The Current Affairs 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, in advertising raises the demand by the percentage shown in the last row times the amount spent on advertising. For example, an increase in advertising of $5,000 for table lamps would raise demand by 600 units. However, there is a budget limit of $18,000 on the total amount to be spent on advertising among all four products.
Table 1
Product
Table
Floor
Ceiling
Pendant
Material cost
$57
$95
$60
$80
Table 2
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
$128
$150
$105
$160
Potential sales (000)
60
20
100
35
Advertising effect
12.5%
10.5%
9%
15.5%
This problem was taken from Powell, S.G. and Baker, K.R. (2007). Management Science: The Art of Modeling with Spreadsheets, 2nd ed., Hoboken, NJ: John Wiley & Sons, Inc., p. 280-281