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Case Problem 3 Tr Truck uck Leasing Strategy
Reep Construction recently won a contract for the excavation and site preparation of a new rest area on the Pennsylvania Pennsylvania Turnpike. In preparing his bid for the ob! "ob Reep! founder and president of Reep Construction! estimated that it would four months to perform the work and that #$! #%! #&! and ' trucks would be needed in months # through &! respectively. The firm currently has %$ trucks of the type needed to perform the work on the new proect. These trucks were obtained obtained last year when "ob signed a long(term lease with Penn)tate *easing. +lthough most of these trucks are currently currently being used on existing obs! "ob estimates that one truck will be available av ailable for use on the new proect in month #! two trucks will be available in month %! three trucks will be available av ailable in month 3! and one truck will be available available in month &. Thus! to complete the proect! proect! "ob will have to lease additional trucks. The long(term leasing contract with Penn)tate has a monthly cost of ,-$$ per truck. Reep Construction pays its truck drivers ,%$ an hour! hour! and daily fuel costs costs are approximately ,#$$ per truck. +ll maintenance costs are paid by Penn)tate *easing. *easing. or planning purposes! "ob estimates that each truck used on the new proect will be operating eight hours a day! five days a week for approximately a pproximately four weeks each month. "ob does not believe that current business conditions ustify committing the firm to additional long(term leases. In discussing the short(term short(term leasing possibilities possibilities with Penn)tate *easing! "ob learned that he can obtain short(term leases of #(& months. )hort(term leases differ from long(term leases in that the short(term leasing plans include the cost of both a truck and a driver. /aintenance costs for short(term leases also are are paid by Penn)tate *easing. The following costs for each of the four months cover the lease of a truck and driver.
Length of Lease
Cost per Month (!
"
#$$$
%
&'$$
&
&%%
#
&$#$
"ob Reep would like to ac0uire a lease that would minimi1e the cost of meeting the monthly trucking re0uirements for his new proect! but he also takes great pride in the fact that his company has never laid off employees. "ob is committed to maintaining his no layoff policy2 that is! he will use his own drivers even if costs are higher. Managerial )eport
Perform an analysis of Reep Constructions leasing problem and prepare a report for "ob Reep that summari1es your findings. "e sure to include information on and analysis of the following items. "* The optimal leasing plan %* The costs associated +ith the optimal leasing plan &* The cost for )eep Construction to maintain its current policy of no layoffs
