Tutorial Set Two (Linear Programming)

1. The amount by which an objective function value must improve before it would be possible for the
corresponding value to assume a positive value in the optimal
solution is referred to as
(a) shadow price (b) minimum ratio test (c) reduced cost
(d) allowable increase (e) feasible solution value

2.Linear programming theory states that the optimal solution to any problem will lie at
(a) the origin (b) a corner point of the feasible region
(c) the highest point of the feasible region (d) the lowest point of a feasible region
(e) none of the above

3.The shadow price is calculated to be 3 for a less than or equal to constraint in a maximization LP problem,
this means:
(a) If the RHS for that constraint is increased by 3 then the optimal objective function value is increase by1
(b) If the coefficient of the objective value is increased by 1 then the RHS for that constraint must be
increased by3
(c) if the RHS for that constraint is increased by 1then the optimal objective function value will increase by
3
(d) if the coefficient of the objective function is increased by 3 then the RHS for that constraint must be
increased by1

4.Which of the following are true of linear programming?

I. For a maximization problem, an optimal solution to an LP is a point in the feasible region with the largest
objective function value
II. The feasible region for an LP is the set of all points that satisfies the LPs constraints and sign restrictions
III. A constraint is binding if the left-hand side of the constraints equals to the right-hand side of the
constraint when the optimal values of the decision variables are substituted into the constraint
IV. A constraint is non-binding if the left-hand side and the right-hand side of the constraint are unequal
when the optimal values of the decision variables are substituted into the constraint
V. The reduced cost is the increase in objective function value due to a unit increase in the RHS value of a
constraint
(a)I, II, III (b)III, IV, V (c)I, II, III, IV (d)I, II, III, V (e) all of the above

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5.Which of the following is true about non-negativity constraint?
I. They restrict decision variables to positive values only
II. Negative values of decision variables are not allowed in the model formulation
III. They restrict decision variables from negative values
IV. They restrict the solution to the first quadrant in the x-y plane for a two variable linear programming
problem
(a)I, III, IV (b)I, II, III (c)I, II, III, IV (d)II, III, IV (e)none of above

6.Which of the following is true about feasible solutions to a linear programming problem?
I. They do not violate any of the model constraints
II. they represent the final maximum and minimum values in the linear problem
III They are positive integer values
(a) I only (b) II only (c) I,II (d) I, III (e)none of above

7.A binding constraint

I. means that all the resources for that constraint are used
II. has the slacks for that constraint as zero
III. has a non-zero shadow price
IV. has a zero-shadow price

(a) I, II, III (b) I,II,IV (c) I and II (d) I and IV (e) II and III

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8. Consider the following linear programming problem
MaxZ: = 14x + 18y
S.t
8x + 6y ≤ 960
4x + 6y ≤ 720
x, y ≥ 0
Which of the following points (x, y) are feasible?
I. (-70,60) II. (110, -15) III. (60,90) IV. (60,80) V. (30,100)

(a) I, II, III, IV (b) II, III, IV (c)II, III, IV (d) IV only (e) IV, V

Solution

8x + 6y = 960 … … … … … … … … … … … … … (1)
4x + 6y = 720 … … … … … … … … … … … … … (2)
The next step is to graph the points above. Remember we need two set of points from each equation
For 8x + 6y = 960
when y = 0, x = 120 and When x = 0, y = 160
The two points for 8x + 6y = 960 are (120,0) and (0, 160)

For 4x + 6y = 720
when y = 0, x = 180 and when x = 0, y = 120
The two points for 4x + 6y = 720 are (180,0) and (0, 120)

180

D
120 C

A B
60 120 180

Solving equation (1) and equation (2) simultaneously,

x = 60 and y = 80

The corner points are:

A(0,0) B(120,0) C(60,80) and D(0,120)
The points I and II are in 2nd and 4th Quadrant respectively which do not fall within the feasible region. Note
that the point D is a corner point thus, III will be a point outside the feasible region.

Therefore, IV and V are the feasible points.

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9. What is the optimal solution for the LP problem
MinZ = 5X1 + 10X2
s.t
7x1 + 2x2 ≥ 28
2x1 + 12x2 ≥ 24
x1, x2 ≥ 0
(a) x1 = 3.6, x2 = 1.4 (b) x1 = 0, x2 = 14 (c) x1 = 12, x2 = 0 (d) x1= 0, x2 = 0 (e) x1 = 0, x2 = 2

Solution

7𝑥 + 2𝑥 = 28 … … … … … … … … … … … … … (1)
2𝑥 + 12𝑥 = 24 … … … … … … … … … … … … … (2)

For 7𝑥 + 2𝑥 = 28 For 2𝑥 + 12𝑥 = 24

when 𝑥 = 0, 𝑥 = 4 and When 𝑥 = 0, 𝑥 = 14 when 𝑥 = 0, 𝑥 = 12 and When 𝑥 = 0, 𝑥 = 2
The two points for 7𝑥 + 2𝑥 = 28 are (4,0) and (0, 14) The two points for 2𝑥 + 12𝑥 = 24 are (12,0) and (0, 2)

Not drawn to scale

14

12 C
10

A B
2 4 6 8 10 12

Solving equation (1) and equation (2) simultaneously, 𝑥 = 3.6 and 𝑥 = 1.4

The corner points are:

A(3.6,1.4) B(12,0) and C(0,14)

Minz = 5𝑥 + 10𝑥

A(3.6, 1.4) = 5(3.6) + 10(1.4) = 32 B(12, 0) = 5(12) + 10(0) = 60 C(0, 14) = 5(0) + 10(14) = 140
Point A has the least objective function value. Therefore, 𝑥 = 3.6 𝑎𝑛𝑑 𝑥 = 1.4
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10. You are mixing x grams of ingredient A and y grams of ingredient B. What is the equation or inequality
that models the requirement that the mixture should contain at least25% of ingredient A by weight?

(a) 4x - y ≤ 0 (b) x- 4y ≥ 0 (c) x – y ≥ 4 (d) 3x – y ≥ 0 (e) 4x – y = 0

Solution
Total mixture = x + y
x ≥ 25%(x + y) … … … . . Ingredient A should be 25% or more in the total mixture
4x ≥ x + y
3x − y ≥ 0
Ans D

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11. How many corner points has the feasible region of the linear program below?
MaxZ = x + y
St.
x+y≤1
x + y ≤ 0.5
x–y≥0
x, y ≥ 0

(a) 1 (b) 2 (c) 3 (d) 4 (e) 5

Solution
x + y = 1 … … … … … … … … … … … … … . . (1)
x + y = 0.5 … … … … … … … … … … … … … (2)
x − y = 0 … … … … … … … … … … … … … . . (3)

For x + y = 1
when 𝑥 = 0, 𝑦 = 1 and When 𝑦 = 0, 𝑥 = 1
The two points for x + y = 1 are (1,0) and (0, 1)

For x + y = 0.5
when 𝑥 = 0, 𝑦 = 0.5 and When 𝑦 = 0, 𝑥 = 0.5
The two points for x + y = 1 are (0.5,0) and (0, 0.5)

For x − y = 0 ⇒ x=y

Not drawn to scale

1 x+y=1
x−y=0

D
x + y = 0.5
0.5

B C
0.5 1

Points A, B, C and D are the corner points.

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12. Sammy Barnes, an individual investor, has 70,000cedis to divide among several investments. The
alternative investments are CIP with an 8.5% annual return, certificates of deposit (CDs) with a 5% return,
treasury bills with a 6.5% return, and a growth stock fund with a 13% annual return. The investments are
all evaluated after 1year. However, each investment alternative has a different perceived risk to the investor;
thus, it is advisable to diversify. Sammy wants to know how much to invest in each alternative in order to
maximize the return.
The following guidelines have been established for diversifying the investments and lessening the risk
perceived by the investor:
i. No more than 20% of the total investment should be in CIP.
ii. The amount invested in certificates of deposit should not exceed the amount invested in the
other three alternatives.
iii. At least 30% of the investment should be in treasury bills and certificates of deposit.
iv. To be safe, more should be invested in CDs and treasury bills than in CIP and the growth stock
fund, by a ratio of at least 1.2 to1.
Formulate a linear programming for this problem.

Solution
Let 𝑥 , 𝑥 , 𝑥 and 𝑥 be the amount invested in CIP, certificates of deposits, treasury bills and growth
stock fund respectively.

MaxZ = 0.085𝑥 + 0.05𝑥 + 0.065𝑥 + 0.13𝑥

St.
𝑥 + 𝑥 + 𝑥 + 𝑥 ≤ 70000
𝑥 ≤ 14000 (i. e 20% × 70000)
𝑥 +𝑥 +𝑥 ≥𝑥
𝑥 + 𝑥 ≥ 21000 (i. e 30% × 70000)
𝑥 +𝑥 1.2
−1.2𝑥 + 𝑥 + 𝑥 − 1.2𝑥 ≥ 0 i. e =
𝑥 +𝑥 1
𝑥 , 𝑥 , 𝑥 𝑎𝑛𝑑 𝑥 ≥ 0

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13. The Ghana Police Academy plans to invite prospective candidates for recruitment training program. In
all, the academy would like to add at least 1650 new personnel into the Police Force. However, for a fair
representation of the major Ghanaian ethnic groups in the Ghana Police service, the academy wishes to
recruit at least twice as many people from Cluster1(which comprises, Western, Central, Brong Ahafo,
Eastern and Ashanti Region), as Cluster3(comprising Greater Accra and Volta region). In addition, the
number of recruits from cluster1 must be at most three times that from cluster2 (comprising northern, upper
west and upper east).

Also, there must be at most twice as many recruits from cluster1as cluster2 and 3 combined. In general, it
costs the academy GHc1700, Ghc1700 and GHc1600 to train new recruits (cost includes transport, feeding,
accommodation) from cluster1, 2 and 3respectively.

Formulate a linear programming problem to help the Ghana Police academy decide on the number of people
to recruit in order to achieve a fair representation of all ethnic groups at the lowest possible cost.

Solution
Let 𝑥 , 𝑥 , and 𝑥 be the number of people to recruit from cluster 1, cluster 2 and cluster 3 respectively.

Min Z = 1700𝑥 + 1700𝑥 + 1600𝑥

St.
𝑥 + 𝑥 + 𝑥 ≥ 1650
𝑥 − 2𝑥 ≥ 0 (i. e 𝑥 ≥ 2𝑥 )
𝑥 − 3𝑥 ≤ 0 (i. e 𝑥 ≤ 3𝑥 )
𝑥 − 2𝑥 − 2𝑥 ≤ 0 [i. e 𝑥 ≤ 2(𝑥 + 𝑥 )]
𝑥 , 𝑥 , 𝑎𝑛𝑑 𝑥 ≥ 0

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14. Joan wakes up Saturday morning, she remembers that she promised the PTA she would make some
cakes and / or homemade bread for its bake sale that afternoon. However, she does not have time to go to
the store to get ingredients, and she has only a short time to bake things in her oven. Because cakes and
breads require different baking temperatures, she cannot bake them simultaneously, and she has only 3hours
available to bake. A cake requires 3cups of flour, and a loaf of bread requires 8cups; Joan has 20cups of
flour. A cake requires 45minutes to bake, and a loaf of bread requires 30minutes. The PTA will sell a cake
for 10cedis and a loaf of bread for 6cedis. Joan wants to decide how many cakes and loaves of bread she
should make.
a. Formulate a linear programming model for this problem.
b. Convert the linear programming model into the standard form
c. Solve this model by using graphical analysis.
d. Find the amount of unused resources

Solution
a. Let 𝑥 , and 𝑥 be the number of cakes and loaves of break to bake respectively.
Max Z = 10𝑥 + 6𝑥
St.
3𝑥 + 8𝑥 ≤ 20 … … … … … . . Flour constraint
45𝑥 + 30𝑥 ≤ 180 … … … … … . Time constraint
𝑥 and 𝑥 ≥ 0
b.
In standard form,
3𝑥 + 8𝑥 + S = 20 … … … … … . . Flour constraint
45𝑥 + 30𝑥 + S = 180 … … … … … . Time constraint

c.
3𝑥 + 8𝑥 = 20 … … … … … … … … … … … … … (1)
45𝑥 + 30𝑥 = 180 … … … … … … … … … … … … . (2)

For 3𝑥 + 8𝑥 = 20
20 5
when 𝑥 = 0, 𝑥 = and When 𝑥 = 0, 𝑥 =
3 2
20 5
The two points for 3𝑥 + 8𝑥 = 20 are ,0 and 0 ,
3 2

For 45𝑥 + 30𝑥 = 180

when 𝑥 = 0, 𝑥 = 4 and When 𝑥 = 0, 𝑥 = 6
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The two points for 45𝑥 + 30𝑥 = 180 are (4,0) and (0, 6)

Not drawn to scale

D
2
C
B
A 2 4 6 8
Solving the two equations simulataneously to find the cordinates of point C
28 4
𝑥 = and 𝑥 =
9 3
The corner points are:
28 4 5
A(0,0) B(4,0) C , and D 0,
9 3 2

Max Z = 10𝑥 + 6𝑥

A(0, 0) = 10(0) + 6(0) = 0 B(4, 0) = 10(4) + 6(0) = 40

28 4 28 4 5 5
C , = 10 +6 = 39.11 D 0, = 10(0) + 6 = 15
9 3 9 3 2 2
Point B has the highest objective function value. Therefore, Joan should bake 4 cakes and zero loaves of
bread.

d.
In finding the amount of unused resources, substitute the values of the point that yield the highest objective
function value into the standard form of the constraint’s functions (for a maximization problem).

Subtituting 𝑥 = 4 and 𝑥 = 0 into the flour constraint

3(4) + 8(0) + S = 20
S =8

Subtituting 𝑥 = 4 and 𝑥 = 0 into the time constraint

45(4) + 30(0) + S = 180
S =0
From the computation above, time will be fully utilized but 8 cups of flour will remain unused.

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15. On their farm, the Friendly family grows apples that they harvest each October and make into three
products—apple butter, applesauce, and apple jelly. They sell these three items at several local grocery
stores, at craft fairs in the region, and at their own Friendly Farm Fair for 2weeks in October. Their three
primary resources are cooking time in their kitchen, their own labour time, and the apples. They have a total
of 500 cooking hours available, and it requires 3.5hours to cook a 10-gallon batch of apple butter, 5.2hours
to cook 10gallons of applesauce, and 2.8hours to cook 10gallons of apple jelly. A 10-gallon batch of apple
butter requires 72minutes of labour, a batch of sauce takes 48minutes, and a batch of jelly requires
90minutes.
The Friendly family has 240hours of labour available during the October. They produce about 6,500 apples
each October. A batch of apple butter requires 40 apples, a 10-gallon batch of apple sauce requires 55apples,
and a batch of jelly requires 20 apples. After the products are canned, a batch of apple butter will generate
GHS190 in sales revenue, a batch of apple sauce will generate a sales revenue of GHS170, and a batch of
jelly will generate sales revenue of GHS155. The Friendly’s want to know how many batches of apple
butter, applesauce and apple jelly to produce in order to maximize their revenues.
The problem was solved using Excel Solver and the following output was obtained. Use the output
to answer questions a to h

a. How many batches of apple butter, applesauce and apple jelly are needed to be produced by friendly in
order to maximise their profit?
b. What is the total maximum profit of friendly family company?
c. Find the values of A to E
d. If the profit for apple butter is increased to 193per each 10-gallon pack, what will happen to the objective
solution and profit?
e. Assume Friendly family decides to ignore the recommended allocations and hence produces 50 batches
of applesauce?

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f. If Friendly Family has additional 200hours of cooking time, what will be the effect on profit?
g. How much profit will be added to Friendly family when 20 extra apples are added to their production?
h. If friendly family has the option to either add extra cooking time or extra available labour, which choice
should they make? Justify your answer

Solution
a. From the excel output, 41.27, 0 and 126.98 of apple butter, apple sauce and apple jelly are needed to be
produced respectively.

𝐛.
Let 𝑥 , 𝑥 , and 𝑥 be the number of apple butter, apple sauce and apple jelly needed to be produced
respectively.
Max Z = 190𝑥 + 170𝑥 + 155𝑥

To find the total maximum profit, substitute the values found in (a) into the objective function.
Subsituting 𝑥 = 41.27, 𝑥 = 0 and 𝑥 = 126.98 into Max Z = 190𝑥 + 170𝑥 + 155𝑥
⇒ Max Z = 190(41.27) + 170(0) + 155(126.98) = GHS27523.2

Therefore, the maximum profit of friendly family company is GHS 27523.2

c.

The objective function is Max Z = 190𝑥 + 170𝑥 + 155𝑥 . This implies that 190, 170 and 155 are the
objective function coefficients. Therefore A = 190, B = 170 and C = 155

Please note that 𝐑𝐞𝐝𝐮𝐜𝐞𝐝 𝐜𝐨𝐬𝐭 = −𝟏 × 𝐀𝐥𝐥𝐨𝐰𝐚𝐛𝐥𝐞 𝐢𝐧𝐜𝐫𝐞𝐚𝐬𝐞.

⇒ D = −1 × 3.75 = −3.75 and E = −1 × 58.69 = −58.69

d. An increase in the profit for apple butter to 193 indicates an increase in the profit for apple butter by 3
(193-190=3). But the allowable increase for apple butter is 3.75. This means that the increase in the profit
for apple butter is in the range of the allowable increase. There will be no changes in the objective solution
(i.e. 41.27, 0 and 126.98). However, the objective profit will increase by GHS123.81 (i.e. 41.27×3).

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e.

In producing 50 batches of apple sauce, the company is trying to force a zero value to be non-zero. From
the excel solver, as long as apple sauce is produced between the range (infinity and 106.83), profit will
reduce by 106.83 per each unit produced. Hence, producing 50 batches of apple will cause a decline in the
objective profit by GHS5341.5 (i.e. 50×106.83).

f.

The shadow price for cooking time is 52.38. this means for each increase in the cooking time, profit will
increase by 52.38. 200 additional cooking time will therefore cause an increase in the objective profit by
GHS 10476 (i.e. 200×52.38).

g.
There will be no addition to profit if there is an increase in apples by 20. This is because the shadow price
for apples is 0.

h.

The shadow price for cooking time is 52.38 whereas 5.56 is the shadow price for labour. It is obvious
increasing the cooking time will increase profit. The friendly family company should therefore add extra
cooking time because it will increase profit more than adding extra available labour.

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16. Cras Sandals limited manufactures two popular sandals identified as Sandal A and Sandal B. Each
show has its lowest possible production cost when produced on Cras’ news production line. However, the
new production line does not have the capacity to handle the total production of both sandals. As a result,
at least some of the production must be routed to a higher-cost, old production line. The table below Shows
the minimum production requirements for next month, the production line capacities in units per month,
and the production cost per unit for each production line:
Production cost per unit
Sandal New Line Old Line Minimum Production requirement
A GHc 30 GHc 50 50000
B GHc 25 GHc 40 70000
Production line capacity 80000 60000

Let
XAN = units of sandal A produced on the new production line
XAO = units of sandal B produced on the old production line
XBN = units of sandal B produced on new production line
XBO = units of sandal B produced on old production line
Cras’ objective is to determine the minimum cost production plan
(a) formulate the linear programming model for Cras’ production plan for next month

(b) What is the optimal solution, and what is the total production cost associated with this solution
(c) Which constraints are binding?

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(d) The production manager noted that the only constraint with a negative shadow price value is the
constraint on the capacity of the new production line. The manager’s interpretation of the shadow price was
that a one-unit increase in the right-hand side of this constraint would actually increase the total production
cost by GHC15 per unit. Do you agree with this interpretation? Would an increase in capacity for the new
production line be desirable? Explain
(e) Would you recommend increasing the capacity of the old production line?
(f) The production cost for sandal A on the old production line is GHc50 per unit. How much would this
cost have to change to make it worthwhile to produce sandal A on the old production line? Explain

Solution
a.
Min Z = 30X + 50X + 25X + 30X
St
X +X ≥ 50000

X +X ≥ 70000

X +X ≤ 80000

X +X ≤ 60000

X ,X , X and X ≥0

b. The optimal solution from the excel solver is: X = 50000 X =0 X = 30000 and X = 40000.
Hence Cras Sandals Limited should produce 50000units of sandal A on the new production line, 0 units of
sandal A on the old production line, 30000units of sandal B on the new production line and 40000units of sandal
B on the old production line.

The associated cost is Min Z = 30X + 50X + 25X + 30X

Substituting; X = 50000 X = 0, X = 30000 and X = 40000 into the objective function

Min Z = 30(50000) + 50(0) + 25(30000) + 30(40000) = 3450000

The associated cost is therefore GHC3450000

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c. The binding constraints have the final values and Constraint RH. Side been equal in the solver output.
Therefore, the binding constraints are Sandal A, Sandal B and New production line.

d. A negative shadow price in a minimization problem shows a reduction in cost for a unit increase in the
RHS. The manager’s assertion is therefore wrong. An increase in the capacity for the new production line
is therefore desirable. More of the resources should be used to expand the capacity of the new production
line in order to reduce cost by GHC15 per each unit of sandal produced.

e. The final value for old production line is 40000 whereas its capacity is 60000. It is not fully utilized and
as such a zero-shadow price. It is not advisable increasing the capacity of the old production line.

f. A unit increase in the production for Sandal A will increase production cost by GHC5. Therefore, so long
as the cost of Sandal A is GHC55 per unit or more, it will be worthwhile producing on the old production
line.

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17. A care taker phone seller at Madina market sells three types of phones: lower-class, middleclass, and
upper-class phones. The unit cost of a lower-class phone from a bulk supplier is Ghc60 and can be sold for
Ghc76. The unit cost of a middleclass phone however is Ghc136 and be sold for Ghc160. Similarly, an
upper-class phone with a selling price of Ghc272 has a unit cost of Ghc240 from the bulk supplier.
Currently, the phone seller has available Ghc300,000 to spend on new phones.
Based on past sales and current market demand data, the seller would want to adhere to the following three
demand restrictions:
I. Total orders for all three types of phones must not exceed 200
II. The number of lowerclass phones ordered must be at least as many as the combined order for middle
and upper-class phones.
III. The number of upper-class phones cannot exceed the number of middle-class phones since there has
never been a month where upper class phones out sold the middleclass phones.
a. What is the unit profit obtained from selling a lowerclass phone?
b. Formulate a linear programming problem to help the phone seller decide on the optimal number of phones
to order for each of the three types of phones to maximize his monthly profit.
The answer to question above has been solved using excel solver. Answer the following question

c. What is the optimal solution and total profit for the seller according to the LP
problem above?
d. Give an interpretation for the shadow price value of constraint 1
e. All final values of the decision variables have reduced cost of zero, why?

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Solution
a.
Unit profit for lower class phone = Sales per unit − cost per unit
= 76 − 60 = Ghc16
The unit profit obtained from selling lower class phone is Ghc16.

b.
Let 𝑥 , 𝑥 , and 𝑥 be the number of phones ordered for lower class, middle class and upper class respectively.

Max Z = 16𝑥 + 24𝑥 + 32𝑥

St
60𝑥 + 136𝑥 + 240𝑥 ≤ 300000

𝑥 + 𝑥 + 𝑥 ≤ 200

𝑥 + 𝑥 − 𝑥 ≤ 0 … … … … . . (𝑖. 𝑒. 𝑥 ≥ 𝑥 + 𝑥 )

𝑥 − 𝑥 ≤ 0 … … … … . . ( 𝑖. 𝑒. 𝑥 ≥ 𝑥 )

𝑥 , 𝑥 , and 𝑥 ≥0

c. The optimal solution from the excel solver is: 𝑥 = 100 𝑥 = 50 and 𝑥 = 50 . The seller should
therefore order 100 units of lower-class phones and 50 units of both middle class and upper-class phones in
order to maximize profit.

The Total profit is Max Z = 16𝑥 + 24𝑥 + 32𝑥

Substituting; 𝑥 = 100, 𝑥 = 50 and 𝑥 = 50 into the objective function
Max Z = 16(100) + 24(50) + 32(50) = 4400
The associated total profit is therefore GHC4400

d. There will be zero addition to profit even if the seller spends more than Ghc300000 in buying the phones.

e. Reduced cost is associated with decision variables which have zero final values. However, the final values
or optimal solutions for this problem are positive non-zero number. Hence a reason for the zero reduced cost.

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18. Premium capital has GHC1000,000 that must be invested in Oil stocks, Utility stocks and Insurance
stocks. The annual rates of return for the three types of stocks are 9% for Oil stocks, 8% for Utility stocks
and 9% for insurance stocks. The governing board of Premium Capital has decided that at least 65% of the
available fund must be allocated to Utility and Oil stocks. In addition, the board has specified that the
amount allocated to Oil and Utility stocks must not be more than twice as that allocated to Insurance stocks.
Each GHC1 invested in Oil stocks, Utility Stocks, and Insurance stocks has a risk index of 0.006, 0.004
and 0.004 respectively. Premium Capital can only accept a risk index of 5000 from the three stocks.

a. Formulate a linear programming model that can be used to determine how much money Premium capital
should allocate to each type of fund in order to maximize the total annual return accrued for the
GHC1million investments.

Below is the answer and sensitivity reports of Premium Capital’s problem solved using Excel’s solver.
Answer questions b to g using the information in the reports

b. How much should be allocated to each type of stock and what is the total annual return?

c. If interest rate on Oil stocks increases from the current9% to12%, would the amount allocated to each
type of stock change? Explain.
d. Why is the reduced cost for all three stocks zero?
e. If Premium Capital is willing to increase its total risk indexby100 index points, would there be a gain or
loss in the annual return and by how much?
f. Suppose the total amount available for investment in the stocks was increased by GHC10,000. What
effect would this have on the total annual return? Explain.
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Solution
a.
Let 𝑥 , 𝑥 and 𝑥 represent the amount invested in Oil stocks, Utility stocks and Insurance stocks respectively.
Max Z = 0.09𝑥 + 0.08𝑥 + 0.09𝑥
St
𝑥 + 𝑥 + 𝑥 ≤ 1000000
𝑥 + 𝑥 ≥ 650000
𝑥 + 𝑥 − 2𝑥 ≤ 0
0.006𝑥 + 0.004𝑥 + 0.004𝑥 ≤ 5000
𝑥 , 𝑥 and 𝑥 ≥ 0

b. The optimal solution from the excel solver is: 𝑥 = 500000, 𝑥 = 150000 and 𝑥 = 350000 . Therefore GHC500000,
GHC150000 and GHC350000 should be invested in Oil stocks, Utility stocks and Insurance stocks respectively.
The total annual return; Max Z = 0.09𝑥 + 0.08𝑥 + 0.09𝑥
Substituting; 𝑥 = 500000, 𝑥 = 150000 and 𝑥 = 350000 the objective function
Max Z = 0.09(500000) + 0.08(150000) + 0.09(350000) = 88500
The total annual return on the allocated amount to the stocks is GHC88500

c. The increase in the Oil stocks is 3% (12%-9%). This falls with the range (-0.01…...0.035). The amount
allocated to each stock would not change.

d. This is because the final values of each stocks are positive non-zero number.

e. From the excel solver, the risk index has a shadow price of 5. The increase in total risk index by 100 falls
within the range (-10000…...300). In view of this increasing the total risk index by 100 will result in a gain
in total return by GHC500.

f. Total annual return will increase by GHC700 when the amount available for investment in stocks is
increased by GHC10000. This is because from the excel solver, the available capital constraint has a shadow
price of 0.07 and also the increase in the total amount available for investment in stocks of GHC10000 falls
within the range of the allowable increase and allowable decrease.

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