Chapter 1 (Introduction)

1.1

Special Products BreakEven Analysis
Data:
If they go ahead with this product, a fixed cost of $50,000 is incurred.
The variable cost is $400 per clock produced.
Each clock sold would generate $900 in revenue.
A sales forecast will be obtained.
*

1.2

Expressing the Problem Mathematically
Decision variable:
* o Number of grandfather clocks to produce
Costs:
Fixed Cost o $50,000 (if * > 0)
Variable Cost o $400 *
Total Cost o
0, if * o 0
$50,000 + $400 * if * > 0
Profit:
Profit o Total revenue Total cost
Profit o 0, if * o 0
Profit o $900* ($50,000 + $400*) o $50,000 + $500*, if * > 0

1.3

Special Products Co. Spreadsheet
0 $ 1
X >
2.&&
23/&&&&
#
$ 2&&&&
#
$ 2&&&&
)
$ 2 &&
' (
$ 2/&&&&
X&& *+" 2&&&&
/ >
. ! 4&& #
$ $
)
$ $
! $.
*
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$"

1.4

Analysis of the Problem
1
Re ene =
Profit
1
oss
1 1
rea een oint = 1 nits

1.5

Management Science Interactive Modules
Sensitivity analysis can be performed using the BreakEven module in the Interactive
Management Science Modules (available on your MS Courseware CD packaged with
the text).
Here we see the impact of changing the fixed cost to $75,000.

1.6

Special Products Co. Spreadsheet
0 1
X >
2.&&
24 &&&&
2&&&&
2&&&&
2&&
234&&&&
X&& *+" 23&&&&&
/ >
.
X&& 0,
3&&
.
*
X >
"
& &"

1.7

An Advertising Problem
Parker Mothers is a manufacturer of childrens toys and games. One of their hottest
selling toys is an interactive electronic Harry Potter doll.
Some data:
Unit Variable Cost: $48
Unit Selling Price: $65
Fixed Overhead: $42,000
Parker Mothers has analyzed past data for the Harry Potter doll (and other similar toys),
and determined that sales are affected by a number of factors:
the season (e.g., more at Christmas, more when a new Harry Potter book or movie is released,
etc.),
the size of the sales force devoted to the product,
the level of advertising.
*
!!!!"

1.8

Predicting the Sales Level
After performing a statistical regression analysis, they estimate that sales for the quarter will be
approximately related to the season and advertising budget, as follows:
Seasonality Factors:
Q1: 1.2 (publication of new Harry Potter book)
Q2: 0.7
Q3: 0.8
Q4: 1.3 (Christmas and expected release of new Harry Potter movie)
Effect of Advertising:
Sales

1.9

Spreadsheet for Quarter 1
0 $
X
' (
$ 2 /
2
#
6
7
2 4&&&
! 384
/
3& 9
) 2&&&&
33
34 0 $
3X #:
33 3 34
3 3X #:
$4&&& X$3&""
3
2 3
3 $*
2 3 3
$3X2$2
3 ; ) 24&& 3 $*
$3X2$2
3/ 3 ; ) $3,$3
3/
3 9
)$ 2&&&&
3 9
)$ $3&
4& #
6
7
2 4&&& 4& #
6
7
2$2
43 43
44 23&/ 44 $3,$3 ,$4&

1.10

X
0 $ Trial Solutions
' (
$ 2 /
2
#
6
7
2 4&&&
! 384
/
$ $ $
3& 9
) 2&&&& 3& 23&&&&& 3& 23&&&& 3& 24&&&&&
33 33 33 33
34 34 34 34
3X #:
33 3 3X 3/4 3X 3/ 3X 433/X
3 3 3 3
3
2 3 23&3 X&4 3 2343XX4 3 23X/ X
3 $*
2 3 3 243 3 2/ X 3 23&3/X
3 ; ) 24&& 3 24/ 3 2X3XX3 3 2X&333
3/ 3/ 3/ 3/
3 9
)$ 2&&&& 3 23&&&&& 3 23&&&& 3 24&&&&&
4& #
6
7
2 4&&& 4& 2 4&&& 4& 2 4&&& 4& 2 4&&&
43 43 43 43
44 23&/ 44 234 / 44 234XX3 44 233/333
0 $
3& 9
) 234&&&
33
34
3X #:
34
3
3
233434&3
3 $*
2/4
3 ; ) 24 X4X
3/
3 9
)$ 234&&&
4& #
6
7
2 4&&&
43
44 2344X

1.11

The Excel Solver
0 $
X
' (
$ 2 /
2
#
6
7
2 4&&&
! 384
/
3& 9
) 2&&&&
33
34
3X #:
33 3
3
3
2
3 $*
2 3
3 ; ) 24&&
3/
3 9
)$ 2&&&&
4& #
6
7
2 4&&&
43
44 23&/

1.12

The Optimized Solution
0 $
X
' (
$ 2 /
2
#
6
7
2 4&&&
! 384
/
3& 9
) 234
33
34
3X #:
3X
3
3
233X&3&
3 $*
2/X 34
3 ; ) 24 /
3/
3 9
)$ 234
4& #
6
7
2 4&&&
43
44 2344

1.13

Four Quarters Spreadsheet
X
8 8 8 8X
.
X
. X.X
. . XX
*
.. XX X X X X
.X XXX
.
X .X X X

1.14

Four Quarters Solver Optimized
0 $ 1 ;
X
' (
$ 2 /
2
#
6
7
2 4&&&
! 384 &8 &8/ 38X
/
3&
33 9
) 234 2 XX/ 2 23 2X&X
34
3X
3 #:
3X &4 /4 4&3 4X
3
3
233X&3& 2 44X/ 2X3& 23X34/3X 2X &X443
3 $*
2/X 34 2X343&4 2X 4 2 4 243X3 /
3/ ; ) 24 / 233&X 23 & // 2X XX3 2/ &&X
3
4& 9
)$ 234 2 XX/ 2 23 2X&X
43 #
6
7
2 4&&& 2 4&&& 2 4&&& 2 4&&& 23/&&&
44
4X 2344 243/ 2 3/ 233 2X &X

1.15

esidual Effect
0 $ 1 ;
X
' (
$ 2 /
2
#
6
7
2 4&&&
! 384 &8 &8/ 38X
/ 9
)
2&&&&
3&
33 9
) 234 2 XX/ 2 23 2X&X
34
3X
3 #:
3 /3 /&4 3/ X &4X
3
3
23&XX& 2&/&/ 243 234&&4X 2X4&
3 $*
2&3& 2X3 2X/443 2//// 24 3X33
3/ ; ) 2434 23X4//4 23X XX 2X3 &X 2/
3
4& 9
)$ 234 2 XX/ 2 23 2X&X
43 #
6
7
2 4&&& 2 4&&& 2 4&&& 2 4&&& 23/&&&
44
4X 23&3/ 2 3 2X/ 2344 & 2X& &/
0 $ 1
! 384 &8
/ 9
)
&&&&
3X
3 #:
$4&&&X &8$33&8X$/"" 14&&&X &8133&8X$33""
;
3X
3 4&&&X &833&8X133"" 4&&&X &833&8X33"" $3 <3 "

1.16

esidual Effect (Solver Optimized)
0 $ 1 ;
X
' (
$ 2 /
2
#
6
7
2 4&&&
! 384 &8 &8/ 38X
/ 9
)
2&&&&
3&
33 9
) 23X ,2433 / 23X& 2 / 2XX3&&
34
3X
3 #:
3 3 3X& X 3 3/ /4
3
3
233 X 2X / X 2X 43 2 2X3X
3 $*
2/&& & 24 4X3 2 / X 23&X 24XX/
3/ ; ) 2X& 23& 4& 23 / 24X& 2/4/X//
3
4& 9
)$ 23X ,2433 / 23X& 2 / 2XX3&&
43 #
6
7
2 4&&& 2 4&&& 2 4&&& 2 4&&& 23/&&&
44
4X 2/ &43 2/XX ,23 234/4 2X4///

1.17

Solver Options

1.18

esidual Effect (Solver eOptimized)
0 $ 1 ;
X
' (
$ 2 /
2
#
6
7
2 4&&&
! 384 &8 &8/ 38X
/ 9
)
2&&&&
3&
33 9
) 234/& 2& 2343 X3 243 2X4 X3
34
3X
3 #:
334 // X 3 3/ / 3
3
3
233334 2 X 3 2X 43 2 2X33
3 $*
2/4 4X 2X43&4& 2 / X 23&X 24X4 4
3/ ; ) 24 3 3 233X 23 / 24X& 2/43
3
4& 9
)$ 234/& 2& 2343 X3 243 2X4 X3
43 #
6
7
2 4&&& 2 4&&& 2 4&&& 2 4&&& 23/&&&
44
4X 2 X 23 24 23/ 2X4/4X

1.19

esidual Effect with Budget (Optimized)
X
8 8 8 8X
.
. XX X
X
X X
.XXX X . XX X.
*
.. XX . . .
. X . .
.
. XX X
X . X X

1.20

Adding a Constraint in Solver

1.21
