Question

Phillips Inc. produces two distinct products, A and B. The products do not compete with each other in the marketplace; that is, neither cost, price, nor demand for one product will impact the demand for the other. Phillips’ analysts have collected data on the effects of advertising on profits. These data suggest that, although higher advertising correlates with higher profits, the marginal increase in profits diminishes at higher advertising levels, particularly for product B. Analysts have estimated the following functions:

Annual profit for product A = 1.3712 LN(X_A) + 17.414

Annual profit for product B = 0.3970 LN(X_B) + 16.109

where X_A and X_B are the advertising amount allocated to products A and B, respectively, in thousands of dollars, profit is in millions of dollars, and LN is the natural logarithm function. The advertising budget is $500,000, and management has dictated that at least $50,000 must be allocated to each of the two products.

Build an optimization model that will prescribe how Phillips should allocate its marketing budget to maximize profit and solve this model using Excel Solver. (Hint: To compute a natural logarithm for the value X in Excel, use the formula =LN(X). For Solver to find an answer, you also need to start with decision variable values greater than 0 in this problem.) Round the first two answers (advertising) to the nearest whole number and to three decimal digit the last answer (total profit.)

	Advertising($000)
Product A
Product B

Total profit ($MM)

Answer 1

We have to find the values off XA and XB first.

The total amount spent for advertisement is 500,000 dollars.

So,

XA + XB = 500,000

Also, FRom the question,

XA >= 50,000

and

XB > = 50,000

So,

The initial data is given in excel as shown below.

Now, using excel solver,

The optimum values are