American office Systems

EXECUTIVE SUMMARY

This Paper tries to summaries the situation American Office Solutions Company faces, and tries to develop a linear model for the company in order to generate a positive cash flow.

American Office Systems is producing two type of adapters for copy machines compatible with IBM and Mac computers. Top managers of the company ask Mr Garcia to prepare a plan for 1996 and find out the best way to allocate the initial $750.000 credit.

Mr Garcia has to decide how much money to allocate for advertising which directly affects the demand and how much money to allocate for production. Also he has to decide how much from this demand they should actually sell. Therefore Advertising Cost, Production amounts

and Sales Amounts are his decision variables

Meanwhile he has to consider some constraints. Production plus end period inventory has to be at least %10 more than the estimated sales for the first 3 quarters, for the last quarter it has to be double. His production amounts cannot exceed the maximum production capacity which is calculated from information in the case. Also by nature sales can not exceed the inventory levels at the beginning of the quarter. Also sales can not exceed sales.

For the accounting data, Mr Garcia has to calculate the actual cash collected from the revenues earned in each quarter. This should be calculated according to the rules in Table4.18. Each quarter has an initial cash, gross profit and final cash. Initial cash comes from initial credit 750000 at the first quarter and previous quarters at the other quarters. Gross Profit is calculated by decreasing production, advertising, inventory and interest costs, from the revenues collected. Government securities are bought with the cash available (initial cash plus gross profit), which produce interest. Interest from these securities is also the cash available and final cash is calculated.. Final cash of that quarter is transferred to the initial cash for the next period. The objective function is then to maximize the final cash at the end of Quarter 4. After calculating the final cash at the end of Quarter 4, as the last step, fixed costs are also decreased which gives the net profit for the year 1996.

ANALYSIS OF THE PROBLEM

The aim in American Office Solutions case is to maximize profit at the end of Quarter 4. In order to propose a solution to this problem, a linear programming model should be developed. Therefore we should find out the input parameters, decision variables and constraints to reach the performance objective of our model.

Input Parameters

1- Unit Price of IBM Adapter (170$)

2- Unit Price of Mac Adapter (200$)

3- Unit Variable Costs for IBM Adapters (100$)

4- Unit Variable Costs for Mac Adapters (110$)

5- Inventory Costs for IBM Adapters

6- Inventory Costs for Mac Adapters

7- Production Capacity of IBM Adapters per Quarter

8- Production Capacity of Mac Adapters per Quarter

9- Estimated Sales Levels for IBM Adapters per Quarter

10- Estimated