QM Mid Term PPT's Merged PDF

CHAPTER 1: Introduction
 Body of Knowledge
 Problem Solving and Decision Making
 Quantitative Analysis and Decision Making
 Quantitative Analysis
 Models of Cost, Revenue, and Profit
 Quantitative Methods in Practice
1
Body of Knowledge
 The body of knowledge involving quantitative

approaches to decision making is referred to as
• Management Science
• Operations Research
• Decision Science
 It had its early roots in World War II and is flourishing
in business and industry due, in part, to:
• numerous methodological developments (e.g.
simplex method for solving linear programming
problems)
• a virtual explosion in computing power
2
Problem Solving
 7 Steps of Problem Solving

(First 5 steps are the process of decision making)
1. Define the problem.
2. Determine the set of alternative solutions.
3. Determine the criteria for evaluating alternatives.
4. Evaluate the alternatives.
5. Choose an alternative (make a decision).
---------------------------------------------------------------------
6. Implement the selected alternative.
7. Evaluate the results.
3
Quantitative Analysis and Decision Making
 Decision-Making Process
Structuring the Problem Analyzing the Problem
Define Identify Determine Identify Choose

the the the the an
Problem Alternatives Criteria Alternatives Alternative
• Problems in which the objective is to find the best solution

with respect to one criterion are referred to as single-
criterion decision problems.
• Problems that involve more than one criterion are referred
to as multicriteria decision problems.
4
 Analysis Phase of Decision-Making Process
Qualitative Analysis
• based largely on the manager’s judgment and
experience
• includes the manager’s intuitive “feel” for the
problem
• is more of an art than a science
5
 Analysis Phase of Decision-Making Process
Quantitative Analysis
• analyst will concentrate on the quantitative facts
or data associated with the problem
• analyst will develop mathematical expressions
that describe the objectives, constraints, and
other relationships that exist in the problem
• analyst will use one or more quantitative
methods to make a recommendation
6
 Potential Reasons for a Quantitative Analysis

Approach to Decision Making
• The problem is complex.
• The problem is very important.
• The problem is new.
• The problem is repetitive.
7
 Quantitative Analysis Process

• Model Development
• Data Preparation
• Model Solution
• Report Generation
8
Model Development
 Models are representations of real objects or situations

 Three forms of models are:
• Iconic models - physical replicas (scalar
representations) of real objects
• Analog models - physical in form, but do not
physically resemble the object being modeled
• Mathematical models - represent real world
problems through a system of mathematical
formulas and expressions based on key
assumptions, estimates, or statistical analyses
9
Model Development
 Generally, experimenting with models (compared to

experimenting with the real situation):
• requires less time
• is less expensive
• involves less risk
 The more closely the model represents the real
situation, the accurate the conclusions and predictions
will be.
10
Mathematical Models
 Objective Function – a mathematical expression that

describes the problem’s objective, such as maximizing
profit or minimizing cost
• Consider a simple production problem. Suppose x
denotes the number of units produced and sold
each week, and the firm’s objective is to maximize
total weekly profit. With a profit of $10 per unit, the
objective function is 10x.
11
Mathematical Models
 Constraints – a set of restrictions or limitations, such as

production capacities
 To continue our example, a production capacity
constraint would be necessary if, for instance, 5
hours are required to produce each unit and only 40
hours are available per week. The production
capacity constraint is given by 5x < 40.
 The value of 5x is the total time required to produce
x units; the symbol indicates that the production
time required must be less than or equal to the 40
hours available.
12
Mathematical Models
 Uncontrollable Inputs – environmental factors that are

not under the control of the decision maker
 In the preceding mathematical model, the profit per
unit ($10), the production time per unit (5 hours), and
the production capacity (40 hours) are environmental
factors not under the control of the manager or
decision maker.
13
Mathematical Models
 Decision Variables – controllable inputs; decision

alternatives specified by the decision maker, such as
the number of units of a product to produce.
 In the preceding mathematical model, the
production quantity x is the controllable input to the
model.
14
Mathematical Models
 A complete mathematical model for our simple production

problem is:
Maximize 10x (objective function)

subject to: 5x < 40 (constraint)
x>0 (constraint)
[The second constraint reflects the fact that it is not

possible to manufacture a negative number of units.]
15
Mathematical Models
 Deterministic Model – if all uncontrollable inputs to the

model are known and cannot vary
 Stochastic (or Probabilistic) Model – if any
uncontrollable are uncertain and subject to variation
 Stochastic models are often more difficult to analyze.
 In our simple production example, if the number of
hours of production time per unit could vary from 3
to 6 hours depending on the quality of the raw
material, the model would be stochastic.
16
Mathematical Models
 Cost/benefit considerations must be made in

selecting an appropriate mathematical model.
 Frequently a less complicated (and perhaps less
precise) model is more appropriate than a more
complex and accurate one, due to cost and ease of
solution considerations.
17
Mathematical Models
Uncontrollable Inputs
(Environmental Factors)
Controllable
Output
Inputs Mathematical
(Projected
(Decision Model
Results)
Variables)
18
Mathematical Models
 Data preparation is not a trivial step, due to the time

required and the possibility of data collection errors.
 A model with 50 decision variables and 25 constraints
could have over 1300 data elements!
 Often, a fairly large data base is needed.
 Information systems specialists might be needed.
19
Model Solution
 The analyst attempts to identify the alternative (the set

of decision variable values) that provides the “best”
output for the model.
 The “best” output is the optimal solution.
 If the alternative does not satisfy all of the model
constraints, it is rejected as being infeasible,
regardless of the objective function value.
 If the alternative satisfies all of the model constraints,
it is feasible and a candidate for the “best” solution.
20
Model Solution
 Trial-and-Error Solution for Production Problem

Production Projected Total Hours Feasible
Quantity Profit of Production Solution
0 0 0 Yes
2 20 10 Yes
4 40 20 Yes
6 60 30 Yes
8 80 40 Yes
10 100 50 No
12 120 60 No
21
Model Solution
 A variety of software packages are available for

solving mathematical models.
• Microsoft Excel
• LINGO
22
Model Testing and Validation
 Often, goodness/accuracy of a model cannot be

assessed until solutions are generated.
 Small test problems having known, or at least
expected, solutions can be used for model testing and
validation.
 If the model generates expected solutions, use the
model on the full-scale problem.
 If inaccuracies or potential shortcomings inherent in
the model are identified, take corrective action such
as:
• Collection of more-accurate input data
• Modification of the model
23
Report Generation
 A managerial report, based on the results of the

model, should be prepared.
 The report should be easily understood by the
decision maker.
 The report should include:
• the recommended decision
• other pertinent information about the results (for
example, how sensitive the model solution is to
the assumptions and data used in the model)
24
Example: Iron Works, Inc.
Iron Works, Inc. manufactures two products made

from steel and just received this month's allocation of b
pounds of steel. It takes a1 pounds of steel to make a
unit of product 1 and a2 pounds of steel to make a unit of
product 2.
Let x1 and x2 denote this month's production level of
product 1 and product 2, respectively. Denote by p1 and
p2 the unit profits for products 1 and 2, respectively.
Iron Works has a contract calling for at least m units
of product 1 this month. The firm's facilities are such that
at most u units of product 2 may be produced monthly.
25
 Mathematical Model
• The total monthly profit =
(profit per unit of product 1)
x (monthly production of product 1)
+ (profit per unit of product 2)
= p1x1 + p2x2
We want to maximize total monthly profit:
Max p1x1 + p2x2
26
 Mathematical Model (continued)

• The total amount of steel used during monthly
production equals:
(steel required per unit of product 1)
+ (steel required per unit of product 2)
= a1x1 + a2x2
This quantity must be less than or equal to the
allocated b pounds of steel:
a1x1 + a2x2 < b
27
 Mathematical Model (continued)

• The monthly production level of product 1 must be
greater than or equal to m :
x1 > m
• The monthly production level of product 2 must be
less than or equal to u :
x2 < u
• However, the production level for product 2 cannot
be negative:
x2 > 0
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 Mathematical Model Summary
Max p1x1 + p2x2 Objective Function

“Subject to” s.t. a1x1 + a2x2 < b
x1 > m
x2 < u Constraints
x2 > 0
29
 Question
Suppose b = 2000, a1 = 2, a2 = 3, m = 60, u = 720,

p1 = 100, p2 = 200.
Rewrite the model with these specific values for the

uncontrollable inputs.
30
 Answer
Substituting, the model is:
Max 100x1 + 200x2

s.t. 2x1 + 3x2 < 2000
x1 > 60
x2 < 720
x2 > 0
31
 Question
The optimal solution to the current model is x1 =
60 and x2 = 626 2/3. If the product were engines,
explain why this is not a true optimal solution for the
"real-life" problem.
 Answer
One cannot produce and sell 2/3 of an engine.
Thus the problem is further restricted by the fact that
both x1 and x2 must be integers. (They could remain
fractions if it is assumed these fractions are work in
progress to be completed the next month.)
32
Uncontrollable Inputs
$100 profit per unit Prod. 1
$200 profit per unit Prod. 2
2 lbs. steel per unit Prod. 1
3 lbs. Steel per unit Prod. 2
2000 lbs. steel allocated
60 units minimum Prod. 1
720 units maximum Prod. 2
0 units minimum Prod. 2
Max 100(60) + 200(626.67)
60 units Prod. 1 s.t. 2(60) + 3(626.67) < 2000 Profit = $131,333.33
626.67 units Prod. 2 60 > 60 Steel Used = 2000
Controllable Inputs 626.67 < 720 Output
626.67 > 0
Mathematical Model
33
Example: Ponderosa Development Corp.
Ponderosa Development Corporation (PDC) is

a small real estate developer that builds only one style
house. The selling price of the house is $115,000.
Land for each house costs $55,000 and lumber,
supplies, and other materials run another $28,000 per
house. Total labor costs are approximately $20,000
per house.
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Ponderosa leases office space for $2,000 per

month. The cost of supplies, utilities, and leased
equipment runs another $3,000 per month.
The one salesperson of PDC is paid a commission
of $2,000 on the sale of each house. PDC has seven
permanent office employees whose monthly salaries
are given on the next slide.
35
Employee Monthly Salary

President $10,000
VP, Development 6,000
VP, Marketing 4,500
Project Manager 5,500
Controller 4,000
Office Manager 3,000
Receptionist 2,000
36
Question
Identify all costs and denote the marginal cost
and marginal revenue for each house.
Answer
The monthly salaries total $35,000 and monthly
office lease and supply costs total another $5,000.
This $40,000 is a monthly fixed cost.
The total cost of land, material, labor, and sales
commission per house, $105,000, is the marginal
cost for a house.
The selling price of $115,000 is the marginal
revenue per house.
37
Question
Write the monthly cost function c (x), revenue
function r (x), and profit function p (x).
Answer
c (x) = variable cost + fixed cost = 105,000x + 40,000
r (x) = 115,000x
p (x) = r (x) - c (x) = 10,000x - 40,000
38
Question
What is the breakeven point for monthly sales
of the houses?
Answer
r (x ) = c (x )
115,000x = 105,000x + 40,000
Solving, x = 4.
39
Question
What is the monthly profit if 12 houses per month are
built and sold?
Answer
p (12) = 10,000(12) - 40,000 = $80,000 monthly profit
40
1200 Total Revenue =

115,000x
Thousands of Dollars
1000
800
600
Total Cost =
400 40,000 + 105,000x
200
Break-Even Point = 4 Houses
0
0 1 2 3 4 5 6 7 8 9 10
Number of Houses Sold (x)
41
Using Excel for Breakeven Analysis
 A spreadsheet software package such as Microsoft

Excel can be used to perform a quantitative analysis
of Ponderosa Development Corporation.
 We will enter the problem data in the top portion of the
spreadsheet.
 The bottom of the spreadsheet will be used for model
development.
42
Formula Spreadsheet
A B
1 PROBLEM DATA
2 Fixed Cost $40,000
3 Variable Cost Per Unit $105,000
4 Selling Price Per Unit $115,000
5 MODEL
6 Sales Volume
7 Total Revenue =B4*B6
8 Total Cost =B2+B3*B6
9 Total Profit (Loss) =B7-B8
43
Question
What is the monthly profit if 12 houses are built
and sold per month?
44
Spreadsheet Solution
A B
1 PROBLEM DATA
5 MODEL
6 Sales Volume 12
7 Total Revenue $1,380,000
8 Total Cost $1,300,000
9 Total Profit (Loss) $80,000
45
Question
What is the breakeven point for monthly sales
of the houses?
Spreadsheet Solution:
• One way to determine the break-even point using a
spreadsheet is to use the Goal Seek tool.
• Microsoft Excel ‘s Goal Seek tool allows the user to
determine the value for an input cell that will cause
the output cell to equal some specified value.
• In our case, the goal is to set Total Profit to zero by
seeking an appropriate value for Sales Volume.
46
 Spreadsheet Solution: Goal Seek Approach

Using Excel ’s Goal Seek Tool
Step 1: Select Data on menu
Step 2: Choose What-If Analysis in Data Tools
submenu
Step 3: Choose the Goal Seek option
Step 4: When the Goal Seek dialog box appears:
Enter B9 in the Set cell box
Enter 0 in the To value box
Enter B6 in the By changing cell box
Click OK
47
 Spreadsheet Solution: Goal Seek Approach
Completed Goal Seek Dialog Box
48
Spreadsheet Solution: Goal Seek Approach

A B
1 PROBLEM DATA
5 MODEL
6 Sales Volume 4
7 Total Revenue $460,000
8 Total Cost $460,000
9 Total Profit (Loss) $0
49
Management Science Techniques
 Linear Programming  Simulation

 Integer Linear  Decision Analysis
Programming  Goal Programming
 Nonlinear Programming  Analytic Hierarchy Process
 PERT/CPM  Forecasting
 Inventory Models  Markov-Process Models
 Waiting Line Models  Distribution/Network Models
50
 Linear programming is a problem-solving approach

developed for situations involving maximizing or
minimizing a linear function subject to linear
constraints that limit the degree to which the objective
can be pursued.
 Integer linear programming is an approach used for
problems that can be set up as linear programs with
the additional requirement that some or all of the
decision recommendations be integer values.
 Network models are specialized solution procedures
for problems in transportation system design,
information system design, project scheduling, …..
51
 Project scheduling: PERT (Program Evaluation and

Review Technique) and CPM (Critical Path Method)
help managers responsible for planning, scheduling,
and controlling projects that consist of numerous
separate jobs or tasks performed by a variety of
departments, individuals, and so forth.
 Inventory models are used by managers faced with
the dual problems of maintaining sufficient inventories
to meet demand for goods and, at the same time,
incurring the lowest possible inventory holding costs.
52
 Waiting line (or queuing) models help managers

understand and make better decisions concerning the
operation of systems involving waiting lines.
 Simulation is a technique used to model the operation
of a system. This technique employs a computer
program to model the operation and perform
simulation computations.
 Decision analysis can be used to determine optimal
strategies in situations involving several decision
alternatives and an uncertain pattern of future events.
 Forecasting methods are techniques that can be used
to predict future aspects of a business operation.
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 Goal programming is a technique for solving multi-

criteria decision problems, usually within the
framework of linear programming.
 Analytic hierarchy process is a multi-criteria decision-
making technique that permits the inclusion of
subjective factors in arriving at a recommended
decision.
 Markov-process models are useful in studying the
evolution of certain systems over repeated trials (such
as describing the probability that a machine,
functioning in one period, will function or break down
in another period).
54
Methods Used Most Frequently
 Linear programming
 Integer programming
 Network models (such as transportation and
transshipment models)
 Simulation
55
Introduction to Linear Programming
• Linear Programming Problem

• Problem Formulation
• A Simple Maximization Problem
• Graphical Solution Procedure
• Extreme Points and the Optimal Solution
• Computer Solutions
• A Simple Minimization Problem
• Special Cases
Linear Programming
 Linear programming - the use of the word “programming” here

means “choosing a course of action.”
 Linear programming involves choosing a course of action when
the mathematical model of the problem contains only linear
functions.
Linear Programming (LP) Problem
• The maximization or minimization of some quantity is the objective
in all linear programming problems.
• All LP problems have constraints that limit the degree to which the
objective can be pursued.
• A feasible solution satisfies all the problem's constraints.
• An optimal solution is a feasible solution that results in the largest
possible objective function value when maximizing (or smallest
when minimizing).
• A graphical solution method can be used to solve a linear program
with two variables.
Linear Programming (LP) Problem
• If both the objective function and the constraints are linear, the
problem is referred to as a linear programming problem.
• Linear functions are functions in which each variable appears in a
separate term raised to the first power and is multiplied by a
constant (which could be 0).
• Linear constraints are linear functions that are restricted to be
"less than or equal to", "equal to", or "greater than or equal to" a
constant.
Problem Formulation
• Problem formulation or modeling is the process of translating a
verbal statement of a problem into a mathematical statement.
• Formulating models is an art that can only be mastered with
practice and experience.
• Every LP problems has some unique features, but most
problems also have common features.
• General guidelines for LP model formulation are illustrated
here.
Guidelines for Model Formulation
• Understand the problem thoroughly.
• Describe the objective.
• Describe each constraint.
• Define the decision variables.
• Write the objective in terms of the decision variables.
• Write the constraints in terms of the decision variables.
Example 1: A Simple Maximization Problem
• LP Formulation
Objective
Max 5x1 + 7x2
Function
s.t. x1 < 6
“Regular”
2x1 + 3x2 < 19 Constraints
x1 + x2 < 8
x1 > 0 and x2 > 0 Non-negativity

Constraints
Example 1: Graphical Solution
• First Constraint Graphed
x2
8
7 x1 = 6
6
Shaded region
5 contains all
4 feasible points
for this constraint
3
2 (6, 0)
1
x1
1 2 3 4 5 6 7 8 9 10
• Second Constraint Graphed
x2
8 (0, 6 1/3)
7
6
2x1 + 3x2 = 19
5
4
Shaded
3
region contains
2 all feasible points (9 1/2, 0)
1 for this constraint
x1
1 2 3 4 5 6 7 8 9 10
• Third Constraint Graphed
x2 (0, 8)
8
7
6 x1 + x2 = 8
5
4
Shaded
3
region contains
2 all feasible points
for this constraint (8, 0)
1
x1
1 2 3 4 5 6 7 8 9 10
• Combined-Constraint Graph Showing Feasible Region
x2
x1 + x2 = 8
8
7
x1 = 6
6
5
4
3
Feasible 2x1 + 3x2 = 19
2 Region
1
x1
1 2 3 4 5 6 7 8 9 10
• Objective Function Line
x2
8
7
(0, 5)
6 Objective Function
5x1 + 7x2 = 35
5
4
3
2
(7, 0)
1
x1
1 2 3 4 5 6 7 8 9 10
 Selected Objective Function Lines

x2
8
7
5x1 + 7x2 = 35
6
5 5x1 + 7x2 = 39
4
3 5x1 + 7x2 = 42
2
1
x1
1 2 3 4 5 6 7 8 9 10
• Optimal Solution
x2 Maximum
Objective Function Line
8 5x1 + 7x2 = 46
7
6 Optimal Solution
(x1 = 5, x2 = 3)
5
4
3
2
1
x1
1 2 3 4 5 6 7 8 9 10
Summary of the Graphical Solution Procedure for Maximization Problems
• Prepare a graph of the feasible solutions for each of the constraints.

• Determine the feasible region that satisfies all the constraints
simultaneously.
• Draw an objective function line.
• Move parallel objective function lines toward larger objective function
values without entirely leaving the feasible region.
• Any feasible solution on the objective function line with the largest
value is an optimal solution.
Slack and Surplus Variables
• A linear program in which all the variables are non-negative and all
the constraints are equalities is said to be in standard form.
• Standard form is attained by adding slack variables to "less than or
equal to" constraints, and by subtracting surplus variables from
"greater than or equal to" constraints.
• Slack and surplus variables represent the difference between the
left and right sides of the constraints.
• Slack and surplus variables have objective function coefficients
equal to 0.
Slack Variables (for < constraints)
 Example 1 in Standard Form
Max 5x1 + 7x2 + 0s1 + 0s2 + 0s3

s.t. x1 + s1 = 6
2x1 + 3x2 + s2 = 19
x1 + x2 + s3 = 8
x1, x2 , s1 , s2 , s3 > 0
s1 , s2 , and s3 are slack variables

Slack Variables
 Optimal Solution
x2 Third
Constraint: First
x1 + x2 = 8 Constraint:
8 x1 = 6
7
s3 = 0
s1 = 1
6
5
Second
4 Constraint:
2x1 + 3x2 = 19
3
Optimal
2 Solution s2 = 0
(x1 = 5, x2 = 3)
1
x1
1 2 3 4 5 6 7 8 9 10
Extreme Points and the Optimal Solution
• The corners or vertices of the feasible region are referred to as the
extreme points.
• An optimal solution to an LP problem can be found at an extreme
point of the feasible region.
• When looking for the optimal solution, you do not have to evaluate
all feasible solution points.
• You have to consider only the extreme points of the feasible
region.
Example 1: Extreme Points
x2
8
7 5 (0, 6 1/3)
6
5
4
4 (5, 3)
3 Feasible
Region 3 (6, 2)
2
1 1 (0, 0) 2 (6, 0)
x1
1 2 3 4 5 6 7 8 9 10
Computer Solutions
• LP problems involving 1000s of variables and 1000s of
constraints are now routinely solved with computer packages.
• Linear programming solvers are now part of many
spreadsheet packages, such as Microsoft Excel.
• Leading commercial packages include CPLEX, LINGO, MOSEK,
Xpress-MP, and Premium Solver for Excel.
Interpretation of Computer Output
• In this chapter we will discuss the following output:
• objective function value
• values of the decision variables
• reduced costs
• slack and surplus
• In the next chapter we will discuss how an optimal solution is

affected by a change in:
• a coefficient of the objective function
• the right-hand side value of a constraint
Example 1: Spreadsheet Solution
• Partial Spreadsheet Showing Problem Data
A B C D
1 LHS Coefficients
2 Constraints X1 X2 RHS Values
3 #1 1 0 6
4 #2 2 3 19
5 #3 1 1 8
6 Obj.Func.Coeff. 5 7
• Partial Spreadsheet Showing Solution
A B C D
8 Optimal Decision Variable Values
9 X1 X2
10 5.0 3.0
11
12 Maximized Objective Function 46.0
13
14 Constraints Amount Used RHS Limits
15 #1 5 <= 6
16 #2 19 <= 19
17 #3 8 <= 8
• Interpretation of Computer Output
We see from the previous slide that:
Objective Function Value = 46

Decision Variable #1 (x1) = 5
Decision Variable #2 (x2) = 3
Slack in Constraint #1 = 6– 5=1
Slack in Constraint #2 = 19 – 19 = 0
Slack in Constraint #3 = 8– 8=0
Reduced Cost
• The reduced cost for a decision variable whose value is 0 in the
optimal solution is:
the amount the variable's objective function coefficient would have to
improve (increase for maximization problems, decrease for minimization
problems) before this variable could assume a positive value.
• The reduced cost for a decision variable whose value is > 0 in the
optimal solution is 0.
 Reduced Costs
Adjustable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$8 X1 5.000 0.000 5.000 2.000 0.333
$C$8 X2 3.000 0.000 7.000 0.500 2.000
Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$B$13 #1 5.000 0.000 6.000 1E+30 1.000
$B$14 #2 19.000 2.000 19.000 5.000 1.000
$B$15 #3 8.000 1.000 8.000 0.333 1.667
Example 2: A Simple Minimization Problem
• LP Formulation
Min 5x1 + 2x2
s.t. 2x1 + 5x2 > 10

4x1 - x2 > 12
x1 + x2 > 4
x1, x2 > 0
• Graph the Constraints
Constraint 1: When x1 = 0, then x2 = 2; when x2 = 0,
then x1 = 5. Connect (5,0) and (0,2). The ">" side is
above this line.
Constraint 2: When x2 = 0, then x1 = 3. But setting x1
to 0 will yield x2 = -12, which is not on the graph. Thus,
to get a second point on this line, set x1 to any number
larger than 3 and solve for x2: when x1 = 5, then x2 =
8. Connect (3,0) and (5,8). The ">“ side is to the right.
 Graph the Constraints (continued)
Constraint 3: When x1 = 0, then x2 = 4; when x2 = 0,
then x1 = 4. Connect (4,0) and (0,4). The ">" side is
above this line.

• Constraints Graphed
x2
6
Feasible Region
5
4x1 - x2 > 12
4
x1 + x2 > 4
3
2 2x1 + 5x2 > 10
x1
1 2 3 4 5 6
• Graph the Objective Function

Set the objective function equal to an arbitrary constant (say 20)
and graph it. For 5x1 + 2x2 = 20, when x1 = 0, then x2 = 10; when x2= 0,
then x1 = 4.
Connect (4,0) and (0,10).
• Move the Objective Function Line Toward Optimality

Move it in the direction which lowers its value (down), since we
are minimizing, until it touches the last point of the feasible region,
determined by the last two constraints.
 Objective Function Graphed
x2 Min 5x1 + 2x2

6
5
4x1 - x2 > 12
4
x1 + x2 > 4
3
2 2x1 + 5x2 > 10
x1
1 2 3 4 5 6
• Solve for the Extreme Point at the Intersection of the Two Binding Constraints
4x1 - x2 = 12
x1+ x2 = 4
Adding these two equations gives:
5x1 = 16 or x1 = 16/5
Substituting this into x1 + x2 = 4 gives: x2 = 4/5
 Solve for the Optimal Value of the Objective Function

5x1 + 2x2 = 5(16/5) + 2(4/5) = 88/5
x2
6
4x1 - x2 > 12
5
x1 + x2 > 4
4
Optimal Solution:
3 x1 = 16/5, x2 = 4/5,
5x1 + 2x2 = 17.6
2
2x1 + 5x2 > 10
1
x1
1 2 3 4 5 6
Summary of the Graphical Solution Procedure
for Minimization Problems
 Prepare a graph of the feasible solutions for each of the constraints.

 Determine the feasible region that satisfies all the constraints
simultaneously.
 Draw an objective function line.
 Move parallel objective function lines toward smaller objective function
values without entirely leaving the feasible region.
 Any feasible solution on the objective function line with the smallest value
is an optimal solution.
Surplus Variables
 Example 2 in Standard Form
Min 5x1 + 2x2 + 0s1 + 0s2 + 0s3
s.t. 2x1 + 5x2 - s1 = 10

4x1 - x2 - s2 = 12
x1 + x2 - s3 = 4
x1, x2, s1, s2, s3 > 0
s1 , s2 , and s3 are
surplus variables
A B C D
9 Decision Variables
10 X1 X2
11 Dec.Var.Values 3.20 0.800
12
13 Minimized Objective Function 17.600
14
15 Constraints Amount Used Amount Avail.
16 #1 10.4 >= 10
17 #2 12 >= 12
18 #3 4 >= 4
 Interpretation of Computer Output
We see from the previous slide that:
Objective Function Value = 17.6

Decision Variable #1 (x1) = 3.2
Decision Variable #2 (x2) = 0.8
Surplus in Constraint #1 = 10.4 - 10 = 0.4
Feasible Region
• The feasible region for a two-variable LP problem can be nonexistent, a
single point, a line, a polygon, or an unbounded area.
• Any linear program falls in one of four categories:
• is infeasible
• has a unique optimal solution
• has alternative optimal solutions
• has an objective function that can be increased without bound
• A feasible region may be unbounded and yet there may be optimal
solutions. This is common in minimization problems and is possible in
maximization problems.
Special Cases
• Alternative Optimal Solutions
In the graphical method, if the objective function line is
parallel to a boundary constraint in the direction of
optimization, there are alternate optimal solutions, with all
points on this line segment being optimal.
Example: Alternative Optimal Solutions
 Consider the following LP problem.
Max 4x1 + 6x2
s.t. x1 < 6
2x1 + 3x2 < 18
x1 + x2 < 7
x1 > 0 and x2 > 0

Example: Alternative Optimal Solutions
 Boundary constraint 2x1 + 3x2 < 18 and objective function Max
4x1 + 6x2 are parallel. All points on line segment A – B are
optimal solutions.
x2 x1 + x2 < 7
7
6
A
5
B x1 < 6
4
3 2x1 + 3x2 < 18
2
1
x1
1 2 3 4 5 6 7 8 9 10
Special Cases
 Infeasibility
• No solution to the LP problem satisfies all the constraints,
including the non-negativity conditions.
• Graphically, this means a feasible region does not exist.
• Causes include:
• A formulation error has been made.
• Management’s expectations are too high.
• Too many restrictions have been placed on the problem (i.e.
the problem is over-constrained).
Example: Infeasible Problem
• Consider the following LP problem.
Max 2x1 + 6x2
s.t. 4x1 + 3x2 < 12

2x1 + x2 > 8
x1, x2 > 0
Example: Infeasible Problem
• There are no points that satisfy both constraints, so
there is no feasible region (and no feasible solution).
x2
10
2x1 + x2 > 8
8
6
4x1 + 3x2 < 12
4
x1
2 4 6 8 10
Special Cases
 Unbounded
• The solution to a maximization LP problem is unbounded if the
value of the solution may be made indefinitely large without
violating any of the constraints.
• For real problems, this is the result of improper formulation.
(Quite likely, a constraint has been inadvertently omitted.)
Example: Unbounded Solution
• Consider the following LP problem.
Max 4x1 + 5x2
s.t. x1 + x2 > 5
3x1 + x2 > 8
x1, x2 > 0
Example: Unbounded Solution
• The feasible region is unbounded and the objective function line
can be moved outward from the origin without bound, infinitely
increasing the objective function.
x2
10
3x1 + x2 > 8
8
4
x1 + x2 > 5
2
x1
2 4 6 8 10
LP - Sensitivity Analysis and Interpretation of Solution
• Introduction to Sensitivity Analysis

• Objective Function Coefficients
• Right-Hand Sides
• Limitations of Classical Sensitivity Analysis
Introduction to Sensitivity Analysis
• In the previous chapter we discussed:
• objective function value
• values of the decision variables
• reduced costs
• slack/surplus
• In this chapter we will discuss:
• changes in the coefficients of the objective function
• changes in the right-hand side value of a constraint
Introduction to Sensitivity Analysis
• Sensitivity analysis (or post-optimality analysis) is used to determine
how the optimal solution is affected by changes, within specified
ranges, in:
• the objective function coefficients
• the right-hand side (RHS) values
• Sensitivity analysis is important to a manager who must operate in a
dynamic environment with imprecise estimates of the coefficients.
• Sensitivity analysis allows a manager to ask certain what-if questions
about the problem.
Example 1
• LP Formulation
Max 5x1 + 7x2
s.t. x1 < 6
2x1 + 3x2 < 19
x1 + x2 < 8
x1, x2 > 0
Example 1
• Graphical Solution
x2
x1 + x2 < 8
8 Max 5x1 + 7x2
7
6 x1 < 6
5
Optimal Solution:
4 x1 = 5, x2 = 3
3
2x1 + 3x2 < 19
2
1
x1
1 2 3 4 5 6 7 8 9 10
Objective Function Coefficients
• Let us consider how changes in the objective function
coefficients might affect the optimal solution.
• The range of optimality for each coefficient provides the range
of values over which the current solution will remain optimal.
• Managers should focus on those objective coefficients that have
a narrow range of optimality and coefficients near the endpoints
of the range.
Example 1
• Changing Slope of Objective Function
x2 Coincides with
8 x1 + x2 < 8
7 constraint line
6 Objective function
5 5 line for 5x1 + 7x2
4 Coincides with
2x1 + 3x2 < 19
3 Feasible
4 constraint line
2 Region
3
1
1 2
x1
1 2 3 4 5 6 7 8 9 10
Range of Optimality
• Graphically, the limits of a range of optimality are found by

changing the slope of the objective function line within the
limits of the slopes of the binding constraint lines.
• Slope of an objective function line, Max c1x1 + c2x2, is -c1/c2,

and the slope of a constraint, a1x1 + a2x2 = b, is -a1/a2.
Example 1
• Range of Optimality for c1
The slope of the objective function line is -c1/c2.
The slope of the first binding constraint, x1 + x2 = 8, is -1 and
the slope of the second binding constraint, x1 + 3x2 = 19, is -2/3.
Find the range of values for c1 (with c2 staying 7) such that the
objective function line slope lies between that of the two binding
constraints: -1 < -c1/7 < -2/3
Multiplying through by -7 (and reversing the inequalities):
14/3 < c1 < 7
Example 1
• Range of Optimality for c2

Find the range of values for c2 ( with c1 staying 5) such that
the objective function line slope lies between that of the two
binding constraints:
-1 < -5/c2 < -2/3
Multiplying by -1: 1 > 5/c2 > 2/3

Inverting, 1 < c2/5 < 3/2
Multiplying by 5: 5 < c2 < 15/2

Software packages such as LINGO and Microsoft Excel provide the
following LP information:
 Information about the objective function:
• its optimal value
• coefficient ranges (ranges of optimality)
 Information about the decision variables:
• their optimal values
• their reduced costs
 Information about the constraints:
• the amount of slack or surplus
• the dual prices
• right-hand side ranges (ranges of feasibility)
Example 1
 Range of Optimality for c1 and c2
Variable Cells
Model Final Reduced Objective Allowable Allowable
Variable Name Value Cost Coefficient Increase Decrease
X1 X1 5.000 0.000 5.000 2.000 0.333
X2 X2 3.000 0.000 7.000 0.500 2.000
Constraints
Constraint Final Shadow Constraint Allowable Allowable
Number Name Value Price R.H. Side Increase Decrease
1 1 5.000 0.000 6.000 1E+30 1.000
2 2 19.000 2.000 19.000 5.000 1.000
3 3 8.000 1.000 8.000 0.333 1.667
Right-Hand Sides
• Let us consider how a change in the right-hand side for a constraint
might affect the feasible region and perhaps cause a change in the
optimal solution.
• The improvement in the value of the optimal solution per unit
increase in the right-hand side is called the shadow price.
• The range of feasibility is the range over which the shadow price is
applicable.
• As the RHS increases, other constraints will become binding and limit
the change in the value of the objective function.
Shadow Price
• Graphically, a shadow price is determined by adding +1 to the
right hand side value in question and then resolving for the
optimal solution in terms of the same two binding constraints.
• The shadow price for a nonbinding constraint is 0.
• A negative shadow price indicates that the objective function
will not improve if the RHS is increased.
Relevant Cost and Sunk Cost
• A resource cost is a relevant cost if the amount paid for it is
dependent upon the amount of the resource used by the decision
variables.
• Relevant costs are reflected in the objective function coefficients.
• A resource cost is a sunk cost if it must be paid regardless of the
amount of the resource actually used by the decision variables.
• Sunk resource costs are not reflected in the objective function
coefficients.
Cautionary Note on the Interpretation of Shadow Prices
• Resource Cost is Sunk

The shadow price is the maximum amount you should be
willing to pay for one additional unit of the resource.
• Resource Cost is Relevant
The shadow price is the maximum premium over the normal
cost that you should be willing to pay for one unit of the
resource.
Example 1
• Shadow Prices
Constraint 1: Since x1 < 6 is not a binding constraint,
its shadow price is 0.
Constraint 2: Change the RHS value of the second
Constraint to 20 and resolve for the optimal point
determined by the last two constraints:
2x1 + 3x2 = 20 and x1 + x2 = 8.
The solution is x1 = 4, x2 = 4, z = 48. Hence, the
shadow price = znew - zold = 48 - 46 = 2.
Example 1
• Shadow Prices
Constraint 3: Change the RHS value of the third
constraint to 9 and resolve for the optimal point
determined by the last two constraints: 2x1 + 3x2 = 19
and x1 + x2 = 9.
The solution is: x1 = 8, x2 = 1, z = 47.
The shadow price is znew - zold = 47 - 46 = 1.
Example 1
• Shadow Prices
Variable Cells
X1 X1 5.000 0.000 5.000 2.000 0.333
X2 X2 3.000 0.000 7.000 0.500 2.000
Constraints
1 1 5.000 0.000 6.000 1E+30 1.000
2 2 19.000 2.000 19.000 5.000 1.000
3 3 8.000 1.000 8.000 0.333 1.667
Range of Feasibility
• The range of feasibility for a change in the right hand side value
is the range of values for this coefficient in which the original
dual price remains constant.
• Graphically, the range of feasibility is determined by finding the
values of a right hand side coefficient such that the same two
lines that determined the original optimal solution continue to
determine the optimal solution for the problem.
Example 1
• Range of Feasibility
Variable Cells
X1 X1 5.000 0.000 5.000 2.000 0.333
X2 X2 3.000 0.000 7.000 0.500 2.000
Constraints
1 1 5.000 0.000 6.000 1E+30 1.000
2 2 19.000 2.000 19.000 5.000 1.000
3 3 8.000 1.000 8.000 0.333 1.667
Example 2: Olympic Bike Co.
Olympic Bike is introducing two new lightweight

bicycle frames, the Deluxe and the Professional, to be
made from special aluminum and steel alloys. The
anticipated unit profits are $10 for the Deluxe and $15 for the
Professional.
The number of pounds of each alloy needed per
frame is summarized on the next slide.
A supplier delivers 100 pounds of the aluminum alloy

and 80 pounds of the steel alloy weekly.
Aluminum Alloy Steel Alloy

Deluxe 2 3
Professional 4 2
How many Deluxe and Professional frames should

Olympic produce each week?
• Model Formulation
• Verbal Statement of the Objective Function
Maximize total weekly profit.
• Verbal Statement of the Constraints
Total weekly usage of aluminum alloy < 100 pounds.
Total weekly usage of steel alloy < 80 pounds.
• Definition of the Decision Variables
x1 = number of Deluxe frames produced weekly.
x2 = number of Professional frames produced weekly.
• Model Formulation (continued)

Max 10x1 + 15x2 (Total Weekly Profit)
s.t. 2x1 + 4x2 < 100 (Aluminum Available)

3x1 + 2x2 < 80 (Steel Available)
x1, x2 > 0
A B C D
6 Decision Variables
7 Deluxe Professional
8 Bikes Made 15 17.500
9
10 Maximized Total Profit 412.500
11
12 Constraints Amount Used Amount Avail.
13 Aluminum 100 <= 100
14 Steel 80 <= 80
According to the output:
x1 (Deluxe frames) = 15
x2 (Professional frames) = 17.5
Objective function value = $412.50
• Range of Optimality
Question
Suppose the profit on deluxe frames is increased to $20.
Is the above solution still optimal? What is the value of the
objective function when this unit profit is increased to $20?
• Sensitivity Report
Variable Cells
X1 Deluxe 15.000 0.000 10.000 12.500 2.500
X2 Profes. 17.500 0.000 15.000 5.000 8.333
Constraints
1 Alum. 100.000 3.125 100.000 60.000 46.667
2 Steel 80.000 1.250 80.000 70.000 30.000
Answer
The output states that the solution remains optimal as
long as the objective function coefficient of x1 is between 7.5
and 22.5. Because 20 is within this range, the optimal solution
will not change. The optimal profit will change: 20x1 + 15x2 =
20(15) + 15(17.5) = $562.50.
Question
If the unit profit on deluxe frames were $6 instead of $10,
would the optimal solution change?
Variable Cells
X1 Deluxe 15.000 0.000 10.000 12.500 2.500
X2 Profes. 17.500 0.000 15.000 5.000 8.333
Constraints
1 Alum. 100.000 3.125 100.000 60.000 46.667
2 Steel 80.000 1.250 80.000 70.000 30.000
Answer
The output states that the solution remains optimal as long
as the objective function coefficient of x1 is between 7.5 and
22.5. Because 6 is outside this range, the optimal solution would
change.
Simultaneous Changes
• Range of Optimality and 100% Rule
The 100% rule states that simultaneous changes in objective function

coefficients will not change the optimal solution as long as the sum of the
percentages of the change divided by the corresponding maximum
allowable change in the range of optimality for each coefficient does not
exceed 100%.
Question
If simultaneously the profit on Deluxe frames was
raised to $16 and the profit on Professional frames was
raised to $17, would the current solution be optimal?
 Range of Optimality and 100% Rule
Answer
If c1 = 16, the amount c1 changed is 16 - 10 = 6 . The
maximum allowable increase is 22.5 - 10 = 12.5, so this is a 6/12.5
= 48% change.
If c2 = 17, the amount that c2 changed is 17 - 15 = 2. The
maximum allowable increase is 20 - 15 = 5 so this is a 2/5 = 40%
change. The sum of the change percentages is 88%.
Since this does not exceed 100%, the optimal solution would not
change.
Simultaneous Changes
• Range of Feasibility and 100% Rule
The 100% rule states that simultaneous changes in right-hand

sides will not change the dual prices as long as the sum of the
percentages of the changes divided by the corresponding
maximum allowable change in the range of feasibility for each
right-hand side does not exceed 100%.
• Range of Feasibility and Sunk Costs
Question
Given that aluminum is a sunk cost, what is the maximum
amount the company should pay for 50 extra pounds of
aluminum?
Variable Cells
X1 Deluxe 15.000 0.000 10.000 12.500 2.500
X2 Profes. 17.500 0.000 15.000 5.000 8.333
Constraints
1 Alum. 100.000 3.125 100.000 60.000 46.667
2 Steel 80.000 1.250 80.000 70.000 30.000
Answer
Because the cost for aluminum is a sunk cost, the
shadow price provides the value of extra aluminum. The
shadow price for aluminum is $3.125 per pound and the
maximum allowable increase is 60 pounds. Because 50 is in
this range, the $3.125 is valid. Thus, the value of 50
additional pounds is = 50($3.125) = $156.25.
• Range of Feasibility and Relevant Costs
Question
If aluminum were a relevant cost, what is the
maximum amount the company should pay for 50 extra
pounds of aluminum?
 Range of Feasibility and Relevant Costs
Answer
If aluminum were a relevant cost, the shadow price would be
the amount above the normal price of aluminum the company would
be willing to pay. Thus if initially aluminum cost $4 per pound, then
additional units in the range of feasibility would be worth $4 +
$3.125 = $7.125 per pound.
Example 3
• Consider the following linear program:
Min 6x1 + 9x2 ($ cost)
s.t. x1 + 2x2 < 8

10x1 + 7.5x2 > 30
x2 > 2
x1, x2 > 0
Example 3
 Sensitivity Report
Variable Cells
X1 X1 1.500 0.000 6.000 6.000 6.000
X2 X2 2.000 0.000 9.000 1E+30 4.500
Constraints
1 1 5.500 2.500 8.000 1E+30 2.500
2 2 30.000 -0.600 30.000 25.000 15.000
3 3 2.000 -4.500 2.000 2.000 2.000
Example 3
According to the output:

x1 = 1.5
x2 = 2.0
Objective function value = 27.00
Example 3
Question
Suppose the unit cost of x1 is decreased to $4. Is the
current solution still optimal? What is the value of the
objective function when this unit cost is decreased to $4?
Example 3
Variable Cells
X1 X1 1.500 0.000 6.000 6.000 6.000
X2 X2 2.000 0.000 9.000 1E+30 4.500
Constraints
1 1 5.500 2.500 8.000 1E+30 2.500
2 2 30.000 -0.600 30.000 25.000 15.000
3 3 2.000 -4.500 2.000 2.000 2.000
Example 3
Answer
long as the objective function coefficient of x1 is between 0 and
12. Because 4 is within this range, the optimal solution will not
change. However, the optimal total cost will change:
6x1 + 9x2 = 4(1.5) + 9(2.0) = $24.00.
Example 3
Question
How much can the unit cost of x2 be decreased
without concern for the optimal solution changing?
Example 3
Variable Cells
X1 X1 1.500 0.000 6.000 6.000 6.000
X2 X2 2.000 0.000 9.000 1E+30 4.500
Constraints
1 1 5.500 2.500 8.000 1E+30 2.500
2 2 30.000 -0.600 30.000 25.000 15.000
3 3 2.000 -4.500 2.000 2.000 2.000
Example 3
Answer
long as the objective function coefficient of x2 does not fall
below 4.5.
Example 3
Question
If simultaneously the cost of x1 was raised to $7.5 and
the cost of x2 was reduced to $6, would the current
solution remain optimal?
Example 3
Variable Cells
X1 X1 1.500 0.000 6.000 6.000 6.000
X2 X2 2.000 0.000 9.000 1E+30 4.500
Constraints
1 1 5.500 2.500 8.000 1E+30 2.500
2 2 30.000 -0.600 30.000 25.000 15.000
3 3 2.000 -4.500 2.000 2.000 2.000
Example 3
Answer
If c1 = 7.5, the amount c1 changed is 7.5 - 6 = 1.5. The
maximum allowable increase is 12 - 6 = 6, so this is a 1.5/6 =
25% change. If c2 = 6, the amount that c2 changed is 9 - 6 = 3.
The maximum allowable decrease is 9 - 4.5 = 4.5, so this is a
3/4.5 = 66.7% change.
The sum of the change percentages is 25% + 66.7% = 91.7%.
Because this does not exceed 100%, the optimal solution
would not change.
Example 3
Question
If the right-hand side of constraint 3 is increased
by 1, what will be the effect on the optimal solution?
Example 3
Variable Cells
X1 X1 1.500 0.000 6.000 6.000 6.000
X2 X2 2.000 0.000 9.000 1E+30 4.500
Constraints
1 1 5.500 2.500 8.000 1E+30 2.500
2 2 30.000 -0.600 30.000 25.000 15.000
3 3 2.000 -4.500 2.000 2.000 2.000
Example 3
Answer
A shadow price represents the improvement in the
objective function value per unit increase in the right-hand side.
A negative shadow price indicates a negative improvement in
the objective, which in this problem means an increase in total
cost because we're minimizing. Since the RHS remains within
the range of feasibility, there is no change in the optimal
solution. However, the objective function value increases by
$4.50.
Changes in Constraint Coefficients
 Classical sensitivity analysis provides no information about

changes resulting from a change in the coefficient of a
variable in a constraint.
 We must change the coefficient and rerun the model to learn
the impact the change will have on the solution.
Non-intuitive Shadow Prices
 Constraints with variables naturally on both the left-hand

and right-hand sides often lead to shadow prices that have a
non-intuitive explanation.
Example 2: Olympic Bike Co. (Revised)
Recall that Olympic Bike is introducing two new
lightweight bicycle frames, the Deluxe and the
Professional, to be made from special aluminum and
steel alloys. The objective is to maximize total profit,
subject to limits on the availability of aluminum and
steel.
Let us now introduce an additional constraint. The
number of Deluxe frames produced (x1) must be greater than or
equal to the number of Professional frames produced (x2) .
x1 > x2
 Model Formulation (continued)
Max 10x1 + 15x2 (Total Weekly Profit)
s.t. 2x1 + 4x2 < 100 (Aluminum Available)

3x1 + 2x2 < 80 (Steel Available)
x1 - x2 > 0 (Product Ratio)
x1, x2 > 0
 Sensitivity Report (Revised)
Variable Cells
X1 Deluxe 16.000 0.000 10.000 12.500 10.000
X2 Profes. 16.000 0.000 15.000 1E+30 8.333
Constraints
1 Alum. 96.000 0.000 100.000 1E+30 4.000
2 Steel 80.000 5.000 80.000 3.333 80.000
3 Ratio 0.000 -5.000 0.000 26.667 2.500
 Shadow Price for Constraint #3
The interpretation of the shadow price -5.00 is correctly stated
as follows:
“If we are forced to produce 1 more Deluxe frame

over and above the number of Professional frames
produced, total profits will decrease by $5.00.”
Example 2: Olympic Bike Co. (Revised Again)
We might instead be interested in what happens if we change the
coefficient on x2.
For instance, what if management required Olympic to produce a
number of Deluxe frames that is at least 110% of the number of
Professional frames produced?
In other words, the constraint would change to
x1 > 1.1x2
The shadow price does not tell us what will happen in this case.
We need to resolve the problem with this new constraint.
Chapter 4: Linear Programming Applications
• Marketing Applications
• Financial Applications
• Operations Management Applications
Marketing Applications
• Media Selection
• One application of linear programming in marketing is media selection.

• LP can be used to help marketing managers allocate a fixed budget to
various advertising media.
• The objective is to maximize reach, frequency, and quality of exposure.
• Restrictions on the allowable allocation usually arise during consideration
of company policy, contract requirements, and media availability.
Media Selection
SMM Company recently developed a new instant salad

machine, has $282,000 to spend on advertising.
The product is to be initially test marketed in the Dallas area.
The money is to be spent on a TV advertising blitz during one
weekend (Friday, Saturday, and Sunday) in November.
The three options available are: daytime advertising, evening news

advertising, and Sunday game-time advertising.
A mixture of one-minute TV spots is desired.
Media Selection
Estimated Audience
Ad Type Reached With Each Ad Cost Per Ad
Daytime 3,000 $5,000
Evening News 4,000 $7,000
Sunday Game 75,000 $100,000
SMM wants to take out at least one ad of each type (daytime,

evening-news, and game-time).
Further, there are only two game-time ad spots available.
There are ten daytime spots and six evening news spots available
daily.
SMM wants to have at least 5 ads per day, but spend no more than
$50,000 on Friday and no more than $75,000 on Saturday.
Media Selection
 Define the Decision Variables
DFR = number of daytime ads on Friday

DSA = number of daytime ads on Saturday
DSU = number of daytime ads on Sunday
EFR = number of evening ads on Friday
ESA = number of evening ads on Saturday
ESU = number of evening ads on Sunday
GSU = number of game-time ads on Sunday
Media Selection
 Define the Objective Function
Maximize the total audience reached:
Max (audience reached per ad of each type)

x (number of ads used of each type)
Max 3000DFR +3000DSA +3000DSU +4000EFR

+4000ESA +4000ESU +75000GSU
Media Selection
 Define the Constraints
Take out at least one ad of each type:
(1) DFR + DSA + DSU > 1
(2) EFR + ESA + ESU > 1
(3) GSU > 1
Ten daytime spots available:
(4) DFR < 10
(5) DSA < 10
(6) DSU < 10
Six evening news spots available:
(7) EFR < 6
(8) ESA < 6
(9) ESU < 6
Media Selection
 Define the Constraints (continued)
Only two Sunday game-time ad spots available:

(10) GSU < 2
At least 5 ads per day:
(11) DFR + EFR > 5
(12) DSA + ESA > 5
(13) DSU + ESU + GSU > 5
Spend no more than $50,000 on Friday:
(14) 5000DFR + 7000EFR < 50000
Media Selection
Spend no more than $75,000 on Saturday:

(15) 5000DSA + 7000ESA < 75000
Spend no more than $282,000 in total:

(16) 5000DFR + 5000DSA + 5000DSU + 7000EFR
+ 7000ESA + 7000ESU + 100000GSU7 < 282000
Non-negativity:
DFR, DSA, DSU, EFR, ESA, ESU, GSU > 0
Media Selection
 The Management Scientist Solution
Variable Value Reduced Costs

DFR 8.000 0.000
DSA 5.000 0.000
DSU 2.000 0.000
EFR 0.000 0.000
ESA 0.000 0.000
ESU 1.000 0.000
GSU 2.000 0.000
Media Selection
 Solution Summary
Total new audience reached = 199,000
Number of daytime ads on Friday = 8

Number of daytime ads on Saturday = 5
Number of daytime ads on Sunday = 2
Number of evening ads on Friday = 0
Number of evening ads on Saturday = 0
Number of evening ads on Sunday = 1
Number of game-time ads on Sunday = 2
Marketing Applications
 Marketing Research
• A firm conducts marketing research to learn about consumer
characteristics, attitudes, and preferences.
• Marketing research services include designing the study,
conducting surveys, analyzing data collected, and providing
recommendations for the client.
• In the research design phase, targets or quotas may be established
for the number and types of respondents to be surveyed.
• The marketing research firm’s objective is to conduct the survey so
as to meet the client’s needs at a minimum cost.
Marketing Research
Market Survey, Inc. (MSI) specializes in evaluating consumer

reaction to new products, services, and advertising campaigns. A client
firm requested MSI’s assistance in ascertaining consumer reaction to a
recently marketed household product.
During meetings with the client, MSI agreed to conduct door-to-

door personal interviews to obtain responses from households with
children and households without children. In addition, MSI agreed to
conduct both day and evening interviews.
Marketing Research
The client’s contract called for MSI to conduct 1000 interviews

under the following quota guidelines:
1. Interview at least 400 households with children.
2. Interview at least 400 households without children.
3. The total number of households interviewed during the evening must
be at least as great as the number of households interviewed during the
day.
4. At least 40% of the interviews for households with children must be
conducted during the evening.
5. At least 60% of the interviews for households without children must
be conducted during the evening.
Marketing Research
Because the interviews for households with children take

additional interviewer time and because evening interviewers are
paid more than daytime interviewers, the cost varies with the type
of interview. Based on previous research studies, estimates of the
interview costs are as follows:
Interview Cost
Household Day Evening
Children $20 $25
No children $18 $20
Marketing Research
In formulating the linear programming model for the MSI problem,

we utilize the following decision-variable notation:
DC = the number of daytime interviews of households with children

EC = the number of evening interviews of households with children
DNC = the number of daytime interviews of households without children
ENC = the number of evening interviews of households without children
Marketing Research
The objective function:

Min 20DC + 25EC + 18DNC + 20ENC
The constraint requiring a total of 1000 interviews is:
DC + EC + DNC + ENC = 1000
The specifications concerning the types of interviews:
• Households with children: DC + EC > 400
• Households without children: DNC + ENC > 400
• At least as many evening interviews as day interviews
EC + ENC > DC + DNC or -DC + EC - DNC + ENC > 0
Marketing Research
The specifications concerning the types of interviews:

• At least 40% of interviews of households with children during the
evening:
EC > 0.4(DC + EC) or -0.4DC + 0.6EC > 0
• At least 60% of interviews of households without children during the
evening:
ENC > 0.6(DNC + ENC) or -0.6DNC + 0.4ENC > 0
The non-negativity requirements:

DC, EC, DNC, ENC > 0
Marketing Research
The 4-variable, 6-constraint LP problem formulation is:

Marketing Research
• Minimum total cost = $20,320
Number of Interviews
Household Day Evening Totals
Children 240 160 400
No children 240 360 600
Totals 480 520 1000
Financial Applications
 LP can be used in financial decision-making that involves capital

budgeting, make-or-buy, asset allocation, portfolio selection, financial
planning, and more.
 Portfolio selection problems involve choosing specific investments –
for example, stocks and bonds – from a variety of investment
alternatives.
 This type of problem is faced by managers of banks, mutual funds,
and insurance companies.
 The objective function usually is maximization of expected return or
minimization of risk.
Portfolio Selection
Winslow Savings has $20 million available for investment.

It wishes to invest over the next four months in such a way that
it will maximize the total interest earned over the four month
period as well as have at least $10 million available at the start
of the fifth month for a high rise building venture in which it
will be participating.
Portfolio Selection
For the time being, Winslow wishes to invest only in 2-
month government bonds (earning 2% over the 2-month
period) and 3-month construction loans (earning 6% over the
3-month period).
Each of these is available each month for investment.
Funds not invested in these two investments are liquid
and earn 3/4 of 1% per month when invested locally.
Portfolio Selection
Formulate a linear program that will help Winslow

Savings determine how to invest over the next four
months if at no time does it wish to have more than $8
million in either government bonds or construction loans.
Portfolio Selection
• Define the Decision Variables

Gi = amount of new investment in government
bonds in month i (for i = 1, 2, 3, 4)
Ci = amount of new investment in construction
loans in month i (for i = 1, 2, 3, 4)
Li = amount invested locally in month i,
(for i = 1, 2, 3, 4)
Portfolio Selection
• Define the Objective Function

Maximize total interest earned in the 4-month period:
Max (interest rate on investment) x (amount invested)
Max .02G1 + .02G2 + .02G3 + .02G4
+ .06C1 + .06C2 + .06C3 + .06C4
+ .0075L1 + .0075L2 + .0075L3 + .0075L4
Portfolio Selection
• Define the Constraints
Month 1's total investment limited to $20 million:

(1) G1 + C1 + L1 = 20,000,000
Month 2's total investment limited to principle and interest

invested locally in Month 1:
(2) G2 + C2 + L2 = 1.0075L1
or G2 + C2 - 1.0075L1 + L2 = 0
Portfolio Selection
• Define the Constraints (continued)
Month 3's total investment amount limited to principle and

interest invested in government bonds in Month 1 and
locally invested in Month 2:
(3) G3 + C3 + L3 = 1.02G1 + 1.0075L2
or - 1.02G1 + G3 + C3 - 1.0075L2 + L3 = 0
Portfolio Selection
Month 4's total investment limited to principle and interest

invested in construction loans in Month 1, government bonds in
Month 2, and locally invested in Month 3:
(4) G4 + C4 + L4 = 1.06C1 + 1.02G2 + 1.0075L3
or - 1.02G2 + G4 - 1.06C1 + C4 - 1.0075L3 + L4 = 0
$10 million must be available at start of Month 5:

(5) 1.06C2 + 1.02G3 + 1.0075L4 > 10,000,000
Portfolio Selection
No more than $8 million in government bonds at any
time:
(6) G1 < 8,000,000
(7) G1 + G2 < 8,000,000
(8) G2 + G3 < 8,000,000
(9) G3 + G4 < 8,000,000
Portfolio Selection

No more than $8 million in construction loans at any time:
(10) C1 < 8,000,000
(11) C1 + C2 < 8,000,000
(12) C1 + C2 + C3 < 8,000,000
(13) C2 + C3 + C4 < 8,000,000
Non-negativity:
Gi, Ci, Li > 0 for i = 1, 2, 3, 4
Portfolio Selection
 Computer Solution

Variable Value Reduced Cost
G1 8000000.0000 0.0000
G2 0.0000 0.0000
G3 5108613.9228 0.0000
G4 2891386.0772 0.0000
C1 8000000.0000 0.0000
C2 0.0000 0.0453
C3 0.0000 0.0076
C4 8000000.0000 0.0000
L1 4000000.0000 0.0000
L2 4030000.0000 0.0000
L3 7111611.0772 0.0000
L4 4753562.0831 0.0000
Financial Planning
Hewlitt Corporation established an early retirement

program as part of its corporate restructuring. At the close of
the voluntary sign-up period, 68 employees had elected early
retirement. As a result of these early retirements, the
company incurs the following obligations over the next eight
years:
Year 1 2 3 4 5 6 7 8
$ Required 430 210 222 231 240 195 225 255
The cash requirements (in thousands of dollars) are due at

the beginning of each year.
Financial Planning
The corporate treasurer must determine how

much money must be set aside today to meet the eight
yearly financial obligations as they come due. The
financing plan for the retirement program includes
investments in government bonds as well as savings.
The investments in government bonds are limited to
three choices:
Years to
Bond Price Rate (%) Maturity
1 $1150 8.875 5
2 1000 5.500 6
3 1350 11.750 7
Financial Planning
The government bonds have a par value of $1000, which

means that even with different prices each bond pays $1000 at
maturity. The rates shown are based on the par value.
For purposes of planning, the treasurer assumed that any
funds not invested in bonds will be placed in savings and earn
interest at an annual rate of 4%.
Financial Planning

F = total dollars required to meet the retirement
plan’s eight-year obligation
B1 = units of bond 1 purchased at the beginning of
year 1
year 1
year 1
S = amount placed in savings at the beginning of
year i for i = 1, . . . , 8
Financial Planning
The objective function is to minimize the total dollars needed

to meet the retirement plan’s eight-year obligation: Min F
A key feature of this type of financial planning problem is that a

constraint must be formulated for each year of the planning
horizon. It’s form is:
(Funds available at the beginning of the year)
- (Funds invested in bonds and placed in savings)
= (Cash obligation for the current year)
Financial Planning

A constraint must be formulated for each year of the planning
horizon in the following form:
Year 1: F – 1.15B1 – 1B2 – 1.35B3 – S1 = 430

Year 2: 0.08875B1 + 0.055B2 + 0.1175B3 – 1.04S1 – S2 = 210
Year 3: 0.08875B1 + 0.055B2 + 0.1175B3 – 1.04S2 – S3 = 222
Year 4: 0.08875B1 + 0.055B2 + 0.1175B3 – 1.04S3 – S4 = 231
Year 5: 0.08875B1 + 0.055B2 + 0.1175B3 – 1.04S4 – S5 = 240
Year 6: 1.08875B1 + 0.055B2 + 0.1175B3 – 1.04S5 – S6 = 195
Year 7: 1.055B2 + 0.1175B3 – 1.04S6 – S7 = 225
Year 8: 1.1175B3 – 1.04S7 – S8 = 255
Financial Planning
 Optimal solution to the 12-variable, 8-constraint LP

problem:
• Minimum total obligation = $1,728,794
Bond Units Purchased Investment Amount
1 B1 = 144.988 $1150(144.988) = $166,736
2 B2 = 187.856 $1000(187.856) = $187,856
3 B3 = 228.188 $1350(228.188) = $308,054
Operations Management Applications
 LP can be used in operations management to aid in decision-

making about product mix, production scheduling, staffing,
inventory control, capacity planning, and other issues.
 An important application of LP is multi-period planning such as
production scheduling.
 Usually the objective is to establish an efficient, low-cost
production schedule for one or more products over several
time periods.
 Typical constraints include limitations on production capacity,
labor capacity, storage space, and more.
Production Scheduling
Chip Hoose is the owner of Hoose Custom Wheels. Chip has

just received orders for 1,000 standard wheels and 1,250 deluxe
wheels next month and for 800 standard and 1,500 deluxe the
following month. All orders must be filled.
The cost of making standard wheels is $10 and deluxe
wheels is $16. Overtime rates are 50% higher. There are 1,000
hours of regular time and 500 hours of overtime available each
month. It takes .5 hour to make a standard wheel and .6 hour to
make a deluxe wheel.
The cost of storing a wheel from one month to the next is $2.

We want to determine the regular-time and overtime
production quantities in each month for standard and
deluxe wheels.
Month 1 Month 2
Wheel Reg. Time Overtime Reg. Time Overtime
Standard SR1 SO1 SR2 SO2
Deluxe DR1 DO1 DR2 DO2

We also want to determine the inventory quantities
for standard and deluxe wheels.
SI = number of standard wheels held in

inventory from month 1 to month 2
DI = number of deluxe wheels held in
inventory from month 1 to month 2

We want to minimize total production and inventory
costs for standard and deluxe wheels.
Min (production cost per wheel)
x (number of wheels produced)
+ (inventory cost per wheel)
x (number of wheels in inventory)
Min 10SR1 + 15SO1 + 10SR2 + 15SO2
+ 16DR1 + 24DO1 + 16DR2 + 24DO2
+ 2SI + 2DI

Production Month 1 = (Units Required) + (Units Stored)
Standard:
(1) SR1 + SO1 = 1,000 + SI or SR1 + SO1 - SI = 1,000
Deluxe:
(2) DR1 + DO1 = 1,250 + DI or DR1 + DO1 -–DI = 1,250
Production Month 2 = (Units Required) - (Units Stored)

Standard:
(3) SR2 + SO2 = 800 - SI or SR2 + SO2 + SI = 800
Deluxe:
(4) DR2 + DO2 = 1,500 - DI or DR2 + DO2 + DI = 1,500

Reg. Hrs. Used Month 1 < Reg. Hrs. Avail. Month 1
(5) .5SR1 + .6DR1 < 1000
OT Hrs. Used Month 1 < OT Hrs. Avail. Month 1
(6) .5SO1 + .6DO1 < 500
Reg. Hrs. Used Month 2 < Reg. Hrs. Avail. Month 2
(7) .5SR2 + .6DR2 < 1000
OT Hrs. Used Month 2 < OT Hrs. Avail. Month 2
(8) .5SO2 + .6DO2 < 500
SR1 500.000 0.000
SO1 500.000 0.000
SR2 200.000 0.000
SO2 600.000 0.000
DR1 1250.000 0.000
DO1 0.000 2.000
DR2 1500.000 0.000
DO2 0.000 2.000
SI 0.000 2.000
DI 0.000 2.000
Thus, the recommended production schedule is:
Month 1 Month 2
Reg. Time Overtime Reg. Time Overtime
Standard 500 500 200 600
Deluxe 1250 0 1500 0
No wheels are stored and the minimum total cost is

$67,500.
Workforce Assignment
National Wing Company (NWC) is gearing up for

the new B-48 contract. NWC has agreed to produce 20
wings in April, 24 in May, and 30 in June.
Currently, NWC has 100 fully qualified workers. A fully
qualified worker can either be placed in production or can train
new recruits. A new recruit can be trained to be an apprentice
in one month. After another month, the apprentice becomes a
qualified worker. Each trainer can train two recruits.
The production rate and salary per employee

type is listed below.
Type of Production Rate Wage

Employee (Wings/Month) Per Month
Production .6 $3,000
Trainer .3 $3,300
Apprentice .4 $2,600
Recruit .05 $2,200
At the end of June, NWC wishes to have no recruits

or apprentices, but have at least 140 full-time workers.

Pi = number of producers in month i
(where i = 1, 2, 3 for April, May, June)
Ti = number of trainers in month i
(where i = 1, 2 for April, May)
Ai = number of apprentices in month i
(where i = 2, 3 for May, June)
Ri = number of recruits in month i
(where i = 1, 2 for April, May)

Minimize total wage cost for producers, trainers,
apprentices, and recruits for April, May, and June:
Min 3000P1 + 3300T1 + 2200R1 + 3000P2 + 3300T2
+ 2600A2+2200R2 + 3000P3 + 2600A3

Total production in Month 1 (April) must equal or
exceed contract for Month 1:
(1) .6P1 + .3T1 +.05R1 > 20
Total production in Months 1-2 (April, May) must
equal or exceed total contracts for Months 1-2:
(2) .6P1 + .3T1 + .05R1 + .6P2 + .3T2 + .4A2 + .05R2 > 44
Total production in Months 1-3 (April, May, June)
must equal or exceed total contracts for Months 1-3:
(3) .6P1+.3T1+.05R1+.6P2+.3T2+.4A2+.05R2
+.6P3+.4A3 > 74

The number of producers and trainers in a month
must equal the number of producers, trainers, and
apprentices in the previous month:
(4) P1 - P2 + T1 - T2 = 0
(5) P2 - P3 + T2 + A2 = 0
The number of apprentices in a month must equal
the number of recruits in the previous month:
(6) A2 - R1 = 0
(7) A3 - R2 = 0

Each trainer can train two recruits:
(8) 2T1 - R1 > 0
(9) 2T2 - R2 > 0
In April there are 100 employees that can be
producers or trainers:
(10) P1 + T1 = 100
At the end of June, there are to be at least 140
employees:
(11) P3 + A3 > 140
Non-negativity:
P1, T1, R1, P2, T2, A2, R2, P3, A3 > 0
P1 = 100, T1 = 0, R1 = 0
P2 = 80, T2 = 20, A2 = 0, R2 = 40
P3 = 100, A3 = 40
Total Wage Cost = $1,098,000
April May June July

Producers 100 80 100 140
Trainers 0 20 0 0
Apprentices 0 0 40 0
Recruits 0 40 0 0
Product Mix
Floataway Tours has $420,000 that can be used to

purchase new rental boats for hire during the summer. The
boats can be purchased from two different manufacturers.
Floataway Tours would like to purchase at least 50 boats
and would like to purchase the same number from Sleekboat as
from Racer to maintain goodwill. At the same time, Floataway
Tours wishes to have a total seating capacity of at least 200.
Product Mix
Formulate this problem as a linear program.
Maximum Expected
Boat Builder Cost Seating Daily Profit
Speedhawk Sleekboat $6000 3 $ 70
Silverbird Sleekboat $7000 5 $ 80
Catman Racer $5000 2 $ 50
Classy Racer $9000 6 $110
Product Mix
x1 = number of Speedhawks ordered
x2 = number of Silverbirds ordered
x3 = number of Catmans ordered
x4 = number of Classys ordered

Maximize total expected daily profit:
Max (Expected daily profit per unit)
x (Number of units)
Max 70x1 + 80x2 + 50x3 + 110x4
Product Mix
• Define the constraints
Spend no more than $420,000:
(1) 6000x1 + 7000x2 + 5000x3 + 9000x4 < 420,000
Purchase at least 50 boats:

(2) x1 + x2 + x3 + x4 > 50
Number of boats from Sleekboat must equal

number of boats from Racer:
(3) x1 + x2 = x3 + x4 or x1 + x2 - x3 - x4 = 0
Product Mix
• Define the constraints (continued)

Capacity at least 200:
(4) 3x1 + 5x2 + 2x3 + 6x4 > 200
Non-negativity of variables:
xi > 0, for i = 1, 2, 3, 4
Product Mix
• Computer Output

x1 28.000 0.000
x2 0.000 2.000
x3 0.000 12.000
x4 28.000 0.000
Constraint Slack/Surplus Shadow Value
1 0.000 0.012
2 6.000 0.000
3 0.000 -2.000
4 52.000 0.000
Product Mix
• Solution Summary
• Purchase 28 Speedhawks from Sleekboat.
• Purchase 28 Classy’s from Racer.
• Total expected daily profit is $5,040.00.
• The minimum number of boats was exceeded by 6 (surplus
for constraint #2).
• The minimum seating capacity was exceeded by 52 (surplus
for constraint #4).
Blending Problem
Ferdinand Feed Company receives four raw

grains from which it blends its dry pet food. The pet
food advertises that each 8-ounce packet meets the
minimum daily requirements for vitamin C, protein
and iron. The cost of each raw grain as well as the
vitamin C, protein, and iron units per pound of each
grain are summarized on the next slide.
Blending Problem
Vitamin C Protein Iron

Grain Units/lb Units/lb Units/lb Cost/lb
1 9 12 0 .75
2 16 10 14 .90
3 8 10 15 .80
4 10 8 7 .70
Ferdinand is interested in producing the 8-ounce

mixture at minimum cost while meeting the minimum
daily requirements of 6 units of vitamin C, 5 units of
protein, and 5 units of iron.
Blending Problem
 Define the decision variables
xj = the pounds of grain j (j = 1,2,3,4)

used in the 8-ounce mixture
 Define the objective function
Minimize the total cost for an 8-ounce mixture:

MIN .75x1 + .90x2 + .80x3 + .70x4
Blending Problem
 Define the constraints

Total weight of the mix is 8-ounces (.5 pounds):
(1) x1 + x2 + x3 + x4 = .5
Total amount of Vitamin C in the mix is at least 6 units:
(2) 9x1 + 16x2 + 8x3 + 10x4 > 6
Total amount of protein in the mix is at least 5 units:
(3) 12x1 + 10x2 + 10x3 + 8x4 > 5
Total amount of iron in the mix is at least 5 units:
(4) 14x2 + 15x3 + 7x4 > 5
Non-negativity of variables: xj > 0 for all j
Blending Problem
 Computer Output

X1 0.099 0.000
X2 0.213 0.000
X3 0.088 0.000
X4 0.099 0.000
Thus, the optimal blend is about .10 lb. of grain 1, .21 lb.
of grain 2, .09 lb. of grain 3, and .10 lb. of grain 4. The
mixture costs Frederick’s 40.6 cents.
Advanced Optimization Applications
• Data Envelopment Analysis

• Revenue Management
• Portfolio Models and Asset Allocation
Data Envelopment Analysis
• Data envelopment analysis (DEA) is an LP application
used to determine the relative operating efficiency of
units with the same goals and objectives.
• DEA creates a fictitious composite unit made up of an
optimal weighted average (W1, W2,…) of existing units.
• An individual unit, k, can be compared by determining E,
the fraction of unit k’s input resources required by the
optimal composite unit.
• If E < 1, unit k is less efficient than the composite unit
and be deemed relatively inefficient.
• If E = 1, there is no evidence that unit k is inefficient, but
one cannot conclude that k is absolutely efficient.
Data Envelopment
• The DEA Model Analysis
Min E
s.t. Weighted outputs > Unit k’s output
(for each measured output)
Weighted inputs < E [Unit k’s input]
(for each measured input)
Sum of weights = 1
E, weights > 0
The Langley County School District is trying to
determine the relative efficiency of its three high
schools. In particular, it wants to evaluate Roosevelt
High.
The district is evaluating performances on SAT
scores, the number of seniors finishing high school,
and the number of students who enter college as a
function of the number of teachers teaching senior
classes, the prorated budget for senior instruction,
and the number of students in the senior class.
Data Envelopment
• Input Analysis
Roosevelt Lincoln
Washington
Senior Faculty 37 25 23
Budget ($100,000's) 6.4 5.0 4.7
Senior Enrollments 850 700 600
Data Envelopment
• Output Analysis
Roosevelt Lincoln Washington
Average SAT Score 800 830 900
High School Graduates 450 500 400
College Admissions 140 250 370
E = Fraction of Roosevelt's input resources required

by the composite high school
w1 = Weight applied to Roosevelt's input/output
resources by the composite high school
w2 = Weight applied to Lincoln’s input/output
w3 = Weight applied to Washington's input/output
Minimize the fraction of Roosevelt High School's input

resources required by the composite high school:
Min E
Data •Envelopment
Define the ConstraintsAnalysis
Sum of the Weights is 1:
(1) w1 + w2 + w3 = 1
Output Constraints:
Since w1 = 1 is possible, each output of the composite
school must be at least as great as that of Roosevelt:
(2) 800w1 + 830w2 + 900w3 > 800 (SAT Scores)
(3) 450w1 + 500w2 + 400w3 > 450 (Graduates)
(4) 140w1 + 250w2 + 370w3 > 140 (College
Admissions)
Input Constraints:
The input resources available to the composite
school is a fractional multiple, E, of the resources
available to Roosevelt. Since the composite high school
cannot use more input than that available to it, the input
constraints are:
(5) 37w1 + 25w2 + 23w3 < 37E (Faculty)
(6) 6.4w1 + 5.0w2 + 4.7w3 < 6.4E (Budget)
(7) 850w1 + 700w2 + 600w3 < 850E (Seniors)
Nonnegativity of variables:
E, w1, w2, w3 > 0
Data Envelopment
• Computer Solution
Analysis
E 0.765 0.000
W1 0.000 0.235
W2 0.500 0.000
W3 0.500 0.000
Data Envelopment
• Conclusion
Analysis
The output shows that the composite school is
made up of equal weights of Lincoln and
Washington. Roosevelt is 76.5% efficient compared
to this composite school when measured by college
admissions (because of the 0 slack on this constraint
#4).
It is less than 76.5% efficient when using
measures of SAT scores and high school graduates
(there is positive slack in constraints 2 and 3.)
Revenue Management
 Another LP application is revenue management.

 Revenue management involves managing the short-
term demand for a fixed perishable inventory in order
to maximize revenue potential.
 The methodology was first used to determine how
many airline seats to sell at an early-reservation
discount fare and many to sell at a full fare.
 Application areas now include hotels, apartment
rentals, car rentals, cruise lines, and golf courses.
Revenue Management
LeapFrog Airways provides passenger service for

Indianapolis, Baltimore, Memphis, Austin, and Tampa.
LeapFrog has two WB828 airplanes, one based in
Indianapolis and the other in Baltimore.
Each morning the Indianapolis based plane flies to
Austin with a stopover in Memphis. The Baltimore based
plane flies to Tampa with a stopover in Memphis. Both
planes have a coach section with a 120-seat capacity.
Revenue Management
LeapFrog uses two fare classes: a discount fare D

class and a full fare F class. Leapfrog’s products, each
referred to as an origin destination itinerary fare (ODIF),
are listed on the next slide with their fares and
forecasted demand.
LeapFrog wants to determine how many seats it
should allocate to each ODIF.
Revenue Management
Fare ODIF
ODIF Origin Destination Class Code Fare Demand
1 Indianapolis Memphis D IMD 175 44
2 Indianapolis Austin D IAD 275 25
3 Indianapolis Tampa D ITD 285 40
4 Indianapolis Memphis F IMF 395 15
5 Indianapolis Austin F IAF 425 10
6 Indianapolis Tampa F ITF 475 8
7 Baltimore Memphis D BMD 185 26
8 Baltimore Austin D BAD 315 50
9 Baltimore Tampa D BTD 290 42
10 Baltimore Memphis F BMF 385 12
11 Baltimore Austin F BAF 525 16
12 Baltimore Tampa F BTF 490 9
13 Memphis Austin D MAD 190 58
14 Memphis Tampa Austin D MTD 180 48
15 Memphis Tampa F MAF 310 14
16 Memphis F MTF 295 11
Revenue Management

There are 16 variables, one for each ODIF:
IMD = number of seats allocated to Indianapolis-Memphis-

Discount class
IAD = number of seats allocated to Indianapolis-Austin-
Discount class
ITD = number of seats allocated to Indianapolis-Tampa-
Discount class
IMF = number of seats allocated to Indianapolis-Memphis-
Full Fare class
IAF = number of seats allocated to Indianapolis-Austin-Full
Fare class
Revenue Management
 Define the Decision Variables (continued)

ITF = number of seats allocated to Indianapolis-Tampa-
Full Fare class
BMD = number of seats allocated to Baltimore-Memphis-
Discount class
BAD = number of seats allocated to Baltimore-Austin-
Discount class
BTD = number of seats allocated to Baltimore-Tampa-
Discount class
BMF = number of seats allocated to Baltimore-Memphis-
Full Fare class
BAF = number of seats allocated to Baltimore-Austin-
Full Fare class
Revenue Management
 Define the Decision Variables (continued)

BTF = number of seats allocated to Baltimore-Tampa-
Full Fare class
MAD = number of seats allocated to Memphis-Austin-
Discount class
MTD = number of seats allocated to Memphis-Tampa-
Discount class
MAF = number of seats allocated to Memphis-Austin-
Full Fare class
MTF = number of seats allocated to Memphis-Tampa-
Full Fare class
Revenue Management

Maximize total revenue:
Max (fare per seat for each ODIF)

x (number of seats allocated to the ODIF)
Max 175IMD + 275IAD + 285ITD + 395IMF

+ 425IAF + 475ITF + 185BMD + 315BAD
+ 290BTD + 385BMF + 525BAF + 490BTF
+ 190MAD + 180MTD + 310MAF + 295MTF
Revenue Management

There are 4 capacity constraints, one for each flight leg:
Indianapolis-Memphis leg
(1) IMD + IAD + ITD + IMF + IAF + ITF < 120
Baltimore-Memphis leg
(2) BMD + BAD + BTD + BMF + BAF + BTF < 120
Memphis-Austin leg
(3) IAD + IAF + BAD + BAF + MAD + MAF < 120
Memphis-Tampa leg
(4) ITD + ITF + BTD + BTF + MTD + MTF < 120
Revenue Management

There are 16 demand constraints, one for each ODIF:
(5) IMD < 44 (11) BMD < 26 (17) MAD < 5
(6) IAD < 25 (12) BAD < 50 (18) MTD < 48
(7) ITD < 40 (13) BTD < 42 (19) MAF < 14
(8) IMF < 15 (14) BMF < 12 (20) MTF < 11
(9) IAF < 10 (15) BAF < 16
(10) ITF < 8 (16) BTF < 9
Revenue Management

IMD 44.000 0.000
IAD 3.000 0.000
ITD 40.000 0.000
IMF 15.000 0.000
IAF 10.000 0.000
ITF 8.000 0.000
BMD 26.000 0.000
BAD 50.000 0.000
Portfolio Models and Asset Allocation
 Asset allocation involves determining how to allocate

investment funds across a variety of asset classes
such as stocks, bonds, mutual funds, real estate.
 Portfolio models are used to determine percentage of
funds that should be made in each asset class.
 The goal is to create a portfolio that provides the best
balance between risk and return.
Portfolio Model
John Sweeney is an investment advisor who is

attempting to construct an "optimal portfolio" for a
client who has $400,000 cash to invest. There are ten
different investments, falling into four broad categories
that John and his client have identified as potential
candidate for this portfolio.
The investments and their important characteristics
are listed in the table on the next slide. Note that
Unidyde Corp. under Equities and Unidyde Corp. under
Debt are two separate investments, whereas First
General REIT is a single investment that is considered
both an equities and a real estate investment.
Portfolio Model
Exp. Annual
After Tax Liquidity Risk
Category Investment Return Factor Factor
Equities Unidyde Corp. 15.0% 100 60
(Stocks) CC’s Restaurants 17.0% 100 70
First General REIT 17.5% 100 75
Debt Metropolis Electric 11.8% 95 20
(Bonds) Unidyde Corp. 12.2% 92 30
Lewisville Transit 12.0% 79 22
Real Estate Realty Partners 22.0% 0 50
First General REIT ( --- See above --- )
Money T-Bill Account 9.6% 80 0
Money Mkt. Fund 10.5% 100 10
Saver's Certificate 12.6% 0 0
Portfolio Model
Formulate a linear programming problem to

accomplish John's objective as an investment advisor
which is to construct a portfolio that maximizes his
client's total expected after-tax return over the next year,
subject to the limitations placed upon him by the client
for the portfolio. (Limitations listed on next two slides.)
Portfolio Model
Portfolio Limitations
1. The weighted average liquidity factor for the portfolio
must to be at least 65.
2. The weighted average risk factor for the portfolio must
be no greater than 55.
3. No more than $60,000 is to be invested in Unidyde
stocks or bonds.
4. No more than 40% of the investment can be in any one
category except the money category.
5. No more than 20% of the total investment can be in
any one investment except the money market fund.
continued
Portfolio Model
Portfolio Limitations (continued)

6. At least $1,000 must be invested in the Money Market
fund.
7. The maximum investment in Saver's Certificates is
$15,000.
8. The minimum investment desired for debt is $90,000.
9. At least $10,000 must be placed in a T-Bill account.
Portfolio Model

X1 = $ amount invested in Unidyde Corp. (Equities)
X2 = $ amount invested in CC’s Restaurants
X3 = $ amount invested in First General REIT
X4 = $ amount invested in Metropolis Electric
X5 = $ amount invested in Unidyde Corp. (Debt)
X6 = $ amount invested in Lewisville Transit
X7 = $ amount invested in Realty Partners
X8 = $ amount invested in T-Bill Account
X9 = $ amount invested in Money Mkt. Fund
X10 = $ amount invested in Saver's Certificate
Portfolio Model
Maximize the total expected after-tax return over the

next year:
Max .15X1 + .17X2 + .175X3 + .118X4 + .122X5
+ .12X6 + .22X7 + .096X8 + .105X9 + .126X10
Portfolio Model

Total funds invested must not exceed $400,000:
(1) X1 + X2 + X3 + X4 + X5 + X6 + X7 + X8 + X9 + X10 = 400,000
Weighted average liquidity factor must to be at least 65:

(2) 100X1 + 100X2 + 100X3 + 95X4 + 92X5 + 79X6 + 80X8 + 100X9 > 65(X1 +
X2 + X3 + X4 + X5 + X6 + X7 + X8 + X9 + X10)
Weighted average risk factor must be no greater than 55:

(3) 60X1 + 70X2 + 75X3 + 20X4 + 30X5 + 22X6 + 50X7 + 10X9 < 55(X1 + X2
+ X3 + X4 + X5 + X6 + X7 + X8 + X9 + X10)
No more than $60,000 to be invested in Unidyde Corp:

(4) X1 + X5 < 60,000
Portfolio Model

No more than 40% of the $400,000 investment can be
in any one category except the money category:
(5) X1 + X2 + X3 < 160,000
(6) X4 + X5 + X6 < 160,000
(7) X3 + X7 < 160,000
No more than 20% of the $400,000 investment can be

in any one investment except the money market fund:
(8) X2 < 80,000 (12) X7 < 80,000
(9) X3 < 80,000 (13) X8 < 80,000
(10) X4 < 80,000 (14) X10 < 80,000
(11) X6 < 80,000
Portfolio Model

At least $1,000 must be invested in the Money Market fund:
(15) X9 > 1,000
The maximum investment in Saver's Certificates is $15,000:
(16) X10 < 15,000
The minimum investment the Debt category is $90,000:
(17) X4 + X5 + X6 > 90,000
At least $10,000 must be placed in a T-Bill account:
(18) X8 > 10,000
Non-negativity of variables:
Xj > 0 j = 1, . . . , 10
Portfolio Model
Total Expected After-Tax Return = $64,355

X1 = $0 invested in Unidyde Corp. (Equities)
X2 = $80,000 invested in CC’s Restaurants
X3 = $80,000 invested in First General REIT
X4 = $0 invested in Metropolis Electric
X5 = $60,000 invested in Unidyde Corp. (Debt)
X6 = $74,000 invested in Lewisville Transit
X7 = $80,000 invested in Realty Partners
X8 = $10,000 invested in T-Bill Account
X9 = $1,000 invested in Money Mkt. Fund
X10 = $15,000 invested in Saver's Certificate
Conservative Portfolio
A portfolio manager has been asked to develop a

portfolio for the firm’s conservative clients who express a
strong aversion to risk. The manager’s task is to
determine the proportion of the portfolio to invest in each
of six mutual funds so that the portfolio provides the best
return possible with a minimum risk.
The annual return (%) for five 1-year periods for the
six mutual funds are shown on the next slide. The
portfolio manager thinks that the returns for the five years
shown in the table are scenarios that can be used to
represent the possibilities for the next year.
Planning Scenarios
Mutual Fund Year 1 Year 2 Year 3 Year 4 Year 5
Foreign Stock 10.06 13.12 13.47 45.42 -21.93
Intermediate-Term Bond 17.64 3.25 7.51 -1.33 7.36
Large-Cap Growth 32.41 18.71 33.28 41.46 -23.26
Large-Cap Value 32.36 20.61 12.93 7.06 -5.37
Small-Cap Growth 33.44 19.40 3.85 58.68 -9.02
Small-Cap Value 24.56 25.32 -6.70 5.43 17.31
S&P 500 Return 25.00 20.00 8.00 30.00 -10.00

FS = proportion invested in foreign stock mutual fund
IB = proportion invested in intermediate-term bond fund
LG = proportion invested in large-cap growth fund
LV = proportion invested in large-cap value fund
SG = proportion invested in small-cap growth fund
SV = proportion invested in small-cap value fund
 Constraints
Minimum returns for five scenarios:
– M + 10.06FS + 17.64IB + 32.41LG + 32.36LV + 33.44SG + 24.56SV ≥ 0
– M + 13.12FS + 3.25IB + 18.71LG + 20.61LV + 19.40SG + 25.32SV ≥ 0
– M + 13.47FS + 7.51IB + 33.28LG + 12.93LV + 3.85SG – 6.70SV ≥ 0
– M + 45.42FS – 1.33IB + 41.46LG + 7.06LV + 58.68SG + 5.43SV ≥ 0
– M – 21.93FS + 7.36IB – 23.26LG – 5.37LV – 9.02SG + 17.31SV ≥ 0
Sum of the proportions must equal 1:
FS + IB + LG + LV + SG + SV = 1
Non-negativity
M, FS, IB, LG, LV, SG, SV ≥ 0
 Objective Function
Maximize the minimum return for the portfolio:
Max M
The optimal value of the objective function is 6.445.
(The optimal portfolio will earn 6.445% in the worst-
case scenario.)
55.4% of the portfolio should be invested in the
intermediate-term bond fund.
large-cap growth fund.
small-cap value fund.
Moderate Risk Portfolio
A portfolio manager would like to construct a portfolio

for clients who are willing to accept a moderate amount
of risk in order to attempt to achieve better returns.
Suppose that clients in this risk category are willing to
accept some risk, but do not want the annual return for
the portfolio to drop below 2%.
The annual return (%) for five 1-year periods for the
six mutual funds are shown on the next slide. The
portfolio manager thinks that the returns for the five years
shown in the table are scenarios that can be used to
represent the possibilities for the next year.
 Constraints
Minimum returns for five scenarios:
– M + 10.06FS + 17.64IB + 32.41LG + 32.36LV + 33.44SG + 24.56SV ≥ 2
– M + 13.12FS + 3.25IB + 18.71LG + 20.61LV + 19.40SG + 25.32SV ≥ 2
– M + 13.47FS + 7.51IB + 33.28LG + 12.93LV + 3.85SG – 6.70SV ≥ 2
– M + 45.42FS – 1.33IB + 41.46LG + 7.06LV + 58.68SG + 5.43SV ≥ 2
– M – 21.93FS + 7.36IB – 23.26LG – 5.37LV – 9.02SG + 17.31SV ≥ 2
Sum of the proportions must equal 1:
FS + IB + LG + LV + SG + SV = 1
Non-negativity
M, FS, IB, LG, LV, SG, SV ≥ 0
 Objective Function
The coefficient of FS in the objective function is given by:
0.2(10.06) + 0.2(13.12) + 0.2(13.47)
+ 0.2(45.42) + 0.2( – 21.93) + 12.03
The coefficient of IB is given by:

0.2(17.64) + 0.2(3.25) + 0.2(7.51)
+ 0.2( – 1.33) + 0.2(7.36) + 6.89
… and so on. Thus, the objective function is:

Maximize the minimum return for the portfolio:
Max 12.03FS + 6.89IB + 20.52LG
+ 13.52LV + 21.27SG + 13.18SV
Invest 10.8% of the portfolio in a large-cap growth
mutual fund.
Invest 41.5% in a small-cap growth mutual fund.
Invest 47.7% in a small-cap value mutual fund.
This allocation provides a maximum expected return
of 17.33%.
The portfolio return will only be 2% if scenarios 3 or 5
occur (constraints 3 and 5 are binding).
The portfolio return will be 29.093% if scenario 1
occurs, 22.149% if scenario 2 occurs, and 31.417%
if scenario 4 occurs.

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CHAPTER 1: Introduction

 The body of knowledge involving quantitative

 7 Steps of Problem Solving

Structuring the Problem Analyzing the Problem

Define Identify Determine Identify Choose

• Problems in which the objective is to find the best solution

 Analysis Phase of Decision-Making Process

 Analysis Phase of Decision-Making Process

 Potential Reasons for a Quantitative Analysis

 Quantitative Analysis Process

 Models are representations of real objects or situations

 Generally, experimenting with models (compared to

 Objective Function – a mathematical expression that

 Constraints – a set of restrictions or limitations, such as

 Uncontrollable Inputs – environmental factors that are

 Decision Variables – controllable inputs; decision

 A complete mathematical model for our simple production

Maximize 10x (objective function)

[The second constraint reflects the fact that it is not

 Deterministic Model – if all uncontrollable inputs to the

 Cost/benefit considerations must be made in

 Data preparation is not a trivial step, due to the time

 The analyst attempts to identify the alternative (the set

 Trial-and-Error Solution for Production Problem

 A variety of software packages are available for

 Often, goodness/accuracy of a model cannot be

 A managerial report, based on the results of the

Iron Works, Inc. manufactures two products made

 Mathematical Model (continued)

 Mathematical Model (continued)

 Mathematical Model Summary

Max p1x1 + p2x2 Objective Function

Suppose b = 2000, a1 = 2, a2 = 3, m = 60, u = 720,

Rewrite the model with these specific values for the

Max 100x1 + 200x2

Ponderosa Development Corporation (PDC) is

Ponderosa leases office space for $2,000 per

Employee Monthly Salary

1200 Total Revenue =

 A spreadsheet software package such as Microsoft

 Spreadsheet Solution: Goal Seek Approach

 Spreadsheet Solution: Goal Seek Approach

Completed Goal Seek Dialog Box

Spreadsheet Solution: Goal Seek Approach

 Linear Programming  Simulation

 Linear programming is a problem-solving approach

 Project scheduling: PERT (Program Evaluation and

 Waiting line (or queuing) models help managers

 Goal programming is a technique for solving multi-

• Linear Programming Problem

 Linear programming - the use of the word “programming” here

x1 > 0 and x2 > 0 Non-negativity

 Selected Objective Function Lines

• Prepare a graph of the feasible solutions for each of the constraints.

 Example 1 in Standard Form

Max 5x1 + 7x2 + 0s1 + 0s2 + 0s3

s1 , s2 , and s3 are slack variables

• In the next chapter we will discuss how an optimal solution is

• Interpretation of Computer Output

We see from the previous slide that:

Objective Function Value = 46

Min 5x1 + 2x2