Contents Page

Linear Programming
Product Mix at Manvi Motors 2–3

Probem Set 1 4 – 10
Product Mix Problems
Blending Type Problems
Petroleum Blending
Assembly Type Problems
Transportation Type Problems
Production Planning at National Steel Corporation
Financial Planning
Scheduling Decisions at Call-Me
Trim Loss Type Problems
Revenue Management at Leisure Air

Integer Programming 11 – 25

Advertisement Decisions
Warehouse Location
Solving Integer Programming Poblems
Telstar Corporation
Capital Budgeting at Agrico Inc.
The Lockbox Problem
Electricity Generation at a Utility Company
Building Fire Stations in JP Nagar
Orion’s Contracts Problem
Deccan Copier Company
The Hanover Plant

NonLinear Programming 22 - 25

Vijayanagara Communications
The Safety-Trans Company
Larson & Larson Co.
A Portfolio Selection Problem

Goal Programming 26 - 30

Nicolo Investments
Suncoast Office Supplies
The Maximum Impact Advertising Agency

1
Promotion of Women’s Professional Football League

2
 LINEAR PROGRAMMING (LP)

PRODUCT MIX AT MANVI MOTORS

Manvi Motors of Malaysia produces cars under an agreement with Suzuki of Japan and
trucks under an agreement with General Motors of the USA. The company was
established in 1972 and now employs approximately 1000 people and can generally
produce an average of 25 cars and trucks per day.

Capital investment constraints have limited the nature of Manvi’s manufacturing

facilities. Consequently, it is not able to manufacture many of the items required for the
assembly of cars and trucks. These items are imported from Suzuki or GM. However,
both Suzuki and GM must limit the quantities of parts shipped to Manvi because of
constraints on their own capacities. GM has guaranteed to provide parts sufficient for up
to 200 trucks per month and Suzuki has guaranteed to provide parts sufficient for up to
500 cars per month.

GM has just announced several price increases, which have raised the direct
manufacturing cost (which includes all labor and material costs) of a Manvi truck from
$800 to $1000 converted to US dollars.

Suzuki has not raised prices on purchased parts, so the direct manufacturing cost of a
Manvi car has remained stable at $800.

The Ministry of Economics controls the selling price of Manvi’s output: cars sell at
$4300 and trucks sell at $6000.

Manvi’s vehicles have a reputation as well-made and dependable products, suitable for
the Malaysian market. Demand is so great that the company can sell all the cars and
trucks it can produce, and the company expects no change in this situation. Manvi
presently has unfilled orders (already paid for) for 150 cars and 100 trucks.

The manufacturing process for both cars and trucks consists essentially of two
departments, which limits the number of vehicles that can be produced during any month.
These departments are fabrication and assembly. An agreement with the Ministry of
Labor has set the minimum labor usage combined in both departments to be at 14,000
worker-hours per month.

The fabrication department is organized as a job-shop, which produces hundreds of

different parts on 45 machine tools. A recent analysis has shown that this shop can plan
on no more than 12,000 worker-hours of capacity in the coming month. Each car
manufactured requires 20 worker-hours of fabrication; each truck requires 40 worker-
hours.

The assembly department is set up as a conventional assembly line. 10,000 worker-hours

of capacity will be available in the assembly department in the coming month. Each car
requires 25 worker-hours of assembly; each truck requires only 10 worker-hours.

3
The fixed overhead costs are estimated at $10,000 in the fabrication department and
$12,000 in the assembly department per month.

At this morning’s management meeting, Farah Hormozi, the production manager

expressed considerable concern over GM’s price increases. The next month’s production
schedule was to be announced tomorrow, and she asked Sunil Ray, the managing
director, whether the cost should affect the currently planned production of 200 cars and
200 trucks. Mr. Ray replied “I have never been sure if our current plan is the best we can
have. If it is, I think we will just have to absorb the price increase until the Ministry of
Economics allows us to increase our selling price. In that case we will go ahead with the
previous plan – 200 cars and 200 trucks”.

1. Find the best product mix for Manvi Motors under the new cost structure.
2. Was the current policy of producing 200 cars and 200 trucks the best for Manvi
Motors under the old cost structure?
3. If an additional worker-hour in any of the departments will cost the same amount,
in which department would you recommend making this additional hour
available?
4. If 200 additional worker hours were available in the fabrication department for
$3000, should Farah pay this amount and get the additional hours? What would
the profit be if the worker-hour capacity in the fabrication department is changed
to 13000?
5. What are 1000 additional hours in the assembly department worth? What about
1100 hours?
6. If the net profit from a truck is decreased by $500 will the optimal solution
change? Will the total profit change? If yes, by how much?
7. An error in record keeping indicates that the number of back-ordered trucks is
only 85. Will this change the best product mix? Explain, and find the new
product mix if it is affected.
8. Farah has received word that the Minister of Labor will relax your labor
restriction by 2000 worker-hours. How will this change your decision regarding
the best product mix? Explain.

9. Manvi Motors is considering introducing a new Manvi van. The new model
requires 30 hours in the fabrication department and 20 hours in the assembly
department. Each Manvi van will give a net profit of $4000.

a) Should any vans be produced?

b) How much would it cost in terms of profit if, for some reason the management
insisted that at least one van be made?
c) How high would the profit from each van have to be before it became attractive to
produce any?

4
 PROBLEM SET 1
LP FORMULATIONS AND APPLICATIONS

I. PRODUCT MIX PROBLEMS

Consider the monthly production of two types of printers:
LQ Printers (LQP)
DM Printers (DMP)
All printers produced can be sold but the resources are limited. The profit from each is:
Rs. 1000 per unit of LQP
Rs. 500 per unit of DMP
Resource requirements and availability are as follows:

RESOURCE LQP DMP AVAILABILITY

LABOUR (HRS) 1 1 10,000
CLEAN ROOM (HRS) 1 2 16,000
TESTING ROOM (HRS) 3 1 24,000

What should the product mix be?

II. BLENDING TYPE PROBLEMS

An alloy is made of lead, zinc and tin. The required composition is 35% lead, 30% zinc
and 35% tin. This alloy is made by mixing alloys having different lead, zinc and tin
compositions. The alloys available in the market, their compositions and their cost per kg.
are as given below:

ALLOY I II III IV V VI VII

% OF
LEAD 30 40 20 35 40 25 30
ZINC 30 20 30 30 35 45 35
TIN 40 40 50 35 25 30 35

COST/KG 38 43 35 48 40 45 48

Assume that there are no blending losses. Find the optimal blend.

III. PETROLEUM BLENDING

Two types of crudes are blended to form premium and regular type of petrol. This can be
done by 2 processes. The output depends on the number of times each process is run.

The requirements and outputs for the two processes for each run are as given below:

5
 REQUIREMENT / RUN OUTPUT / RUN
PROCESS CRUDE A CRUDE B PREMIUM REGULAR

I 1 3 5 2
II 4 2 3 8
AVAILABLE 1000 1500
MINIMUM DEMAND 800 700
PROFIT / UNIT 3000 2500

What should be done to maximize profits?

IV. ASSEMBLY TYPE PROBLEMS

An assembly requires 4 units of part A, 6 units of part B, and 3 units of part C.
Three different types of machines can be used to produce these components.
Two raw materials RM1 and RM2 are required for the production and their consumption
and availability is given in the table below.

The parts A, B and C are simultaneously produced on each of the 3 machines and the
outputs are as given below:

INPUT PER RUN OUTPUT PER RUN

RM1 RM2 A B C
MACHINE
1 7 5 2 4 2
2 4 8 1 3 4
3 2 7 3 1 2
AVAILABLE 1000 1500

What should be done to get the maximum number of assemblies?

V. TRANSPORTATION TYPE PROBLEMS

Given below is availability of goods at three warehouses and requirements of the goods at
four demand points. The cost of transporting one unit from each warehouse to each
demand point is known and is given in the table below.

WARE- DEMAND POINT AVAILABI-

1 2 3 4
HOUSE LITY
1 2 1.5 1 2.5 10,000
2 1 2.5 1.5 1 6,000

6
 3 3 1 2.5 2 4,000
REQUIRED 7,000 4,000 6,000 3,000 20,000

How much should be transported from each warehouse to each demand point?

VI. PRODUCTION PLANNING AT NATIONAL STEEL CORPORATION

National Steel Corporation (NSC) produces special purpose steel used in the aircraft and
aerospace industries. The Sales Department of NSC has received orders of 2400, 2200,
2700 and 2500 tons of steel for each of the next 4 months. NSC can meet these demands
by producing the steel, by drawing from its inventory, or by using any combination of the
two alternatives.
The production costs per ton of steel during each of the next 4 months are projected to be
$7400, $7500, $7600 and $7650. Because costs are rising each month – due to
inflationary pressures – NSC might be better off producing more steel than it needs in a
given month and storing the excess. Production capacity though cannot exceed 4000 tons
in any single month. The monthly production is finished at the end of the month at which
time the demand is met. Any remaining steel is then stored in inventory at a cost of $120
per ton for each month it remains there. These data are summarized in Table 1.
If the production level is increased from one month to the next, then the company incurs
a cost of $50 per ton of increased production to cover the additional labor and/or
overtime. Each ton of decreased production incurs a cost of $30 to cover the benefits of
unused employees.

TABLE 1. Data for the Production-Planning Problem of NSC

MONTH
________________________________________________________________________
1 2 3 4
________________________________________________________________________

Demand (tons) 2400 2200 2700 2500

Prod. Costs ($/ton) 7400 7500 7600 7650
Inventory Cost
($/ton/month) 120 120 120 120
________________________________________________________________________

7
The production level during the previous month was 1800 tons, and the beginning
inventory is 1000 tons. Inventory at the end of the fourth month must be at least 1500
tons to cover anticipated demand. Develop a production plan for NSC that minimizes the
total costs over the next 4 months.

VII. FINANCIAL PLANNING

Tiles R Us is a large manufacturer of all varieties of flooring tiles. The company’s cash
receivables and payables for the coming 4 periods are as given in the table below. The
payables need not be paid at once and may be paid out of future funds. In particular,
suppose that a 1-period delay in meeting payables means that the company must pay Rs.
1.02 for each Re. 1 owed, and a 2-period delay requires payment of Rs. 1.04 for each
rupee owed.

Period1 Period2 Period 3 Period 4

Cash receipts (in lakhs 80 90 70 80

of Rs)
Accounts payable (lakhs 60 70 50 50
of rupees)

Beginning cash on hand is Rs. 20 lakhs, and cash receivables feed into cash on hand.
Cash carried forward from period to period may be allocated in any desired split between
a bank account that pays 1% rate of interest per period and bonds that pay 3% rate of
interest every two periods. However, the bonds can only be purchased in Periods 1 and
2, and cannot be cashed in until two periods after purchase.

Mr. Seshan, the owner of Tiles R Us would like to maximize cash on hand at the end of
the planning horizon (the amount carried beyond Period 4 after making the payments).

a) Define the variables required to help him in his decision.

b) Formulate this decision problem be modeled as a linear programming problem?

c) Now suppose that the penalty on payments delayed for 2 periods depends on the
amount delayed. The company must pay Rs. 1.04 for each Re. 1 owed up to a maximum
10% amount delayed for 2 periods and Rs. 1.05 thereafter. Define any new variables
needed to incorporate this information in your model of part b). Give an appropriate
formulation that will help Mr. Seshan in his decision under this new penalty structure.

VIII. SCHEDULING DECISIONS AT CALL-ME

8
Call-Me Inc. has a major call center at Chennai that specializes in answering medical
billing queries for a few health insurance companies from around the world. This
company has available trained professionals that can answer questions in English,
French, German and Japanese, and they operate 24 hours a day, 7 days a week.

They estimate the following minimal daily requirements for the trained professionals:

Time of Day Period Minimum Number of

(24-hour clock) Trained Professionals Required

2- 6 1 20
6-10 2 50
10-14 3 80
14-18 4 100
18-22 5 40
22- 2 6 30

Each professional works eight consecutive hours. All trained professionals are paid the
same for an eight hour stint. What must be the daily schedule so that the requirements
above are met?
Call-Me is considering the option of scheduling overtime hours using the same pool of
professionals that are working for them. The specific option they are considering is that a
professional who is not working in a given time period can give overtime and be paid one
and a half times the regular rate. For instance, if period 6 is not covered by a professional
during his/her regular schedule, then he/she is eligible to work overtime in this period. If
so, he/she will be paid 0.75x, if x is the regular pay for an 8 hour stint. Is it worthwhile
scheduling overtime hours? Why or Why not?

IX. TRIMLOSS TYPE PROBLEMS

When making paper, the deckle width determines the width of the paper roll produced.
Suppose, deckle width produced is 20 feet and the following requirement needs to be
met: roll of width 9' and 7,000' long
roll of width 7' and 12,000' long
roll of width 5' and 9,000' long
Any extra width and length is a waste. Assuming that the requirement can be fulfilled by
providing more than one roll of a type, how should the roll be cut (what patterns should
be used) such that the trim waste is minimized?

X. REVENUE MANAGEMENT AT LEISURE AIR

9
Leisure Air is a regional airline that provides service for Pittsburgh, Newark, Charlotte,
Myrtle Beach, and Orlando. It has two Boeing 737-400 airplanes, one based in Pittsburgh
and the other in Newark. Both airplanes have a coach section with a 132-seat capacity.
Each morning the Pittsburgh-based plane flies to Orlando with a stopover in Charlotte,
and the Newark-based plane flies to Myrtle Beach, also with a stopover in Charlotte. At
the end of the day, both planes return to their home bases. To keep the size of the
problem reasonable, we restrict our attention to the Pittsburgh-Charlotte, Charlotte-
Orlando, Newark-Charlotte, and Charlotte-Myrtle Beach flight legs for the morning
flights. The figure illustrates the logistics of the Leisure Air problem situation.
Leisure Air uses two fare classes: a discount-fare Q class and a full-fare Y class.
Reservations using the discount-fare Q class must be made 14 days in advance and must
include a Saturday night stay in the destination city. Reservations using the full-fare

Y class may be made anytime, with no penalty for changing the reservation at a later
date. To determine the itinerary and fare alternatives that Leisure Air can offer its
customers, we must consider not only the origin and the destination of each flight, but
also the fare class. For instance, possible products include Pittsburgh to Charlotte using
Q class, Newark to Orlando using Q class, Charlotte to Myrtle Beach using Y class, and
so on. Each product is referred to as an origin-destination-itinerary fare (ODIF). For
May 5, Leisure Air has established fares and developed forecasts of customer demand for
each of 16 ODIFs. These data are shown in Table.

Suppose that on April 4 a customer calls the Leisure Air reservation office and requests a
Q class seat on the May 5 flight from Pittsburgh to Myrtle Beach. Should Leisure Air
accept the reservation? The difficulty in making this decision is that even though Leisure
Air may have seats available, the company may not want to accept this reservation at the
Q class fare of $268, especially if it is possible to sell the same reservation later at the Y
class fare of $456. Thus, determining how many Q and Y class seats to make available
are important decisions that Leisure Air must make in order to operate its reservation
system.

10
 LOGISTICS OF THE LEISURE AIR PROBLEM

Pitsburg Newark
P N
Flight

Leg 1

Flight

Leg 2

Charlotte
C
Flight

Leg 4

Flight

Orlando Leg 3 Myrtle

O Beach
M

FARE AND DEMAND DATA FOR 16 LEISURE AIR ORIGIN-DESTINATION ITINERARY

FARES (ODIFs)

Fare ODIF Forecasted

ODIF Origin Destination Class Code Fare Demand
1 Pittsburgh Charlotte Q PCQ $178 33
2 Pittsburgh Myrtle Beach Q PMQ 268 44
3 Pittsburgh Orlando Q POQ 228 45
4 Pittsburgh Charlotte Y PCY 380 16
5 Pittsburgh Myrtle Beach Y PMY 456 6
6 Pittsburgh Orlando Y POY 560 11
7 Newark Charlotte Q NCQ 199 26
8 Newark Myrtle Beach Q NMQ 249 56
9 Newark Orlando Q NOQ 349 39
10 Newark Charlotte Y NCY 385 15
11 Newark Myrtle Beach Y NMY 444 7
12 Newark Orlando Y NOY 580 9
13 Charlotte Myrtle Beach Q CMQ 179 64
14 Charlotte Myrtle Beach Y CMY 380 8
15 Charlotte Orlando Q COQ 224 46
16 Charlotte Orlando Y COY 582 10

11
 INTEGER PROGRAMMING

Advertisement Decisions

The Big Bucks Placements Company wants to make a decision on which advertising
media to use. Its target is to reach 20,000 people at minimum advertising cost. The media
through which it may advertise are three different weekly magazines. Fixed Costs of
developing an advertisement for the three magazines are Rs. 15000, Rs. 20,000 and
Rs. 25000 respectively. Cost of advertising is given on the basis of column length of the
advertisement and is Rs. 200, Rs. 180 and Rs. 230 per column cm. respectively. The
number of people that can be reached by the three magazines depends on the length of the
advertisement and is as follows:
Magazine 1: 300*column length
Magazine 2: 250*column length
Magazine 3: 500*column length
Maximum length of the advertisement is to be restricted to 30cm.
Assuming independence of readership, determine the advertisement plan to attain the
targeted reach at minimum cost.

Warehouse Locations

A clothes manufacturer is trying to decide on the number and location of its warehouses
such that it can meet estimated demands at its retail outlets at minimum total cost. There
are M possible sites where the warehouses can be located. The associated costs and
capacities are given below along with the demands at the N retail outlets.

Possible Locations: 1 2 … M
Fixed Costs: F1 F2 … FM
Variable Cost/ Unit: V1 V2 … VM
Capacity: C1 C2 … CM
Demand Points: 1 2 … N
Demand: D1 D2 … DN

The cost of transportation from warehouse location i to demand point j is estimated to be

cij per unit. Where should the warehouses be located to meet the demand at minimum
total cost?

Solving Integer Programming Problems

Ex: Solve the following integer linear programming (ILP) problem:
Max 3x1 + 4x2
st 5x1 + 3x2  15
3x1 + 5x2  15
x1 and x2 are non-negative integers

12
 Telstar Corporation

To satisfy telecommunication needs for the next 20 years, Telstar Corporation estimates
that the number of circuits required between the United States and Germany, France,
Switzerland, and the United Kingdom will be as given in Table 1.

Two types of circuits may be created: cable and satellite. Two types of cable circuits
(TA7 and TA8) are available. The fixed cost of building each type of cable and the
circuit capacity of each type are as given in Table 2.

TA7 and TA8 cable go under seas from the United States to the English Channel. Thus,
it costs an additional amount to extend these circuits to other European countries. The
annual variable cost per circuit is given in Table 3.

TABLE 1
Country Required Circuits
France 20,000
Germany 60,000
Switzerland 16,000
United Kingdom 60,000

TABLE 2
Cable Type Fixed Operating Cost Capacity
($ Billion)
TA7 1.6 8,500
TA8 2.3 37,800

TABLE 3
Country Variable Cost per Circuit ($)
France 0
Germany 310
Switzerland 290
United Kingdom 0

To create and use a satellite circuit, Telstar must launch a satellite, and each country
using the satellite must have an earth station(s) to receive the signal. It costs $3 billion to
launch a satellite. Each launched satellite can handle up to 140,000 circuits. All earth
stations have a maximum capacity of 190 circuits and cost $6000 per year to operate.

Formulate an integer programming model to help determine how to supply the needed
circuits and minimize total cost incurred during the next 20 years.
Which variables should be taken as integers? Decide and solve using Solver. Compare
the results when all variables are taken to be integer

13
 CAPITAL BUDGETING AT AGRICO INC.

AGRICO INC. is a fairly large size firm that specializes in the manufacture and sale of
agriculture related heavy equipment. The board of directors of AGRICO INC. are faced
with a capital budgeting decision problem as summarized in Table 1 below. As shown in
the table, they have four investment alternatives to choose from. The dollar amounts
reported in this table are in thousands. Clearly, the board wishes to maximize the present
value of total return, while ensuring that the capital requirements are met with what is
available.

TABLE 1. AGRICO’S CAPITAL BUDGETING ALTERNATIVES

CAPITAL REQUIRED IN YEAR

BY ALTERNATIVE ($000s)

ALTERNATIVE PRESENT
VALUE OF
NET RETURN
($000s) 1 2 3 4 5
400 100 50 200 100 0
Expand Indian Plant
Expand Capacity in US 700 300 200 100 100 100

Build New Plant in 800 100 200 270 200 100

Chile
Build New Plant in US 1000 200 100 400 200 200
Capital Available Each 500 450 700 400 300
Year

ADDITIONAL CONSTRAINTS (Mutually Exclusive)

a) Choose exactly 2 projects

b) Choose no more than 3 projects

c) Cannot take project 4 unless project 3 is taken

d) Must take both 1 and 2 or neither

e) Can take #1 if either 3 or 4 is taken

f) Can take #1 only if both #3 and #4 are taken

14
 THE LOCKBOX PROBLEM

J. C. Nickles receives credit card payments from four regions of the country (West,
Midwest, East, and South). The average daily value of payments mailed by customers
from each region is as follows: the West, $70,000; the Midwest, $50,000; the East,
$60,000; the South $40,000. Nickles must decide where customers should mail their
payments. Since Nickles can earn 20% annual interest by investing these revenues, they
would like to receive payments as quickly as possible. Nickles is considering setting up
operations to process payments (often referred to as lockboxes) in four different cities:
Los Angeles, Chicago, New York, and Atlanta. The average number of days (from the
time payment is sent) until a check clears and Nickles can deposit the money depends on
the city to which the payment is mailed, as shown in Table 1. For example, if a check is
mailed from West to Atlanta, it would take an average of 8 days before Nickles could
earn interest on the check. The annual cost of running a lockbox in any city is $50,000.
Formulate an integer program that Nickles can use to minimize the sum of costs due to
lost interest and lockbox operations. Assume that each region must send all its money to a
single city and that there is no limit on the amount of money that each lockbox can
handle.

To
City 1 City 2 City 3 City 4
(Los Angeles) (Chicago) (New York) (Atlanta)

From
2 6 8 8
Region 1 West
6 2 5 5
Region 2 Midwest
8 5 2 5
Region 3 East
8 5 5 2
Region 4 South

15
 ELECTRICITY GENERATION AT A UTILITY COMPANY

A problem faced by an electrical utility company each day is that of deciding which
generators to start up and how much electricity to generate. The company in question has
three generators with the characteristics shown in the table below. There are two periods
in a day. The first period demand is 2900 megawatts. The second period requires 3900
megawatts. A generator started in the first period may be used in the second period
without incurring an additional start-up cost. All generators (e.g., A, B, and C) are turned
off at the end of each day.

FIXED START-UP COST PER PERIOD MAXIMUM

COST($) PER MEGAWATT($) CAPACITY IN

GENERATOR EACH PERIOD

A 3000 5 2100

B 2000 4 1800

C 1000 7 3000

16
 BUILDING FIRE STATIONS IN JP NAGAR

Supposing that for planning purposes, the JP Nagar area has been divided into six zones.
The city planners must now determine where to build fire stations. The city wants to
build the minimum number of fire stations needed to ensure that at least one fire station is
within 15 minutes (driving time) of each zone. The times (in minutes) required to drive
between the zones in JP Nagar are shown in the table below. Develop and integer
program that will tell the city planners how many fire stations should be built and where
should they be located.

To
Zone 1 Zone 2 Zone 3 Zone 4 Zone 5 Zone 6
From

Zone 1 0 10 20 30 30 20

Zone 2 10 0 25 35 20 10

Zone 3 20 25 0 15 30 20

Zone 4 30 35 15 0 15 25

Zone 5 30 20 30 15 0 14

Zone 6 20 10 20 25 14 0

17
 ORION’S CONTRACTS PROBLEM

Orion, a computer manufacturer plans to award contracts for the supply of 50,000 RAM
units. Three subcontractors have submitted bids. Of these, subcontractor 1 represents an
international firm and subcontractors 2 and 3 represent domestic firms. The
manufacturer also wants to ensure that the order must be placed with at least one
domestic firm.

Subcontractor 1 can supply any amount and offers the following discount structure:
Quantity Price (Rs/unit)
0 - 10,000 1000
10,001 - 20,000 800
20,001 - 30,000 600
30,001 - 40,000 500
 40,000 400

Subcontractor 2 will supply no more that 20,000 units at a unit price of Rs 800 per unit.
Subcontractor 3 will supply no less than 30,000 units at a unit price of Rs 680 per unit.

Can this problem be formulated as an LP or an ILP? Give the appropriate formulation.

18
 DECCAN COPIER COMPANY

The Deccan-Copier Company sells copying machines. A major factor in making a sale is
Indi-Copier’s quick service. Deccan-Copier sells copiers in six cities: Mangalore,
Hyderabad, Kochi, Chennai, Bangalore and Coimbatore. The annual sales of copiers
projected depend on whether a service centre is within 300 kilometers of a city (see Table
1). Each copier costs Rs 10,000 to produce and sells for Rs 20,000. The annual cost per
service centre is Rs. 1,600,000. Deccan must determine which of its markets to base a
service centre. Only Hyderabad, Chennai, Bangalore and Kochi are under consideration
as bases for service centres. The distance (in kilometers) between the cities is shown in
Table 2. Where must the service centers be opened?

TABLE 1.

Service Centre
Within 300 Sales
Kms?
Mang. Hyd. Kochi Chenn. Bang. Coimb.

Yes 40 100 50 100 90 45

No 20 75 30 45 70 30

TABLE 2. Inter-City Distances in Kms.

Hyd. Kochi Chenn. Bang.

Mang. 375 220 650 350

Hyd. 0 580 420 390

Kochi 580 0 680 370

Chenn. 420 680 0 295

Bang. 390 370 295 0

Coimb. 510 220 240 260

19
 THE HANOVER PLANT

New Hampshire Electric Company plans to build a steam generating plant in Hanover
capable of producing 2 million kilowatt hours of electrical energy per day. The major
equipment in the plant will consist of boilers, generators, and condensers. The sources of
supply for these pieces of equipment have been narrowed to 11 manufacturers. In
Exhibit 1 are presented data relative to the equipment offered by these suppliers
[suppliers A through K].

Exhibit 1
Manufacturer's Data

Steam Annual
[thousands of Electricity Initial Cost Operating Cost
cubic feet/ [thousands of [thousands of [thousands of
minute, cfm kwh/day] dollars] dollars]

Boilers: [capacity]
A 100 $50 $50
B 140 $75 $60
C 90 $60 $40
D 80 $50 $20

Generators: [requirements] [capacity]

E 70 500 $600 $60
F 120 650 $600 $75
G 150 $800 $75
H 100 800 $750 $90

Condensers: [capacity]
A 50 $25 $3
I 65 $17 $4
J 70 $20 $4
K 55 $13 $2

The data in Exhibit 1 are straightforward. For example, line 3 states that supplier C's
boiler has a capacity of 90,000 cubic feet per minute of steam, costs $60,000, and has an
expected annual operating cost of $40,000.

20
New Hampshire Electric wants the "best" system [combination of boilers, generators, and
condensers] which will meet the energy capacity of the plant [and other requirements at
least cost]. Requirements are given below.

REQUIREMENTS
A The total generator capacity must be at least 2 million kwh/day.

BOILERS GENERATORS CONDENSERS

Steam capacity, in cfm, Must have a capacity of Steam capacity, in cfm,

must be adequate for the at least 2,000,000 kwh/day must be adequate for the
generators served boilers served

B The steam requirements of the generators must be met by the combined capacities
of the boilers selected.

C The steam capacities of the set of condensers selected must be adequate to

accommodate the steam capacities of the boilers.

D Equipment of one supplier is interchangeable with that of another supplier except

in the case of supplier A. Note that supplier A produces both boilers and
condensers. The operating costs quoted for supplier A's boiler and condenser are
based on the assumption that each of A's boilers will be matched with two of A's
condensers, since they constitute a "matched set." If each and every one of the
A's boilers is not used with two of A's condensers then an added $10,000 annual
operating cost can be expected.

E Because of their size and shape it is impracticable to fit one of supplier F's
generators into the plant with one or more of supplier G's generators.

F Supplier K's condensers are of such construction that they must be used in pairs.

G Management has decided the initial capital outlay for the system should not
exceed $2.3 million.

21
New Hampshire Electric would like your team to propose a system for the Hanover plant
considering equipment costs, salvage values, operating costs, interest rates and system
output.
Exhibit 2
Salvage Values

Forecast salvage
value at the end of 30
years [thousands of
dollars]
Boilers:
A $5
B $10
C $2
D $1

Generators:
E $50
F $100
G $75
H $40

22
 NONLINEAR PROGRAMMING

VIJAYANAGARA COMMUNICATIONS

Vijayanagara Communications currently provide cellular phone service in Bangalore.

They wish to expand their operations to provide inter-city service between four cities in
south Karnataka. They are, Bangalore, Mysore, Mangalore and Chikkamagalur. To
enable this, a new communications tower has to be built which is capable of relaying
transmission within a 160 km radius. Of course, closer a location is to the tower, better is
the quality of the transmission. Where must the tower be located?

The relative locations of the four cities with respect to Bangalore, described in terms of
the X-Y coordinates are: Bangalore (0, 0), Mysore (-110, 60), Chikkamagalur (-130, 20)
and Mangalore: (-250, 100).

23
 THE SAFETY-TRANS COMPANY

Safety-Trans Inc. specializes in trucking extremely valuable and extremely hazardous

materials. It is imperative for the company to avoid accidents. Why? Because a) it
protects their reputation, b) It keeps their insurance premiums down, and c) The potential
environmental consequences of an accident are disastrous.

The company maintains a database of highway accident data, which it uses to determine
safest routes. This is summarized in the network below. The immediate need is to
determine the safest route from Los Angeles, CA to Amarillo, TX.

Las 0.006
Vegas 0.001 Albuquerqe
0.001
2 8
Flagstaff
Amarillo
6 10
0.010
0.003
0.006
0.004

Los
Angeles 0.002 0.009 0.010
Phoenix 0.005 0.006
1 4

0.002
0.004 Lubbock
0.002
0.003 9
Las
0.003 Cruces
San 7
Diego Tucson
3 5
0.010

24
 LARSON & LARSON CO.

Larson and Larson needs to allocate Rs. 8.5 crores of R&D budget and up to 25 engineers
among 6 projects. The probability of success for each project depends on the number of
engineers assigned (Xi), and is defined as:

Pi = Xi/( Xi + i)

i is a probability parameter which is specific to a given project. The other details

pertaining to each project is listed below.

Project 1 2 3 4 5 6

Startup Costs 325 200 490 125 710 240

NPV if successful 750 120 900 400 1,110 800
Probability
Parameter i 3.1 2.5 4.5 5.6 8.2 8.5

(all monetary values are in lakhs of Rs.)

How must the engineers be assigned so that the expected return is maximized?

25
 A PORTFOLIO SELECTION PROBLEM

A financial planner wants to create a portfolio that is least risky but with at least 12%
expected return using the stocks of InfoTech, StarTV and UPS. The annual return data for
the past twelve years along with the covariance matrix is provided below.

Annual Return
Year InfoTech StarTV UPS
1 11.2% 8.0% 10.9%
2 10.8% 9.2% 22.0%
3 11.6% 6.6% 37.9%
4 -1.6% 18.5% -11.8%
5 -4.1% 7.4% 12.9%
6 8.6% 13.0% -7.5%
7 6.8% 22.0% 9.3%
8 11.9% 14.0% 48.7%
9 12.0% 20.5% -1.9%
10 8.3% 14.0% 19.1%
11 6.0% 19.0% -3.4%
12 10.2% 9.0% 43.0%

Avg 7.64% 13.43% 14.93%

Covariance Matrix

InfoTech StarTV UPS

InfoTech 0.00258 -0.00025 0.00440
StarTV -0.00025 0.00276 -0.00542
UPS 0.00440 -0.00542 0.03677

26
 GOAL PROGRAMMING

Nicolo Investments

Nicolo Investment Advisors is facing the following problem. A client has up to $80,000
to invest and, as an initial investment strategy, would like the portfolio restricted to a mix
of the following two stocks:

Stock Price/Share Estimated annual Risk

Return / Share Index / Share

US Oil $25 $3 .50

Hub Properties $50 $5 .25

US Oil, which has a return of $3 on a $25 share price, provides an annual rate of return of
12% and Hub Properties provides an annual rate of return of 10%. The risk index per
share, .50 for US Oil and .25 for Hub Properties, is a rating Nicolo has assigned to
measure the relative risk of the two investment alternatives. Higher risk index values
imply greater risk; hence, we see that Nicolo has judged US Oil to be the riskier
investment. By specifying a maximum portfolio risk, Nicolo is able to avoid placing too
much of the portfolio in high-risk investments.

If the client would like to maximize the estimated return on his portfolio, what should the
portfolio mix be? In case he wants to minimize total portfolio risk instead, what should
the portfolio mix be?

After discussions with Nicolo, the client decided that he would like to avoid a high-risk
portfolio and would not want the total risk index to be more than 700. But he would also
like to receive an annual return of at least $9000. Can you suggest a portfolio mix that
would satisfy the client’s requirements?

Suppose the client’s top-priority goal is restricting the risk; that is, keeping the portfolio
risk index at 700 or less is so important that he is not willing to trade off the achievement
of this goal for any amount of an increase in annual return. On the other hand, as long as
the portfolio risk does not exceed 700, the client seeks the best possible return. Suggest
an optimal portfolio mix for the client.

27
 Suncoast Office Supplies

Management of Suncoast Office Supplies establishes monthly goals, or quotas, for the
types of customers contacted. For the next 4 weeks, Suncoast’s customer contact strategy
calls for the force, which consists of 4 salespeople, to make 200 contacts with customers
who have previously purchased supplies from the firm. In addition, the strategy calls for
120 contacts of new customers. The purpose of this latter goal is to ensure that the sales
force is continuing to investigate new sources of sales.

Making allowances for travel and waiting time, as well as for demonstration and direct
sales time, Suncoast has allocated 2 hours of sales force efforts to each contact of a
previous customer. Customer contacts tend to take longer and require 3 hours per contact.
Normally, each salesperson works 40 hours per week, or 160 hours over the 4-week
planning horizon; under a normal work schedule, the 4 salespeople will have 4(160) =
640 hours of sales force time available for customer contacts.

Management is willing to use some overtime, if needed, or to accept a solution that uses
less than the scheduled 640 hours available. However, management desires a solution
that will limit both overtime and under-utilization of the work force to at most 40 hours
over the 4-week period.

In addition to the customer contact goals, Suncoast has established a goal regarding sales
volume. Based on past experience, Suncoast estimates that each previous customer
contacted will generate Rs. 250 of sales and each new customer contacted will generate
Rs. 1250 of sales. Management would like to generate sales of at least Rs. 700,000 for
the next month.

After further consideration of these goals, management has concluded that the most
important goals are the labour utilization goals. That is, given Suncoast’s small sales
force and the short time frame involved, management has decided that the overtime goal
and the labor utilization goal are both priority level 1 goals. Management also concluded
that the Rs. 700,000 sales goal should be a priority level 2 goal and that the two customer
contact goals should be priority level 3 goals.

Formulate a goal programming model to help Suncoast decide how best to utilize its
resources to meet the goals it has set.

28
 The Maximum Impact Advertising Agency

The Maximum Impact Advertising Agency is trying to determine a TV advertising

schedule for Manvi Motors. Manvi Motors has three goals:

Goal 1 Its ads should be seen by at least 40 lakh high-income men

(HIM).
Goal 2 Its ads should be seen by at least 60 lakh low-income people
(LIP).
Goal 3 Its ads should be seen by at least 35 lakh high-income women
(HIW).

Maximum Impact Advertising Agency can purchase two types of ads: those shown
during cricket games and those shown during serial shows in Hindi. At most, Rs.
600,000 can be spent on ads. The advertising costs and potential audiences of a one-
minute ad of each type are shown in the Table below. Maximum Impact Advertising
Agency must determine how many cricket ads and serial ads to purchase for Manvi.

Lakhs of Viewers
Ad HIM LIP HIW Cost (Rs.)
Cricket 7 10 5 100,000
Serial 3 5 4 60,000

Suppose Manvi determines that for each one lakh exposures by which it falls short of the
HIM goal the estimated lost sales are around Rs. 200,000
LIP goal the estimated lost sales are around Rs. 100,000
HIW goal the estimated lost sales are around Rs. 50,000

What should Maximum Impact Advertising Agency do?

29
 Promotion of Women’s Professional Football League

A committee in charge of promoting Women’s Professional Football League in India

(which is still in a nascent stage), has organized a series of exhibition matches between a
visiting professional women’s team from U.S. and the Indian national women’s team.
These matches have been scheduled at the four metropolitan cities, New Delhi, Calcutta,
Chennai and Mumbai. This committee is trying to determine how best to advertise this
event during the 2 weeks prior to the start of these matches. They obtained the following
information about the three advertising media that they are considering using.

Audience Reached Per Cost Per Maximum Number of

Advertisement Advertisement Advertisements
TV 200,000 Rs. 50,000 10

Radio 50,000 Rs. 8,000 15

Newspaper 100,000 Rs. 10,000 20

The last column in this table shows the maximum number of advertisements that can be
run during the next 2 weeks. These cannot be violated under any circumstances. Assume
that the audience reached by the 3 media options is mutually exclusive. The committee
has established the following goals for the campaign.

Priority Level 1 Goal: Reach at least 4 million people.

Priority Level 2 Goal: The number of television advertisements should be at least 30% of
the total number of advertisements.

Priority Level 3 Goal: The number of radio advertisements should not exceed 20% of the total
number of advertisements.

Priority Level 4 Goal: Limit the total amount spent for advertising to Rs. 6 lakhs.

a) Describe all the goal constraints (only) for this problem and label them
appropriately. Make sure all variables that appear in the goal constraints are
properly defined.

b) Supposing that there is an OR expert on this committee who is responsible for

determining the most acceptable decision and is going to use goal programming to
arrive at a decision. In seeking such a solution, this individual has already
considered goals 1 and 2, and has found a solution that achieves these two goals.
Next, in trying to achieve priority level 3 goal, what specific linear programming
model must be solved? State the LP model clearly, i.e., state the purpose of each
constraint clearly.

30
c) Consider the following decision alternatives listed below:

Decision Decision Decision

1 2 3
# of Advertisements
on TV 10 5 10
# of Advertisements
on Radio 10 15 12
# of Advertisements
on Newspaper 20 20 18

Determine the amount of over-achievement and under-achievement associated with

each goal, for each of the three decisions listed above.

d) If the committee were to rank the above three decisions, consistent with their
stated goals, from most preferred to least preferred, what will be the ranking?
Give reasons why? If there is a tie, then say so with reasons.

31