Costs and Decision Models

Topics: Costs, Variable cost, Cost Pages: 3 (465 words) Published: January 20, 2013
Decision Models:

Lecture 2


Shelby Shelving Decision Model Decision Models Decision Variables: Let S = # of Model S shelves to produce, and LX = # of Model LX shelves to produce. To specify the objective function, we need to be Lecture 2 Shelby Shelving Case Understanding the optimizer sensitivity report ! Dual prices ! Righthand side ranges ! Objective coefficient ranges If time permits: Distribution / Network Optimization Models Summary and Preparation for next class LX ) Net profit 39S 55LX 400 and 1 So for the current production plan of S 1400, we get Net profit = $61,400. Selling Price Standard cost Profit contribution able to compute net profit for any production plan S; LX . Case information: S 1800 1839 39 LX 2100 2045 55

Is equation (1) correct?

Decision Models:

Lecture 2


Decision Models:

Lecture 2


Equation (1) is not correct (although it does give the correct net profit for the current production plan). Why? Because the standard costs are based on the current production plan and they do not correctly account for the fixed costs for different production plans. For example, what is the net profit for the production plan S Net profit LX 0? Since Variable cost Fixed cost 385,000. max subject to: Revenue

Shelby Shelving LP Decision Variables: Let S = # of Model S shelves to produce, and LX = # of Model LX shelves to produce. Shelby Shelving Linear Program 260 S 245 LX 385;000 (Net Profit) (S assembly) (LX assembly) (Stamping) (Nonnegativity) 0:3 S (Forming) 0:25 S S LX 0:3 LX 0:5 LX S; LX 1900 1400 800 800 0

and Fixed cost = 385,000, the Net profit is But equation (1) incorrectly gives Net profit 39S 55LX 0

To derive a correct formula for net profit, we must separate the fixed and variable costs. Profit Contribution Calculation Model S Model LX a) Selling price 1800 2100 b) Direct materials 1000 1200 c) Direct labor 175 210 d) Variable overhead 365 445 e) Profit contribution 260 245 (e = a b c d) The correct objective function...
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