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11 Chapter 3 Solutions
11 Chapter 3 Solutions
Note to Instructor: The difference between relevant and sunk costs is critical. The cost of the shipment of
nuts is a sunk cost. Practice in applying sensitivity analysis to a business decision is obtained. You may
want to suggest that sensitivity analyses other than the ones we have suggested be undertaken.
Note that the cost of the five shipments of nuts is a sunk (not a relevant) cost and should not
affect the decision. However, this information may be useful to management in future
pricing and purchasing decisions. A linear programming model for the optimal product mix
is given.
The following linear programming model can be solved to maximize profit contribution for
the nuts already purchased.
3. From the dual prices it can be seen that additional almonds are worth $8.50 per pound to
TJ. Additional walnuts are worth $1.50 per pound. From the slack variables, we see that
additional Brazil nut, Filberts, and Pecans are of no value since they are already in excess
supply.
4. Yes, purchase the almonds. The dual price shows that each pound is worth $8.50; the dual
price is applicable for increases up to 583.33 pounds.
5. From the dual prices it is clear that there is no advantage to not satisfying the orders for the
Regular and Deluxe mixes. However, it would be advantageous to negotiate a decrease in
the Holiday mix requirement.