Gennadiy

Sverzhinskiy

Problem 1
Conclusions and Recommendations
The optimal production schedule for Surfs Up is shown below.
Monthly Production Schedule
105 90

Surfboards Produced

75
60 45 30 15 0 Surfboards Jan 0 Feb 0 Mar 0 Apr 70 May 0 June 85 July 100 Aug 100 Sept 65 Oct 0 Nov 0 Dec 0

This production schedule yields an annual profit of $21,050, yielding a net profit margin of approximately 25%.

Managerial Problem Definition

Surfs Up faces a seasonal demand for their high-end surfboards. Having limited capacity, Surfs Up meets the high summer demand by producing and storing surplus surfboards during the winter. In addition to the manufacturing costs, Surfs Up has two other costs to consider. The first is a start-up cost, which is a flat fee for any month of production. The second is a sales person cost, which is a flat fee for any month of sales. In order to maximize their profits they would like to determine the optimal production schedule so that the demand is met at the minimal cost. In addition, to accommodate for any fluctuations in demand, Surfs Up needs to maintain a minimum level of safety stock.

Formulation
Decision variables: ! = ! = (1 = , 0 = ) ! = (1 = , 0 = ) Assignment #2

Gennadiy Sverzhinskiy Intermediate Variables: ! = ! = Other Variables: ! = ! = Maximize:

!!!" !!!

200! 500! 125! 1000! 5! Equation 1

Subject to: ! = ! = 0 ! ! ! ! !!! , !"!!" 5 !!! 10

Solution Methodology
The model consists of five sections. The first section contains the revenue and costs associated with the production and storage of the surfboards on a unit basis as well as the monthly start-up and sales person costs. The second, third and fourth sections contain the production, sales and demand, and inventory figures. The fifth section contains the summary of the revenues, costs, and total profit. Excel Solver is used to maximize the total annual profit based on the three decision variables and the six constraints listed in the Formulation section above. In order to maintain linearity of the SUi constraint, an intermediate variable ECi was introduced. This variable represents the effective capacity, equal to 100 or 0 based on the decision to start production (and consequently pay the start-up fee.) Similar method was used to determine the upper bound for the Si , via introduction of the EDi variable.

Assignment #2

Gennadiy Sverzhinskiy
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 B C D E F
$200 $125 $5 $500 $1,000 Production Eff. Cap. Produce =F9*G9 0 0 0 100 1 0 100 1 100 1 100 1 100 1 0 0 0 Sold Max Cap. 100 100 100 100 100 100 100 100 100 100 100 100
=F1 * SUM(I9:I20) =F4 * SUM(F9:F20) =F2 * SUM(C9:C20) =F3 * SUM(O9:O20) =F5 * SUM(L9:L20) =F1 * SUM(I9:I20) - F4 * SUM(F9:F20) - F2 * SUM(C9:C20) - F3 * SUM(O9:O20) - F5 * SUM(L9:L20)

Price per Board Production Cost Per Board Inventory Cost Per Board Set-Up Cost Salesperson Cost

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

Actual 0 0 0 70 0 85 100 100 65 0 0 0

0 0 0 20 45 65 110 110 40 30 0 0

Effective Demand 20 45 65 110 110 40 30 -

Sales Prsn Actual Hire Demand 0 10 0 14 0 15 =M12*L12 1 20 1 45 1 65 1 110 1 110 1 40 1 30 0 15 0 10

Beginning 5 5 5 5 55 10 30 20 10 35 5 5

Inventory Ending 5 =P9 5 5 55 10 30 20 10 35 5 5 5

Safety 5 5 5 5 =O13+C13-I13 10 10 10 10 10 5 5 5

Revenue Set-Up Cost Production Cost Inventory Cost Sales Person Cost Total Profit

$84,000 2,500 52,500 950 7,000 $21,050

Assignment #2

Gennadiy Sverzhinskiy

Problem 2
Conclusions and Recommendations
Tim Cook should set the prices for the iPod Touch and iPod Nano at $250.1, and $190.4, respectively, for a total maximum profit of $1,913,133.2.

Managerial Problem Definition

Based on historical demand of the iPod Touch and iPod Nano, Tim Cook would like to (i) determine the demand functions for each product, and (ii) determine the price points that would maximize combined total revenues for both products. Having two version of a similar product results in demand curves that are dependent on each other as consumer demand for one product will not only be affected by that product, but also its substitute.

Formulation
Demand Curves Decision Variables: ! , ! , ! = ! , ! , ! = Other Variables: !"#$!,!"#$% , !"#$,!"#$% = !"#$!,!"#$%&' , !"#$,!"#$%&! = Minimize:
!!! !

!"#$!, !"#$% !"#$!, !"#$%&'

!!! !!! !

!"#$, !"#$% !"#$, !"#$%&'

!!!

Subject to:

Assignment #2

Gennadiy Sverzhinskiy 19,000 ! 27,000 0 ! 15 70 ! 30 7,000 ! 17,000 100 ! 0 0 ! 25 Profit Decision Variables: !"#$! = !"#$ = Other Variables: !"#$! = !"#$ =

Maximize: !"!"! !"#$! + !"#$ !"#$ Subject to: !"#$! , !"#$ 0 0 !"#$! 400 0 !"#$ 300

Assignment #2

Gennadiy Sverzhinskiy

Solution Methodology
Demand Curves The demand curve constants we solved for using the Premium Solver, an Excel add-on. This section will describe the solution methodology for the iPod Touch demand curve, but similar methodology was used to solve for the iPod Nano demand curve. The requirement for upper and lower bounds required by Premium Solver required that an estimate of the bounds be obtained. The estimates of the constraints were obtained as follows. A scatter plot of the iPod Touch was graphed for each iPod Nano price point. Observing the graphical results allowed for an approximation of the B1 and C1 constants. Once the B1 and C1 constants were estimated, A1 was estimated by plugging in the B1 and C1 constants into the demand equation and solving for A1. After obtaining the approximations for the intervals, Premium Solver produced the variables for all three constants using the Evolutionary method. The results were further refined by using the GRG non-linear method.

Demand of iPod Touch

16,000 14,000 12,000 10,000 8,000 6,000 4,000

Demand

$100.0 $150.0 $200.0

$0.0 $100.0 $200.0 $300.0 $400.0 Price

Assignment #2

Gennadiy Sverzhinskiy
1 Constants Lower Bound 2 A1 19,000.0 3 B1 0.0 4 C1 (70.0) 5 6 7 Price 8 iPod Nano iPod Touch 9 $100.0 $100.0 10 100.0 150.0 11 100.0 200.0 12 $150.0 200.0 13 150.0 250.0 14 150.0 300.0 15 $200.0 300.0 16 17 A B C D E F G
Touch Upper Bound 20,279.3 27,000.0 1.5 15.0 (51.6) (30.0)
=A_2 + B_2 * $A9 + C_2 * $B9

Demand (in thousands) Given 15,166 12,266 10,875 10,222 7,771 4,410 5,320 Formula 15,274 12,694 10,115 10,192 7,612 5,033 5,110
2 Difference Difference (108) 11,663 (428) 183,591 760 577,668 30 910 =(C13-D13) 159 25,184 (623) 387,862 210 44,244

=E14^2

Sum of Difference 2

1,231,123

=SUM(F9:F15)

A B 1 Constants Lower Bound 2 A2 7,000.0 3 B2 (100.0) 4 C2 0.0 5 6 7 Price 8 iPod Nano iPod Touch 9 $100.0 $100.0 10 100.0 150.0 11 100.0 200.0 12 $150.0 200.0 13 150.0 250.0 14 150.0 300.0 15 $200.0 300.0 16 17

Nano Upper Bound 10,313.5 17,000.0 (32.9) 0.0 2.8 25.0

=A_1 + B_1*$A9 + C_1*$B9

Demand (in thousands) Given 7,311 7,387 7,499 5,992 6,398 6,210 4,431 Formula 7,311 7,453 7,594 5,951 6,093 6,235 4,592 Difference Difference 0 0 (66) 4,296 (95) 9,063 41 1,660 =(C13-D13) 305 93,077 (25) 604 (161) 25,802 134,501
2

=E14^2

Sum of Difference 2

=SUM(F9:F15)

Profit Premium Solver was also used to solve for the optimal price points using the objective function and constraints described above using the Evolutionary method. The results were further refined using the GRG non-linear method.

Assignment #2

Gennadiy Sverzhinskiy
1 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 A
Price Max Cost Margin

B
iPod Touch $250.1 $400.0 $93.0 $157.1 iPod Touch $1,204,854.4

C
iPod Nano $190.4 $300.0 $38.0 $152.4 iPod Nano $726,278.8

Profit

Total $1,931,133.2

=SUM(B9:C9)

Demand Min

=(B3-B5)*B12 Nano =(C3-C5)*C12 iPod Touch iPod 7,671 4,766 0 0

A B C

Constants iPod Touch iPod Nano 20,279.3 10,313.5 1.5 (32.9) (51.6) 2.8

Assignment #2

Gennadiy Sverzhinskiy

Problem 3
Conclusions and Recommendations
The minimum expansion cost is $3.115 million. The annual expenditures and capacities are summarized in the tables below.
Year 1 Costs Incurred (in $1,000s) $950.0 Year 2 $250.0 Year 3 $670.0 Year 4 $550.0 Year 5 $695.0 Total

$3,115.0

Capacity Year 0 Added Current (EOY) Minimum 750 Year 1 100 850 780 Year 2 10 860 860 Year 3 100 960 950 Year 4 100 1060 1060 Year 5 125 1185 1180

Managerial Problem Definition

A power company is interested in increasing its generating capacity to meet expected demand in its growing service area at the lowest possible cost. Their total generating capacity must meet the minimum required needs.

Formulation
Decision variables: !,! = where, i = purchase year and j = generator size Minimize:
!!! !!!

(!,! , !,! )
!!! !!!

Subject to: !,! =

Assignment #2

Gennadiy Sverzhinskiy ! !"# !

Solution Methodology
The model consists of three sections. The first section contains the decision variables, Pi,j. The second section contains the costs associated with purchasing a generator of a specific capacity in a given year as well as the costs incurred in each year. The third section contains the added, total and minimum generating capacities. Using Excels Solver, the decision variables are obtained to meet the minimum capacity in a given year, while simultaneously using those same decision variables to do so at the lowest cost. Cell I15 contains the total coast of expansion.
A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Generator Size (MW) 10 25 50 100 Generator Size (MW) 10 25 50 100

B
Year 0

C
Year 1 0 0 0 1

D
Year 2 1 0 0 0

E
Year 3 0 0 0 1

F
Year 4 0 0 0 1

G
Year 5 0 1 0 1

Year 0

Cost of Generator (in $1,000s) in Year 1 Year 2 Year 3 Year 4 $300.0 $250.0 $200.0 $170.0 460.0 375.0 350.0 280.0 670.0 558.0 465.0 380.0 950.0 790.0 670.0 550.0 Year 1 $950.0 Year 2 $250.0 Year 3 $670.0 Year 4 $550.0

Year 5 $145.0 235.0 320.0 460.0 Year 5 $695.0 Total $3,115.0

=SUM(C16:G16)

Year 0 Costs Incurred (in $1,000s)

=SUMPRODUCT(C3:C6,C10:C13)

Year 0 Added Current (EOY) Minimum 750

Year 1 100 850 780

Capacity Year 2 Year 3 10 100 860 960 860 950

Year 4 100 1060 1060

Year 5 125 1185 1180

=SUMPRODUCT(G3:G6,$A$3:$A$6) =F21+G20

Assignment #2