2021 11 09 Session3

IQDM
Session 3
Questions?
Case Discussion:
Merton Truck Company
• You are the company’s president.
• What is it that you must decide?

– Product mix
• With what objective?

– Maximize profit or contribution or …?
• Current product mix
(1000, 1500)
• “I know we are operating at capacity in some

of our production lines.”
– Binding constraints or tight constraints
• Slack or non-binding constraints
• Slackness of each constraint

“… As I see it, we are losing $1205 for each
Model 101 truck we sell.” ??
“Why don’t we just stop making Model 101
trucks?”
Other suggested alternatives?
“We would be better off increasing production
of Model 101 trucks, cutting back if necessary
on Model 102 production.”
“We can relieve the capacity problem in engine

assembly by purchasing Model 101 or Model
102 engines from an outside supplier.”
• As the president, which of these alternatives
would you accept?
• Why?
• Or do you have a better alternative?

• What is mentioned about the economies of
scale?
• Should we look at contribution or profit?
• Does it matter?
• What if economies of scale?

Contributions
• Unit contribution for Model 101 trucks
= selling price – variable costs
= selling price – [direct material + direct labor
+ variable overhead]
= $39,000 - $[24,000 + 4,000 + 8,000] = $3,000.
• Similarly, unit contribution for Model 102 trucks

= $38,000 - $[20,000 + 4,500 + 8,500] = $5,000.
LP Formulation
Decision Variables
x = Number of Model 101 trucks/ month
y = Number of Model 102 trucks/ month

Objective Function
max z = 3000x + 5000y

Constraints
• Engine Assembly:
x + 2y ≤ 4000
• Metal Stamping:
2x + 2y ≤ 6000
• Model 101 Assembly:
2x ≤ 5000
• Model 102 Assembly:
3y ≤ 4500
Demand of M101 and M102?
Non-negativity: x, y ≥ 0
Graph
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x
Figure 1 Coordinates for graphical analysis

Graph
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x
Figure 1 EA constraint boundary line

Graph
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x
Figure 1 EA constraint feasible region
Graph
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x
Figure 1 MS constraint boundary
Graph
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x
Figure 1 MS constraint feasible region
Graph
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x
Figure 1 EA and MS feasible region

Graph
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x
Figure 1 Feasible region of the LP

Graph
y
Feasible Region: ABCDEF Contributions:
A (0, 0) 0
B (2500, 0) $7.5 million
C (2500, 500) $10 million
D (2000, 1000) $ 11 million
max z = 3000x + 5000y E (1000, 1500) $ 10.5 million
3000
s.t. F (0, 1500) $ 7.5 million
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 x

Graphical solution
• Does there exist a line on which all points give

the same contribution?
• Iso-profit/ Iso-contribution line

Graphical Solution
y
Iso-contribution lines:
Lines with slope −3/ 5
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 x

Graphical Solution
y
3000x + 5000y = c Lines with slope −3/ 5
y = (−3000/5000)x + c
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 5000 x

Graphical Solution
y
y = (−3000/5000)x + c
max z = 3000x + 5000y 3000

s.t.
An iso-contribution line
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 5000 x

Graphical Solution
y
y = (−3000/5000)x + c
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Another iso-contribution line
Region C
0
A B
1000 2000 3000 4000 5000 x

Graphical Solution
y
y = (−3000/5000)x + c
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 5000 x

Graphical Solution
y
y = (−3000/5000)x + c
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 5000 x

Graphical Solution
y
y = (−3000/5000)x + c
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 5000 x

Graphical Solution
y
y = (−3000/5000)x + c
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 5000 x

Graphical Solution
y
y = (−3000/5000)x + c
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 5000 x

Graphical Solution
y
y = (−3000/5000)x + c
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 5000 x

Graphical Solution
y
y = (−3000/5000)x + c
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 5000 x

Graphical Solution
y
y = (−3000/5000)x + c
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
Optimal point
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 5000 x

Graphical Solution
y Optimal Solution:
Optimal point is (2000, 1000), that is,

2000 M101 trucks and
y = (−3000/5000)x + c 1000 M102 trucks.
max z = 3000x + 5000y Optimal value (that is, max contribution) is

3000
s.t. z = $11 million
x + 2y  4000
2x + 2y  6000 2000
2x  5000 E
Optimal point
3y  4500 F
x, y 0 D
1000 Feasible
Region C
0
A B
1000 2000 3000 4000 5000 x

Questions?
Excel Solver
Sensitivity Analysis of
Capacities (RHS of Constraints)
• What if one more hour of engine assembly is

available?
• RHS of EA constraint increases by 1.

Sensitivity Analysis
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x
Figure 1 Sensitivity Analysis of EA Capacity

max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

y Shadow Price of EA
= Increase in contribution per EA hour
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

As D (after modification) continues to be optimal,
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

As D (after modification) continues to be optimal,

solve modified EA, x + 2y = 4001, and
max z = 3000x + 5000y 3000 MS, 2x + 2y = 6000
s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

New D is (1999, 1001).
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

New D is (1999, 1001).

New max contribution
max z = 3000x + 5000y 3000 = 3000(1999) + 5000(1001)
s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

New D is (1999, 1001).

New max contribution
max z = 3000x + 5000y 3000 = 3000(1999) + 5000(1001)
s.t. = 11002000
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

=
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

= 11002000 – 11000000
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

= 11002000 – 11000000
= $2000/ hour
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

y Alternatively,
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

y Alternatively,
1 hour increase in EA capacity

corresponds to increasing y by 1
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

y Alternatively,
1 hour increase in EA capacity

corresponds to increasing y by 1
(and decreasing x by 1).
max z = 3000x + 5000y 3000
s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

y Contribution increases by 5000 – 3000
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

• How many additional hours will you buy?
Allowable Increase?
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E
x, y 0 D
1000
0
1000 2000 3000 4000 x

Allowable Increase?
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
E D
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500 D
E
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500 D
E
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
New D is (1500, 1500).

max z = 3000x + 5000y 3000
s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
New D is (1500, 1500).

max z = 3000x + 5000y Each “step” involved increasing y by 1.
3000
s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
New D is (1500, 1500).

3000
s.t. Therefore, from (2000, 1000),
x + 2y  4000 we have moved “500 steps”
2x + 2y  6000 2000
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
New D is (1500, 1500).

3000
s.t. Therefore, from (2000, 1000),
x + 2y  4000 we have moved “500 steps”,
2x + 2y  6000 2000 corresponding to 500 EA hours.
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
New D is (1500, 1500).

max z = 3000x + 5000y Alternatively,
3000
s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
New D is (1500, 1500).

max z = 3000x + 5000y Alternatively, used EA capacity
3000
s.t. = x + 2y
x + 2y  4000
2x + 2y  6000 2000
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
New D is (1500, 1500).

max z = 3000x + 5000y Alternatively, used EA capacity
3000
s.t. = x + 2y
x + 2y  4000 = 4500
2x + 2y  6000 2000
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
Alternatively,
max z = 3000x + 5000y 3000
s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?
Alternatively, max possible increase in y

max z = 3000x + 5000y 3000
s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?

max z = 3000x + 5000y = slack in 102A/ hours per 102 truck
3000
s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?

3000
s.t. = 1500/3
x + 2y  4000
2x + 2y  6000 2000
2x  5000
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Allowable Increase?

3000
s.t. = 1500/3
x + 2y  4000
2x + 2y  6000 2000 Each “step” involved increasing y by 1.
2x  5000 Therefore, allowable increase = 500.
E
3y  4500
x, y 0
1000
0
1000 2000 3000 4000 x

Questions?
Allowable Decrease?
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0 D
1000
C
0
1000 2000 3000 4000 x

Allowable Decrease?
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0
1000 D
C
0
1000 2000 3000 4000 x

Allowable Decrease?
max z = 3000x + 5000y 3000

s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0
1000
C
0
1000 2000 3000 4000 x

Allowable Decrease?
C is (2500, 500).
max z = 3000x + 5000y 3000
s.t.
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0
1000
C
0
1000 2000 3000 4000 x

Allowable Decrease?
C is (2500, 500).
max z = 3000x + 5000y Per hour decrease in EA capacity,
3000
s.t. x goes up by 1 and y goes down by 1
x + 2y  4000
2x + 2y  6000 2000
2x  5000
3y  4500
x, y 0
1000
C
0
1000 2000 3000 4000 x

Allowable Decrease?
C is (2500, 500).
max z = 3000x + 5000y Per hour decrease in EA capacity,
3000
s.t. x goes up by 1 and y goes down by 1.
x + 2y  4000
2x + 2y  6000 2000 Therefore, allowable decrease
2x  5000 = 500 hours.
3y  4500
x, y 0
1000
C
0
1000 2000 3000 4000 x

Questions?
Excel Solver
Q. 2
• Should Merton buy engine assembly hours?
• If so, how much should be paid per hour?

(Shadow price)
• How many hours?

(Allowable increase)
Questions?
Other Departments
• Homework
H.W.: Q.6.
• What if we increase the price of M101?
• Should we re-solve?
H.W.: Q.7.
• What if we rent out capacities across

departments?
Questions?
Thank You

2021 11 09 Session3

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IQDM

• You are the company’s president.

• What is it that you must decide?

• With what objective?

• “I know we are operating at capacity in some

• Slack or non-binding constraints

• Slackness of each constraint

“We can relieve the capacity problem in engine

• Or do you have a better alternative?

• Should we look at contribution or profit?

• What if economies of scale?

• Similarly, unit contribution for Model 102 trucks

x = Number of Model 101 trucks/ month

y = Number of Model 102 trucks/ month

max z = 3000x + 5000y

max z = 3000x + 5000y 3000

Figure 1 Coordinates for graphical analysis

max z = 3000x + 5000y 3000

Figure 1 EA constraint boundary line

max z = 3000x + 5000y 3000

max z = 3000x + 5000y 3000

max z = 3000x + 5000y 3000

max z = 3000x + 5000y 3000

Figure 1 EA and MS feasible region

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

Figure 1 Feasible region of the LP

• Does there exist a line on which all points give

• Iso-profit/ Iso-contribution line

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

max z = 3000x + 5000y 3000

Figure 1 Feasible region of the LP

Optimal point is (2000, 1000), that is,

max z = 3000x + 5000y Optimal value (that is, max contribution) is

Figure 1 Feasible region of the LP

• What if one more hour of engine assembly is

• RHS of EA constraint increases by 1.

max z = 3000x + 5000y 3000

Figure 1 Sensitivity Analysis of EA Capacity

max z = 3000x + 5000y 3000

Figure 1 Sensitivity Analysis of EA Capacity