Truck Leasing Strategy
Reep Construction recently won a contract for excavation and site preparation of a new rest area on the Pennsylvania Turnpike. 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 truck 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 the bob signed a long term lease with Pennstate Leasing. Although most of these trucks are currently being used on the existing jobs, Bob estimates that one truck will be available for use on the new project in month 1, two truck will be available in month 2, three truck will be available in month 3, 4 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 PennState 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 Pennstate 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 for four month.
Bob does not believe that current business conditions justify committing the firm to additional long term lease. In discussing the short-term leasing possibilities with PenState leasing, Bob learned that he can obtain short term lease of one to four months. Short term lease differ from long term leases in that the short term leasing plans include the costs of both truck and a driver. Maintenance costs short term leases also are paid by PenState leasing. The following costs for each of the four months cover the lease of a truck and a driver.
Length of Lease
Cost per month
Bob Reep would like to acquire a lease that minimizes the costs of meeting the monthly trucking requirement for his new project, but he also take great pride in the fact that his company has never laid off employees. Bob is committed to maintaining its no-layoff policy; that is, he will use his own drivers even if costs are higher.
Perform as analysis of Reep Construction’s leasing problem and prepare a report for Bob Reep that summarizes your finding. Be sure to include information on the 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
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