. Capacity Management:

- Ensure that Solutions Plus maintains adequate capacity for existing and potential future orders.

- Evaluate production limits to balance bid competitiveness and operational capabilities.

7.Final Bid Recommendation:

- Summarize recommendations for bid pricing, production facility selection, optimal shipment quantities, and strategies to address variable costs.

By addressing these aspects, Solutions Plus can make informed decisions to optimize bid competitiveness and ensure the viability of the locomotive cleaning fluid supply contract.