--%>

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 : What is nonlinearity in option pricing

    What is nonlinearity in option pricing model?

  • Q : NPV and Other Investment Criteria The

    The XYZ Manufacturing Company is considering the below investment proposal. The initial investment is $100,000. It was an expected economic life of 10 years. The net cash flow in the initial year is expected to be $25,000 and annual net cash flow is expected to develo

  • Q : Which currency is utilized in an

    Which currency has to be utilized in an international acquisition in order to compute the flows?

  • Q : Explain the way of estimating an average

    Explain the way of estimating an average.

  • Q : Types of Corporate Bonds What are the

    What are the various types of Corporate Bonds?

  • 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 : Explain lognormal random walk based on

    Explain lognormal random walk based on Brownian motion.

  • Q : Problem on financial manager

    Assume that you are a financial manager of Yuen Cheong Manufacturng Company. Due to the rising demand of product X, Yuen Cheong Manufacturng Company decides to open a new production plant in China, so it needs to take a loan of US$1 million. Bank A offers Yuen Cheong

  • Q : Tax credit for lease payments problem

    ABC Inc. is planning to lease a computer for $3000 per annum, payable in advance, for a period of 4 years. The lease will cover maintenance costs. ABC CFO feels that if he buys the same computer he should be able to sell it at 15% of the purchase price after 4 years.

  • Q : Does the equity of shareholders have

    Does the equity of shareholders represents the savings a company has accumulated by the years?