The Hawley Lighting Company manufactures four types of lamps at its factory including table lamps, floor lamps, ceiling lamps, and pendant lamps. Table 1 presents the average material costs for each of the products. Each product is made in one of two production processes by purchasing components, assembling and testing the product, and finally packaging it for shipping. Table lamps and floor lamps go through the assembly and finishing process in Department 1, while ceiling fixtures and pendant lamps go through the process in Department 2. Variable production costs and capacities are shown in Table 2. The capacities are measured in units of product. Note that there are regular and overtime possibilities for each department.

Average selling prices for the four products are known, and estimates have been made of the market demand for each product at these prices (see Table 3). Sales levels can also be affected by advertising expenditures. Starting with the demand levels in the table, an increase of up to $10,000 in advertising raises the demand by the percentage shown in the last row. An expenditure of less than $10,000 in advertising will lead to a proportional effect on demand. For example, an increase in advertising of $5,000 for table lamps would raise demand by 6 percent, or 3,600 units. However, there is a budget limit of $18,000 on the total amount to be spent on advertising among all four products.

1

Table 1

Table 2

Product

Table

Floor

Ceiling

Pendant

Material cost

$66

85

50

80

Process

Regular Time

Overtime

Unit Cost

Capacity

Unit Cost

Capacity

Department 1

$16

100,000

18

25,000

Department 2

12

90,000

15

24,000

Table 3

Table

Floor

Ceiling

Pendant

Selling price

$120

150

100

160

Potential sales (000)

60

20

100

35

Advertising effect

12%

10%

8%

15%

What is an Estimate the optimal production plan and run the sensitivity analysis. Analyze the tactical and strategic information provided by the optimal solution:

1. Optimal output plan for the company?
2. What factors could lead to even better level of performance:
3. For each department, what is the marginal value of additional overtime capacity?
4. What is the marginal value of additional advertising dollars?
5. What is the marginal value of additional sales for each product?