Practice Problem Set 1

1. Consider a company that manufactures widgets. The company sells widgets at a price of $225 per
unit. Each widget requires 4 hours of labour at $12/hour and 3kg of raw materials at $50 per kg. Fixed
costs of operating the facility are $20,000 per year. Assume that the number of units sold is 7,500.
a. The cost per unit of materials may vary between $48 and $52. How do the profit and unit
production cost vary with the material cost?
b. How does the profit vary with material and labour costs? The cost per unit of labour varies
between $11 and $14 and the cost per unit of materials varies between $48 and $52.

2. You work for a drug company that produces six different products at its plant. For each product, you
need labor and raw material. Row 2 in Table 1 shows the hours of labor needed to produce a pound
of each product, and row 3 shows the pounds of raw material needed to produce a pound of each
product. For example, producing a pound of Product 1 requires 6 hours of labor and 3.2 pounds of
raw material. For each drug, the price per pound is given in row 4 and the unit cost per pound is given
in row 5. For example, Product 2 sells for $11.00 per pound and incurs a unit cost of $5.70 per pound.
The month’s demand for each drug is given in row 6. For example, demand for Product 3 is 1,041
pounds. This month, 4,500 hours of labor and 1,600 pounds of raw material are available.
How can this company maximize its monthly profit?

Product No. 1 2 3 4 5 6
Labour (hours) 6 5 4 3 2.5 1.5
Raw Material 3.2 2.6 1.5 0.8 0.7 0.3
(pounds)
Unit price $12.50 $11 $9 $7 $6 $3
Unit cost $6.50 $5.70 $3.60 $2.80 $2.20 $1.20
Demand/month 960 928 1041 977 1084 1055
Table 1

3. Rita owns a teak furniture shop. She is considering three promotional strategies for the coming month.

Option A: Newspaper advertisements for a big sale in which everything in the store is 15% off.
Option B: A promotional spot on the local television network, The Home Network, focused on re-
styling your dining space.
Option C: No investment in any new promotional activities.
If she goes with Option C, Rita expects to sell five bedroom sets, three dining room sets, four china
cabinets and eight patio sets. Rita sells bedroom sets for $4,500, dining room sets for $3,500, china
cabinets for $4000 and patio sets for $1,500. The furniture sold at Rita’s store is of top quality. She
purchases bedroom sets for $2,500, dining room sets for $2,000, china cabinets for $2,000 and patio
sets for $750. Her business has monthly fixed costs of Operations and Salaries totaling $20,000.
Advertising in the newspaper costs $3,000, but two years ago when she used this strategy she sold
one more bedroom set, two more dining room sets, no increased amount of china cabinets and six
more patio sets than she had expected. A promotional spot in The Home Network costs $4,000 and
as a result, Rita expects that she will be able to sell four more dining room sets and three additional
china cabinets.
Develop a spreadsheet model to assist Rita in making a decision.