--%>

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 : Who explained put–call parity Who

    Who explained put–call parity?

  • Q : Does it make sense to apply identical

    The National Company responsible for the company where he work has newly published a document stating as that the levered beta of the sector of energy transportation is as 0.471870073 (it is 9 decimals). They acquired this number by considering the betas into the sect

  • Q : Which data is the most suitable for

    Which data is the most suitable for finding betas?

  • Q : Who were the creators of uncertain

    Who were the creators of uncertain volatility model?

  • Q : Finc . A&B Enterprises is trying to

    . A&B Enterprises is trying to select the best investment from among four alternatives. Each alternative involves an initial outlay of $100,000. Their cash flows follow: Year A B C D 1 $10,000 $50,000 $25,000 $ 0 2 20,000 40,000 25,000 0 3 30,000 30,000 25,000 45,0

  • Q : Illustrates financial consultant has

    A financial consultant obtains various valuations of my company when this discounts the Free Cash Flow (FCF) as opposed to when this uses the Equity Cash Flow. Is it correct?

  • Q : Portfolio return probability XY Company

    XY Company has made a portfolio of such three securities: The correlation coeffic

  • Q : Define Capital Projects Capital

    Capital Projects: It is a long-term investment made in order to build on, add or enhance on a capital-intensive project. A capital project is any undertaking that requires the usage of notable amounts of capital, together with financial and labor, to

  • Q : Calculate their after tax cost of debt

    Your Corp, Inc. has a corporate tax rate of 35%. Please calculate their after tax cost of debt expressed as a percentage. Your Corp, Inc. has several outstanding bond issues all of whichrequire semiannual interest payments. Bond A has a coupon rate of 4.0%; a price qu

  • Q : Calculated betas when they give

    Calculated betas give different information if they are acquired by using weekly, monthly or daily data.