--%>

Problem on Decision variables

A factory has three distinct systems for making similar product:

System 1: Worker runs 3 machines of type-A, each of which costs $20 per day to run, each generates 100 units per day and the worker is paid $40 per day.
System 2: Worker runs 5 machines of type-A, each of which costs $20 per day to run, generates 70 units per day and the worker is paid $50 per day.
System 3: Worker runs 2 machines of type-B, each of which costs $35 per day to run, generates 160 units per day and the worker is paid $60 per day.
There are 45 machines of type-A, 10 of type-B and 16 workers. Each and every unit can be sold for $50.

Give answers to the questions below:

1. Give a model which explains how production must be organized so as to maximize gain. Clearly explain all computations, formulas and model.

2. Give an optimal solution to your model supposing continuous decision variables (explain the solution).

3. Determine the maximum amount you would pay for an extra machine type A, B? How did you come up to this conclusion? Would you hire additional workers? Determine the maximum you would pay per day?

E

Expert

Verified

(1) Decision variables:

X1 - Number of setups as system 1
X2 – Number of setups as system 2
X3 – Number of setups as system 3

Objective function
Max Z = $15000X1 + $17500X2 + $16000X3 - $40X1 - $60X1 - $50X2 - $100X2 - $60X3 - $70X3
Max Z = $14900X1 + $17350X2 + $15870X3
For X1, the revenue = 3machines*100units*selling price$50 = $15,000 and similarly for others.

Constraints
3X1 + 5X2 ≤ 45 (constraint for type A machines)
2X3 ≤ 10 (constraint for type B machines)
X1 + X2 + X3 ≤ 16 (constraint for workers)
X1, X2, X3 ≥ 0 (continuous decision variable and so integer is not assumed)

(2) The optimal solution was found using excel solver and it was found to be 5 setups of system 1, 6 setups of system 2 and 5 setups of system 3 to achieve a maximum profit of $257,950.

(3) The maximum amount that could be paid for an extra machine for type A is $1225 and that for type B is $2322.5, since increase in these availability values by 1 unit will increase the total profit by $1225 and $2322.5 respectively (meaning they are Lagrange multipliers for type A and B machines). Yes, it is profitable to hire extra workers. An increase in the number of workers by 1 per day can increase the profit by $11225 (Lagrange multiplier for worker usage). Hence the maximum that could be paid per day is $11225.

   Related Questions in Corporate Finance

  • Q : Is the price of futures the excellent

    Is the price of futures the excellent estimate of €/$ exchange rate?

  • Q : Did you see Vueling case Did you notice

    Did you notice the Vueling case? How is this possible that an investment bank sets the objective price of its shares in €2.50 per share upon the 2nd of October, 2007, just after replacing Vueling shares at €31 per share in J

  • Q : Explain modern quantitative

    Explain modern quantitative methodology for portfolio selection.

  • Q : Calculate the risk-free rate You have

    You have been given the following information on two corporations; you are to assume that thesecurities are correctly priced. My Corp, Inc. has a Beta of 1.25 and an Expected Return of .145;Your Corp, Inc. has a Beta of .75 and an Expected Return of .095. Based on the

  • Q : Financial problem regarding acquistion

    My Company paid an extremely higher price for the acquisition of other company; the price was recommended through the valuation of an investment bank. Now we have financial problems. So is there any way to make this bank legally responsible for such situation?

  • Q : Could we explain that goodwill is equal

    Could we explain that goodwill is equal to brand value?

  • Q : Efficient Market Hypotheses Write

    Write Efficient Market Hypotheses in brief?

  • Q : Problem on implied exchange rate a) The

    a) The Australian firm sold a ship to a Swiss firm and gave the Swiss client an option of paying either AUS10,000 or SF15,000 in 9 months. (i) In above, the Australian firm efficiently gave the Swiss client a free option to buy up

  • Q : Is there any optimal capital structure

    Is there any optimal capital structure?

  • Q : Which taxes do I have to use for

    Which taxes do I have to utilize when calculating Free Cash Flow (FCF) – is this the medium tax rate or the marginal tax rate of the leveraged company?