Petro Refinery LLC, a crude oil refinery, faces an issue common in many production and service industries: finding the optimal product mix or input mix. A central difficulty is that each product consumes different amounts of the firm’s shared resources, but contributes different revenues toward the firm’s fixed costs. Managers do not necessarily want to sacrifice the production of one product for another just because one has a higher contribution. Even so, the best utilization of the firm’s resources toward a good product mix should drive the firm’s marketing strategy—what mix of products will result in the most profit? Petro Refinery is a simple but realistic exercise to illustrate product mix decisions.
This slide deck can be taught in conjunction with the case Petro Refinery: Product Mix Optimization.