Red Brand Canners

Burhan Sadiq

December 3, 2009

Outline

Statement of Problem
Dilemma

LP Formulation Results
Optimum Product Mix Additional Grade A Tomatoes Advertising Campaign Tomato Juice Price Increase

Conclusion

Red Brand Canners

Red Brand Canners used to be a medium-size company canning and distributing a variety of fruit and vegetable products in the western part of USA in the 1960s. In one year, they signed an agreement at planting time, to purchase the entire tomato crop in a large eld at an average delivered price of 6 cents per lb. At harvest time, Produce Inspection estimates that the total crop will be 3 106 lb, of which 20% is expected to be Grade A and the remaining portion expected to be Grade B.

Data

The company makes three dierent tomato products, and they set the selling prices of these products in light of the long-term marketing strategy of the company.

Data

The company makes three dierent tomato products, and they set the selling prices of these products in light of the long-term marketing strategy of the company. Moreover, the company uses a numerical scale to record the quality of both the raw produce and prepared products. The scale runs from 0 to 10 points, higher numbers representing better quality. On this scale, Grade A tomatoes were valued at 9 points/lb, and Grade B tomatoes 5 points/lb.

Data Cont.

Product (cases) SP TU VC DF MAIQR(per pound) Whole Tomatoes 4 18 2.52 Unlimited 8 Tomato Juice 4.5 20 3.18 50,000 6 Tomato Paste 3.8 25 1.95 80,000 5 SP:Selling Price($/case), TU:Tomatoes (lb) used/case, VC:Variable Costs(excluding tomato purchase costs) ($/case) ,DF: Demand Forecast (cases) at these prices and MAIQR: Minimum Average Input Quality Requirement.

Problem
The company hires you as a consultant to determine the following: i) How to allocate the already purchased tomatoes among the three tomato products in order to maximize prot.

Problem
The company hires you as a consultant to determine the following: i) How to allocate the already purchased tomatoes among the three tomato products in order to maximize prot. ii) Red Brand Canners has been approached by another distribution company that will supply additional Grade A tomatoes at a price of .085$ per lb. Should the company purchase additional Grade A tomatoes and if so, what is the maximum amount the company can purchase? If the company wishes to purchase only 80,000 lbs of Grade A tomatoes, what is the new optimum product mix?

Problem
The company hires you as a consultant to determine the following: i) How to allocate the already purchased tomatoes among the three tomato products in order to maximize prot. ii) Red Brand Canners has been approached by another distribution company that will supply additional Grade A tomatoes at a price of .085$ per lb. Should the company purchase additional Grade A tomatoes and if so, what is the maximum amount the company can purchase? If the company wishes to purchase only 80,000 lbs of Grade A tomatoes, what is the new optimum product mix? iii) The Marketing Department feels that it can increase demand for tomato juice by 25,000 cases. How much should the company spend on such a campaign?

Problem
The company hires you as a consultant to determine the following: i) How to allocate the already purchased tomatoes among the three tomato products in order to maximize prot. ii) Red Brand Canners has been approached by another distribution company that will supply additional Grade A tomatoes at a price of .085$ per lb. Should the company purchase additional Grade A tomatoes and if so, what is the maximum amount the company can purchase? If the company wishes to purchase only 80,000 lbs of Grade A tomatoes, what is the new optimum product mix? iii) The Marketing Department feels that it can increase demand for tomato juice by 25,000 cases. How much should the company spend on such a campaign? iv) If the selling price of tomato juice is increased by .30 $/case, how will the optimum product mix change if the demand remains xed.

Problem
The company hires you as a consultant to determine the following: i) How to allocate the already purchased tomatoes among the three tomato products in order to maximize prot. ii) Red Brand Canners has been approached by another distribution company that will supply additional Grade A tomatoes at a price of .085$ per lb. Should the company purchase additional Grade A tomatoes and if so, what is the maximum amount the company can purchase? If the company wishes to purchase only 80,000 lbs of Grade A tomatoes, what is the new optimum product mix? iii) The Marketing Department feels that it can increase demand for tomato juice by 25,000 cases. How much should the company spend on such a campaign? iv) If the selling price of tomato juice is increased by .30 $/case, how will the optimum product mix change if the demand remains xed. How do you solve this problem?

Problem
The company hires you as a consultant to determine the following: i) How to allocate the already purchased tomatoes among the three tomato products in order to maximize prot. ii) Red Brand Canners has been approached by another distribution company that will supply additional Grade A tomatoes at a price of .085$ per lb. Should the company purchase additional Grade A tomatoes and if so, what is the maximum amount the company can purchase? If the company wishes to purchase only 80,000 lbs of Grade A tomatoes, what is the new optimum product mix? iii) The Marketing Department feels that it can increase demand for tomato juice by 25,000 cases. How much should the company spend on such a campaign? iv) If the selling price of tomato juice is increased by .30 $/case, how will the optimum product mix change if the demand remains xed. How do you solve this problem? Linear Programming

LP Formulation
3

max z =
i=1

(si vi )

xai + xbi li

c S

subject to:
3

xai Sa
i=1 3

Supply Restriction on Grade A tomatoes

xbi Sb
i=1

Supply Restriction on Grade B tomatoes i Quality Restriction

qa xai + qb xbi Qi (xai + xbi ) xai + xbi li di

Demand Restriction

xai , xbi 0 Non-Negativity si , li , vi : selling price, lbs of tomatoes used, variable costs per case of ith product. xai , xbi : Amounts of Grade A, Grade B tomatoes used in ith product.

Results
Optimum Mix
Product Whole Tomatoes Tomato Juice Tomato Paste Grade A 525,000 75,000 Grade B 175,000 225,000 2,000,000

Results
Optimum Mix
Product Whole Tomatoes Tomato Juice Tomato Paste Grade A 525,000 75,000 Grade B 175,000 225,000 2,000,000

Marginal Values
Item Grade A tomatoes Grade B tomatoes Demand of WholeTomatoes Demand of Tomato Juice Demand of Tomato Paste Marginal Values ($/unit) 0.090 0.058 0.000 0.000 0.403

Results
Optimum Mix
Product Whole Tomatoes Tomato Juice Tomato Paste Grade A 525,000 75,000 Grade B 175,000 225,000 2,000,000

Marginal Values
Item Grade A tomatoes Grade B tomatoes Demand of WholeTomatoes Demand of Tomato Juice Demand of Tomato Paste Marginal Values ($/unit) 0.090 0.058 0.000 0.000 0.403

Optimum Objective Value: $45,355.56

Results
Makes sense to purchase additional Grade A tomatoes for 8.5 cents/lb. How much? Turns out: 600,000 lbs of Grade A Tomatoes. Optimum Objective Value: $48,555.56

Optimum Mix
Product Whole Tomatoes Tomato Juice Tomato Paste Grade A 1,200,000 Grade B 400,000 2,000,000

Results
Makes sense to purchase additional Grade A tomatoes for 8.5 cents/lb. How much? Turns out: 600,000 lbs of Grade A Tomatoes. Optimum Objective Value: $48,555.56

Optimum Mix
Product Whole Tomatoes Tomato Juice Tomato Paste Grade A 1,200,000 Grade B 400,000 2,000,000

Updated Marginal Values

Item Grade A tomatoes Grade B tomatoes Demand of Whole Tomatoes Demand of Tomato Juice Demand of Tomato Paste Marginal Values ($/unit) 0.085 0.074 0.000 0.000 0.003

Results

If the company wishes to purchase only an additional 80,000 lbs of Grade A tomatoes, the new optimum mix is given by:

Optimum Product Mix

Product Whole Tomatoes Tomato Juice Tomato Paste Grade A 615,000 65,000 Grade B 205,000 195,000 2,000,000

Results

If the company wishes to purchase only an additional 80,000 lbs of Grade A tomatoes, the new optimum mix is given by:

Optimum Product Mix

Product Whole Tomatoes Tomato Juice Tomato Paste Grade A 615,000 65,000 Grade B 205,000 195,000 2,000,000

Optimum Objective Value: $45,782.22

Advertising Campaign

Given that the Marginal Values at the optimum product mix are:

Marginal Values
Item Grade A tomatoes Grade B tomatoes Demand of Whole Tomatoes Demand of Tomato Juice Demand of Tomato Paste Marginal Values ($/unit) 0.090 0.058 0.000 0.000 0.403

Company should NOT pay any money for an advertising campaign to increase the demand for Tomato Juice.

Results
Tomato Juice price is increased by 30 cents per case.

Optimum Product Mix

Product Whole Tomatoes Tomato Juice Tomato Paste Grade A 350,000 250,000 Grade B 116,667 750,000 1,533,330

Results
Tomato Juice price is increased by 30 cents per case.

Optimum Product Mix

Product Whole Tomatoes Tomato Juice Tomato Paste Grade A 350,000 250,000 Grade B 116,667 750,000 1,533,330

Marginal Values
Item Grade A tomatoes Grade B tomatoes Demand of Whole Tomatoes Demand of Tomato Juice Demand of Tomato Paste Marginal Values ($/unit) 0.085 0.074 0.000 0.085 0.000

Optimum Objective Value: $52,837.04

Conclusions

i) Optimum Objective Value: $45,355.56 ii) Company should purchase an additional 600,000 Grade A tomatoes. Optimum Objective Value: $48,555.56 iii) Company should NOT pay any money for an advertising campaign to increase the demand for Tomato Juice. iv) If the selling price of tomato juice is increased by .30 $/case and if the demand remains xed, the new Optimum Objective Value: $52,837.04