Fixed-Charge Problem

Many decisions result in a fixed cost being incurred:

• The cost to lease, rent, or purchase a piece of equipment or a vehicle that will be required if a
particular action is taken.
• The setup cost required to prepare a machine or production line to produce a different type of
product.
• The cost to construct a new production line or facility that will be required if a particular decision
is made.
• The cost of hiring additional personnel that will be required if a particular decision is made.

The important part of fixed-charge problems is to model the fixed costs incurred during the processes.
Binary variables are used to capture those costs. Below is an example of fixed-charge problem:

Remington Manufacturing is planning its next production cycle. The company can produce three
products, each of which must undergo machining, grinding, and assembly operations. The following
table below summarizes the hours of machining, grinding, and assembly required by each unit of each
product, and the total hours of capacity available for each operation.

Hours Required By

Operation Product 1 Product 2 Product 3 Total Hours Available

Machining 2 3 6 600
Grinding 6 3 4 300
Assembly 5 6 2 400

The cost accounting department has estimated that each unit of product 1 manufactured and sold will
contribute $48 to profit, and each unit of products 2 and 3 contributes $55 and $50, respectively.
However, manufacturing a unit of product 1 requires a setup operation on the production line that
costs $1,000. Similar setups are required for products 2 and 3 at costs of $800 and $900, respectively.

The marketing department believes that it can sell all the products produced. Therefore, the
management of Remington wants to determine the most profitable mix of products to produce.

1
 Mathematical Model

Decision Variables:

𝑥" : Amount of product i to be produced, 𝑖 = 1,2,3

1, 𝑥" > 0
𝑦" : : 𝑖 = 1,2,3
0, 𝑥" = 0

Objective Function:

𝑀𝑎𝑥 48𝑥A + 55𝑥D + 50𝑥E − 1000𝑦A − 800𝑦D − 900𝑦E

Constraints:

Þ Resource Constraints:

2𝑥A + 3𝑥D + 6𝑥E ≤ 600

6𝑥A + 3𝑥D + 4𝑥E ≤ 300
5𝑥A + 6𝑥D + 2𝑥E ≤ 400

Þ Linking Constraints:

𝑥A ≤ 50𝑦A
𝑥D ≤ 67𝑦D
𝑥E ≤ 75𝑦E

Þ Binary Constraints:

𝐴𝑙𝑙 𝑦" 𝑚𝑢𝑠𝑡 𝑏𝑒 𝑏𝑖𝑛𝑎𝑟𝑦

Þ Non-negativity Conditions:

𝑥" ≥ 0 𝑖 = 1,2,3