Merton Truck Company

Session 1
Quantitative Methods II
2017 18 Session
 Contribution to Profits
Contribution per unit = Revenue per unit Direct Costs per unit
Direct costs = Direct Materials + Direct Labor + Variable Overhead

Model 101 Model 102

Revenue $39,000 $38,000
Direct Costs $36,000 $33,000
Direct Materials $24,000 $20,000

Direct Labor $4,000 $4,500

Variable Overhead $8,000 $8,500

Contribution $3000 $5000

 In Search of a Better Solution
Contribution from Model 101: $3000
Contribution from Model 102: $5000

Current solution: 1 = 1000, 2 = 1500

If there is a better solution, it is not here!

2 < 1500 2 = 1500 2 > 1500

1 < 1000

1 = 1000

1 > 1000
 In Search of a Better Solution
Contribution from Model 101: $3000
Contribution from Model 102: $5000

Current solution: 1 = 1000, 2 = 1500

If there is a better solution, it is not here!

2 < 1500 2 = 1500 2 > 1500

1 < 1000

1 = 1000

1 > 1000 ?
 In Search of a Better Solution
2 < 1500 2 = 1500 2 > 1500
Contribution from Model 101: $3000
1 < 1000
Contribution from Model 102: $5000
1 = 1000

Current solution: 1 = 1000, 2 = 1500 1 > 1000

1 = 1000 1 = 1000 1 = 1002

Resource Available 2 = 1500 Remaining 2 = 1499 Remaining 2 = 1499 Remaining
Eng. Assy. 4000 4000 0 3998 2 4000 0
Mtl. Stmp. 6000 5000 1000 4998 1002 5002 998
101 Assy. 5000 2000 3000 2000 3000 2004 2996
102 Assy 4500 4500 0 4497 3 4497 3

$10,500,000 $10,495,000 $10,501,000

 In Search of a Better Solution
2 < 1500 2 = 1500 2 > 1500
Contribution from Model 101: $3000
1 < 1000
Contribution from Model 102: $5000
1 = 1000

Current solution: 1 = 1000, 2 = 1500 1 > 1000

1 = 1000 1 = 1000 1 = 1002

STEP
Resource Available 2 = 1500 Remaining 2 = 1499 Remaining 2 = 1499 Remaining
Eng. Assy. 4000 4000 0 3998 2
NO CHANGE 4000 0
Mtl. Stmp. 6000 5000 1000 4998USE 2 EXTRA
1002HOURS 5002 998
101 Assy. 5000 2000 3000 2000USE 4 EXTRA
3000HOURS 2004 2996
102 Assy 4500 4500 0 4497 USE 3 LESS3HOURS 4497 3

$10,500,000 INCREASE
$10,495,000
BY $1000 $10,501,000
 In Search of a Better Solution
2 < 1500 2 = 1500 2 > 1500
Contribution from Model 101: $3000
1 < 1000
Contribution from Model 102: $5000
1 = 1000

Current solution: 1 = 1000, 2 = 1500 1 > 1000

1 = 1000 1 = 1000 1 = 2000

Resource Available 2 = 1500 Remaining 2 = 1499 Remaining 2 = 1000 Remaining
Eng. Assy. 4000 4000 0 3998 2 4000 0
Mtl. Stmp. 6000 5000 1000 4998 500
After steps
500 1002
steps 6000 0
101 Assy. 5000 2000 3000 2000 3000 4000 1000
102 Assy 4500 4500 0 4497 3 3000 1500

$10,500,000 $10,495,000 $11,000,000

 In Search of a Better Solution
Contribution from Model 101: $3000
Contribution from Model 102: $5000

Current solution: 1 = 2000, 2 = 1000

2 < 1000 2 = 1000 2 > 1000

1 < 2000

1 = 2000

1 > 2000 ?
 In Search of a Better Solution
2 < 1000 2 = 1000 2 > 1000
Contribution from Model 101: $3000
1 < 2000
Contribution from Model 102: $5000
1 = 2000

Current solution: 1 = 2000, 2 = 1000 1 > 2000

1 = 2000 1 = 2000 1 = 2001

Resource Available 2 = 1000 Remaining 2 = 999 Remaining 2 = 999 Remaining
Eng. Assy. 4000 4000 0 3998 2 3999 1
Mtl. Stmp. 6000 6000 0 5998 2 6000 0
101 Assy. 5000 4000 1000 4000 1000 4002 998
102 Assy 4500 3000 1500 2997 1503 2997 1503

$11,000,000 $10,995,000 $10,998,000

 Building a Model
What is a solution to the problem?
(What are you allowed to change?)
Maximize 1 , 2 = 30001 + 50002
Decision variables
How much change will be tolerated?
Constraints
1 + 22 4000 (Engine Assembly)
How do you measure how good a 21 + 22 6000 (Metal Stamping)
solution is? 21 5000 (Model 101 Assembly)
Objective function 32 4500 (Model 102 Assembly)
1 , 2 0 Non negativity
What is a best solution?
Objective
 Building a Model
What is a solution to the problem?
(What are you allowed to change?)
Maximize 1 , 2 = 30001 + 50002
Decision variables
How much change will be tolerated? Subject to
Constraints
Model to provide as 1 + 22 4000 (Engine Assembly)
How do youinput
measure
to a how good a
solver 21 + 22 6000 (Metal Stamping)
solution is? 21 5000 (Model 101 Assembly)
Objective function 32 4500 (Model 102 Assembly)
1 , 2 0 Non negativity
What is a best solution?
Objective
Finding optimal solutions: Graphical Method
1 , 2 0
Finding optimal solutions: Graphical Method
21 + 22 4000 Engine
1 , 2 0 Assembly
Finding optimal solutions: Graphical Method
1 + 22 4000 Engine
21 + 22 6000 Assembly
1 , 2 0
Metal
Stamping
Finding optimal solutions: Graphical Method
1 + 22 4000 Engine
21 + 22 6000 Assembly
21 5000
1 , 2 0 Metal
Stamping

Model 101
Assembly
Finding optimal solutions: Graphical Method
1 + 22 4000 Engine
21 + 22 6000 Assembly
21 5000
32 4500 Metal
1 , 2 0 Stamping

Model 101
Assembly

Model 102
Assembly
Finding optimal solution: Graphical method

10.5
11.0 Million
(1 , 2 ) = 10.0
 Finding optimal solution: Graphical method
Engine
Assembly

Has used up the engine

assembly capacity fully
1 + 22 = 4000
Has not used up the engine
assembly capacity fully

1 + 22 < 4000
Finding optimal solutions: Graphical Method
For some , 0 1
= + 1 .

So the objective function value at

= + 1 .

So and cannot BOTH be
worse than ().

So if P is optimal, then so are both

and . Else, one of them is better
than .
Finding optimal solutions: Graphical Method

10.5M
7.5M
11.0M

10.0M

0.0M
Tying up the two approaches

Current solution: 1 = 1000, 2 = 1500

2 < 1500 2 = 1500 2 > 1500

1 < 1000

1 = 1000

1 > 1000
Tying up the two approaches

Current solution: 1 = 1000, 2 = 1500

2 < 1500 2 = 1500 2 > 1500

1 < 1000

1 = 1000

1 > 1000
 Tying up the two approaches

Current solution: 1 = 1000, 2 = 1500

Metal
Stamping
Resource Available 1 = 1000
2 = 1500 Remaining
Engine
Assembly Eng. Assy. 4000 4000 0

Mtl. Stmp. 6000 5000 1000

Model 102
Assembly 101 Assy. 5000 2000 3000

102 Assy 4500 4500 0

Tying up the two approaches

Current solution: 1 = 1000, 2 = 1499

1 = 1000
Resource Available 2 = 1499 Remaining
Eng. Assy. 4000 3998 2

Mtl. Stmp. 6000 4998 1002

101 Assy. 5000 2000 3000

102 Assy 4500 4497 3

 Tying up the two approaches

Current solution: 1 = 1002, 2 = 1499

1 = 1002
Resource Available 2 = 1499 Remaining
Eng. Assy. 4000 4000 0
Remaining
Mtl. Stmp. Mtl. Stmp. 6000 5002 998
resource
101 Assy. 5000 2004 2996
Remaining
102 Assy. 102 Assy 4500 4497 3
resource
 Tying up the two approaches
101 Assembly resource
runs out here
Metal stamping resource
runs out here

1 = 1000 1 = 1002
Resource Available 2 = 1500 Remaining 2 = 1499 Remaining
Eng. Assy. 4000 4000 0 4000 0

Mtl. Stmp. 6000 5000 1000 5002 998

101 Assy. 5000 2000 3000 2004 1996

102 Assy 4500 4500 0 4497 3

And now to Microsoft Excel

 Model 103s

Model Model Model

101 102 103 Maximize 1 , 2 , 3 = 30001 + 50002 + 20003
Contribution 3000 5000 2000 Subject to
1 + 22 + 3 4000 (Engine Assembly)
Engine Assembly 1 2 1 21 + 22 + 1.53 6000 (Metal Stamping)
21 + 3 5000 (Model 101 Assembly)
Metal Stamping 2 2 1.5 32 4500 (Model 102 Assembly)
Model 101 Assembly 2 1 1 , 2 , 3 0 Non negativity
Model 102 Assembly 3
 Overtime
What about

Maximize 24001 + 39002

Subject to
1 + 22 6000
21 + 22 6000
21 5000
32 4500
1 , 2 0
 Overtime

101 102

Sells as Model 101 Sells as Model 102

Contribution $3000 Contribution $5000
Engines manufactured anytime Engines manufactured anytime
 Overtime
101 102
1 2

Sells as Model 101 Sells as Model 102

Contribution $3000 Contribution $5000
Engines in regular time Engines in regular time

101 102
1 2

Sells as Model 101 Sells as Model 102

Contribution $2400 Contribution $3900
Engines only in overtime Engines only in overtime
 Overtime

Maximize 30001 + 50002 + 24001 + 3900

Subject to
1 + 22 4000
1 + 22 2000
21 + 22 + 21 + 22 6000
21 + 21 5000
32 + 32 4500
1 , 2 , 1 , 2 0

Contribution = $11.725 Million

 Long term objective

# of 101s is at least 3 # of 102s

1 32

1 32 0
 Long term objective

Maximize 30001 + 50002

Subject to
1 + 22 4000
21 + 22 6000
21 5000
32 4500
1 32 0
1 , 2 0

Optimal mix
2250 Model 101s and 750 Model 102s
Contribution $10.5 Million
 Profit vs. Contribution

Profit / unit Profit / unit

Revenue 39000 38000 Selling price

Direct Costs 36000 33000 Direct cost incl. variable overheads
Allocated Costs
Engine Assembly 1.7

Metal Stamping 2.7

Fixed overheads
101 Assembly 2.7

102 Assembly 1.5

 Profit vs. Contribution
Sales Managers point of view
Hours 101 102
Profit / unit Profit / unit
Eng. Assy. 1000 3000
Revenue 39000 38000 Mtl. Stmp. 2000 3000
Direct Costs 36000 33000 101 Assy. 2000 0
102 Assy. 0 4500
Allocated Costs
Engine Assembly 1.7 1000 101s and 1500 102s

Metal Stamping 2.7 Fraction 101 102

101 Assembly 2.7 Eng. Assy. 1/4 3/4

Mtl. Stmp. 2/5 3/5
102 Assembly 1.5 101 Assy. 1 0
102 Assy. 0 1
 Profit vs. Contribution
Sales Managers point of view
Hours 101 102
Profit / unit Profit / unit
Eng. Assy. 1000 3000
Revenue 39000 38000 Mtl. Stmp. 2000 3000
Direct Costs 36000 33000 101 Assy. 2000 0
102 Assy. 0 4500
Allocated Costs
Engine Assembly 1/4 1.7
0.425
3/4 1.7
1.275
1000 101s and 1500 102s

Metal Stamping 2/5 2.7

1.08
3/5 2.7
1.62
Fraction 101 102

101 Assembly 2.7 Eng. Assy. 1/4 3/4

Mtl. Stmp. 2/5 3/5
102 Assembly 1.5 101 Assy. 1 0
102 Assy. 0 1
 Profit vs. Contribution
Sales Managers point of view
Hours 101 102
Profit / unit Profit / unit
Eng. Assy. 1000 3000
Revenue 39000 38000 Mtl. Stmp. 2000 3000
Direct Costs {36000 {33000 101 Assy. 2000 0
102 Assy. 0 4500
Allocated Costs
Engine Assembly + 425 + 850 1000 101s and 1500 102s

Metal Stamping + 1080 +1080 Fraction 101 102

101 Assembly + 2700 } Eng. Assy. 1/4 3/4

Mtl. Stmp. 2/5 3/5
102 Assembly + 1000 } 101 Assy. 1 0
102 Assy. 0 1
= 1205 = 2070
 Profit vs. Contribution
Sales Managers point of view

Profit / unit Profit / unit

Revenue 39000 38000

Direct Costs 36000 33000
Allocated Costs
Engine Assembly 425 850

Metal Stamping 1080 1080

Product Mix: 1000 Model 101s + 1500 Model 102s Product Mix: 2500 Model 101s + 500 Model 102s
$4251000 + $8501500
101 Assembly 2700 = $1,700,000 $4252500 + $850500 = $1,487,500

102 Assembly 1000

 Profit vs. Contribution
Product mix of 1 Model 101s and 2 Model 102s
Hours 101 102
Profit / unit Profit / unit
Eng. Assy. 1 22
Revenue 39000 38000 Mtl. Stmp. 21 22
Direct Costs 36000 33000 101 Assy. 21 0
102 Assy. 0 32
Allocated Costs
Engine Assembly 1.7 1 101s and 2 102s

Metal Stamping 2.7 Fraction 101 102

1 22
101 Assembly 2.7 Eng. Assy.
1 + 22 1 + 22
Mtl. Stmp. 21 22
102 Assembly 1.5 21 + 22 21 + 22
101 Assy. 1 0
102 Assy. 0 1
 Profit vs. Contribution
Total Profit = 1 + 2 = 3000 1 + 50002 8.6

Hours 101 102

Profit / unit Profit / unit
Eng. Assy. 1 22
Revenue 39000 38000 Mtl. Stmp. 21 22
Direct Costs 36000 33000 101 Assy. 21 0
102 Assy. 0 32
Allocated Costs
1.7 2 1.7
Engine Assembly 1 + 22 1 + 22 1 101s and 2 102s
1 + 2
2 2.7 2 2.7
Metal Stamping 21 + 22 21 + 22 Fraction 101 102
2.7 1 22
101 Assembly 0 Eng. Assy.
1 1 + 22 1 + 22
1.5 Mtl. Stmp. 21 22
102 Assembly 0 1 21 + 22 21 + 22
101 Assy. 1 0
102 Assy. 0 1
Done