Problem 2: Pricing for Blue Ridge Hot Tubs Howie Jones, owner of Blue Ridge Hot Tubs, is facing a new problem. Although sale of the two hot tubs manufactured by his company (Aqua Spas and Hydro Luxes) have been brisk, the company is not earning the level of profits that Howie wants to achieve. Having established a reputation for high quality and reliability, Howie believes he can increase profits by increasing the prices of the hot tubs. However, he is concerned that a price increase might have a detrimental effect on demand, so Howie has engaged a marketing research firm to estimate the level of demand for Aqua Spas and Hydro Luxes at various prices. The marketing research firm used the technique of regression analysis to develop a model of the relationship between the prices and demand for the hot tubs. After analyzing the situation, the marketing research firm concluded that Howie can expect the demand for hot tubs in the next quarter to vary with price in the following way: Demand for Aqua - Spas = 300 – 0.175 × price of Aqua - Spas Demand for Hydro - Luxes = 325 – 0.15 × price of Hydro - Luxes Howie Jones also needs to determine the number of each product to produce. Apparently, he cannot sell more than the anticipated demand for a product. For example, suppose Aqua - Spas are priced at $900 each, the demand will be 300 - (0.175)(900)=142.5. That means Howie Jones can sell at most 142.5 products. Let’s assume he can produce and sell fractional number of products . Howie determined that the costs of manufacturing Aqua - Spas and Hydro - Luxes are $850 and $700 per unit, respectively.. Each Aqua - Spa requires 1 pump, 9 hours of labor, and 12 feet of tubing; each Hydro - Lux requires 1 pump, 6 hours of labor, and 16 feet of tubing. Howie's suppliers have committed to supplying him with 200 pumps and 2,800 feet of tubing. Also, 1,566 hours of labor are available for production. Howie wants to determine how much to charge for each type of hot tub and how many of each type to produce to maximize Howie’s profit. Remember the company can only produce integer number of products. 1. Please provide a mathematical formulation for this problem (defining decision variables, objective function and constraints). You do NOT need to solve it. 2. Suppose there is a setup cost of $1,000 to produce any number of Aqua - Spas. That is, the cost will be incurred as long as any Aqua - Spas is produced, and the cost is $1,000 regardless of the number of products produced. How would you revise your formulation to incorporate this change? 3. (Not a continuum of part 2) If Howie Jones chooses to produce Hydro - Luxes, he needs to produce at least 300 of it, how would you revise your formulation to incorporate this change? 4. (Not a continuum of parts 2 and 3) The production manager of the factory told Howie that their facility is not designed for production of large volume. As a result, they can produce more than 300 units for at most one of the two products. How would you revise your formulation to incorporate this change?
Problem 2: Pricing for Blue Ridge Hot Tubs Howie Jones, owner of Blue Ridge Hot Tubs, is facing a new problem. Although sale of the two hot tubs manufactured by his company (Aqua Spas and Hydro Luxes) have been brisk, the company is not earning the level of profits that Howie wants to achieve. Having established a reputation for high quality and reliability, Howie believes he can increase profits by increasing the prices of the hot tubs. However, he is concerned that a price increase might have a detrimental effect on demand, so Howie has engaged a marketing research firm to estimate the level of demand for Aqua Spas and Hydro Luxes at various prices. The marketing research firm used the technique of regression analysis to develop a model of the relationship between the prices and demand for the hot tubs. After analyzing the situation, the marketing research firm concluded that Howie can expect the demand for hot tubs in the next quarter to vary with price in the following way: Demand for Aqua - Spas = 300 – 0.175 × price of Aqua - Spas Demand for Hydro - Luxes = 325 – 0.15 × price of Hydro - Luxes Howie Jones also needs to determine the number of each product to produce. Apparently, he cannot sell more than the anticipated demand for a product. For example, suppose Aqua - Spas are priced at $900 each, the demand will be 300 - (0.175)(900)=142.5. That means Howie Jones can sell at most 142.5 products. Let’s assume he can produce and sell fractional number of products . Howie determined that the costs of manufacturing Aqua - Spas and Hydro - Luxes are $850 and $700 per unit, respectively.. Each Aqua - Spa requires 1 pump, 9 hours of labor, and 12 feet of tubing; each Hydro - Lux requires 1 pump, 6 hours of labor, and 16 feet of tubing. Howie's suppliers have committed to supplying him with 200 pumps and 2,800 feet of tubing. Also, 1,566 hours of labor are available for production. Howie wants to determine how much to charge for each type of hot tub and how many of each type to produce to maximize Howie’s profit. Remember the company can only produce integer number of products. 1. Please provide a mathematical formulation for this problem (defining decision variables, objective function and constraints). You do NOT need to solve it. 2. Suppose there is a setup cost of $1,000 to produce any number of Aqua - Spas. That is, the cost will be incurred as long as any Aqua - Spas is produced, and the cost is $1,000 regardless of the number of products produced. How would you revise your formulation to incorporate this change? 3. (Not a continuum of part 2) If Howie Jones chooses to produce Hydro - Luxes, he needs to produce at least 300 of it, how would you revise your formulation to incorporate this change? 4. (Not a continuum of parts 2 and 3) The production manager of the factory told Howie that their facility is not designed for production of large volume. As a result, they can produce more than 300 units for at most one of the two products. How would you revise your formulation to incorporate this change?
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Problem 2:
Pricing for Blue Ridge Hot Tubs
Howie Jones, owner of Blue Ridge Hot Tubs, is facing a new problem. Although sale of the two hot tubs
manufactured by his company (Aqua Spas and Hydro Luxes) have been brisk, the company is not
earning the level of profits that Howie wants to achieve. Having established a reputation for high quality
and reliability, Howie believes he can increase profits by increasing the prices of the hot tubs.
However, he is concerned that a price increase might have a detrimental effect on demand, so Howie
has engaged a marketing research firm to estimate the level of demand for Aqua Spas and Hydro Luxes
at various prices. The marketing research firm used the technique of regression analysis to develop a
model of the relationship between the prices and demand for the hot tubs. After analyzing the situation,
the marketing research firm concluded that Howie can expect the demand for hot tubs in the next
quarter to vary with price in the following way:
Demand for Aqua
-
Spas = 300
–
0.175
×
price of Aqua
-
Spas
Demand for Hydro
-
Luxes = 325
–
0.15
×
price of Hydro
-
Luxes
Howie Jones also needs to determine the number of each product to produce. Apparently, he cannot
sell more than the
anticipated demand for a product. For example, suppose Aqua
-
Spas are priced at
$900 each, the demand will be 300
-
(0.175)(900)=142.5. That means Howie Jones can sell at most 142.5
products. Let’s assume he can produce and sell fractional number of products
.
Howie determined that the costs of manufacturing Aqua
-
Spas and Hydro
-
Luxes are $850 and $700 per
unit, respectively.. Each Aqua
-
Spa requires 1 pump, 9 hours of labor, and 12 feet of tubing; each Hydro
-
Lux requires 1 pump, 6 hours of labor, and 16 feet of
tubing. Howie's suppliers have committed to
supplying him with 200 pumps and 2,800 feet of tubing. Also, 1,566 hours of labor are available for
production. Howie wants to determine how much to charge for each type of hot tub and how many of
each type to produce to maximize Howie’s profit. Remember the company can only produce integer
number of products.
1.
Please provide a mathematical formulation for this problem (defining decision variables,
objective function and constraints). You do NOT need to solve it.
2.
Suppose there is a setup cost of $1,000 to produce any number of Aqua
-
Spas. That is, the cost
will be incurred as long as any Aqua
-
Spas is produced, and the cost is $1,000 regardless of the
number of products produced. How would you revise your formulation to incorporate this
change?
3.
(Not a continuum of part 2) If Howie Jones chooses to produce Hydro
-
Luxes, he needs to
produce at least 300 of it, how would you revise your formulation to incorporate this change?
4.
(Not a continuum of parts 2 and 3) The production manager of the factory told Howie that their
facility is not designed for production of large volume. As a result, they can produce more than
300 units for at most one of the two products. How would you revise your formulation to
incorporate this change?
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