MBAA 544 Management Decision Making: Operations and Decision Analysis

Solution: Assignment # 1

Problem 1 (100 marks)

Liberty Taxes is a Vancouver based firm specializing in preparing Canadian Income Tax forms for
their individual and corporate clients. Liberty processes only two types of income tax returns; the T-1
Return for individual clients and the Corporate Return for corporate clients. Three separate
departments within Liberty Tax, whether it is a T-1 or a Corporate Return, check each return. These
departments are called the Deductions, Income and Arithmetic departments and have respectively
500 hours, 600 hours and 600 hours of labour hours available each processing cycle. Each T-1 Return
needs 2 Deduction hour, 3 Income hours and 3.3 Arithmetic hours and each Corporate Return needs
4 Deduction hours, 4 Income hours and 3 Arithmetic hours.

Returns not completed during one processing cycle are completed during the next processing cycle.
Management requires that the company process at least 50 T-1 Returns each processing cycle. The
profit contributions for each T-1 and Corporate Return processed by Liberty Tax are $30 and $50
respectively.

Considering the above equations answer the following questions:

a. What are the two decisions that need to be made? (2 marks)

How many T-1 Return to produce

How many Corporate return to produce

b. What equations you will use to develop the algebraic model? (6 marks)

Let T = number of T-1 Returns to process each processing cycle

C = number of Corporate Returns to process each processing cycle

i. What would be the objective function? (1 marks)

(Maximize Profit) 30T + 50C

ii. What would be the constraints equations? (5 marks)

(Deductions) 2T + 4C <= 500

(Income) 3T + 4C <= 600
(Arithmetic) 3.3T + 3C <= 600
(Minimum demand) T >= 50
(Non-Negativity) T, C >= 0

Page 1
 c. Please complete the graph below and find the Optimal Solution by drawing Iso-Profit
line. (Total 20 marks)
i. Add all constraints (except Non-neg.). (5 marks)
ii. Label all the constraints by name. (5 marks)
iii. Shade and identify the feasible region. (2 marks)
iv. Draw and identify the iso-profit line on this graph showing where the optimal
solution is located. (2 marks)
v. Identify at which intersection the optimal solution exists. (2 marks)
vi. Label all the corner points of feasible region with a, b, c, d, e, ---- (4 marks)

Min Demand
Min Demand
Arithmetic

Optimal Solution
b
c
Deductions

d ISO Profit
Feasible region Income
a e

d. Identify amount of profits at the points a, b, c, d, e, - -? (5 marks)

Point ‘a’ (T = 50, C = 0), Profit = (50*30 + 0*50) = 1,500

Point ‘b’ = (T = 50, C = 100), Profit = (50*30 + 100*50) = $6,500
Point ‘c’ = (T = 100, C = 75), Profit = (100*30 + 75*50) = $6,750 ← optimal revenue
Point ‘d’ = (T = 142.86, C = 42.86), Profit = (142.86*30 + 42.86*50) = $6,428.57
Point ‘e’ = (T = 181.81, C = 0), Profit = (181.81*30 + 0*50) = $5,454.55

e. The Boss at Liberty Taxes has said that the company should only prepare Corporate
returns since each Corporate return translates into $50 profit, whereas each T-1
Return only provides $30 per return. Without referring to the, yet unknown, optimal
solution, how would you respond to this argument? (2 marks)

Boss is ignoring how much resource needed in Deduction, Income and Arithmetic and
not comparing with T-1 returns.

Page 2
 f. Liberty management is hoping to produce 120 T-1 Returns and 110 Corporate Returns
the next processing cycle. Comment on their plans. (2 marks)

Not possible, it is outside of feasible region.

g. What is the optimal solution? (2 marks)

(Income equation) 3T+4C=600

(Deduction equation) 2T+4C=500
T =100
C =75

h. If this problem was formulated in Excel, what would be the value of the target cell? (1
mark)

MAX 20T + 50C => 30 (100) + 50 (75) => $ 6,750

i. How many hours will Liberty use in the Arithmetic Department? (1 mark)

(Arithmetic) 3.3T + 3C = ? => 3.3(100) + 3(75) = 555 Hours

j. What is the allowable increase and allowable decrease for the Arithmetic
constraint? (2 marks)

Arimetic is not a binding constraint, so allowable increase is infinity

Allowable Decrease
Move the arithmetic line (downward) to the point C(100, 75) (intersection of
income and Deduction line)

Arithmetic hours required 3.3*100 + 3*75 = 555

Current usage = 600
Allowable Decrease = 45

Allowable increase = Infinity

Allowable Decrease = 45 hours

k. FOR THIS QUESTION ONLY, suppose the Min Dem constraint was changed so that
the minimum was now 40 units. {Circle the correct responses.} (3 marks)
i. Would the feasible region change? Yes No
ii. Would the optimal solution change? Yes No
iii. Would the set of binding constraints change? Yes No

Page 3
 l. Determine the allowable increase and allowable decrease on the objective function
coefficient for Corporate Returns. (4 marks)

-2/4 >= -30/C >= - 3/4

-2/4 >= -30/C -30/C >= - 3/4

(4C)*2/4 <= (4C)*30/C 30/C <= 3/4
C <= 60 40 <= C
60 >= C >= 40
Allowable increase = (60 – 50) = 10
Allowable Decrease = (50 – 40) = 10

m. Determine the allowable increase and allowable decrease on the objective function
coefficient for T-1 Returns. (5 marks)

-2/4 >= -T/50 >= -3/4

-2/4 >= -T/50 -T/50 >= - 3/4

(50)*2/4 <= (50)*T/50 (50) * T/50 <= (50) * 3/4
25 <= T T <= 37.5
25 <= T <= 37.5
Allowable increase = (37.5 – 30) = 7.5
Allowable Decrease = (30 – 25) = 5

n. Determine the allowable increase on the Income constraint. (4 marks)

Move the income line upwards to the intersection of Deduction and Arithmetic
line. The coordinate of this point is (125,62.5)
2T + 4C <= 500
3.3T + 3C <= 600
13.2T+12C=2400
6T+12C=1500
7.2T=900
T=125
C=62.5
Page 4
 Income hours required 3*125 + 4*62.5 = 625
Current usage 3*125 + 4*62.5 = 600
Allowable Increase = 25

Allowable Increase = 25 hours

o. Determine the allowable decrease on the Income constraint. (4 marks)

Move the income line downwards to the point b (50, 100)

Income hours required 3*50 + 4*100 = 550
Current usage = 600
Allowable Decrease = 50

Allowable Decrease = 50 hours

p. Set up, but, DO NOT SOLVE, all the equations you would need to determine the
shadow price for the Arithmetic constraint. DO NOT SOLVE. (3 marks)

Arithmetic hour is nonbinding constraint, so shadow price is 0

q. Set up the above problem in Excel using the style that we used in class. Make sure
that your spreadsheet model is logical, well organized and easy to understand. In
building formulas, use the sumproduct function where appropriate. Use text boxes to
identify the changing cells, target cell and constraints. (15 marks)

See attached Model 1

Marking Guide:
* This sheet is worth 15 marks for the Excel model (and 5 marks for just printing the page in landscape -
deduct 1 mark if it is printed in Portrait)
* Deduct a maximum of 1 mark if students do not use some formatting (bold, shading, borders etc)
* Do NOT deduct any marks if their model layout is well organized, easily understood by the marker, and
they show at least one formatting activity.
* 1 mark should be allocated to the 3 textboxes (Total of 1 mark for all 3 textboxes)
* 1 mark should be allocated to titles (Type 1, Type 2, Total Used etc.)
* Do NOT deduct point if they put in Gridlines and/or Row and Column Headings however students should
understand that these features should NOT be used on the Model Page.

r. Print out the cell formulas in landscape orientation and include it with your answers. (5
marks)1

See Formulas1 worksheet attached

s. Which constraints are binding? non-binding? 4 marks)

Page 5
 Non-Binding - Arithmetic, minimum T-1 Returns
Binding - Deductions, Income

t. The Liberty problem was correctly formulated and solved in Excel with the following
partial sensitivity report output. (5 marks)

Final Shadow Constraint Allowable Allowable

Cell Name Value Price R.H. Side Increase Decrease
$E$5 Deductions Used 500 7.5 500 50 42.85714286
$E$7 Arithmetic Used 555 0 600 1E+30 45

Suppose Liberty can secure up to an additional 60 hours in either the Deductions or Arithmetic
department, but not both. In which department, Deductions or Arithmetic, would you
recommend purchasing extra time? Circle the correct response and provide convincing
evidence.

Deductions Income Arithmetic

Evidence: We can see from the report that shadow price of Deduction is = 7.5 and
Arithmetic is = 0, So we will only choose Deduction hour. However, the cost of additional
hours should not be more than (7.5*50) = $375, as allowable is only 50 hours.

u. FOR THIS QUESTION ONLY, suppose revenue and cost savings could be realized
that would change the objective function to Max 50T + 30C (from the current Max 30T
+ 50C). What effect(s), if any, would this change have on the optimal solution? No
calculations are required. (4 marks)

• New optimal solution (as the Increase and decreases are beyond the allowable
increase and decrease, the optimal solution will change)

Page 6
 A B C D E F G H I
2 Liberty Taxes
3 Input Data # of tax reurns Total Max
4 T-1 Corporate Used Available Units
5 Deductions 2 4 500 <= 500 Hours 0
6 Income 3 4 600 <= 600 Hours 0
7 Arithmetic 3.3 3 555 <= 600 Hours 45
8 Total Profit
9 Profit/unit $30.00 $50.00 $6,750.00
10 225 135
11
12 ActionPlan
13 T-1 Corporate
14 Produced 100 75
15
16
17
18 Additional Constraint
19 Minimum T-1 Return
20 Produced Minimum required
21 100 >= 50
22

Page 7
 A B C D E F G H
1 Question 1
2 Liberty Taxes
3 Input Data # of tax reurns Total Max
4 T-1 Corporate Used Available Units
5 Deductions 2 4 =SUMPRODUCT(C5:D5,C14:D14) <= 500 Hours
6 Income 3 4 =SUMPRODUCT(C6:D6,C14:D14) <= 600 Hours
7 Arithmetic 3.3 3 =SUMPRODUCT(C7:D7,C14:D14) <= 600 Hours
8 Total Profit
9 Profit/unit 30 50 =SUMPRODUCT(C9:D9,C14:D14)
10 =E9/C9 =E9/D9
11
12 ActionPlan
13 T-1 Corporate
14 Produced 100 75
15
16
17
18 Additional Constraint
19 Minimum T-1 Return
20 Produced Minimum required
21 =C14 >= 50
22

Page 8
 Microsoft Excel 16.23 Sensitivity Report
Worksheet: [Assignment#1_SOL_S18_MBA505.xlsx]Question 1 (4)
Report Created: 2019-05-21 12:47:01 PM

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$C$14 Produced T-1 100 0 30 7.5 5
$D$14 Produced Corporate 75 0 50 10 10

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$C$21 Produced 100 0 50 50 1E+30
$E$5 Deductions Used 500 7.5 500 50 42.85714286
$E$6 Income Used 600 5 600 25 50
$E$7 Arithmetic Used 555 0 600 1E+30 45

Page 9
 Page 10