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 year’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 &...