Linear Programming Problem for Aberdeen OilTeck Firm

Management Accounting 0
Case Study: Linear Programming Problem

Management Accounting 1
Introduction:
This report presents the case of Aberdeen OilTeck firm which engaged in the business of
manufacturing of rig cleaning equipment that is used in Oil and Gas Industry. The company
is producing two types of rig cleaning equipment: RigCleaner and RigBuster. Currently the
company has produced 1000 units of RigCleaner and 1500 units of Rigbuster. However, there
is a demand of 3000 units of RigCleaner and 3500 units of RigBuster in market. The
production of two units had to undergo processing in various departments such as Engine
Assembly, Metal Processing and the individual product’s assembly.
Issues related to current production schedule:
The analysis of present production data of Aberdeen has revealed that the company is not
utilising its maximum capacity of Metal stamping and RigCleaner Assembly department.
Both the said departments had surplus hours remained after producing the 1000 and 1500
units of RigCleaner and RigBuster department respectively. Hence, the current production
mix of the company cannot be said to be optimum. To determine the optimum product mix
use of Linear Programming function has been made and it has be found that in order to best
utilise the operating capacity of the company and to achieve maximum profitability, the
product mix of 2000 units of RigCleaner and 1000 units of RigBuster must be maintained
(Dantzig, 2016).
The new product mix will increase the profits of the company by $ 4800000. With the
existing product mix company could only meet its variable costs and fixed costs and no
profits were generated in the business. However, by rescheduling the production mix, the
profit of $ 48000000 could be made, given the total production capacity.

Management Accounting 2
Issues related to increase of production capacity:
At the optimum production mix point also, the demand of the market could not be fulfilled
completely due to the limitation of production capacity of the company as a whole. The factor
that will be constraint in engine assembly and metal stamping departments of the company
will be machine hours as they are being operated at the maximum capacity. The labour
resource is easily available in the market and this can deployed in the quantum in which it is
necessary to serve the total external market demand.
The capacity of engine assembly department is utilised in full as the number of required
hours to produce the current production mix is equal to the number of available hours.
However, when it comes to producing the units, up-to the external market demand, the
company does not have sufficient capacity.
At the level of optimum mix i.e. 2000 units for RigCleaner and 1000 units of RigBuster, the
best product mix, with the increase in the capacity of engine assembly department by one
hour i.e. from 4000 hours to 4001 hours will remain same because metal stamping which is
also an indispensible process which is required to be undertaken in the manufacturing of both
the products, would be operated at its maximum capacity. Hence, it would not be possible to
stretch its capacity even marginally.
At the existing production level, only total costs of operating the business are being recovered
and no profits are earned. However, to earn the profits the company must utilise the operating
capacities of all its departments to the maximum extent. The company has an alternative
option of purchasing either of its equipment from the external market and rent out the spare
capacity for the production of other equipment.