DD&T, Inc Is Considering the Development of Three New Environmentally Friendly

question 4

Essay

DD&T, Inc. is considering the development of three new environmentally friendly products. One product will be selected from each of the high- end products and the commercial products lines. The company will set aside $2.5 million for this development. If the company's MARR is 8% per year, and all products have the same useful life of 7 years with zero salvage value, formulate the capital allocation problem as a linear programming model. $$\begin{array} { | l | l | c | c | } \hline \text { roduct Line } & \text { Product } & \text { levelopment Cost, \$ } & \begin{array} { l } \text { Estimated Net } \\\text { Annual Revenue, } \$\end{array} \\\hline \text { ommercial } & X 1 & 70,000 & 510,0 \\& && 00 \\\hline & X 2 & 20,000 & 710,0 \\& && 00 \\\hline & X 3 & 45,000 & 810,0 \\& & &00 \\\hline \text { igh - End } & Y 1 & 80,000 & 760,0 \\& & & 00 \\\hline & Y 2 & 30,000 & 860,0 \\& & & 00 \\\hline & Y 3 & 55,000 & 910,0 \\& && 00 \\\hline\end{array}$$ $$\begin{array} { | c | c | c | c | } \hline \text { Product Line } & \text { Product } & \text { Development Cost, \$ } & \begin{array} { c } \text { Estimated Net } \\\text { Annual Revenue, } \$\end{array} \\\hline \text { Commercial } & X 1 & 270,000 & 510,000 \\\hline & X 2 & 420,000 & 710,000 \\\hline & X 3 & 445,000 & 810,000 \\\hline \text { High- End } & Y 1 & 480,000 & 760,000 \\\hline & Y 2 & 730,000 & 860,000 \\\hline & Y 3 & 755,000 & 910,000 \\\hline\end{array}$$ $\begin{array}{|c|c|c|c|}\hline \text { Product Line } & \text { Product } & \text { Development Cost, \$} & \begin{array}{c}\text { Estimated Net } \\\text { AnnualRevenue, } \$\end{array} \\\hline \text { Commercial } & \mathrm{X} 1 & 270,000 & 510,000 \\\hline & \mathrm{X}_{2} & 420,000 & 710,000 \\\hline & \mathrm{X}_{3} & 445,000 & 810,000 \\\hline \text { High- End } & \mathrm{Y1} & 480,000 & 760,000 \\\hline & \mathrm{Y2} & 730,000 & 860,000 \\\hline & \mathrm{Y3} & 755,000 & 910,000 \\\hline\end{array}$

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Definitions:

Price Variances

The difference between the actual cost and the standard cost of goods or services.

Direct Labor Cost Variance

The difference between the budgeted or expected cost of direct labor and the actual cost incurred.

Flexible Budget

A budget that adjusts or flexes with changes in volume or activity levels of the business.

Unfavorable Variance

A financial term describing a situation where actual costs exceed budgeted or planned costs.