QUANTITATIVE METHODS II

MATERIAL FOR CLASS DISCUSSIONS

& PROBLEM SETS - PACKET 2

Sections A & B

1
PRODUCT MIX AT MANVI MOTORS

Manvi Motors of Malaysia produces cars under an agreement with Suzuki of Japan and
trucks under an agreement with General Motors of the USA. The company was
established in 1972 and now employs approximately 1000 people and can generally
produce an average of 25 cars and trucks per day.

Capital investment constraints have limited the nature of Manvi’s manufacturing

facilities. Consequently, it is not able to manufacture many of the items required for the
assembly of cars and trucks. These items are imported from Suzuki or GM. However,
both Suzuki and GM must limit the quantities of parts shipped to Manvi because of
constraints on their own capacities. GM has guaranteed to provide parts sufficient for up
to 200 trucks per month and Suzuki has guaranteed to provide parts sufficient for up to
500 cars per month.

GM has just announced several price increases, which have raised the direct
manufacturing cost (which includes all labor and material costs) of a Manvi truck from
$800 to $1000 converted to US dollars.

Suzuki has not raised prices on purchased parts, so the direct manufacturing cost of a
Manvi car has remained stable at $800.

The Ministry of Economics controls the selling price of Manvi’s output: cars sell at
$4300 and trucks sell at $6000.

Manvi’s vehicles have a reputation as well-made and dependable products, suitable for
the Malaysian market. Demand is so great that the company can sell all the cars and
trucks it can produce, and the company expects no change in this situation. Manvi
presently has unfilled orders (already paid for) for 150 cars and 100 trucks.

The manufacturing process for both cars and trucks consists essentially of two
departments, which limits the number of vehicles that can be produced during any month.
These departments are fabrication and assembly. An agreement with the Ministry of
Labor has set the minimum labor usage combined in both departments to be at 14,000
worker-hours per month.

The fabrication department is organized as a job-shop, which produces hundreds of

different parts on 45 machine tools. A recent analysis has shown that this shop can plan
on no more than 12,000 worker-hours of capacity in the coming month. Each car
manufactured requires 20 worker-hours of fabrication; each truck requires 40 worker-
hours.

The assembly department is set up as a conventional assembly line. 10,000 worker-hours

of capacity will be available in the assembly department in the coming month. Each car
requires 25 worker-hours of assembly; each truck requires only 10 worker-hours.

2
The fixed overhead costs are estimated at $10,000 in the fabrication department and
$12,000 in the assembly department per month.

At this morning’s management meeting, Farah Hormozi, the production manager

expressed considerable concern over GM’s price increases. The next month’s production
schedule was to be announced tomorrow, and she asked Sunil Ray, the managing director,
whether the cost should affect the currently planned production of 200 cars and 200
trucks. Mr. Ray replied “I have never been sure if our current plan is the best we can
have. If it is, I think we will just have to absorb the price increase until the Ministry of
Economics allows us to increase our selling price. In that case we will go ahead with the
previous plan – 200 cars and 200 trucks”.

1. Find the best product mix for Manvi Motors under the new cost structure.
2. Was the current policy of producing 200 cars and 200 trucks the best for Manvi
Motors under the old cost structure?
3. If an additional worker-hour in any of the departments will cost the same amount,
in which department would you recommend making this additional hour
available?
4. If 200 additional worker hours were available in the fabrication department for
$3000, should Farah pay this amount and get the additional hours? What would
the profit be if the worker-hour capacity in the fabrication department is changed
to 13000?
5. What are 1000 additional hours in the assembly department worth? What about
1100 hours?
6. If the net profit from a truck is decreased by $500 will the optimal solution
change? Will the total profit change? If yes, by how much?
7. An error in record keeping indicates that the number of back-ordered trucks is
only 85. Will this change the best product mix? Explain, and find the new
product mix if it is affected.
8. Farah has received word that the Minister of Labor will relax your labor
restriction by 2000 worker-hours. How will this change your decision regarding
the best product mix? Explain.

9. Manvi Motors is considering introducing a new Manvi van. The new model
requires 30 hours in the fabrication department and 20 hours in the assembly
department. Each Manvi van will give a net profit of $4000.

a) Should any vans be produced?

b) How much would it cost in terms of profit if, for some reason the management
insisted that at least one van be made?
c) How high would the profit from each van have to be before it became attractive to
produce any?

3
RED BRAND CANNERS*

On Monday, September 13, 1965, Mr. Mitchell Gordon, Vice-President of Operations,

asked the Controller, the Sales Manager, and the Production Manager to meet with him to
discuss the amount of tomato products to pack that season. The tomato crop, which had
been purchased at planting, was beginning to arrive at the cannery, and packing
operations would have to be started by the following Monday. Red Brand Canners was a
medium-size company which canned and distributed a variety of fruit and vegetable
products under private brands in the western states.

Mr. William Cooper, the Controller, and Mr. Charles Myers, the Sales Manager, were the
first to arrive in Mr. Gordon’s office. Dan Tucker, the Production Manager, came in a
few minutes later and said that he had picked up Produce Inspection’s latest estimate of
the quality of the incoming tomatoes. According to their report, about 20% of the crop
was Grade “A” quality and the remaining portion of the 3,000,000 pound crop was Grade
“B”.

Gordon asked Myers about the demand for tomato products for the coming year. Myers
replied that they could sell all of the whole canned tomatoes they could produce. The
expected demand for tomato juice and tomato paste, on the other hand, was limited. The
Sales Manager then passed around the latest demand forecast, which is shown in Exhibit
1. He reminded the group that the selling prices had been set in light of the long-term
marketing strategy of the Company, and potential sales had been forecasted at these
prices.

Bill Cooper, after looking at Myer’s estimates of demand, said that it looked like the
Company “should do quite well (on the tomato crop) this year.” With the new accounting
system that had been set up, he had been able to compute the contribution for each
product, and according to his analysis the incremental profit on the whole tomatoes was
greater than for any other tomato product. In May, after Red Brand had signed contracts
agreeing to purchase the grower’s production at an average delivered price of 6 cents per
pound, Cooper had computed the tomato products’ contributions (see Exhibit 2).

Dan Tucker brought to Cooper’s attention that, although there was ample production
capacity, it was impossible to produce all whole tomatoes, as too small a portion of the
tomato crop was “A” quality. Red Brand used a numerical scale to record the quality of
both raw produce and prepared products. This scale ran from zero to ten, the higher
number representing better quality. Rating tomatoes according to this scale, “A”
tomatoes averaged nine points per pound and “B” tomatoes averaged five points per
pound. Tucker noted that the minimum average input quality for canned whole tomatoes
was eight and for juice it was six points per pound. Paste could be made entirely from

________________________________________________________________________
*From: Quantitative Methods in Management: Text and Cases (Vatter, Bradley, Frey, Jr.
and Jackson)

4
“B” grade tomatoes. This meant that whole tomato production was limited to 800,000
pounds.Gordon stated that this was not a real limitation. He has been recently solicited to
purchase
80,000 pounds of Grade “A” tomatoes at 8 ½ cents per pound and at that time had turned
down the offer. He felt, however, that the tomatoes were still available.
Myers, who had been doing some calculations, said that although he agreed that the
Company “should do quite well this year,” it would not be by canning whole tomatoes. It
seemed to him that tomato cost should be allocated on the basis of quality and quantity
rather than by quantity only, as Cooper had done.

Therefore, he had recomputed the marginal profit on this basis (see Exhibit 3), and from
his results, Red Brand should use 2,000,000 pounds of the “B” tomatoes for paste, and
the remaining 400,000 pounds of “B” tomatoes and all of the “A” tomatoes for juice. If
the demand expectations were realized, a contribution of $48,000 would be made on this
year’s tomato crop.

Formulate the decision problem faced by Red Brand Canners as an LP to answer the
following:
What is the best product mix for Red Brand Canners?
Should Red Brand Canners purchase the additional tomatoes?

Exhibit 1: Demand Forecasts

Product Selling Price Demand Forecast

per Case (Cases)

24 - 2 ½ whole tomatoes $4.00 800,000

24 – 2 ½ peach halves 5.40 10,000

24 – 2 ½ peach nectar 4.60 5,000

24 - 2 ½ tomato juice 4.50 50,000

24 - 2 ½ cooking apples 4.90 15,000

24 - 2 ½ tomato paste 3.80 80,000

5
Product usage is as given below:

Product Pounds per Case

Whole tomatoes 18
Peach Halves 18
Peach Nectar 17
Tomato Juice 20
Cooking Apples 27
Tomato Paste 25

Exhibit 2: Product Item Profitability

24-2 ½ 24-2 ½ 24-2 ½ 24-2 ½ 24-2 ½ 24-2 ½

Whole Peach Peach Tomato Cooking Tomato
Product Tomatoes Halves Nectar Juice Apples Paste

Selling Price $4.00 $5.40 $4.60 $4.50 $4.90 $3.80

Variable Costs:
Direct Labor 1.18 1.40 1.27 1.32 1.70 .54
Variable OHD .24 .32 .23 .36 .22 .26
Variable Selling .40 .30 .40 .85 .28 .38
Packaging Material .70 .56 .60 .65 .70 .77
Fruit 1.08 1.80 1.70 1.20 .90 1.50

Total Variable Costs 3.60 4.38 4.20 4.38 3.80 3.45

Contribution .40 1.02 .40 .12 1.10 .35

Less Allocated OHD .28 .70 .52 .21 .75 .23

.12 .32 (.12) (.09) .35 .12
Net Profit

6
Exhibit 3: Marginal Analysis of Tomato Products

Z = Cost per pound of A tomatoes in cents

Y = Cost per pound of B tomatoes in cents

(600,000 lbs. x Z) + (2,400, 000 lbs. x Y) = (3,000,000 lbs. x 6)

= , Z = 9.32 cents per pound, Y = 5.18 cents per pound

Product Canned Tomato Tomato

Whole Tomatoes Juice Paste

Selling Price $4.00 $4.50 $3.80

Variable Cost (VC) 2.52 3.18 1.95
(excluding tomato costs)
Selling Price - VC $1.48 $1.32 $1.85

Tomato cost 1.49 1.24 1.30

Marginal Profit $ - .01 $ .08 $ .55

7
 PROBLEM SET 1
OR FORMULATION PROBLEMS

I. PRODUCT MIX PROBLEMS

Consider the monthly production of two types of printers:
LQ Printers (LQP)
DM Printers (DMP)
All printers produced can be sold but the resources are limited. The profit from each is:
Rs. 1000 per unit of LQP
Rs. 500 per unit of DMP
Resource requirements and availability are as follows:

RESOURCE LQP DMP AVAILABILITY

LABOUR (HRS) 1 1 10,000
CLEAN ROOM (HRS) 1 2 16,000
TESTING ROOM (HRS) 3 1 24,000

What should the product mix be?

II. BLENDING TYPE PROBLEMS

An alloy is made of lead, zinc and tin. The required composition is 35% lead, 30% zinc
and 35% tin. This alloy is made by mixing alloys having different lead, zinc and tin
compositions. The alloys available in the market, their compositions and their cost per kg.
are as given below:

ALLOY I II III IV V VI VII

% OF
LEAD 30 40 20 35 40 25 30
ZINC 30 20 30 30 35 45 35
TIN 40 40 50 35 25 30 35

COST/KG 38 43 35 48 40 45 48

Assume that there are no blending losses. Find the optimal blend.

III. PETROLEUM BLENDING

Two types of crudes are blended to form premium and regular type of petrol. This can be
done by 2 processes. The output depends on the number of times each process is run.

The requirements and outputs for the two processes for each run are as given below:

8
 REQUIREMENT / RUN OUTPUT / RUN
PROCESS CRUDE A CRUDE B PREMIUM REGULAR

I 1 3 5 2
II 4 2 3 8
AVAILABLE 1000 1500
MINIMUM DEMAND 800 700
PROFIT / UNIT 3000 2500

What should be done to maximize profits?

IV. ASSEMBLY TYPE PROBLEMS

An assembly requires 4 units of part A, 6 units of part B, and 3 units of part C.
Three different types of machines can be used to produce these components.
Two raw materials RM1 and RM2 are required for the production and their consumption
and availability is given in the table below.

The parts A, B and C are simultaneously produced on each of the 3 machines and the
outputs are as given below:

INPUT PER RUN OUTPUT PER RUN

RM1 RM2 A B C
MACHINE
1 7 5 2 4 2
2 4 8 1 3 4
3 2 7 3 1 2
AVAILABLE 1000 1500

What should be done to get the maximum number of assemblies?

V. TRANSPORTATION TYPE PROBLEMS

Given below is availability of goods at three warehouses and requirements of the goods at
four demand points. The cost of transporting one unit from each warehouse to each
demand point is known and is given in the table below.

WARE- DEMAND POINT AVAILABI-

1 2 3 4
HOUSE LITY
1 2 1.5 1 2.5 10,000
2 1 2.5 1.5 1 6,000
3 3 1 2.5 2 4,000

9
REQUIRED 7,000 4,000 6,000 3,000 20,000

How much should be transported from each warehouse to each demand point?

VI. TRIMLOSS TYPE PROBLEMS

When making paper, the deckle width determines the width of the paper roll produced.
Suppose, deckle width produced is 20 feet and the following requirement needs to be
met: roll of width 9' and 7,000' long
roll of width 7' and 12,000' long
roll of width 5' and 9,000' long
Any extra width and length is a waste. Assuming that the requirement can be fulfilled by
providing more than one roll of a type, how should the roll be cut (what patterns should
be used) such that the trim waste is minimized?

VII. FINANCIAL PLANNING

Tiles R Us is a large manufacturer of all varieties of flooring tiles. The company’s cash
receivables and payables for the coming 4 periods are as given in the table below. The
payables need not be paid at once and may be paid out of future funds. In particular,
suppose that a 1-period delay in meeting payables means that the company must pay Rs.
1.02 for each Re. 1 owed, and a 2-period delay requires payment of Rs. 1.04 for each
rupee owed.
Period1 Period2 Period 3 Period 4

Cash receipts (in lakhs 80 90 70 80

of Rs)
Accounts payable (lakhs 60 70 50 50
of rupees)
Beginning cash on hand is Rs. 20 lakhs, and cash receivables feed into cash on hand.
Cash carried forward from period to period may be allocated in any desired split between
a bank account that pays 1% rate of interest per period and bonds that pay 3% rate of
interest every two periods. However, the bonds can only be purchased in Periods 1 and 2,
and cannot be cashed in until two periods after purchase.

Mr. Seshan, the owner of Tiles R Us would like to maximize cash on hand at the end of
the planning horizon (the amount carried beyond Period 4 after making the payments).

a) Define the variables required to help him in his decision.

b) Formulate this decision problem be modeled as a linear programming problem?

c) Now suppose that the penalty on payments delayed for 2 periods depends on the
amount delayed. The company must pay Rs. 1.04 for each Re. 1 owed up to a maximum

10
10% amount delayed for 2 periods and Rs. 1.05 thereafter. Define any new variables
needed to incorporate this information in your model of part b). Give an appropriate
formulation that will help Mr. Seshan in his decision under this new penalty structure.

VIII. MULTISTAGE PROBLEM

An automobile tire company has the ability to produce both nylon and fibreglass tires.
The company has two presses, a Wheeling machine and a Regal machine and appropriate
moulds that can be used to produce these tires. The production hours available in the
next three months are given below. During the next three months, the company has
agreed to deliver the tires as follows:

MONTH AVAILABLE HOURS DELIVERY REQUIRED

Wheeling Regal Nylon Fibreglass
JUNE 700 1,500 4,000 1,000
JULY 300 400 8,000 5,000
AUGUST 1,000 300 3,000 5,000

The production rate for each machine-tire combination is as follows:

TYRE WHEELING hr./Tyre REGAL
NYLON 0.15 0.16
FIBREGLASS 0.12 0.14

The variable cost of producing tires are Rs.2,500 per operating hour, regardless of which
machine is used or which tire is produced. The inventory carrying costs are Rs.50 per
month. Material costs for the nylon and fiberglass tires are Rs.1,550 and Rs.1959
respectively. Finishing and packaging and shipping costs are Rs.115 per tire. Prices have
been set at Rs. 3,500 per nylon tire and Rs. 4,500 per fiberglass tire.

1. What should be the production schedule for the three months so as to maximize the
profit?
2. A new Wheeling machine is due in September. At a cost of Rs.100,000, it would be
possible to expedite its arrival to August, making available 172 additional hours of
wheeling machine in August. Should it be expedited?

IX. NAPKIN PROBLEM

A hotel has orders to serve a number of dinners during the next week for which special
napkins are required.
Cost of a new napkin: Rs. 20
Cost of quick wash : Rs.1.25
Cost of ordinary wash : Rs.0.75

11
Quick wash will take one day, that is if a napkin is given on first day, then it will be
washed and can be used on the third day. Ordinary wash will take 2 days i.e. if a napkin
is given on first day, then it will be washed and can be used on fourth day.

DAY NO. OF DINNERS

-------- ------------------------
1 200
2 300
3 400
4 275
5 350
6 250
7 300
-----------------------------------
The napkins are disposed of at the end of the week.
How many napkins should be bought? How many should be sent for quick wash and how
many for ordinary wash every day?

X. SCHEDULING DECISIONS AT CALL-ME

Call-Me Inc. has a major call center at Chennai that specializes in answering medical
billing queries for a few health insurance companies from around the world. This
company has available trained professionals that can answer questions in English,
French, German and Japanese, and they operate 24 hours a day, 7 days a week.

They estimate the following minimal daily requirements for the trained professionals:

Time of Day Period Minimum Number of

(24-hour clock) Trained Professionals Required

2- 6 1 20
6-10 2 50
10-14 3 80
14-18 4 100
18-22 5 40
22- 2 6 30

Each professional works eight consecutive hours. All trained professionals are paid the
same for an eight hour stint. What must be the daily schedule so that the requirements
above are met?
Call-Me is considering the option of scheduling overtime hours using the same pool of
professionals that are working for them. The specific option they are considering is that a
professional who is not working in a given time period can give overtime and be paid one

12
and a half times the regular rate. For instance, if period 6 is not covered by a professional
during his/her regular schedule, then he/she is eligible to work overtime in this period. If
so, he/she will be paid 0.75x, if x is the regular pay for an 8 hour stint. Is it worthwhile
scheduling overtime hours? Why or Why not?

XI. PRODUCTION PLANNING AT NATIONAL STEEL CORPORATION

National Steel Corporation (NSC) produces special purpose steel used in the aircraft and
aerospace industries. The Sales Department of NSC has received orders of 2400, 2200,
2700 and 2500 tons of steel for each of the next 4 months. NSC can meet these demands
by producing the steel, by drawing from its inventory, or by using any combination of the
two alternatives.
The production costs per ton of steel during each of the next 4 months are projected to be
$7400, $7500, $7600 and $7650. Because costs are rising each month – due to
inflationary pressures – NSC might be better off producing more steel than it needs in a
given month and storing the excess. Production capacity though cannot exceed 4000 tons
in any single month. The monthly production is finished at the end of the month at which
time the demand is met. Any remaining steel is then stored in inventory at a cost of $120
per ton for each month it remains there. These data are summarized in Table 1.
If the production level is increased from one month to the next, then the company incurs
a cost of $50 per ton of increased production to cover the additional labor and/or
overtime. Each tome of decreased production incurs a cost of $30 to cover the benefits of
unused employees.

13
TABLE 1. Data for the Production-Planning Problem of NSC

MONTH
________________________________________________________________________
1 2 3 4
________________________________________________________________________

Demand (tons) 2400 2200 2700 2500

Prod. Costs ($/ton) 7400 7500 7600 7650
Inventory Cost
($/ton/month) 120 120 120 120
________________________________________________________________________

The production level during the previous month was 1800 tons, and the beginning
inventory is 1000 tons. Inventory at the end of the fourth month must be at least 1500
tons to cover anticipated demand. Develop a production plan for NSC that minimizes the
total costs over the next 4 months.

XII. REVENUE MANAGEMENT AT LEISURE AIR

Leisure Air is a regional airline that provides service for Pittsburgh, Newark, Charlotte,
Myrtle Beach, and Orlando. It has two Boeing 737-400 airplanes, one based in Pittsburgh
and the other in Newark. Both airplanes have a coach section with a 132-seat capacity.
Each morning the Pittsburgh-based plane flies to Orlando with a stopover in Charlotte,
and the Newark-based plane flies to Myrtle Beach, also with a stopover in Charlotte. At
the end of the day, both planes return to their home bases. To keep the size of the
problem reasonable, we restrict our attention to the Pittsburgh-Charlotte, Charlotte-
Orlando, Newark-Charlotte, and Charlotte-Myrtle Beach flight legs for the morning
flights. The figure illustrates the logistics of the Leisure Air problem situation.
Leisure Air uses two fare classes: a discount-fare Q class and a full-fare Y class.
Reservations using the discount-fare Q class must be made 14 days in advance and must
include a Saturday night stay in the destination city. Reservations using the full-fare

Y class may be made anytime, with no penalty for changing the reservation at a later
date. To determine the itinerary and fare alternatives that Leisure Air can offer its
customers, we must consider not only the origin and the destination of each flight, but
also the fare class. For instance, possible products include Pittsburgh to Charlotte using

14
Q class, Newark to Orlando using Q class, Charlotte to Myrtle Beach using Y class, and
so on. Each product is referred to as an origin-destination-itinerary fare (ODIF). For
May 5, Leisure Air has established fares and developed forecasts of customer demand for
each of 16 ODIFs. These data are shown in Table.

Suppose that on April 4 a customer calls the Leisure Air reservation office and requests a
Q class seat on the May 5 flight from Pittsburgh to Myrtle Beach. Should Leisure Air
accept the reservation? The difficulty in making this decision is that even though Leisure
Air may have seats available, the company may not want to accept this reservation at the
Q class fare of $268, especially if it is possible to sell the same reservation later at the Y
class fare of $456. Thus, determining how many Q and Y class seats to make available
are important decisions that Leisure Air must make in order to operate its reservation
system.

15
 LOGISTICS OF THE LEISURE AIR PROBLEM

Pitsburg P Newark
N
Flight

Leg 1

Flight

Leg 2

Charlotte
C
Flight

Leg 4

Flight

Orlando Leg 3 Myrtle Beach

O M

FARE AND DEMAND DATA FOR 16 LEISURE AIR ORIGIN-DESTINATION ITINERARY

FARES (ODIFs)

Fare ODIF Forecasted

ODIF Origin Destination Class Code Fare Demand
1 Pittsburgh Charlotte Q PCQ $178 33
2 Pittsburgh Myrtle Beach Q PMQ 268 44
3 Pittsburgh Orlando Q POQ 228 45
4 Pittsburgh Charlotte Y PCY 380 16
5 Pittsburgh Myrtle Beach Y PMY 456 6
6 Pittsburgh Orlando Y POY 560 11
7 Newark Charlotte Q NCQ 199 26
8 Newark Myrtle Beach Q NMQ 249 56
9 Newark Orlando Q NOQ 349 39
10 Newark Charlotte Y NCY 385 15
11 Newark Myrtle Beach Y NMY 444 7
12 Newark Orlando Y NOY 580 9
13 Charlotte Myrtle Beach Q CMQ 179 64
14 Charlotte Myrtle Beach Y CMY 380 8
15 Charlotte Orlando Q COQ 224 46
16 Charlotte Orlando Y COY 582 10

16