Solution Key Average = 22.

45 Range 9 to 25 BOSTON COLLEGE GRADUATE SCHOOL OF MANAGEMENT Operations and Strategic Management Department MD716 Modeling and Decision Analysis Quiz 1 Spring 2004

This quiz is printed on both sides of the page. There are a total of 5 questions (labeled a-e). Valu-Com Electronics manufactures five different models of telecommunications interface cards for personal and laptop computers. As summarized in the following table, each of these devices requires differing amounts of printed circuit (PC) board, resistors, memory chips, and assembly Per Unit Requirements SpeedLink 10 18 4 0.5

PC Board (square inches) Resistors Memory Chips Assembly Labor (in hours)

HyperLink 20 28 8 0.75

FastLink 15 24 8 0.6

MicroLink 8 12 4 0.65

EtherLink 5 16 6 1

The unit wholesale price and manufacturing cost for each model are as follows. Per Unit Revenues and Costs SpeedLink $129 $96

Wholesale Price Manufacturing Cost

HyperLink FastLink $189 $149 $136 $101

MicroLink $169 $137

EtherLink $139 $101

In their next production period, Valu-Com has 80,000 square inches of PC board, 100,000 resistors, 30,000 memory chips, and 5,000 hours of assembly time available. They can sell all the product they can manufacture, but the marketing department wants to be sure they produce at least 500 units of each product and at least twice as many FastLink cards as HyperLink cards while maximizing profit.

Valu-Com has formulated the following linear program. Let x1 = number of HyperLink cards to make x 2 = number of FastLink cards to make x 3 = number of SpeedLink cards to make x 4 = number of MicroLink cards to make x 4 = number of EtherLink cards to make
Maximize 53x1 + 48 x 2 + 33x 3 + 32 x 4 + 38x 5 Subject to 20 x1 + 15 x 2 + 10 x 3 + 8x 4 + 5 x5 80,000 28 x1 + 24 x 2 + 18 x3 + 12 x 4 + 16 x5 100,000 8x1 + 8 x 2 + 4 x3 + 4 x 4 + 6 x 5 30,000 .75 x1 + .6 x 2 + .5x 3 + .65x 4 + 1x5 5,000 x1 500 x 2 500 x 3 500 x 4 500 x 5 500 x 2 2 x1 or 2 x1 + x2 0 x1, x 2, x 3, x 4, x 5 0

a. Before solving this model (i.e. answer this question without referring to the attached answer report or sensitivity report) Valu-Com management proposes the following: Last period we produced 1500 FastLink cards and 750 of each of the other four cards? Is this solution feasible? Why or why not? Can this solution possibly be optimal? Why or why not? 20(750)+15(1500)+10(750)+8(750)+5(750)=54,750<80,000 91,500<100,000 28,500<30,000 3,075<5,000 all xs>500 1500=2(750) binding This solution is feasible (all constraints are satisfied). The solution lies on the constraint x2 =2x 1 . It can only be optimal if there are alternate optimal solutions. However, if ValuCom simply produces one more FastLink the profit goes up and all constraints are still satisfied (in this case none are binding). In addition, it can be seen that the objective function and binding constraint are not parallel.

b.

Valu-com management now makes the following recommendation (again, answer this question without referring to the attached answer report and sensitivity report), HyperLink cards are the most profitable, why dont we produce1500 HyperLink cards and 1500 FastLink cards, and 750 of each of the other three cards? Is this solution feasible? Why or why not? Can this solution possibly be optimal? Why or why not?

x1 =x 2=1500 x3 =x4 =x5 =750 69,750<80,000 112,500>100,000 not feasible 34,500>30,000 not feasible 3,637.5<5,000 all xs>500 1,500<2(1500) not feasible This solution is not feasible and therefore can not be optimal.

c. Valu-Com management is not satisfied with the solutions above. To remedy this they solve the linear programming model using Excel and solver. Attached are the Excel spreadsheet, solver answer report and solver sensitivity report. What is the optimal number of each type of card that Valu-Com should produce? How many assembly hours will they use? How much profit will this product mix yield? From the answer report: Produce 500 HyperLink 1000 FastLink 1500SpeedLink 2250 MicroLink 500 EtherLink Use 3687.5 assembly hours Yield $215,000 in profit

d. Valu-Com management had forecasted profit for the period to be $225,000. They are concerned that investors will react negatively to their missing this forecast. ValuCom believes that they can obtain either more PC board or more memory chips by borrowing from next periods inventory. (You can assume that Valu-Com is not concerned about the impact this may have on next periods profit.) Should they borrow PC board? Why or Why not? If yes, how much should they borrow to reach their profit forecast? Should they borrow memory chips? Why or Why not? If yes, how many should they borrow to reach their profit forecast? They should not borrow PC board because they already have excess (see slack in answer report). The should borrow 1334 memory chips (less than the allowable increase). Each chip contributes $7.50 to profit. This will increase total profit to $215,000+$7.50(1334)=$225,005.

e. Valu-Com has heard a rumor that HyperLink cards are going to become an industry standard. This is likely to drive the price of HyperLink cards up. How much will the wholesale price of HyperLink cards have to increase before Valu-Com should consider producing more HyperLink Cards? Explain. (Answer this question independent of question d.)

The price of HyperLink cards must go up by at least $43.67. This can be seen from the allowable increase for the HyperLink contribution to profit or the shadow price on the HyperLink production constraint.

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