Tritech Mortgage specializes in making first, second, and even third trust deed loans on residential properties and first trust deeds on commercial properties. Any funds not invested in mortgages are invested in an interestbearing savings account. The following table gives the rate of return and the company’s risk level for each possible type of loan.

Tritech wishes to invest $68,000,000 in available funding so that:

• Yearly return is maximized.

• At least $5,000,000 is to be available in a savings account for emergencies.

• At least 80% of the money invested in trust deeds should be in residential properties.

• At least 60% of the money invested in residential properties should be in first trust deeds.

• The average risk should not exceed 5.

a. What distribution of funding do you recommend? What is the rate of return on this distribution of funds?

b. Suppose the rate of return on first trust deeds increases. What is the maximum rate of return so that your recommendation in part (a) remains optimal? What would be the overall rate of return on the investment if this rate were increased to its maximum limit?

Each motor home cabinet requires three man-hours to produce, whereas each mobile home cabinet requires five man-hours. Labor rates normally average $18 per hour. During July and August, however, when Mobile employs many part-time workers, labor rates average only $14 and $16 per hour, respectively. A total of 2100 man-hours are available in July, 1500 in August, and 1200 in September. During any given month, management at the Lexington plant can schedule up to 50% additional man-hours, using overtime at the standard rate of time and a half. Material costs for motor home cabinets are $146; for mobile home cabinets they are $210. The Lexington plant expects to have 25 motor home and 2 0 mobile home assembled cabinets in stock at the beginning of July. The home office wants the Lexington plant to have at least 10 motor home and 25 mobile cabinet assemblies in stock at the beginning of October to cover possible shortages in production from other plants. The Lexington plant has storage facilities capable of holding up to 300 cabinets in any one month. The costs for storing motor home and mobile home cabinets from one month to the next are estimated at $ 6 and $9 per cabinet, respectively. Devise a monthly production schedule that will minimize the costs at the Lexington plant over the quarter.

 

Loan Type Rate of Return Risk First Trust Deeds 7.75% Second Trust Deeds 11.25% 6 Third Trust Deeds 14.25% 9 Commercial Trust Decds 8.75% 3 Savings Account 4.45%