Handout - LP

1. A company has two grades of inspectors I and II, who are to be assigned for a
quality control inspection. It is required that at least 1,800 pieces be inspected per
day (8 hours). Grade-I inspector can check 25 pieces per hour with an accuracy of
98%. Grade-II can check 15 pieces per hour with an accuracy of 95%.

The hourly wage rate of Grade-I and II is $4 and $3 respectively. Each time an
error is made, the cost to the company is $2. The company has available for the
inspection job eight grade-I and ten grade-II inspectors. The company wants to
determine optimal number of inspectors to be appointed for the job with objective
to minimize total cost.

2. A homeowner wants to paints her house. The paint must possess a viscosity of at
least 200 centipoises. For the desired level of brilliance and durability, there must
be at least 14 grams of a chemical-A and 30 grams of chemical-B in each gallon
of paint.

There are two kinds of paint (I and II) available to her. Type I cost $6 and II cost
$4 per gallon. Per gallon specifications of paints are as follows:

Paint-I Paint-II
Viscosity 400 100
Chemical-A 20 10
Chemical-B 20 60

The homeowner decides to blend I and II in order to meet the three requirements
at a minimum cost. How much of I and II should be used in each gallon of the
blend in order to minimize cost.

3. A business firm is planning to advertise a special anniversary sale on radio and

TV during a particular week. For that, a maximum budget of $16,000 is
approved. It is found that radio commercial cost $800 per spot with a minimum
contract of five spots. TV commercial cost $4,000 per spot. Because of heavy
demand, only four TV spots are available in the designated week. A study reveals
that a TV spot is six times effective as a radio spot in reaching potential
customers. How should the firm allocate its advertising to attract the largest
possible number of potential customers?

4. A federal agency has a budget of $1 billion in the form of grants for innovative
research in the area of energy alternatives. A management review team consisting
of scientists and economists has made a preliminary review of 200 applications,
narrowing the field to 6 finalists. Each of the six finalists’ projects have been
evaluated and scored in relation to potential benefits expected over the next ten
years. These estimated benefits are shown in the table below. They represent the
net benefits per dollar invested in each alternative.

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 Handout - LP

Net Benefit per Requested level of

Project dollar invested funding ($ in million)
Solar-1 4.4 220
Solar-2 3.8 180
Synthetic fuels 4.1 250
Coal 3.5 150
Nuclear 5.1 400
Geothermal 3.2 120

Above table also shows the requested level of funding. These figures represent the
maximum amount, which can be awarded to any project. The agency can award
any amount up to the indicated maximum for a given project. Similarly, the
president has mandated that the nuclear project should be funded to al least 50%
of the requested amount. The agency’s administrator has a strong interest in solar
projects and has requested that the combined amount awarded to the two projects
should be at least $300 million.

Apart from above, following constraints should also be considered.

i. Each project should receive at least 20% of the requested amount.

ii. The amount awarded for the synthetic fuel project should be at least as
much as that awarded for the coal project.
iii. Combined funding for the geothermal project and synthetic project should
be at least $30 million.
iv. Funding for the nuclear project should be at least 40% greater then the
funding for the geothermal project.
v. Funding for the Solar-2 should be no more then 80% of the funding for
Solar-1.
Formulate a LP model to determine the amount of money to be awarded to each
project in order to maximize total benefits.

5. The Investment Bank Limited is in the process of formulating a loan policy

involving a total of Rs. 200 million. Being a full-service facility, the bank is
obliged to grant loans to different clientele. The following table provides the type
of loans, the rate of interest and the rate of debt (estimated from past experience):

Type of loan Interest Rate (%) Bad Debt Rate (%)

Personal 14.0 10
Car 13.0 7
Home 12.0 3
Farm 12.5 5
Commercial 10.0 2
[Bad debts are assumed to be unrecoverable and hence produce no interest revenue].
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Competition with other financial institutions requires that the bank allocate at
least 40% of the total funds to farm and commercial loans. To assist the housing
industry in the region, home loans must equal at least 50% of the personal, car
and home loans. The bank also has a stated policy specifying that overall ratio of
bad debts on all loans may not exceed 0.04.

Formulate a LP model to determine optimal distribution of loans so as to

maximize net return of the bank. Net return is defined as difference between the
interest on recoverable debt and loss of funds due to bad debts.

6. The real estate company owns 800 acres of undeveloped land and the president of
the company is studying the possibility of developing a housing project on it.
Apart from homes, the project will also include the area for roads, utilities and
recreation. He estimates that 15% of the acreage will be consumed in the roads
and utilities.

Following Government Regulations are applicable in this region.

i. Only single, double and triple-family homes can be constructed, with the
single family homes accounting for at least 50% of the total.
ii. The lot size of 2, 3 and 4 acres are required for single, double and triple-
family homes, respectively.
iii. Recreation area of one acre each must be to be established at the rate of one
area per 200 families.
The availability of water for the project is limited to 200,000 gallon per day. The
per unit water consumption and net returns from the different housing units are as
under:

Single Double Triple Recreation

Water Consumption (gallon/day) 400 600 840 450
10,00 20,00
Net Return (Rupees) 0 15,000 0 -

Formulate a LP model to determine optimal number of single, double and triple-

family homes that maximize the return of the company.