Lecture 2: Linear Programming Sensitivity Analysis

• Group formation for Assignment

• Computer solutions to Linear Programming

• Introduction to Sensitivity Analysis
• Graphical Sensitivity Analysis
• Sensitivity Analysis: Computer Solution
• Simultaneous Changes and 100% Rule

Slide 1
 Computer Solutions
• LP problems involving 1000s of variables and 1000s of
constraints are now routinely solved with computer
packages.
• Linear programming solvers are now part of many
spreadsheet packages, such as Microsoft Excel.
• Leading commercial packages include CPLEX, LINGO,
MOSEK, Xpress-MP, and Premium Solver for Excel.
• The Management Scientist, a package developed by the
authors of your textbook, has an LP module.
• we will discuss the following output:
• objective function value
• values of the decision variables
• reduced costs
• slack and surplus 2
 Constraints: Standard Vs Inequality Form
Inequality form:
Actual ≤ RHS e.g.

Or Actual ≥ RHS e.g.

Standard Form

For Objective Function:

For ≤ Constraint: Actual (to be calculated) + Slack = RHS (given)

=> Slack = RHS - Actual

For ≥ Constraint Actual (to be calculated) - Surplus = RHS (given)

=> Surplus = Actual - RHS
3
 Formulation of LP model in Management Scientist

Par Inc’s
Maxi-
misation
of profit

M&D
Chemical’
s
Mini-
misation
of cost 4
 Computer Solutions of Par Inc’s Problem

1. The maximum profit is ______.

2. Par need to produce ____ standard and _____ deluxe golf bags.
3. Reduce Cost indicates how much the Objective Function (O.F.)
coefficient of each decision variables must improve to before the
variable can assume a positive value in the optimal solution.
4. C&D and Finishing are ________ constraints which have ___ slack.
5. There are s_____ of 120 hrs for sewing and ___ hrs for I&P.
6. _____ hrs of sewing are used. 5
 Computer Solutions of M&D Chemicals Problem

1. The minimum cost is _____.

2. M&D need to produce _____ & _____ gallons of Product A & B.
3. Both variables A & B are ________, so reduced costs are 0.
4. Total production volume (C2) and Processing time (C3) are
______. All production volume are fully met and processing
times are used up.
5. Seen from the non binding constraint 1, there is a surplus of 125
6
gallons of Product A. Total production of A is ________.
 Introduction to Sensitivity Analysis
• Sensitivity analysis (or post-optimality analysis) is
used to determine how the optimal solution is
affected by changes, within specified ranges, in:
– the objective function coefficients
– the right-hand side (RHS) values
• Sensitivity analysis is important to a manager who
must operate in a dynamic environment with
imprecise estimates of the coefficients.
• Sensitivity analysis allows a manager to ask certain
what-if questions about the problem.

Slide 7
 Objective Function Coefficients
• Let us consider how changes in the objective function
coefficients might affect the optimal solution.
• The range of optimality for each coefficient provides
the range of values of the O.F coefficient over which
the current (optimal) solution will remain optimal.
• Managers should focus on those objective
coefficients that have a narrow range of optimality
and coefficients near the endpoints of the range.

Slide 8
Range of Optimality (Ref: Sect 3.2)
Line B: coincides with the finishing constraint
line 1S + 2/3D = 708) Slope=?

O.F. line P=CsS+CdD, Slope=?

Feasible Region Line A: coincides with the C&D

line (7/10)S + 1D = 630 Slope=?

Slide 9
Range of Optimality

Slide 10
Range of Optimality

Slide 11
 Vertical slope => one side limit
Line B: coincides with the
finishing constraint line
1S + 2/3D = 708) Slope=?

New Optimal Solution

Slide 12
 Simultaneous Change
The ranges of optimality found
6.3 ≤ CS≤ 13.5, while CD = ________
and 6.67 ≤ CD≤ 14.29 while CS = ________
which kept the optimal solution at S=_______ and D= ________.
The ranges are applicable when one parameter changes at a time.

If Cs and CD change simultaneously, then we need to evaluate

whether -3/2 ≤ -Cs /CD ≤ -7/10
E.g. If the profit of standard bag and deluxe bag are found to be $13
and $8, do we still keep the production at 540 std bag and 252
deluxe bag?
Ans:

Question: Then, how to find the optimal solution?

Slide 13
 Changes on RHS of Constraints:
E.g. If additional 10 hours is available to Cutting & Dyeing
The new Constraint is:
How will it affect :
a. the constraint line?
b. the feasible region?
c. The optimal solution?
The maximum profit?
Increase in profit =
Dual price = Change in O.F/change in RHS

Slide 14
 Dual Price
Dual Price: The change (+ve means increase, -ve means decreast)
in the value of the objective function per unit increase in the RHS of
the constraint.

For both maximization and minimization problems:

Positive dual price = OF Change increases when RHS of the
constraint increases by 1 unit (i.e. increase profit or increase cost).

Negative dual price = OF Change decreases when RHS of the

constraint increases by 1 unit. (i.e. decrease profit or decrease cost)

Question: Can the value of dual price be applicable over a long

range of change of the RHS of constraint? Why?
Ans:

Slide 15
 Range of Feasibility
The range of feasibility is the range over which the dual price is applicable.
• As the RHS increases, other constraints will become binding and limit the
change in the value of the objective function.

Example: Dual Price for a minimisation problem (ignore this example)

A company wants to find the minimum of total cost of a product. If the

current total cost under optimal solution is $700, and the dual price for a
constraint, quantity of chemical X, is $10 per kg. What is the total cost if
X is: a) increased by 5 kg? b) decreased by 3kg? (assume changes
are within range of feasibility)Ans: Dual price = change in OF/change in
constraint
=> Change in cost = dual price x change in constraint

Slide 16
 Relevant Cost and Sunk Cost
• A resource cost is a relevant cost if the amount paid for it
is dependent upon the amount of the resource used by
the decision variables.
• Relevant costs are reflected in the objective function
coefficients (i.e. considered in the derivation of the
coefficients) .
• A resource cost is a sunk cost if it must be paid
regardless of the amount of the resource actually used
by the decision variables.
• Sunk resource costs are not reflected in the objective
function coefficients (Hence, the sunk costs are not
affected by the outcome of the LP. Whatever is the
optimal solution, the cost would have been incurred).
Slide 17
Cautionary Note on the Interpretation of Dual Prices
• If the Resource cost is sunk
The dual price is the maximum amount you should be
willing to pay for one additional unit of the resource.
• If the Resource cost is relevant
The dual price is the maximum premium over the
normal cost that you should be willing to pay for one
unit of the resource (since the basic cost is already
considered when you derive the O.F, any additional
amount are in excess of the basic cost).

Slide 18
 Sensitivity Analysis: Dual Price

The dual price for Sewing (C2) and Inspecting& packaging (C4)
=0 because these are ___________________.
Cutting &Dyeing (C1) and Finishing (C3) has dual price because
these are ___________________.
The dual price for Cutting & dyeing is $4.37 => One additional hr
to C&D increases profit by $4.37
The dual price for Finshing is $6.94 => One additional hr to
Finishing increases profit by $6.94
If Par has hire one additional staff, where shall this person be
deployed? Ans:____________
Slide 19
 Sensitivity Analysis: Sunk Vs Relevant Cost

If labor cost is sunk cost, what is the maximum rate you are
willing to pay the additional staff?
Ans:

If labor cost is relevant cost, what is the maximum rate you are
willing to pay the additional staff?
Ans:

Slide 20
 Range of Optimality

The current optimal solution is S=540, D=252, subject to the four

constraints and profits of std bag, Cs= $10 and deluxe bag, CD=$9
This solution remains unchanged if $6.3≤ Cs ≤ $13.4 while CD=$9
or $6.67≤ CD ≤ $14.29 while CS=$10
Is current Cs near to the boundaries?
Is Cs range of optimality narrow?
How near is near?
% of max allowable increase=

% of max allowable decrease =

Slide 21
<5% mean very sensitive; <10% mean sensitive
 Range of Optimality

This means that a slight change in Cs value (due to new circumstance

or error in calculation) will/will not shift the optimal solution.

What is the consequence of changing optimal solution?

Does the profit change even if the optimal solution is unchanged? (Y/N)

Same analysis applies to CD

Slide 22
 Range of Feasibility

The dual prices for C&D (C1) is $4.37

This dual price is applicable if the available C&D time is between
495.6 hrs to 682.4 hrs. Every one hrs increase from 630 hr
increases the profit by $4.37 until the C&D reaches 682 hrs.
Beyond that C&D may become a ________________.
The dual prices for Finishing is $6.94
This dual price is applicable if the available Finishing time is
between 580 hrs to 900 hrs. Every one hrs decrease from 708 hr
decreases the profit by $6.94 until the Finishing reaches 580 hrs.
Slide 23
Sensitivity Analysis for M&D Chemical

Dual price = for

Range of Optimality:

Range of Feasibility:

Slide 24
 LP Model with more than 2 variables
Example: If Par Inc decides to add a lightweight model bag and
derived the following LP model for maximising the profit:

Max 10S + 9D + 12.85L

s.t. 0.7S + 1D + 0.8L ≤ 630 Cutting & dyeing
0.5S + 0.83333D + 1L ≤ 630 Sewing
1S + 0.66667D + 1L ≤ 708 Finishing
0.1S + 0.25D + 0.25L ≤ 135 Inspection & packaging
S,D,L ≥ 0

Solve the problem using MS

Slide 25
 Question:
What is the maximum profit
achievable?
- Ans: $

How many deluxe bags Par

need to produce to achieve
the max profit?
Ans:

Reduced Costs of $1.15

means this amount must
add to the current
coefficient of D so that the
D value in optimal solution
will be positive.

So profit (i.e. coefficient of

D must be at least
$9+$1.15= $10.15 before D
can be par of the optimal
solution. (Ref Pg 116) Slide 26
 Class Activity: Olympic Bike Co.
Olympic Bike is introducing two new lightweight
bicycle frames, the Deluxe and the Professional, to be
made from special aluminum and steel alloys. The
anticipated unit profits are $10 for the Deluxe
and $15 for the Professional.
The number of pounds of each alloy needed per frame is
summarized below
A supplier delivers 100 pounds of the aluminum alloy and
80 pounds of the steel alloy weekly.
Aluminum Alloy Steel Alloy
Deluxe 2 3
Professional 4 2

How many Deluxe and Professional frames should

Olympic produce each week?
Slide 27
Slide 28
 Activity questions
1. Formulate the LP Model
Use the MS output and answer the following questions:
2. What is the Objective Function value and the optimal solution?
3. Suppose the profit on deluxe frames is increased to $20. Is the
above solution still optimal? What is the value of the objective
function when this unit profit is increased to $20?
4. If the unit profit on deluxe frames were $6 instead of $10, would the
optimal solution change?
5. Given that aluminum is a sunk cost, what is the maximum amount
the company should pay for 50 extra pounds of aluminum?
6. If aluminum were a relevant cost, and it costs $4 per pound initially,
what is the maximum amount the company should pay for 50
extra pounds of aluminum?

Slide 29