Case Problem 1: Product Mix

Note to Instructor: The difference between relevant and sunk costs is critical. The cost of the shipment of
nuts is a sunk cost. Practice in applying sensitivity analysis to a business decision is obtained. You may
want to suggest that sensitivity analyses other than the ones we have suggested be undertaken.
1.

Cost per pound of ingredients

Almonds
Brazil
Filberts
Pecans
Walnuts

$7500/6000 = $1.25
$7125/7500 = $.95
$6750/7500 = $.90
$7200/6000 = $1.20
$7875/7500 = $1.05

Cost of nuts in three mixes:

2.

Regular mix:

.15($1.25) + .25($.95) + .25($90) + .10($1.20) + .25($1.05) = $1.0325

Deluxe mix

.20($1.25) + .20($.95) + .20($.90) + .20($1.20) + .20($1.05) = $1.07

Holiday mix:

.25($1.25) + .15($.95) + .15($.90) + .25($1.20) + .20($1.05) = $1.10

Let

R = pounds of Regular Mix produced

D = pounds of Deluxe Mix produced
H = pounds of Holiday Mix produced

Note that the cost of the five shipments of nuts is a sunk (not a relevant) cost and should not
affect the decision. However, this information may be useful to management in future
pricing and purchasing decisions. A linear programming model for the optimal product mix
is given.
The following linear programming model can be solved to maximize profit contribution for
the nuts already purchased.

Max
s.t.

1.65R

2.00D

2.25H

0.15R
0.25R
0.25R
0.10R
0.25R
R

+
+
+
+
+

0.20D
0.20D
0.20D
0.20D
0.20D

+
+
+
+
+

0.25H
0.15H
0.15H
0.25H
0.20H

D
H
R, D, H 0

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6000
7500
7500
6000
7500
10000
3000
5000

Almonds
Brazil
Filberts
Pecans
Walnuts
Regular
Deluxe
Holiday

Chapter 3 11th ed.

The solution found using The Management Scientist is shown below.

Objective Function Value =

61375.000

Variable
-------------R
D
H

Value
--------------17500.000
10624.999
5000.000

Reduced Costs
-----------------0.000
0.000
0.000

Constraint
-------------1
2
3
4
5
6
7
8

Slack/Surplus
--------------0.000
250.000
250.000
875.000
0.000
7500.000
7624.999
0.000

Dual Prices
-----------------8.500
0.000
0.000
0.000
1.500
0.000
0.000
-0.175

OBJECTIVE COEFFICIENT RANGES

Variable
-----------R
D
H

Lower Limit
--------------1.500
1.892
No Lower Limit

Current Value
--------------1.650
2.000
2.250

Upper Limit
--------------2.000
2.200
2.425

Current Value
--------------6000.000
7500.000
7500.000
6000.000
7500.000
10000.000
3000.000
5000.000

Upper Limit
--------------6583.333
No Upper Limit
No Upper Limit
No Upper Limit
7750.000
17500.000
10624.999
9692.307

RIGHT HAND SIDE RANGES

Constraint
-----------1
2
3
4
5
6
7
8

Lower Limit
--------------5390.000
7250.000
7250.000
5125.000
6750.000
No Lower Limit
No Lower Limit
-0.000

3.

From the dual prices it can be seen that additional almonds are worth $8.50 per pound to
TJ. Additional walnuts are worth $1.50 per pound. From the slack variables, we see that
additional Brazil nut, Filberts, and Pecans are of no value since they are already in excess
supply.

4.

Yes, purchase the almonds. The dual price shows that each pound is worth $8.50; the dual
price is applicable for increases up to 583.33 pounds.

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Chapter 3 11th ed.

Resolving the problem by changing the right-hand side of constraint 1 from 6000 to 7000
yields the following optimal solution. The optimal solution has increased in value by
$4958.34. Note that only 583.33 pounds of the additional almonds were used, but that the
increase in profit contribution more than justifies the $1000 cost of the shipment.
Objective Function Value =

66333.336

Variable
-------------R
D
H

Value
--------------11666.667
17916.668
5000.000

Reduced Costs
-----------------0.000
0.000
0.000

Constraint
-------------1
2
3
4
5
6
7
8

Slack/Surplus
--------------416.667
250.000
250.000
0.000
0.000
1666.667
14916.667
0.000

Dual Prices
-----------------0.000
0.000
0.000
5.667
4.333
0.000
0.000
-0.033

OBJECTIVE COEFFICIENT RANGES

Variable
-----------R
D
H

Lower Limit
--------------1.000
1.976
No Lower Limit

Current Value
--------------1.650
2.000
2.250

Upper Limit
--------------1.750
3.300
2.283

Current Value
--------------7000.000
7500.000
7500.000
6000.000
7500.000
10000.000
3000.000
5000.000

Upper Limit
--------------No Upper Limit
No Upper Limit
No Upper Limit
6250.000
7750.000
11666.667
17916.668
15529.412

RIGHT HAND SIDE RANGES

Constraint
-----------1
2
3
4
5
6
7
8

5.

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Lower Limit
--------------6583.333
7250.000
7250.000
4210.000
7250.000
No Lower Limit
No Lower Limit
0.002

From the dual prices it is clear that there is no advantage to not satisfying the orders for the
Regular and Deluxe mixes. However, it would be advantageous to negotiate a decrease in
the Holiday mix requirement.

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Chapter 3 11th ed.

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Chapter 3 11th ed.