Question

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 locomo- tives. 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 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

TABLe 6.8 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

Table 6.9	Freight Cost ($ Per Gallon)
	Cincinnati	Oakland
Santa Ana	0	0.22
El Paso	0.84	0.74
Pendleton	0.83	0.49
Houston	0.45	0
Kansas City	0.36	0
Los Angeles	0	0.22
Glendale	0	0.22
Jacksonville	0.34	0
Little Rock	0.34	0
Bridgetport	0.34	0
Sacramento	0	0.15

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 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 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.

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

Answer 1