1 / 7

Sunk -versus- Variable Costs

Sunk -versus- Variable Costs . Only the variable costs are relevant in optimization models. Sunk costs do not need to be added as a separate term in the objective. The problem can be optimized without it and the sunk cost subtracted later.

tegan
Télécharger la présentation

Sunk -versus- Variable Costs

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Sunk -versus- Variable Costs • Only the variable costs are relevant in optimization models. • Sunk costs do not need to be added as a separate term in the objective. The problem can be optimized without it and the sunk cost subtracted later. • Sunk costs should never be allocated across the coefficients of the decision variables. This will influence the values identified for the decision variables and result in inappropriate allocations.

  2. TJ Inc. Product Mix Problem • Three nut products: regular, deluxe and holiday mixes • Each mix consists of different proportions of five nuts: almonds, brazils, filberts, pecans and walnuts • Management wants an analysis and recommendation for the product mix problem

  3. Objective • Determine how many pounds of each product mix should be produced so that profits will be maximized for the fall season. Assume that the nuts are perishable and cannot be used beyond this season.

  4. Constraints • Limited supply of each type of nut • Existing customer orders that must be satisfied • Demand is greater than capacity

  5. Profit contribution & costs • Profit contribution which includes relevant variable costs are $1.65/lb for regular, $2.00/lb for deluxe, and $2.25 for holiday. • Cost per pound of the nuts included in each mix are $1.0325 for regular, $1.07 for deluxe, and $1.10 for holiday. These costs are sunk however and should not be included in the product mix decision.

  6. LP Formulation • maximize 1.65 X1+ 2 X2+ 2.25 X3 subject to .15X1+.2X2+.25X3<=6000 almond lbs .25X1+.2X2+.25X3<=7500 brazil lbs .25X1+.2X2+.15X3<=7500 filbert lbs .10X1+.2X2+.25X3<=6000 pecan lbs .25X1+.2X2+.20X3<=7500 walnut lbs X1 >=10000 lbs X2 >=3000 lbs X3>=5000 lbs

  7. Optimal Product Mix • Produce 17,500 lbs of regular mix, 10,625 lbs of deluxe mix and 5000 lbs of holiday mix. • Resulting total profit is $24,925 ($61,375 less the $36,450 sunk cost of the nuts)

More Related