CaseProblem1:ProductMix

NotetoInstructor:Thedifferencebetweenrelevantandsunkcostsiscritical.Thecostoftheshipmentof
nutsisasunkcost.Practiceinapplyingsensitivityanalysistoabusinessdecisionisobtained.Youmay
wanttosuggestthatsensitivityanalysesotherthantheoneswehavesuggestedbeundertaken.

1. Costperpoundofingredients

Almonds $7500/6000=$1.25
Brazil $7125/7500=$.95
Filberts $6750/7500=$.90
Pecans $7200/6000=$1.20
Walnuts $7875/7500=$1.05

Costofnutsinthreemixes:

Regularmix: .15($1.25)+.25($.95)+.25($90)+.10($1.20)+.25($1.05)=$1.0325

Deluxemix .20($1.25)+.20($.95)+.20($.90)+.20($1.20)+.20($1.05)=$1.07

Holidaymix: .25($1.25)+.15($.95)+.15($.90)+.25($1.20)+.20($1.05)=$1.10

2. Let R=poundsofRegularMixproduced
D=poundsofDeluxeMixproduced
H=poundsofHolidayMixproduced

Notethatthecostofthefiveshipmentsofnutsisasunk(notarelevant)costandshouldnot
affectthedecision.However,thisinformationmaybeusefultomanagementinfuture
pricingandpurchasingdecisions.Alinearprogrammingmodelfortheoptimalproductmix
isgiven.

Thefollowinglinearprogrammingmodelcanbesolvedtomaximizeprofitcontributionfor
thenutsalreadypurchased.

Max 1.65R + 2.00D + 2.25H

s.t.
0.15R + 0.20D + 0.25H 6000 Almonds
0.25R + 0.20D + 0.15H 7500 Brazil
0.25R + 0.20D + 0.15H 7500 Filberts
0.10R + 0.20D + 0.25H 6000 Pecans
0.25R + 0.20D + 0.20H 7500 Walnuts
R 10000 Regular
D 3000 Deluxe
H 5000 Holiday
R,D,H0

MGTC74W07 Page 1 of 4 Chapter 3 11th ed.

 ThesolutionfoundusingTheManagementScientistisshownbelow.

ObjectiveFunctionValue=61375.000

VariableValueReducedCosts

R17500.0000.000
D10624.9990.000
H5000.0000.000

ConstraintSlack/SurplusDualPrices

10.0008.500
2250.0000.000
3250.0000.000
4875.0000.000
50.0001.500
67500.0000.000
77624.9990.000
80.0000.175

OBJECTIVECOEFFICIENTRANGES

VariableLowerLimitCurrentValueUpperLimit

R1.5001.6502.000
D1.8922.0002.200
HNoLowerLimit2.2502.425

RIGHTHANDSIDERANGES

ConstraintLowerLimitCurrentValueUpperLimit

15390.0006000.0006583.333
27250.0007500.000NoUpperLimit
37250.0007500.000NoUpperLimit
45125.0006000.000NoUpperLimit
56750.0007500.0007750.000
6NoLowerLimit10000.00017500.000
7NoLowerLimit3000.00010624.999
80.0005000.0009692.307

3. Fromthedualpricesitcanbeseenthatadditionalalmondsareworth$8.50perpoundto
TJ.Additionalwalnutsareworth$1.50perpound.Fromtheslackvariables,weseethat
additionalBrazilnut,Filberts,andPecansareofnovaluesincetheyarealreadyinexcess
supply.

MGTC74W07 Page 2 of 4 Chapter 3 11th ed.

 4. Yes,purchasethealmonds.Thedualpriceshowsthateachpoundisworth$8.50;thedual
priceisapplicableforincreasesupto583.33pounds.

Resolvingtheproblembychangingtherighthandsideofconstraint1from6000to7000
yieldsthefollowingoptimalsolution.Theoptimalsolutionhasincreasedinvalueby
$4958.34.Notethatonly583.33poundsoftheadditionalalmondswereused,butthatthe
increaseinprofitcontributionmorethanjustifiesthe$1000costoftheshipment.

ObjectiveFunctionValue=66333.336

VariableValueReducedCosts

R11666.6670.000
D17916.6680.000
H5000.0000.000

ConstraintSlack/SurplusDualPrices

1416.6670.000
2250.0000.000
3250.0000.000
40.0005.667
50.0004.333
61666.6670.000
714916.6670.000
80.0000.033

OBJECTIVECOEFFICIENTRANGES

VariableLowerLimitCurrentValueUpperLimit

R1.0001.6501.750
D1.9762.0003.300
HNoLowerLimit2.2502.283

RIGHTHANDSIDERANGES

ConstraintLowerLimitCurrentValueUpperLimit

16583.3337000.000NoUpperLimit
27250.0007500.000NoUpperLimit
37250.0007500.000NoUpperLimit
44210.0006000.0006250.000
57250.0007500.0007750.000
6NoLowerLimit10000.00011666.667
7NoLowerLimit3000.00017916.668
80.0025000.00015529.412

MGTC74W07 Page 3 of 4 Chapter 3 11th ed.

 5. Fromthedualpricesitisclearthatthereisnoadvantagetonotsatisfyingtheordersforthe
RegularandDeluxemixes.However,itwouldbeadvantageoustonegotiateadecreasein
theHolidaymixrequirement.

MGTC74W07 Page 4 of 4 Chapter 3 11th ed.