--%>

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 : Explain the structure

    Our company (A) is going to buy the other company (B). We need to value the shares of B and, thus, we will use three options of the structure Debt/Shareholders’ Equity in order to obtain the WACC as: 1) Present structure of A

  • Q : Convertible Bonds-Corporate Bonds State

    State the term Convertible Bonds in Corporate Bonds?

  • Q : Is the price of futures the excellent

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

  • Q : Problem on annual mortgage payment You

    You just took out a variable-rate mortgage on your new home. The mortgage value is $100,000, the term is 30 years, and initially the interest rate is 8%. The interest rate is fixed for 5 years, after which the time rate will be adjusted according to the prevailing rat

  • Q : Mm ase Study 1 You work in Walt Disney

    ase Study 1 You work in Walt Disney Company's corporate finance and treasury department and have just been assigned to the team estimating later today. You quickly realize that the information you need is readily available online. 1) Go to http://finance.yahoo.com. under " Market Summary," you will

  • Q : Problem on Bond Price Kevin is

    Kevin is interested in buying a 5-year bond which pays a coupon of 10 % on a semi-annual basis. The present market rate for similar bonds is 8.8 %. What must be the present price of this bond? (Round to the closest dollar.) (a) $1,048  (b) $965  (c) $1,099&n

  • Q : Walt disney WAAC You work in Walt

    You work in Walt Disney Company’s corporate finance and treasury department and have just been assigned to the team estimating Disney’s WACC. You must estimate this WACC in preparation for a team meeting later today....?

  • Q : Explain influences of financial

    Does financial leverage (i.e. debt) have any influence on the Free Cash Flow, upon the Cash Flow to Shareholders, upon the growth of the company and upon the value of the shares?

  • Q : Problem on required rate of return

    Tudor Online Publishing Corporation has tax rate of 35%, debt-to-equity ratio of 25%, and has (leveraged) beta 1.25. The riskless rate is 3% and the market return is 12%. Windsor Publishing Company is an all equity company and is in the same business. What is the requ

  • Q : What are capital investment The capital

    The capital investment appraisal techniques such as NPV, IRR, ARR, PV and Time value of money have become irrelevant post Celtic Tiger. Due to the depth of the recession companies do not have budgets to invest. Discus First use this information when you are writing this essay: 1.&