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A Product Mix Example

Quick-Screen is a clothing manufacturing company that specializes in producing commemorative shirts immediately following major sporting events such as the World Series, Super Bowl, and Final Four. The company has been contracted to produce a standard set of shirts for the winning team, either State University or Tech, following a college football game on New Year’s Day. The item produced include two sweatshirts, one with silk-screen painting on the front and one with print on both sides, and two T-shirts of the same configuration. The company has to complete all production within 72 hours after the game, at which time a trailer truck will pick up the shirts. The company will work around the clock. The truck has enough capacity to accommodate 1,200 standard size boxes. A standard size box holds 12 T-shirts, and a box of 12 sweatshirts is three times of standard box. The company has budgeted $25,000 for the production run. It has 500 dozen blank sweatshirts and T-shirts each in stock, ready for the production. The scenario is illustrated in Figure 4.1 bellow. The scenario requirements, unit costs, and profit per dozen for each type of shirt are shown in the following table: Processing Time (hr) Sweatshirts – Front Sweatshirts – Front/Back T-shirts - Front T-shirt – Front/Back 0.10 0.25 0.08 0.21 Cost per Dozen $36 $48 $25 $35 Profit per Dozen $90 $125 $45 $65

The company wants to know how many dozen (boxes) of each type of shirt to produce in order to maximize profit. Step1: Define the decision variables How many (dozens of) T-shirts and sweatshirts of each type to produce

Step 2: Define the objective function Maximize profit Step 3: Define the constraints The resources available, including processing time, blank shirts, budget, and shipping capacity. Decision Variables This problems contains four decision variables, representing the number of dozens (boxes) of each type of shirts to produce. X1 = sweatshirts, front printing X2 = sweatshirts, front and back printing X3 = T-shirts, front printing X4 = T-shirts, front and back printing The objective function The company’s objective is to maximize profit. The total profit is the sum of the individual profits gained from each type of shirt. The objective is expressed as Maximize Z = $90x1 + 125x2 + 45x1 + 65x4 Model Constraints The first constraint is for processing time. The total available processing time is the 72-hour period between the end of the game and the truck pickup: 0.10x1 + 0.25x2 + 0.08x3 + 0.21x4 ≤ 72 hr The second constraint is for the available shipping capacity, which is 1,200 standard-size boxes. A box of sweatshirts is three times the size of a standardsize box. Thus, each box of sweatshirts is equivalent in size to three boxes of Tshirts. This relative size differential is expressed in the following constraint:

3x1 + 3x2 + x3 + x4 ≤ 1,200 boxes The third constraint is for the cost budget. The total budget available for production is $25,000: $36x1 + 48x2 + 25x3 + 35x4 ≤ 25,000 The last two constraints reflect the available blank sweatshirts and T-shirts the company has in storage: x1 + x2 ≤ 500 x3 + x4 ≤ 500 Model Summary Maximize Z = $90x1 + 125x2 + 45x1 + 65x4 Subject to 0.10x1 + 0.25x2 + 0.08x3 + 0.21x4 ≤ 72 hr 3x1 + 3x2 + x3 + x4 ≤ 1,200 boxes $36x1 + 48x2 + 25x3 + 35x4 ≤ 25,000 x1 + x2 ≤ 500 x3 + x4 ≤ 500 x1 + x2 + x3 + x4 ≥ 0

2.

An Investment Example

Kathleen Allen, an individual investor, has $70,000 to divide among several investments. The alternative investments are municipal bonds with an 8.5% annual return, certificate of deposit with a 5% return, treasury bills with a 6.5% return, and a growth stock fund with a 13% annual return. The investments are all evaluated after 1 year. However, each investment alternative has a different perceived risk to the investor; thus, is advisable to diversify. Kathleen wants to know how much to invest in each alternative in order to maximize the return. The following guidelines have been established for diversifying the investments and lessening the risk perceived by the investor: 1. No more than 20% of the total investment should be in municipal bonds. 2. The amount invested in certificates of deposit should not exceed the amount invested in the other three alternatives. 3. At least 30 % of the investment should be in treasury bills and certificates of deposit. 4. To be safe, more should be invested in CDs and treasury bills than in municipal bonds and the growth stock fund, by a ratio of at least 1.2 to 1. Kathleen wants to invest the entire $70,000. Decision Variables Four decision variables represent the monetary amount invested in each investment alternative: X1 = amount ($) invested in municipal bond X2 = amount ($) invested in certificates of deposit X3 = amount ($) invested in treasury bills X4 = amount ($) invested in growth stock fund

The Objective Function The objective of the investor is to maximize the total return from the investment in the four alternatives. The total return is the sum of the individual returns from each alternative. Thus, the objective function is expressed as Maximize Z = $0.085x1 + 0.x2 + 0.65x3 + 0.130x4 Model Constraints In this problem the constraints are the guidelines established for diversifying the total investment. Each guideline is transformed into a mathematical constraint separately. The first guideline states that no more than 20% of the total investment should be ≤in municipal bonds. The total investment is $70,000; 20% of $70,000 is $14,000. Thus, this constraint is x1 ≤ $14,000 The second guideline indicates that the amount invested in certificates of deposit should not exceed the amount invested in the other three alternatives. Because the investment in certificates of deposit is x2 and the amount invested in the other alternatives is x1, x3, x4, the constraint is x2 ≤ x1 + x3 + x4 This constraint is not in what we referred to as standard form because all variables would be on the left-hand side of the inequality (≤), and all the numeric values would be on the right side. We will convert the constraint to x 2 - x1 - x 3 - x 4 ≤ 0 The third guideline specifies that at least 30% of the investment should be in treasury bills and certificates of deposit. Because 30% of $70,000 is $21,000 and

the amount invested in certificates of deposit and treasury bills is represented by x2 + x3 , the constraint is x2 + x3 ≥ 21,000

The forth guideline states that the ratio of the amount invested in certificates of deposit and treasury bills to the amount invested in municipal bonds and the growth stock fund should be at least 1.2 to 1. [(x2 + x3)/(x1 + x4)] ≥ 1.2 This constraint is not in standard linear programming form because of the fractional relationship of the decision variables, (x2 + x3)/(x1 + x4). It is converted as follows: x2 + x3 ≥ 1.2(x1 + x4) -1.2x1 + x2 + x3 – 1.2 x4 ≥ 0 Finally the investor wants to invest the entire $70,000 in the four alternatives. Thus, the sum of all the investments in the four alternatives must equal $70,000. x1 + x2 + x3 + x4 = 70,000 Model Summary The complete linear programming model for this problem can be summarized as Maximize Z = $0.085x1 + 0.x2 + 0.65x3 + 0.130x4 subject to x1 ≤ $14,000 x 2 - x1 - x 3 - x 4 ≤ 0 x2 + x3 ≥ 21,000 -1.2x1 + x2 + x3 – 1.2 x4 ≥ 0 x1 + x2 + x3 + x4 = 70,000 x1, x2, x3 ,x4 ≥ 0

1.

A Marketing Example

The Biggs Department Store chain has hired and advertising firm to determine the types and amount of advertising it should invest in for its store. The three types of advertising available are television and radio commercials and newspaper ads. The retail chain desires to know the number of each type of advertisement it should purchase in order to maximize exposure. It is estimated that each ad or commercial will reach the following potential audience and cost the following amount: ______________________________________________________________ Exposure (people/ad or commercial) Television commercial Radio commercial Newspaper ad 20,000 12,000 9,000 Cost $15,000 6,000 4,000

The company must consider the following resource constraints: 1. The budget limit for advertising is $100,000. 2. The television station has time available for 4 commercials. 3. The radio station has time available for 10 commercials. 4. The newspaper has space available for 7 ads. 5. The advertising agency has time and staff available for producing no more than a total of 15 commercials and/or ads.

Decision Variables This model consists of three decision variables that represent the number of each type of advertising produced: x1 = number of television commercials x2 = number of radio commercials x3 = number of newspaper ads

The Objective Function The objective of this problem is different from the objectives in previous examples, in which only profit was to be maximized (or cost minimized). In this problem, profit is not to be maximized; instead, audience exposure is to be maximized. Thus, this objective function demonstrates that although a linear programming model must either maximize or minimize some objective, objective itself can be in terms of any type of activity or valuation. For this problem the objective audience exposure is determined by summing the audience exposure gained from each type of advertising:

Maximize Z = 20,000x1 + 12,000x2 + 9,000x3 Where Z = total level of audience exposure 20,000x1 = estimated number of people reached by television commercials 12,000x2 = estimated number of people reached by radio commercials 9,000x3 = estimated number of people reached by newspaper ads

Model Constraints

The first constraint in this model reflects the limited budget of $100,000 allocated for advertisement:

$15,000x1 + 6,000x2 + 4,000x3 ≤ 100,000 Where $15,000x1 = amount spent for television advertising 6,000x2 = amount spent for radio advertising 4,000x3 = amount spent for newspaper advertising The next three constraints represent the fact that television and radio commercials are limited to 4 and 10, respectively, and newspaper ads are limited to 7:

x1 ≤ 4 television commercials x2 ≤ 10 radio commercials x3 ≤ 7 newspaper ads

The final constraint specifies that the total number or commercials and ads cannot exceed 15 because of the limitations of the advertising firm:

x1 + x2 + x3 ≤ 15 commercials and ads

Model Summary The complete linear programming model for this problem is summarized as

Maximize Z = 20,000x1 + 12,000x2 + 9,000x3 subject to $15,000x1 + 6,000x2 + 4,000x3 ≤ 100,000 x1 ≤ 4 x2 ≤ 10 x3 ≤ 7 x1 + x2 + x3 ≤ 15 x1 ,x2, x3 ≥ 0

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