IDENTIFICATION

BACKGROUND

1. MTruck financial position during 6 months.

2. A meeting with Ct, SM and PM.
3. Financial Position = f(production mix)

PRODUCTION POSSIBILITIES AND STANDARD COST

4. Blaming M101 causing loss profit

5. Two models are M101 and M102
6. Four Department are EAs, MSt, M101 As, M102 As
7. Unit is machine-hours (net of downtime)
𝑚𝑎𝑐ℎ𝑖𝑛𝑒−ℎ𝑜𝑢𝑟𝑠
𝑡𝑟𝑢𝑐𝑘𝑠
8. = 𝑚𝑜𝑛𝑡ℎ
𝑚𝑎𝑐ℎ𝑖𝑛𝑒−ℎ𝑜𝑢𝑟
𝑚𝑜𝑛𝑡ℎ
𝑡𝑟𝑢𝑐𝑘
9. EA can be used to produce one model only or both at capacity 4000 machine-hours (normal)
10. EA for M101 = 4000 machine-hours/1 M101
11. EA for M102 = 4000 machine-hours/2 M102
𝑚𝑎𝑐ℎ𝑖𝑛𝑒−ℎ𝑜𝑢𝑟𝑠
𝑡𝑟𝑢𝑐𝑘𝑠
12. Thus if 1000 M101, M102 = = (4000−1000∗1) 𝑚𝑜𝑛𝑡ℎ
= 1500 M102
𝑚𝑜𝑛𝑡ℎ 𝑚𝑎𝑐ℎ𝑖𝑛𝑒−ℎ𝑜𝑢𝑟
2 𝑡𝑟𝑢𝑐𝑘
13. TABEL A represents machine-hour per truck and machine-hours/month
14. During 6 months, montly production : 1000 M101 and 1500 M102
15. In this condition, M102 As and EA at normal capacity
16. However, MSt and M101 As at 83.3% and 40% respectively (under capacity).

THE MEETING

17. SM: Stop making M101! Losing $1.250 for each. Price : M101= $39.000, M102:$38.000
18. Ct: the real problem is entire fixed overhead for 1000 trucks M101 only. Increase M102 meanwhile
decrease 102!
19. PM: There is a middle way to balancing M101 & M102 production. Capacity problem in
EA.
20. How? 1) purchasing model engines from outside supplier. ALTERNATIVE: 2) provide materials &
engine components neeed. 3) making the supplier pay back for labor and overhead.

THE DATA
𝑚𝑎𝑐ℎ𝑖𝑛𝑒−ℎ𝑜𝑢𝑟 𝑚𝑎𝑐ℎ𝑖𝑛𝑒−ℎ𝑜𝑢𝑟𝑠
1. TABLE A : Machine-hours: Requirements ( & Availability ( )
𝑡𝑟𝑢𝑐𝑘 𝑚𝑜𝑛𝑡ℎ
 2. TABLE B: Standard Product Costs consists of 1) Direct Materials, 2) Direct Labor, and 3) Standard
Overhead.

3. TABLE C: Overhead Budget for 1988.

THE PROBLEMS

#1

A. Finding the best production mix

The best production mix = the maximum revenue

- OBJECTIVE FUNCTION -> MAXIMIZE THE PROFIT ($)

𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (𝑀101 & 𝑀102 𝑆𝐴𝐿𝐸𝑆) − 𝐶𝑂𝑆𝑇𝑆

𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (𝑀101 & 𝑀102 𝑆𝐴𝐿𝐸𝑆) − (𝐷𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝐷𝑙𝑎𝑏𝑜𝑟 𝑐𝑜𝑠𝑡
+ 𝑫𝒊𝒔𝒕𝒓𝒊𝒃𝒖𝒕𝒆𝒅 𝐹𝑖𝑥𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑐𝑜𝑠𝑡 𝒐𝒇 𝟏𝟗𝟖𝟖 + 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑/𝑢𝑛𝑖𝑡)
𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (𝑀101 & 𝑀102 𝑆𝐴𝐿𝐸𝑆) − (𝐷𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝐷𝑙𝑎𝑏𝑜𝑟 𝑐𝑜𝑠𝑡
+ 𝑫𝒊𝒔𝒕𝒓𝒊𝒃𝒖𝒕𝒆𝒅 𝐹𝑖𝑥𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑐𝑜𝑠𝑡 𝒐𝒇 𝟏𝟗𝟖𝟖 + 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑/𝑢𝑛𝑖𝑡)

𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (39.000 𝑀101 + 38.000 𝑀102) − ((24.000 𝑀101 + 20.000 𝑀102) + (4.000 𝑀101
+ 4.500 𝑀102) + 𝟖. 𝟔𝟎 𝑥 1.000.000 + (8.000 𝑀101 + 8.500 𝑀102))
 𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (39.000 𝑀101 + 38.000 𝑀102) − ((36.000 𝑀101 + 33.000 𝑀102) + 𝟖. 𝟔00.000))
𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (3.000 𝑀101 + 5.000 𝑀102) − 𝟖. 𝟔00.000 … (1)
$ 𝑚𝑎𝑐ℎ𝑖𝑛𝑒−ℎ𝑜𝑢𝑟𝑠
$
NOTE UNIT -> $ 𝑡𝑟𝑢𝑐𝑘 = 𝑚𝑜𝑛𝑡ℎ
𝑚𝑜𝑛𝑡ℎ = 𝑡𝑟𝑢𝑐𝑘 𝑥 𝑚𝑜𝑛𝑡ℎ 𝑚𝑎𝑐ℎ𝑖𝑛𝑒−ℎ𝑜𝑢𝑟
𝑥 𝑡𝑟𝑢𝑐𝑘
𝑡𝑟𝑢𝑐𝑘

CONSTRAINTS -> Machine-hours

1. NON NEGATIVE CONSTRAIN : 1,0 𝑀101 ≥ 0, 1,0 𝑀102 ≥ 0

2. 𝐸𝐴 ∶ (1,0 𝑀101 + 2,0 𝑀102) ≤ 4.000
3. 𝑀𝑆𝑡 ∶ (2,0 𝑀101 + 2,0 𝑀102) ≤ 6.000
simplified (1,0 𝑀101 + 1,0 𝑀102) ≤ 3.000
4. M101 As : 2,0 𝑀101 ≤ 5.000
simplified 1,0 𝑀101 ≤ 2.500
5. M102 As : 3,0 𝑀102 ≤ 4.500
simplified 1,0 𝑀102 ≤ 1.500
PROBLEM SOLVING : USING LINEAR PROGRAMMING METHOD via EXCEL’S SOLVER

A. Objective function
Sales
Costs
M101 M102
Profit 3000 5000 8600000

B. Constraints
Resources
M101 M102 Usage Constraints Available Left over/Slack
EA 1 2 4000 <= 4000 0
MSt 1 1 3000 <= 3000 0
M101 As 1 0 2000 <= 2500 500
M202 As 0 1 1000 <= 1500 500

C Production Mix
M101 2000
M102 1000
Profit 2400000

Thus, Merton will get maximum profit of $2.400.000, if the company produce 2.000 M101 and 1.000
M102
B. WHAT IF? EA capacity was raised from 4.000 to 4.001 machine-hours? What is the equivalent dollar
to the one extra unit of EA capacity?
 B. Constraints
Resources
M101 M102 Usage Constraints Available Left over/Slack
EA 1 2 4001 <= 4001 0
MSt 1 1 3000 <= 3000 0
M101 As 1 0 1999 <= 2500 501
M202 As 0 1 1001 <= 1500 499

C Production Mix
M101 1999
M102 1001
Profit 2402000

Profit (a) 2400000

Worth 2000

Thus, the additional capacity of 1 unit is worth $2000.

C. Assumption: a second additional of EA capacity is worth the same as first. Verify if the capacity were
increase to 4.100 machine-hours, then the increase in part (B) will be 100 times.

B. Constraints
Resources
M101 M102 Usage Constraints Available Left over/Slack
EA 1 2 4100 <= 4100 0
MSt 1 1 3000 <= 3000 0
M101 As 1 0 1900 <= 2500 600
M202 As 0 1 1100 <= 1500 400

C Production Mix
M101 1900
M102 1100
Profit 2600000

Profit (a) 2400000

Worth 200000
Thus, the new worth as the capacity was added by 100 unit is $200.000 or is 100 times as in part (B).
(PROVEN)
D. How may units of EA capacity can be added before there is a change in the value of an additional
unit of capacity? SOLUTION : USING EXCEL’S SENSITIVITY REPORT
Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$E$14 EA Usage 4000 2000 4000 500 500
$E$15 MSt Usage 3000 1000 3000 250 500
$E$16 M101 As Usage 2000 0 2500 1E+30 500
$E$17 M202 As Usage 1000 0 1500 1E+30 500
 The capacity of EA can be added is below 4500. After that, the optimum usage of EA is never
across the value of 4500. The bigger increment of EA capacity above 4500, the slack resources are
bigger. As we can see at the table below.
Resources
Usage Constraints Available Left over/Slack
4000 <= 4000 0
4250 <= 4250 0
4500 <= 4500 0
4500 <= 4750 250
EA 4500 <= 5000 500
4500 <= 5250 750
4500 <= 5500 1000
4500 <= 5750 1250

#2

PM : purchasing model engines from outside supplier. ALTERNATIVE : provide materials & engine
components
neeed. Making the supplier pay back for labor and overhead.

- What is the maximum rent for one machine-hours of EA capacity?

SOLUTION: As we found in the part (1B), the additional capacity of 1 unit machine-hours is worth $2000 to
stay profitable at the capacity. Therefore, the maximum rent should be not over $2000 for each one
machine- hours.

- What is the maximum number of machine-hours it should rent?

SOLUTION: As we found in the part (1D), the maximum of machine-hours that the company should rent are
500 unit. Above that numbers, the company will get new problem as the slack of EA capacity is bigger.

#3 INTRODUCING NEW MODEL 103. The price is $2000 per truck. EA capacity for the model is 5000 and MSt
capacity is 4000. The model would be assembled in the M101 As. Each 1 M101 machine-hours = 2 M103
machine-hours

A. Should Mertoon produce M103?

NEW PROFIT EQUATION:

𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (3.000 𝑀101 + 5.000 𝑀102) − 8.600.000 + 𝑪𝒉𝒂𝒏𝒈𝒆 𝒐𝒇 𝒂𝒅𝒅𝒊𝒏𝒈 𝑴𝟏𝟎𝟑
𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (3.000 𝑀101 + 5.000 𝑀102) − 8.600.000 + (𝟐. 𝟎𝟎𝟎 𝑴𝟏𝟎𝟑)
NEW CONSTRAINTS

1. NON NEGATIVE CONSTRAIN : 1,0 𝑀101 ≥ 0, 1,0 𝑀102 ≥ 0, 1,0 𝑀103 ≥ 0

4000
2. 𝐸𝐴 ∶ (1,0 𝑀101 + 2,0 𝑀102 + 1,0𝑥( ) 𝑀103) ≤ 4.000
5000
𝐸𝐴𝑁𝐸𝑊 ∶ (1,0 𝑀101 + 2,0 𝑀102 + 0.8 𝑀103) ≤ 4.000
As M103 is needed to completed as a whole truck, and then
𝐸𝐴𝑁𝐸𝑊 ∶ (1,0 𝑀101 + 2,0 𝑀102 + 1,0 𝑀103) ≤ 4.000
6000
3. 𝑀𝑆𝑡 ∶ (2,0 𝑀101 + 2,0 𝑀102 + 1,0𝑥( ) 𝑀103) ≤ 6.000
4000
𝑀𝑆𝑡𝑁𝐸𝑊 ∶ (2,0 𝑀101 + 2,0 𝑀102 + 1,5 𝑀103) ≤ 6.000
As M103 is needed to completed as a whole truck, and then
𝑀𝑆𝑡𝑁𝐸𝑊 ∶ (2,0 𝑀101 + 2,0 𝑀102 + 2 𝑀103) ≤ 6.000
 4. M101 As : 2,0 𝑀101 + 1,0 𝑀103 ≤ 5.000
5. M102 As : 3,0 𝑀102 ≤ 4.500
simplified 1,0 𝑀102 ≤ 1.500
PROBLEM SOLVING : USING LINEAR PROGRAMMING METHOD via EXCEL’S SOLVER

A. Objective function
Sales
Costs
M101 M102 M103
Profit 3000 5000 2000 8600000

B. Constraints
Resources
M101 M102 Usage Constraints Available Left over/Slack
EA 1 2 1 4000 <= 4000 0
MSt 2 2 2 6000 <= 6000 0
M101 As 2 0 1 4000 <= 5000 1000
M202 As 0 1 0 1000 <= 1500 500

C Production Mix
M101 2000 TOTAL 3000
M102 1000
M103 0
Profit 2400000

Thus, to keep the optimum revenue, the company should not produce M103.

B. How high the contribution each M103 before it became worthwhile?

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$C$20 M101 M101 2000 0 3000 2000 500
$C$21 M102 M101 1000 0 5000 1000 2000
$C$22 M103 M101 0 -1000 2000 1000 1E+30

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$F$14 EA Usage 4000 2000 4000 500 500
$F$15 MSt Usage 6000 500 6000 500 1000
$F$16 M101 As Usage 4000 0 5000 1E+30 1000
$F$17 M202 As Usage 3000 0 4500 1E+30 1500

Thus, the price of M103 should be not under $3000 per each. NOTE : In the equation, the coefficient of M3
needed to be calculated in integers not in whole number. However, it can be concluded that the price of
M103 is above the price of M101.
#4 Overtime in EA department. Assumption : Production Effeciency do not change and EA capacity + 2000
machine-hours. Direct labor +50% for overtime. Variable cost=same. Monthly fixed in EA +$0,75 million.

- Should Merton assemble engines on overtime?

NEW OBJECTIVE FUNCTION

𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (𝑀101 & 𝑀102 𝑆𝐴𝐿𝐸𝑆) − 𝐶𝑂𝑆𝑇𝑆

𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (𝑀101 & 𝑀102 𝑆𝐴𝐿𝐸𝑆) − (𝐷𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝑵𝑬𝑾 𝑫𝒍𝒂𝒃𝒐𝒓 𝒄𝒐𝒔𝒕
+ 𝑵𝑬𝑾 𝑫𝒊𝒔𝒕𝒓𝒊𝒃𝒖𝒕𝒆𝒅 𝑭𝒊𝒙𝒆𝒅 𝑶𝒗𝒆𝒓𝒉𝒆𝒂𝒅 𝒄𝒐𝒔𝒕 𝒐𝒇 𝟏𝟗𝟖𝟖 + 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑/𝑢𝑛𝑖𝑡)
𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (𝑀101 & 𝑀102 𝑆𝐴𝐿𝐸𝑆) − (𝐷𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝑐𝑜𝑠𝑡 + 𝑵𝑬𝑾 𝑫𝒍𝒂𝒃𝒐𝒓 𝒄𝒐𝒔𝒕
+ 𝑵𝑬𝑾 𝑫𝒊𝒔𝒕𝒓𝒊𝒃𝒖𝒕𝒆𝒅 𝑭𝒊𝒙𝒆𝒅 𝑶𝒗𝒆𝒓𝒉𝒆𝒂𝒅 𝒄𝒐𝒔𝒕 𝒐𝒇 𝟏𝟗𝟖𝟖 + 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑/𝑢𝑛𝑖𝑡)

𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (39.000 𝑀101 + 38.000 𝑀102) − ((24.000 𝑀101 + 20.000 𝑀102) + (1,5 𝑥 1.200 + 800
+ 2.000 𝑀101 + 1,5 𝑥 2.400 + 600 + 1.500 𝑀102) + (8.60 + 0.75) 𝑥 1.000.000
+ (8.000 𝑀101 + 8.500 𝑀102))
𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (39.000 𝑀101 + 38.000 𝑀102) − ((24.000 𝑀101 + 20.000 𝑀102) + ((4.600) 𝑀101
+ (5.700) 𝑀102) + (9.35) 𝑥 1.000.000 + (8.000 𝑀101 + 8.500 𝑀102))
𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (39.000 𝑀101 + 38.000 𝑀102) − ((36.600 𝑀101 + 34.200 𝑀102) + 9.350.000))
𝑃𝑟𝑜𝑓𝑖𝑡 (𝑍) = (2.400 𝑀101 + 3.800 𝑀102) − 9.350.000
NEW CONSTRAINTS

1. NON NEGATIVE CONSTRAIN : 1,0 𝑀101 ≥ 0, 1,0 𝑀102 ≥ 0

2. 𝑁𝐸𝑊 𝐸𝐴 ∶ (1,0 𝑀101 + 2,0 𝑀102) ≤ 4.000+2.000
𝑁𝐸𝑊 𝐸𝐴 ∶ (1,0 𝑀101 + 2,0 𝑀102) ≤ 6.000
3. 𝑀𝑆𝑡 ∶ (2,0 𝑀101 + 2,0 𝑀102) ≤ 6.000
simplified (1,0 𝑀101 + 1,0 𝑀102) ≤ 3.000
4. M101 As : 2,0 𝑀101 ≤ 5.000
simplified 1,0 𝑀101 ≤ 2.500
5. M102 As : 3,0 𝑀102 ≤ 4.500
simplified 1,0 𝑀102 ≤ 1.500
PROBLEM SOLVING : USING LINEAR PROGRAMMING METHOD via EXCEL’S SOLVER
 A. Objective function
Sales
Costs
M101 M102
Profit 2400 3800 9350000

B. Constraints
Resources
M101 M102 Usage Constraints Available Left over/Slack
EA 1 2 4500 <= 6000 1500
MSt 1 1 3000 <= 3000 0
M101 As 1 0 1500 <= 2500 1000
M202 As 0 1 1500 <= 1500 0

C Production Mix
M101 1500 TOTAL 3000
M102 1500
Profit -50000

As we can see from figure above, there are two main reason why the company should not use EA in
overtime capacity. 1) Though EA capacity is increase to 6.000 machine-hours, the usage of EA is 4500 for
optimum condition. This reason is related to part (1D). 2) The company will experience big loss of #50.000.

#5 President : maximize M101!

NEW CONSTRAINT

M101 => 3 M102

A. Objective function
Sales
Costs
M101 M102
Profit 3000 5000 8600000

B. Constraints
Resources
M101 M102 Usage Constraints Available Left over/Slack
EA 1 2 3750 <= 4000 250
MSt 1 1 3000 <= 3000 0
M101 As 1 0 2250 >= 2250 0
M202 As 0 1 750 <= 1500 750

C Production Mix
M101 2250 TOTAL 3000
M102 750
Profit 1900000

Profit (a) 2400000

Worth -500000
Therefore, as M101 is at least three times of M102, the “optimal production” mix is 2250 unit of M102 and
750 OF M101. But, the company needed to realise that there will be loss profit of $5.000.000 in this
running condition.

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