Linear Programming Applications

Linear Programming
Applications
Media Applications
• Linear programming models have been used in the advertising field as a
decision aid in selecting an effective media mix.
• Sometimes the technique is employed in allocating a fixed or limited budget
across various media, which might include radio or television commercials,
newspaper ads, direct mailings, social media, and so on.
• In other applications, the objective is the maximization of audience
exposure.
• Restrictions on the allowable media mix might arise through contract
requirements, limited media availability, or company policy
Example
• The Win Big Gambling Club promotes gambling junkets from a large
midwestern city to casinos in the Bahamas. The club has budgeted up to
$8,000 per week for local advertising.
• The money is to be allocated among four promotional media: TV spots,
newspaper ads, and two types of radio advertisements.
• Win Big’s goal is to reach the largest possible high potential audience
through the various media. The following table presents the number of
potential gamblers reached by making use of an advertisement in each of the
four media.
• It also provides the cost per advertisement placed and the maximum number
of ads that can be purchased per week
Win Big Gambling Club (2 of 4)
• Advertising options
AUDIENCE COST PER MAXIMUM ADS
MEDIUM REACHED PER AD AD ($) PER WEEK
TV spot (1 minute) 5,000 800 12
Daily newspaper (full-
8,500 925 5
page ad)
Radio spot (30
2,400 290 25
seconds, prime time)
Radio spot (1 minute,
2,800 380 20
afternoon)
Copyright © 2018, 2015, 2012 Pearson Education, Inc. All Rights Reserved.
Example
• Win Big’s contractual arrangements require that at least five radio spots be
placed each week.
• To ensure a broad-scoped promotional campaign, management also insists
that no more than $1,800 be spent on radio advertising every week.
• Problem formulation
X1 = number of 1-minute TV spots taken each week
X2 = number of daily newspaper ads taken each week
X3 = number of 30-second prime-time radio spots taken each week
X4 = number of 1-minute afternoon radio spots taken each week
Objective:
Maximize audience coverage = 5,000X1 + 8,500X2 + 2,400X3 + 2,800X4
Subject to X1 ≤ 12 (max TV spots/wk)
X2 ≤ 5 (max newspaper ads/wk)
X3 ≤ 25 (max 30-sec radio spots/wk)
X4 ≤ 20 (max 1-min radio spots/wk)
800X1 + 925X2 + 290X3 + 380X4 ≤ $8,000 (weekly advertising budget)
X3 + X4 ≥ 5 (min radio spots contracted)
290X3 + 380X4 ≤ $1,800 (max dollars spent on radio)
X1, X2, X3, X4 ≥ 0
Marketing Research
• Linear programming has also been applied to marketing research problems
and the area of consumer research.
• The next example illustrates how statistical pollsters can reach strategy
decisions with LP.
Example
• Management Sciences Associates (MSA) is a marketing and computer
research firm based in Washington, D.C., that handles consumer surveys.
• One of its clients is a national press service that periodically conducts
political polls on issues of widespread interest.
• In a survey for the press service, MSA determines that it must fulfill several
requirements in order to draw statistically valid conclusions on the sensitive
issue of new U.S. immigration laws:
Management Sciences Association (1 of 5)
• MSA is a marketing research firm
• Several requirements for a statistical validity
1. Survey at least 2,300 U.S. households
2. Survey at least 1,000 households whose heads are ≤ 30 years old
3. Survey at least 600 households whose heads are between 31 and 50
4. Ensure that at least 15% of those surveyed live in a state that borders
Mexico
5. Ensure that no more than 20% of those surveyed who are 51 years of age
or over live in a state that borders Mexico
• MSA decides to conduct all surveys in person
• Estimates of the costs of reaching people in each age and region category
• Goal is to meet the sampling requirements at the least possible cost
COST PER PERSON SURVEYED ($)

REGION AGE ≤ 30 AGE 31-50 AGE ≥ 51
State bordering Mexico $7.50 $6.80 $5.50
State not bordering Mexico $6.90 $7.25 $6.10
• Decision variables
X1 = number of 30 or younger and in a border state
X2 = number of 31-50 and in a border state
X3 = number 51 or older and in a border state
X4 = number 30 or younger and not in a border state
X5 = number of 31-50 and not in a border state
X6 = number 51 or older and not in a border state
Objective function
Minimize total interview costs = $7.50X1 + $6.80X2 + $5.50X3 + $6.90X4 +
$7.25X5 + $6.10X6
subject to
X1 + X2 + X3 + X4 + X5 + X6 ≥ 2,300 (total households)
X1 + X4 ≥ 1,000 (households 30 or younger)
X2 + X5 ≥ 600 (households 31-50)
X1 + X2 + X3 ≥ 0.15(X1 + X2+ X3 + X4 + X5 + X6) (border states)
X3 ≤ 0.20(X3 + X6) (limit on age group 51+ who can live
in border state)
X1, X2, X3, X4, X5, X6 ≥ 0
Portfolio Selection
• Bank, investment funds, and insurance companies often have to select
specific investments from a variety of alternatives.
• The manager’s overall objective is generally to maximize the potential
return on the investment given a set of legal, policy, or risk restraints.
Portfolio Selection
• the International City Trust (ICT) invests in short-term trade credits,
corporate bonds, gold stocks, and construction loans. To encourage a
diversified portfolio, the board of directors has placed limits on the amount
that can be committed to any one type of investment.
• ICT has $5 million available for immediate investment and wishes to do
two things: (1) maximize the return on the investments made over the next 6
months and (2) satisfy the diversification requirements as set by the board of
directors. The specifics of the investment possibilities are as follows:
• International City Trust (ICT) invests in short-term trade credits, corporate
bonds, gold stocks, and construction loans
• The board of directors has placed limits on how much can be invested in each
area
• In addition, the board specifies that at least 55% of the funds invested must be
in gold stocks and construction loans and that no less than 15% must be
invested in trade credits.
MAXIMUM INVESTMENT
INVESTMENT INTEREST RETURN ($1,000,000s)
Trade credit 7 1.0
Corporate bonds 11 2.5
Gold stocks 19 1.5
Construction loans 15 1.8
International City Trust (2 of 5)
• ICT has $5 million to invest and wants to accomplish two things
– Maximize the return on investment over the next six months
– Satisfy the diversification requirements set by the board
• The board has also decided that at least 55% of the funds must be invested in
gold stocks and construction loans and no less than 15% be invested in trade
credit
• Variables
X1 = dollars invested in trade credit

X2 = dollars invested in corporate bonds
X3 = dollars invested in gold stocks
X4 = dollars invested in construction loans
• Formulation
Maximize dollars of interest earned = 0.07X1 + 0.11X2 + 0.19X3 + 0.15X4
subject to : X1 ≤ 1,000,000
X2 ≤ 2,500,000
X3 ≤ 1,500,000
X4 ≤ 1,800,000
X3 + X4 ≥ 0.55(X1 + X2 + X3 + X4)
X1 ≥ 0.15(X1 + X2 + X3 + X4)
X1 + X2 + X3 + X4 ≤ 5,000,000
X1, X2, X3, X4 ≥ 0
Product Mix Problem
• Formulate and then solve a linear programming model of this problem, to
determine how many containers of each product to produce tomorrow to
maximize profits. The company makes four juice products using orange,
grapefruit, and pineapple juice.
• The All-in-One juice has equal parts of orange, grapefruit, and pineapple juice.
Each product is produced in a one-quart size (there are four quarts in a gallon).
On hand are 400 gallons of orange juice, 300 gallons of grapefruit juice, and
200 gallons of pineapple juice.
• The cost per gallon is $2.00 for orange juice, $1.60 for grapefruit juice, and
$1.40 for pineapple juice.
• In addition, the manager wants grapefruit juice to be used for no more than 30
percent of the number of containers produced. She wants the ratio of the
number of containers of orange juice to the number of containers of pineapple
juice to be at least 7 to 5.

Linear Programming Applications

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COST PER PERSON SURVEYED ($)

X1 = dollars invested in trade credit

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