Assignment 2

Monash University Malaysia

ETW2440 - Business Modelling Methods

Semester 1, 2019

This assignment is worth 20% of your assessment for this subject. The final assignment is due
by 4 pm on the 22nd of May, 2019. Once completed, your assignments will be put into an
assignment box located in building 6B level 5 (will be announced). This is a group
assignment where groups of one and two are acceptable. Only students whose names are
shown on the assignment will receive marks for the submission.

Problem

Evertop is a company that produces two types of metal stands for supermarkets. Model A is
the standard version; model B is a heavy-duty version. Stands are manufactured through three
major processes: process-1, process-2, and process-3. In the process-1, a large machine is used
to cut standard sheets of metal into appropriate sizes. In the process-2, another machine bends
the metal into shape. Process-3 involves joining the parts with a combination of soldering and
riveting. Evertop's process-1 and process-2 are used for both models of stands. Separate
process-3 departments are used for the final stage of production.

The file Assignment 2-Data.xlsx contains relevant data for Evertop. The production of one
model A approximately requires 0.27 hour and 0.34 hour on the process-1 and process-2
machines, respectively. Similarly, the production of one model B requires 0.5 hours and 0.48
hour on the process-1 and process-2 machines, respectively. Both the process-1 and process-2
machines can operate for 750 hours each month. Model A process-3 department has a monthly
capacity of 1,500 units. The model B process-3 department has a monthly capacity of only
1,350 units. Currently, Evertop is producing and selling 350 units of model A and 1,300 units
of model B per month.

Model A stands are sold for $1,790, and model B stands are sold for $1,995. Evertop’s
operation is fairly small in the industry, and management believes it cannot increase prices
beyond these levels because of the competition. However, the marketing department believes
that Evertop can sell as much as it can produce at these prices.

Notes on data calculations

The costs of production are summarized in the Assignment 2-Data.xlsx file. In this file, the
data in the highlighted cells are given, whereas other values are calculated from these. The
fixed overhead is distributed using activity-based costing principles. For instance, at current
production levels, the process-2 machine spends 119 hours on model A stands and 624 hours
on model B stands. The process-2 machine is used 743 hours of the month, of which 16.02%
of the time is spent on model A stands, and 83.98% is spent on model B stands. The $94,000
of fixed overhead in the process-2 department is distributed as $15,058.80 (94,000×0.1602) to
model A stands and $78,941.2 (94,000×0.8398) to model B stands. The fixed overhead per
unit of output is allocated as $43.02 (15,058.80/350) for model A and $60.72 (78,941.2/1300)
for model B. In the calculation of the standard overhead cost, the fixed and variable costs are
added together, so that the overhead cost for the process-2 department allocated to a model A
stand is $153 (43.02+110, rounded down to $153). Similarly, the overhead cost for the process-
2 department allocated to a model B stand is $225.72 (60.72+165, rounded up to $226).

a) Formulate an LP model for this problem.

[5 marks]

b) List down all the assumptions that are necessary to formulate the LP model for the given
problem.
[3 marks]

c) Develop a spreadsheet model as well as R codes for the problem formulated in part a).
Compare the results from two software.

[3 marks]

d) Assume that management just met to discuss next month’s operating plan. Although
the stands are selling well, the overall profitability of the company might be a concern.
The plant’s accountant advised that the current production of model A stands be cut
back. According to him “Model A stands are sold for $1,790 per unit, but our costs are
$1811. Even though we’re selling only 350 units a month, we’re losing money on each
one. We should decrease the production of model A.” The operations analyst disagreed.
He said that the problem was the model A process-3 department trying to absorb a large
overhead with a small production volume. “The model A units are contributing to
overhead. Even though the production doesn’t cover all of the fixed costs, we’d be
worse off with lower production.” Make a recommendation to management, with a
short verbal argument supporting the accountant or the operations analyst.

[5 marks]

e) Would the company be willing to pay $300 for five extra units of Model A process-3
capacity? Explain.
[4 marks]