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### Bayview Case

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# Bayview Case

By | September 2008
Page 1 of 2
Bayview Case Analysis
A.Estimation of cost structure based on intuition of the management. 1.Material costs are all variable.
2.Direct labor costs are all variable.
3.Factory overheads have initially been estimated as 250% of direct labor costs. However, the management estimates 20% of the overheads to be variable. Thus the variable component of overheads is (250 X .2 = 50)% of direct labor costs. 4.Selling & administrative expense is 15% of sales (selling price for calculations per unit) of which, half is variable. Thus 7.5% of direct labor costs is variable. We can make a table of contributions & profits for all three products as follows:

We know the constraints:
1.Max demand for A, B & C is 130,000, 50,000 and 50,000, respectively. 2.Departments 1 and 2 cannot exceed 67,000 and 63,000 capacity respectively. 3.To maintain loyal customers, we must supply at least 80,000, 32,000 and 12,000 units of A, B & C, respectively. 4.The total production capacity of the whole factory cannot exceed last yearâ€™s production i.e. 160,000.

We can formulate our objective function for contributions & quantity as follows: Objective Function:max (8.5A + 4B + 5.9C)
With constraints:1A expenses on total sales would give us fixed component of mktg &...

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