QUESTION 1 - PRODUCTION STRATEGY

Better Fitness, Inc. (BFI), manufactures exercise equipment at its plant in Freeport, Long Island. It recently designed two universal weight machines for the home exercise market. Both machines use BFI-patented technology that provides the user with an extremely wide range of motion capability for each type of exercise performed. Until now, such capabilities have been available only on expensive weight machines used primarily by physical therapist.

At a recent trade show, demonstration of the machines resulted in significant dealer interest. In fact, the number of orders that BFI received at the trade show far exceeded its manufacturing capabilities for the number of orders that BFI received at the trade show far exceeded its manufacturing capabilities for the current production period. As a result, management decide to begin production of the two machines. The two machines, which BFI has named the Body Plus 100 and the Body Plus 200, require different amounts of resources to produce.

The Body Plus 100 consists of a frame unit, a press station, and a pec-dec station. Each frame produced uses 4 hours of machining and welding time and 2 hours of painting and finishing time. Each press station requires 2 hours of machining and welding time and 1 hour of painting and finishing time, and each pec-dec station uses 2 hours of machining and welding time and 2 hours of painting and finishing time.

In addition, 2 hours are spent assembling, testing, and packaging each Body Plus 100. The raw material costs are $450 for each frame, $300 for each press station and $250 for each pec-dec station; packaging costs are estimated to be $50 per unit. The Body Plus 200 consists of a frame unit, a press station, a pec-dec station, and a leg-press station. Each frame produced uses 5 hours of machining and welding time and 4 hours of painting and finishing time. Each press station requires 3 hours machining and welding time and 2 hours of painting and finishing time, and each leg-press station requires 2 hours of machining and welding time and 2 hours of painting and finishing time. In addition, 2 hours are spent assembling, testing, and packaging each Body Plus 200. The raw material costs are $650 for each frame, $400 for each press station, $250 for each pec-dec station, and $200 for each leg-press station; packaging costs are estimated to be $75 per unit. For the next production period, management estimates that 600 hours of machining and welding time, 450 hours of painting and finishing time, and 140 hours of assembly, testing, and packaging time will be available.

Current labor costs are $20 per hour for machining and welding time, $15 per hour for painting and finishing time, and $12 per hour for assembly, testing and packaging time. The market in which the two machines must compete suggests a retail price of $2400 for the Body Plus 100 and $3500 for the Body Plus 200. Although some flexibility may be available to BFI because of the unique capabilities of the new machine. Authorize BFI dealers can purchase machines for 70% of the suggested retail price.  President believes that the unique capabilities of the Body Plus 200 can help position BFI as one of the leaders in high-end exercise equipment. Consequently, he has stated that the number of units of the Body Plus 200 produced must be least 25% of the total production.

Analyze the production problem at Better Fitness Inc., and prepare a report for BFI president presenting your findings and recommendations. Include (but do not limit your discussion to) a consideration of the following items:

1. What is the recommended number of Body Plus 100 and Body Plus 200 machines to produces?

2. How does the requirement that the number of unit's pf Body Plus 200 produced be at least 25% of the total production affect profits?

3. Where should efforts be expended in order to increase profits?

QUESTION 2 -

Hart Venture Capital (HVC) specializes in providing venture capital for software development and Internet applications. Currently HVC has two investment opportunities: (1) Security Systems, a firm that needs additional capital to develop an Internet security software package, and (2) Market Analysis, a market research company that needs additional capital to develop a software package for conducting customer satisfaction surveys. In exchange for Security Systems stock, the firm has asked HVC to provide $600,000 in year 1, $600,000 in year 2, and $250,000 in year 3over the coming three-year period. In exchange for their stock, Market Analysis has asked HVC to provide $500,000 in year 1, $350,000 in year 2, and $400,000 in year 3 over the same three-year period. HVC believes that both investment opportunities are worth pursuing. However, because of other investments, they are willing to commit at most $800,000 for both projects in the first year, at most $700,000 in the second year and $500,000 in the third year.

HVC's financial analysis team reviewed both projects and recommended that the company's objective should be to maximize the net present value of the total investment in Security Systems and Market Analysis. The net present value takes into account the estimated value of the stock at the end of the three-year period as well as the capital outflows that are necessary during each of the three years. Using an 8% rate of return, HVC's financial analysis team estimates that 100% funding of the Security Systems project has a net present value of $1,800,000, and 100% funding of the Market Analysis has a net present value of $1,600,000.

HVC has the option to fund any percentage of the Security Systems and Market Analysis projects. For example, if HVC decides to fund 40% of the security systems project, investments of 0.40 ($600,000) = $240,000 would be required in year 1, 0.40($600,000) = $240,000 would be required in 2, and 0.40($250,000) = $100,000 would be required in year 3. In this case, the net present value of the security systems project would be 0.40($1,800,000) = $740,000. The investment amounts and the net present value for partial funding of the Market Analysis project would be computed in the same manner.

1) What is the recommended percentage of each project that HVC should fund and the net present value of the total investment?

2) What capital allocation plan for Security Systems and Market Analysis for the coming three-year-period and the total HVC investment each year would you recommend?

3) What effect, if any, would HVC's willingness to commit an additional $100,000 during the first year have on the recommended percentage of each project that HVC should fund?

4) What would the capital allocation plan look like if an additional $100,000 is made available?

5) What is your recommendation as to whether HVC should commit the additional $100,000 in the first year?

Provide model detail and relevant computer output in a report appendix.

CASE PROBLEM: INVESTMENT STRATEGY

J.D. Williams, Inc., is an investment advisory firm that manages more than $120 million in funds for its numerous clients. The company uses an asset allocation model that recommends the portion of each client's portfolio to be invested in a growth stock fund, an income fund, and a money market fund. To maintain diversity in each client's portfolio, the firm places limits on the percentage of each portfolio that may be invested in each of the three funds. General guidelines indicate that the amount invested in the growth fund must be between 20% and 40% of the total portfolio value. Similar percentages for the other two funds stipulate that between 20% and 50% of the total portfolio must be in the income fund, and at least 30% of the total portfolio value must be in the money market fund.

In addition, the company attempts to assess the risk tolerance of each client and adjust the portfolio to meet the needs pf the individual investor. For example, Williams just contracted with a new client who has $800,000 to invest. Based on an evaluation of the client's risk tolerance, Williams assigned a maximum risk index of 0.05 for the client. The firm's risk indicators show the risk of the growth fund at 0.10, the income fund at 0.07, and the money market fund at 0.01. An overall portfolio risk index is computed as a weighted average of the risk rating for the three funds where the weights are the fraction of the client's portfolio invested in each of the funds.

Additionally, Williams is currently forecasting annual yields of 18% for the growth fund, 12.5% for the income fund, and 7.5% for the money market fund. Based on the information provided, how should the new client be advised to allocate the $800,000 among the growth, income, and money market funds? Develop a linear programming model that will provide the maximum yield for the portfolio. Use your model to develop a managerial report.

MANAGERIAL REPORT

1) Recommend how much of the $800,000 should be invested in each of the three funds. What is the annual yield you anticipate for the investment recommendation?

2) Assume that the client's risk index could be increased to 0.055. How much would the yield increase and how would the investment recommendation change?

3) Refer again to the original situation where the client's risk index was assessed to be 0.05. How would your investment recommendation change if the annual yield for the growth fund were revised downward to 16%? Or even to 14%.

4) Assume that the client expressed some concern about having too much money in the growth fund. How would the recommendation change if the amount invested in the growth fund is not allowed to exceed the amount invested in the income fund?

5) The asset allocation model you developed may be useful in modifying the portfolios for all of the firm's clients whenever the anticipated yields for the three funds are periodically revised. What is your recommendation as to whether use of this model is possible?