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Wivco Mini-Case Study

1. Wivco produces two products and must determine production levels, overtime, raw material purchases, and advertising spending to maximize profits. 2. The linear programming model was solved in Excel, showing production of 400 units of product 2, no production of product 1, no overtime, purchasing 400 units of raw materials, and spending $22.67 on advertising product 2. 3. The sensitivity report identifies the optimal solution and how costs would change if variables were increased or decreased.

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Paola Pineda
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126 views2 pages

Wivco Mini-Case Study

1. Wivco produces two products and must determine production levels, overtime, raw material purchases, and advertising spending to maximize profits. 2. The linear programming model was solved in Excel, showing production of 400 units of product 2, no production of product 1, no overtime, purchasing 400 units of raw materials, and spending $22.67 on advertising product 2. 3. The sensitivity report identifies the optimal solution and how costs would change if variables were increased or decreased.

Uploaded by

Paola Pineda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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WIVCO INC.

MINI-CASE STUDY

Wivco produces two products: 1 and 2. The relevant data about the selling
price and the resource requirements for each product are shown in Exhibit 1.
Each week, up to 400 units of raw material can be purchased at a cost of
$2.50 per unit. The company employs six workers who work 40 hours per week
(their salaries are considered a fixed cost). They may also work in overtime
when needed and paid $24 per hour to work overtime. Each week 420 hours of
machine time are available. In the absence of advertising, 50 units of
product 1 and 60 units of product 2 will be demanded each week. Advertising
can be used to stimulate demand for each product. Each dollar spent on
advertising product 1, increases its demand by 10 units. Each dollar spent
for product 2 increases its demand by 15 units. At most $100 can be spent on
advertising.

Exhibit 1: Selling price and production requirement information

Product 1 Product 2
Selling price $30 $16
Labor required 0.75h 0.5h
Machine time required 1.5 hours 0.80 hour
Raw material required 2 units 1 unit

The business problem faced by Wivco Inc. can be formulated as follows:

Let P1= number of units of product 1 produced each week, P2= number of
units of product 2 produced each week, OT = number of hours of overtime
used each week, RM = number of units of raw materials purchased each week,
A1 = dollars spent each week on advertising product 1, A2= dollars spent
each week on advertising product 2. Then, Wivco should solve the following
LP:

Max Z = 30P1 + 16P2 – 24(OT) – 2.5RM – A1 – A2


S.T
P1 – 10A1 ≤ 50 (demand product 1)
P2 – 15A2 ≤ 60 (demand product 2)
0.75P1 + 0.5P2 ≤ 240 + (OT) (hours per week)
2P1 + P2 ≤ RM (raw material)
RM ≤ 400 (raw material)
A1 + A2 ≤ 100 (advertising budget)
1.5P1 + 0.8P2 ≤ 420 (machine time available)
P1,P2,A1,A2,RM,OT  0

The reports shown in Exhibits 2 and 3 have been generated after solving the
corresponding model with Excel Solver.
Exhibit 2: Wivco Solver solution – Answer Report

Name Final Value


Objective function $5,377.33
Name Final Value
Decision variables P1 0
Decision variables P2 400
Decision variables OT 0
Decision variables RM 400
Decision variables A1 0
Decision variables A2 22.67

Exhibit 3: Wivco Solver solution – Sensitivity Report

Final Reduced Objective Allowable Allowable


Name Value Cost Coefficient Increase Decrease
Decision variables P1 0 -1.87 30 1.87 1E+30
Decision variables P2 400 0 16 1E+30 0.93
Decision variables OT 0 -24. -24 24 1E+30
Decision variables RM 400 0 -2.5 1E+30 13.43
Decision variables A1 0 -1 -1 1 1E+30
Decision variables A2 22.67 0 -1 1 14

Final Shadow Constraint Allowable Allowable


Name Value Price R.H. Side Increase Decrease
Demand product 1 0 0 50 1E+30 50
Demand product 2 60 0.067 60 340 1160
Hours per week 200 0 240 1E+30 40
Raw Material Used 0 15.93 0 80 340
Raw material Available 400 13.43 400 80 340
Advertising budget 22.67 0 100 1E+30 77.33
Machine Time available 320 0 420 1E+30 100

Managerial report (SKIP THIS SECTION, QUESTIONS TO BE ANSWERED IN CLASS)

Prepare a report that provides answers to the following questions:

(a) How many of units of each product are produced each week?
(b) How many hours of overtime are used each week?
(c) How many units of raw materials are purchased each week?
(d) How much to spend every week on the advertisement of each product?
(e) What is the amount of the unused advertising budget?
(f) If overtime cost only $14 per hour (instead of 24$), would Wivco use it?
(g) If each unit of product 1 sold for $15.50, how it affect the company
production, purchasing, and advertising decisions?
(h) What should the selling price of product 1 be for Wivco to consider
producing it?
(i) What is the most Wivco would be willing to pay for another unit of raw
material?
(j) How much Wivco would be willing to pay for another hour of machine hour?
(k) If each worker were required (as part of the regular work week) to work 45
hours per week, what would the company’s profits be? 

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