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In the case study, the company obtained an invitation to provide a bid to supply a railway company with one of its products. Solution Plus has two options for manufacturing the cleaning fluid. Also, the shipment costs between the two production plants are provided. The company is faced with the challenge of determining the bidding price to the railway company.
In determining the bidding price, the company needs to take into account the desired profit margin. Also, the company is faced with the challenge of estimating the amount of gallons that needs to be produced at each production site and the quantity to be shipped to each railway station. The paper attempts to discuss some of the concerns for Solution Plus.
If the company wins the bid to supply the cleaning fluid, then it will be important to estimate the total cost. More emphasis will be put on the cost of transporting the supplies between the two manufacturing sites, these are Cincinnati and Oakland. Another item that the management will consider is the cost of transporting the cleaning materials to the railway stations. In the case, the objective of the company is to minimize the total cost.
The solution to the linear programing problem shows that the optimal cost amounts to $1,318,985. This cost includes the transportation cost. The optimal solution generates a total output amounting to 773,522 gallons of the product. Another important value to calculate is the average cost per gallon of producing this product and per unit cost of shipping a gallon of the product to the railway station. The sum of these two costs is $1.71 per gallon.
Further, there is a need to evaluate the total number of gallons that is required in all the railway stations and the amount that will be shipped to each station. The values are presented in the excel file. The results also give the number of gallons that will be shipped from each production site to the railway stations.
A total of 500,000 gallons will be produced in Cincinnati. The remaining 273,522 gallons will be manufactured in Oakland. When the two production sites are compared, it can be noted that Cincinnati has a lower amount of production and shipping cost of the cleaning fluid than Oakland
Evaluation of the break-even point is important because it gives information to the management on how low they can go with their bid without making losses. From the calculations, it can be noted that the average cost per gallon is $1.71. This value represents the break-even point of the company because it shows the total cost per gallon that the company will incur. Therefore, any bid that falls below this value will result in losses.
When coming up with the price per gallon, emphasis will be put on making up the cost by 15%. Thus, to achieve the gross profit margin of 15%, the cost per gallon will be multiplied by this value. In this scenario, the formula is $1.71 * (100% + 15%). The resulting value is $1.96 per gallon of the cleaning fluid. The calculation shows that the management of Solution Plus needs to set the selling price at $1.96 in order to achieve a gross profit margin of 15% (Anderson, Sweeney, Williams, Camm & Martin, 2011).
In summary, 500,000 gallons of the cleaning fluid will be manufactured in Cincinnati while 273,522 in Oakland. The total cost will be $1,318,985. Production in Cincinnati is preferred to Oakland because it results in lower costs. Further, the break-even cost per gallon is $1.71 while the selling price is $1.96. This results in a profit margin of 15%.
Anderson, D., Sweeney, D., Williams, T., Camm, J., & Martin, K. (2011). An introduction to management science: Quantitative approaches to decision making. USA: Cengage Learning