Reep Construction recently won a contract for the excavation and site preparation of a
new rest area on Interstate Highway 5 in California. In preparing his bid for the job, Bob Reep,
founder and president of Reep Construction, estimated that it would take four months to
perform the work and that 10, 12, 14, and 8 trucks would be needed in months 1 through 4,
respectively.
The firm currently has 20 trucks of the type needed to perform the work on the new
project. These trucks were obtained last year when Bob signed a long-term lease with CalState
Leasing. Although most of these trucks are currently being used on existing jobs, Bob
estimates that one truck will be available for use on the new project in month 1, two trucks
will be available in month 2, three trucks will be available in month 3, and one truck will be
available in month 4. Thus, to complete the project, Bob will have to lease additional trucks.
The long-term leasing contract with CalState charges a monthly cost of $600 per truck.
Reep Construction pays its truck drivers $20 an hour, and daily fuel costs are approximately
$100 per truck. All maintenance costs are paid by CalState Leasing. For planning purposes, Bob
estimates that each truck used on the new project will be operating eight hours a day, five
days a week for approximately four weeks each month.
Bob does not believe that current business conditions justify committing the firm to
additional long-term leases. In discussing the short-term leasing possibilities with CalState
Leasing, Bob learned that he can obtain short-term leases of one to four months. Short-term
leases differ from long-term leases in that the short-term leasing plans include the cost of both
a truck and a driver. Maintenance costs for short-term leases also are paid by CalState Leasing.
The following costs for each of the four months cover the lease of a truck and driver:
Length of Lease Cost per Month
1 $4,000
2 $3,700
3 $3,225
4 $3,040
Bob Reep would like to acquire a lease that minimizes the cost of meeting
the monthly trucking requirements for his new project, but he also takes great pride in the fact
that his company has never laid off employees. Bob is committed to maintaining his no-layoff
policy; that is, he will use his own drivers even if costs
are higher.
Questions to be answered in your report:
Write a report that outlines the questions and follows the structure requirement.
Perform an analysis of Reep Construction’s leasing problem and prepare a report for
Bob Reep that summarizes your findings. Be sure to include information on, and analysis of,
the following items:
•The optimal leasing plan
•The costs associated with the optimal leasing plan
•The cost for Reep Construction to maintain its current policy of no layoffs
Sample Solution