CA5103: Management Science

Preliminary Examination

LECTURE

MODULE 1: Introduction to Management Science

Management Science
→ A body of knowledge that uses quantitative approaches to decision making (Anderson et al.,
2019)
→ Simply, management science is being able to perform decision-making and arriving at an
optimum solution using quantitative values.
→ It is also known as Operations Research, Decision Science, Quantitative Analysis, and
Business Analytics. (Taylor, 2006)
→ Management Science as a science is ever evolving.

Frederick W. Taylor (1856-1915)

→ Founder of Management Science
→ A psychologist specializing in problem-solving.

Historical Development of Management Science

→ Management Science started during the World War II period, wherein:
♦ This is flourishing in business and industry due to:
● Numerous methodological developments:
▪ Eg. Simplex Method for solving linear programming problems.
● A virtual explosion in computing power

7 Steps of Problem Solving

Note: Only the first five (5) steps are the process of decision-making.
Example:
Step 1. How to have a satisfying career position?

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 Step 2. There are different offers from companies in Taguig, Makati, QC, and Manila.
Option 1: Accept the position in Taguig
Option 2: Accept the position in Makati
Option 3: Accept the position in QC
Option 4: Accept the position in Manila

Step 3. The four options are evaluated in terms of:

● Salary
● Potential for Advancement
● Job Location

Step 4. Rate each criterion (e.g. poor, fair, average, good, and excellent)
Option Starting Salary Potential for Job Location
Advancement

Taguig PHP 38,500 Average Average

Makati PHP 36,000 Excellent Good

Q.C. PHP 36,000 Good Excellent

Manila PHP 37,000 Average Good

Step 5. After careful evaluation of the data, option 3 is selected.

Step 6. To have a satisfying career position, take the offer in Q.C. Now, think of ways of how to
sustain it. (e.g. engage in professional development, research and training, participate in the
Corporate Social Responsibility (CSR), etc.)

Step 7. Does option 3 (having a starting salary of PHP 36,000; a good potential for advancement
and an excellent job location) ensure a satisfying career position?

*Note that steps 1 to 5 are decision-making process while steps 1 to 7 are for problem solving.

An Alternate Classification of the Decision-making Process

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→ Single-criterion Decision Problems
♦ Problems in which the objective is to find the best solution with respect to one criterion.
→ Multicriteria Decision Problems
♦ Problems that involve more than one criterion.
Analysis Phase of Decision Making

QUALITATIVE ANALYSIS QUANTITATIVE ANALYSIS

● Subjective
● Based largely on the manager’s
judgment and experience.
● Includes the manager’s intuitive
“feel” for the problem.
● More of an art than science.
● Objective
● Analysts concentrate on the
quantitative facts or that are
related to the problem, then develop
mathematical expressions that
describe the objectives, constraints,
and other relationships that exist in
the problem, and use one or more
quantitative methods to make a
recommendation.

The Role of Qualitative and Quantitative Analysis

Quantitative Analysis and Decision-Making

→ Potential Reasons for a Quantitative Analysis Approach to Decision-Making
♦ The Problem is…
● Complex.
● Very important.
● New.
● Repetitive.

Quantitative Analysis Process

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 → Procedures for finding the “best” or optimal solution/s. (Anderson et al., 2019)
♦ Model Development
♦ Data Preparation
♦ Model Solution
♦ Report Generation

Model Development
→ Models are representations of real objects or situations.
→ Three forms of Models are:
♦ Iconic Models
● Physical Replicas (Scalar representations) of real objects.
♦ Analog Models
● Physical in form
● Do not physically resemble the object being modelled.
♦ Mathematical Models
● Represent real world problems through a system of mathematical formulas and
expressions based on key assumptions, estimates, or statistical analyses.

Formulas for Mathematical Models

TREND PROJECTION EQUATION: LINEAR PROGRAMMING MODEL

Ŷ0 = b0 + b1t

𝑛
∑ (𝑡−𝑡)(Ŷ𝑡−Ȳ)
MaxZ = 5x1 + 7x2
b1 = 𝑡=1
𝑛 2

∑ (𝑡−𝑡) s.t.
𝑡=1

x1 ≤ 6
b0 = Ȳ – b1t
2x1 + 3x2 ≤ 19
x1 + x2 ≤ 8
where:
Ŷt = actual value of the time series in period t
x1 ≥ 0 and x2 ≥ 0
n = number of periods in the time series
Ȳ = average values of the time series
t = mean value of t

→ Generally, experimenting with models (compared to experimenting with the real situation):
♦ Requires less time.
♦ Is less expensive.
♦ Involves less risk.
→ The more closely the model represents the real situation, the more accurate the conclusion and
predictions will be.

Mathematical Models
→ Objective Function

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 ♦ A mathematical expression that describes the problem’s objective, such as
maximizing profit or minimizing cost.

Suppose that x denotes the number of units produced and sold each week, and the firm’s
objective is to maximize total weekly profit.

With a profit of PHP 500 per unit, the objective function is 500x.

→ Constraints
♦ A set of restrictions or limitations, such as production capacities.

For this, a production capacity constraint would be necessary if for instance, six (6) hours
are required to produce each unit and only 48 hours are available per week.

With this, we can infer that the production capacity constraint is given by 6x ≤ 48.

The value of 6x is the total time required to produce x units; the symbol indicates that the
production time required must be less than or equal to the 48 hours available.

→ Uncontrollable Inputs
♦ Environmental factors that are not under the control of the decision maker.

The profit per unit (PHP 500), the production time per unit (6 hours), and the production
capacity (48 hours) are environmental factors that are not under the control of the
manager or the decision maker.

→ Decision Variables
♦ Controllable inputs
♦ Decision alternatives specified by the decision maker, such as the number of units of
a product to produce.

In the preceding mathematical model, the production quantity x is the controllable input to
the model.

Full Sample Production Problem:

A complete mathematical model for our simple production problem is:

Maximize: 500x (objective function)

Subject to: 6x ≤ 48 (constraint)

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 x ≥ 0 (constraint)

The second constraint reflects the fact that it is not possible to manufacture a negative number
of units.

→ Deterministic Model
♦ If all controllable inputs to the model are known and cannot vary.

→ Stochastic (Probabilistic) Model

♦ If any uncontrollable inputs are uncertain and subject to variation.
♦ These are often more difficult to analyze.

In the simple production problem example, if the number of hours of production time per
unit could vary from three (3) to six (6) hours depending on the quality of the raw material,
the model will be stochastic.

→ Cost / Benefit Considerations

♦ Must be made in selecting an appropriate mathematical model.

Frequently, a less complicated (and perhaps less precise) model is more appropriate than
a more complex and accurate one, due to cost and ease of solution considerations.

Flowchart of the Process of Transforming Model Inputs to Outputs

Data Preparation
→ Not a trivial step due to time required and the possibility of data collection errors.
♦ Ex. A model with 50 decision variable and 25 constraints could have over 1300 data
elements.
→ Often, a large database and information systems specialists might be needed.

Model Solution

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 → Analyst attempts to identify the alternative on the set of decision variable values that
provides the “best” output for the model.
♦ The best output is considered as the optimal solution.

→ Provided that the alternative can satisfy all the model constraints, it is deemed as feasible and
a candidate for the best solution.
♦ However, the alternative is rejected and deemed as being infeasible if it does not satisfy
all the model constraints.

Trial-and-Error Solution for Production Problem

Total Hours of
Production Quantity Projected Profit Feasible Solution
Production

0 0 0 Yes

2 1000 12 Yes

4 2000 24 Yes

6 3000 36 Yes

8 4000 48 Yes

10 5000 60 No

12 6000 72 No

Note: Software packages like Microsoft Excel and Lingo are available for solving mathematical models.
Model Testing and Validation
→ Until there are solutions generated, the goodness or accuracy of a model cannot be
assessed.
→ Small test problems having known and/or solutions can be used for model testing and
validation.
→ If the model generates expected solutions, the model is used on the full-scale problem.
♦ Corrective Actions (in cases of inaccuracies or potential shortcomings in the model)
● Collection of More Accurate Input Data
● Modification of the Model

Report Generation
→ A managerial report that can be easily understood by the decision maker should be prepared
based on the results of the model. It should include:
♦ The recommended decision
♦ Other pertinent information about the results (Ex. Sensitivity of model solution to
assumptions and data used.)

Management Science Techniques

→ Analytic Hierarchy Process

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 ♦ Multi-criteria decision-making technique that permits the inclusion of subjective
factors in arriving at a recommended decision.

→ Decision Analysis
♦ Used in determining the optimal strategies in situations involving several decision
alternatives and an uncertain pattern of future events.

→ Forecasting Methods
♦ Techniques that can be used to predict future aspects of a business operation.

→ Goal Programming
♦ Technique for solving multi-criteria decision problems, usually with the framework of
linear programming.

→ Integer Linear Programming

♦ An approach used for problems that can be set up as linear programs with additional
requirement that some or all the decision recommendations be integer values.

→ Inventory Models
♦ Used by managers that are faced with the problems of maintaining sufficient
inventories to meet demand for goods and, incurring the lowest possible inventory
holding costs at the same time.

→ Linear Programming
♦ Problem-solving approach that is developed for situations involving maximizing or
minimizing a linear function subject to linear constraints that limit the degree to
which the objective can be pursued.

→ Markov-Process Models
♦ Useful in studying the evolution of certain systems over repeated trials (Ex.
Describing the probability that a machine, functioning in one period, will function or break
down in another period).

→ Network Models
♦ Specialized solution procedures for problems in transportation system design,
information system design, and project scheduling.

→ Project Scheduling: PERT (Program Evaluation and Review Techniques / CPM (Critical
Path Method)
♦ Helps managers responsible for planning, scheduling, and controlling projects
that consist of numerous separate jobs or tasks performed by a variety of departments,
individuals, etc.

→ Simulation
♦ Uses a computer program to model the operation of a system and perform
simulation computations.

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 → Waiting Line (Queueing Models)
♦ Helps managers in understanding and making better decisions concerning the
operation of systems involving queueing or waiting lines.

Methods Used Most Frequently

→ Linear Programming
→ Integer Programming
→ Network Models (Transportation and Transshipment Models)
→ Simulation

Sample Problems on Management Science Techniques

→ Linear Programming Problem (Maximization)

♦ Production must be scheduled in two types of machines: machine 1 and machine 2.
♦ One hundred twenty (120) hours of time can be scheduled for machine 1 and eighty (80)
for machine 2.
♦ Production during the scheduling period is limited to two products: A and B.
♦ Each unit of product A requires two (2) hours of process time on each machine.
♦ Each unit of product B requires three (3) hours on machine 1 and one and a half (1.5)
hours on machine 2.
♦ The profit is PHP 200 per unit of product A and PHP 250 per unit of product B.
♦ Both types of products can be readily marketed; consequently, production should be
scheduled with the objective of maximizing profit.

→ Linear Programming Problem (Maximization)

♦ A feed supplier mixes feed for pigs which requires at least 80 kg of nutrient A, at least 12
kg of nutrient B, and at least 14 kg of nutrient C.
♦ Mico, the supplier, has available soybean meal which costs PHP 150 per 50-kg sack and
contains 20 kg of nutrient A, 2 kg of nutrient B, and 2 kg of nutrient C.
♦ He can also supply enriched darak which costs PHP 140 per 50-kg sack and contains 10
kg, 2 kg, and 3 kg of nutrients A, B, and C respectively.
♦ How many sacks of each ingredient should be used to mix animal feed which satisfies
the minimum requirements at minimum cost?

→ Network Models (Transportation Problem)

♦ A national firm has three factories and four warehouses.
♦ The cost of manufacturing a given product is the same at each of the factories, the cost
of shipping the product from the different factories to the warehouses varies. The
transportation costs, factory capacities, and warehouse requirements are given in the
table.

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 Warehouse
Factory
Factory
Capacity
W1 W2 W3 W4

F1 15 24 11 12 5000

F2 25 20 14 16 4000

F3 12 16 22 13 7000

Warehouse
3000 2500 3500 4000
Requirement

→ Network Models (Assignment Problem)

♦ A firm has five jobs that must be assigned to five work crews.
♦ The cost of each work crew to do each job is given by the cost matrix shown:

I/J 1 2 3 4 5

1 41 72 39 52 25

2 22 29 49 65 81

3 27 39 60 51 40

4 45 50 48 52 37

5 29 40 45 26 30

→ Project Scheduling (PERT / CPM)

♦ A social project manager is faced with a project with the following activities:

Activity Description Duration

Social work team to live in the village. 5 weeks

Social research team to do surveys. 12 weeks

Analyze results of surveys. 5 weeks

Establish mother and child health programs. 14 weeks

Establish a rural credit programme. 15 weeks

Carry out immunization of under-fives. 4 weeks

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MODULE 2: Forecasting Techniques

Forecasts
→ These are basic inputs in decision processes because they provide information on future
sales, demand, etc. (Stevenson, 2012).
→ A prediction of what will happen in the future. (Anderson, et al., 2019)
♦ There is no such thing as a perfect prediction. (Anderson, et al., 2019)
→ Main purpose is to have a better estimate of the future and in doing so be able to reduce the
risks of uncertainties (Render, et al., 2016).

→ Forecasting Methods:
♦ Qualitative
▪ Involves the use of expert judgment to develop forecasts.

♦ Quantitative
▪ Can be used when:
o Past information about the variable being forecast is available.
o The information can be quantified.
o It is reasonable to assume that the past is the prologue, or the past will
continue to the future.

Types of Forecasting Models and Simple Linear Regression Analysis

→ Associative Forecasting
♦ termed as simple linear regression (SLR).

→ Assumptions
♦ conditions that must be met
♦ Violations occur when they are not met, hence, the simple linear regression cannot be
performed for prediction.

Types of Forecasting Techniques (Render, et al., 2016)

→ Qualitative Models
♦ Based on judgmental or subjective factors
● Unavailable o unapplicable historical data
● Relies on expert opinion and individual experiences.
▪ Ex. Introducing a New Product
o Forecasting Demand is difficult due to lack of any historical sales
data.

♦ Types of Qualitative Models:

● This iterative group process allows experts in
Delphi Method different places to make forecasts.
● Often involves three types of participants:

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 - decision makers (usually five (5) to ten (10)
experts)
- staff personnel (assists decision makers)
- respondents (people whose judgments are
valued and being sought).
● Data or answers that were gathered from the
respondents by distributing an initial questionnaire
are used to modify new questionnaires. This
process, then, repeats until a consensus is
reached.

● An approach where each salesperson estimates

what sales will be in his/her region.
● To reach an overall forecast, gathered forecasts
Sales Force Composite from different regions are reviewed and combined
at the district and national levels. Data starts from
an inner circle to a larger one, then reaches an
overall forecast.

● In this method, there is a group of experts (high

level managers who are equipped quantitatively
and qualitatively) who make decisions. Their
Jury of Executive Opinion
opinions are, then, taken, often a combination with
statistical models, and results in a group estimate
or demand.

● A method that solicits ideas from customers or

Consumer Market Survey
potential customers about their future purchasing
plans.
● Assists in forecast preparation, product design
improvement, and new product planning, and uses
input from customers to modify or create
products.

→ Time-Series Models
♦ Quantitative forecasting models / techniques that attempt to predict the future values
of a variable by using only historical data (element of time) on that one variable.
● These are extrapolations of past values of that series.
● Extends the data grounded on the historical data.
▪ Ex. Using the past weekly sales for lawn mowers in making the forecast
for future sales.

♦ Time-Series Analysis and Forecasting Components:

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 Trend ● Overall long-term direction of the series.

● Occurs when there is repeated behavior in the

Seasonality data happening at regular intervals.
● Related to seasonal, natural, or human behavior.

● Occurs when the series follows an up-and-down

Cycles movement with no regular intervals.
● More difficult to detect than seasonality.

Variation ● Regular with the little random variation

● There are strange dips and jumps that may occur

Irregularities
due to a one-off event.

→ Causal Models
♦ Quantitative forecasting models wherein the variable to be forecasted is influenced
by or correlated with other variables included in the model.
● Includes regression models and other more complex models.
● Establishes a connection between variables.
▪ Ex. Daily Sales of bottled water might depend on the average
temperature and humidity, among others.

Simple Linear Regression

x = independent variable y = dependent variable

Regression Analysis (Render, et al., 2016)

→ Has two purposes:
♦ Understanding the relationship between two variables.
♦ Predicting the value of one variable based on the other.
→ Has virtually limitless applicability
♦ Ex. Level of Education, Income, Price of a House, etc.
→ Hypothesized relationship may be linear, quadratic, or some other form.
→ Two types of variables:
♦ Dependent Variable
● Also known as the predicted variable or response variable.

♦ Independent Variable
● Also known as the explanatory variable or predictor variable.

Correlation Analysis
→ Analysis of bivariate data typically begins with a scatter plot that displays each observed pair
of data (x,y).
♦ Can be done by a scatter plot or scattergram.
→ Used to measure the strength of the linear relationship between two variables.

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 ♦ Correlation is only concerned with the strength of the linear relationship.
♦ No causal effect is implied with the correlation.

→ The sample correlation coefficient (like Pearson’s r and Spearman’s rho) measures the degree
of linearity in the relationship between two random variables X and Y, with the value in the
internal (-1,1).
♦ If the slope is leaning to the right = perfect positive
♦ If it is leaning towards the left = perfect negative
♦ 0 = no linear relationship
♦ The nearer the result is to 1, the stronger the relationship.

Tests for Significant Correlation using Student’s t

→ The sample correlation coefficient r is an estimate of the population correlation coefficient p.
♦ Also called the slope test.
♦ There is no flat rule for a high correlation because sample size must be taken into
consideration.

To test the hypothesis Ho: ρ = 0, where there is no linear relationships, the test statistic is:

𝑛−2
tcomputed = 2
1−𝑟

H1: ρ≠0, where there is a linear relationship.

After calculating this value, we can find its p-value by using Excel’s function =
T.DIST.2T(t,deg_freedom).

If the result is <0.05, reject the Ho and accept the H1.

Types of Relationships in Regression Analysis

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 → Simple Linear Regression Model
♦ It has only one independent variable, X.
♦ The relationship between X and Y is described by the linear function.
♦ The changes in Y are related to changes in X.

Overview on Time Series and Forecasting

PAST PRESENT FUTURE

It is considered as historical Analysis of the past Forecasting or predicting

information. information that is used to possible emerging events in
uncover design, pattern, or the future based on the model
model. made at present based on the
analyzed past information.

Major Areas of Forecasting

TECHNOLOGY
DEMAND FORECASTING ECONOMIC FORECASTING
FORECASTING

It predicts the timing and It predicts future business It predicts possible

quantity of demand of a firm’s conditions with reference to technological advancement in
commodities. the underlying economic factors the future (Ex. Latest digital
such as inflation, GDP, GNP, devices and systems)
etc.

Uses of Time Series

→ To compare the changes in the values of different phenomena at different times.
→ To formulate policy decisions and planning of future operations.
→ To predict, estimate, or forecast the behavior of the phenomenon in the future which is
essential in business planning.
→ To study the past behavior of the variable.

Time Series Patterns (Anderson, et al., 2016)

→ Time Series
♦ Sequence of observations on a variable measured at successive points in time or
over successive periods of time.
● Measurements may be taken every hour, day, week, month, year, or at any other
regular intervals.
♦ Data pattern is an important factor in understanding how the time series has behaved in
the past.
● If this behavior can be expected to continue in the future, it can be used in
selecting an appropriate forecasting method.

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 ▪ Ex. Stock price, Sensex, exchange rate, interest rate, inflation rate,
national GDP, retail sales, electric power consumption, and number of
accident fatalities.

Patterns and Trends in Time Series Plots (Anderson, et al., 2018)

→ The common types of data patterns that can be identified when examining a time series plot
include:
♦ Horizontal
♦ Trend
♦ Seasonal
♦ Trend & Seasonal
♦ Cyclical

Horizontal Pattern
→ When the data fluctuates randomly around a constant mean over time.
→ Stationary Time Series
♦ Refers to a time series whose statistical properties are independent of time.
● This means that the process generating data has a constant mean and the
variability of the time series is constant over time.
Example of Stationary Time Series

GASOLINE TIME SERIES

WEEK SALES (1000s OF GALLONS)

1 17

2 21

3 19

4 23

5 18

6 16

7 20

8 18

9 22

10 20

11 15

12 22

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 GASOLINE SALES TIME SERIES PLOT
→ A time series plot for a stationary time series will always exhibit a horizontal pattern with
random fluctuations.

Trend Pattern
→ This time series shows gradual shifts or movements to relatively higher or lower values
over a longer period.
→ A trend is usually the result of long-term factors such as:
♦ Population increases or decreases.
♦ Shifting demographic characteristics of the population.
♦ Improving technology.
♦ Changes in consumer preferences.
→ Trends may be steady and predictable, increasing, decreasing, or staying the same.
(Doane and Seward, 2016)

Example of Time Series with Linear Trend Pattern

BICYCLE SALES TIME SERIES

YEAR SALES (1000s IN UNITS)

1 21.6

2 22.9

3 25.5

4 21.9

5 23.9

6 27.5

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 7 31.5

8 29.7

9 28.6

10 31.4

BICYCLE SALES TIME SERIES PLOT

Seasonal Pattern
→ They are recognized by observing recurring patterns over successive periods of time.
→ Refers to a pattern that is influenced by seasonal factors or in regular interval (Ex. quarterly,
monthly, or daily).
→ Time series of less than one year can also exhibit seasonal patterns of less than one year in
duration, time series data can also exhibit seasonal patterns of less than one year in duration.
♦ Examples: Daily traffic volume shows within-the-day “seasonal” behavior, with peak
levels occurring during rush hours.
● Business in the restaurant industry also experience within-the-day “seasonal”
behavior, with peak levels occurring at lunch time or dinner time.
→ It occurs when there is repeated behavior in the data that occurs at regular intervals; related
to seasonal, natural, or human behavior.

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Example of Time Series with a Seasonal Pattern
UMBRELLA SALES TIME SERIES

YEAR QUARTER SALES

1 125

2 153
1
3 106

4 88

1 118

2 161
2
3 133

4 102

1 138

2 144
3
3 118

4 80

1 109

2 137
4
3 125

4 109

1 130

2 165
5
3 128

4 96

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 UMBRELLA SALES TIME SERIES PLOT

Trend & Seasonal Pattern

→ This pattern occurs in a time series that includes both a trend and a seasonal pattern.
→ In such cases we need to use a forecasting method that has the capability to deal with both
trend and seasonality.
→ Time series decomposition can be used to separate or decompose a time series into trend
and seasonal components.

Cyclical Pattern
→ It exists if the time series plot shows an alternating sequence of points below and above the
trend line that lasts for more than a year or when the data exhibit rises and falls that are not of
a fixed period.
♦ Many economic time series exhibit cyclical behavior with regular runs of observations
below and above the trend line.
→ Often, the cyclical component of a time series is due to multiyear business cycles, such as
periods of moderate inflation followed by periods of rapid inflation.
♦ Since business cycles are extremely difficult to forecast, cyclical effects are often
combined with long-term trend effects and are referred to as trend-cycle effects.
→ It occurs when the series follows an up and down movement with no regular intervals.
♦ More difficult to detect than seasonality.

Selecting a Forecasting Method (Anderson, et al., 2016)

→ The underlying pattern in the time series is an important factor in selecting a forecasting
method.
♦ Thus, a time series plot should be one of the first analytic tools employed when trying
to determine which forecasting method to use.
→ The objective of forecasting is for the error to be as slight as possible.
→ One way of determining if a forecasting technique chosen is appropriate is through the forecast
accuracy.

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Forecast Accuracy (Anderson, et al., 2016)
→ Naïve Forecasting Method
♦ Simplest of all forecasting methods
♦ Uses the most recent observation in the time series as the forecast for the next time
period.
→ The key concept associated with measuring forecast accuracy is forecast error.
♦ It is defined as the difference between the forecast and actual demand at the same
time period.
● ACTUAL VALUE – FORECAST = FORECAST ERROR

NEGATIVE FORECAST
POSITIVE FORECAST ERROR FORECAST BIAS
ERROR

It indicates that the forecasting It indicates that the forecasting The persistent tendency for
method underestimated the method overestimates the forecasts to be greater or
actual value. actual value. less than the actual values of
a time series.

Some Measures of Forecast Accuracy

→ Mean Absolute Deviation (MAD)
♦ A MAD of 0 indicates that the forecast has exactly predicted demand.

→ Mean Absolute Percentage Error (MAPE)

♦ Provides a perspective of the true magnitude of the forecast error.

→ Mean Squared Error (MSE)

♦ Analogous to variance; large forecast errors are heavily penalized.

Comparison of the Three Measures

→ The MAPE and the MSE are measures that avoid the problem of positive and negative
forecasting errors offsetting one another.
♦ The size of these depends upon the scale of the data.
♦ As a result, it is difficult to make comparisons of different time intervals or to make
comparisons across different time series.
→ To make comparisons across different time series, the MAPE offers the advantage.
♦ These three simply measure how well the forecasting method can forecast historical
values of the time series.
→ In general, the smaller the value of the forecast accuracy, the more accurate the forecast.

Some Notes about Measures in Forecast Accuracy

→ Forecast accuracy may not assure good forecasts.
→ Forecast accuracy gives an idea of how close the forecasted values, predicted by the
estimated model, or be alike with the actual values of the corresponding historical past data.
→ MAD computes absolute difference.

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 → MAPE computes relative to the totality of the data and commonly used when comparing cases
of different size or degree/amount (e.g case 1 in millions; case 2 in tens or units).
→ The lower the value of any of the 3 measures, the better quality of forecast accuracy.

MODULE 3: Formulation of Linear Programming Problems

Linear Programming

➔ A problem-solving method that is used by managers to find the optimal solution for a given
problem by expressing problems in linear equations and inequalities
➔ The objective of linear programming is to maximize or minimize a certain quantity
➔ It usually only optimizes one goal and places other goals as linear constraints to be satisfied.
◆ Linear programming problem - a problem where both the objective function and
constraints are linear.
● Graphical Solution Method - is used to solve linear programming problems with
two variables.
◆ Linear functions - a function where variables are raised to the first power, and
multiplied by a constant.
◆ Linear constraints - linear functions that are assigned to be “greater than or equal
to”(≥), “equal”(=), or “less than or equal to”(≤)

Most Common Allocation Problems of Linear Programming

➔ Product-Mix Problem (Maximization)

◆ finding which products to include in the production plan and in what quantities the
chosen products should be produced.
➔ Blending Problem (Minimization)
◆ determining the most optimum blend of ingredients to minimize costs, but still reach the
required quantity of a product.

Components of Linear Programming Model

➔ Decision Variables
◆ known as independent variables/ controllable inputs
◆ inputs that are decided on by the managers
◆ value can be the number of units to produce or resources to allocate
➔ Objective Function
◆ can be to minimize costs, or maximize profit
◆ showing the objective as a linear function
◆ Profit/Cost Coefficients - shows the rate of increase/decrease of the objective function
value
➔ Constraints
◆ restrictions or limitations of the problem that are uncontrollable
◆ Composed of...
● Input-output Variables - displays how much of a resource is used
● Capacity of Various Resources - expresses limit of resources, as well as
minimum requirements
● Limits to Decision Variables - if inputs can be positive, negative, unrestricted

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 ○ Non-negativity constraints - also known as logical constraint; ensures
the solution will not have negative values; a general feature of most linear
programming problems as it is impossible to produce a negative number
of products (ex: x ≥ 0)

Problem Formulation or Modeling

➔ turning real-world problems or verbal statements into linear programs/mathematical statements

Guidelines in Problem Formulation

➔ Understand the problem:

◆ identify what needs to be included in the model; tabulate data
➔ Describe the objective:
◆ either to minimize or maximize a quantity
➔ Describe each constraint:
◆ enumerate all limitations
➔ Define the decision variables:
◆ assign variables(x, y/x 1,x2, etc. ) to the controllable inputs
➔ Write the objective in terms of the decision variable:
◆ denoted by MaxZ if the objective is to maximize
◆ denoted by MinZ if the objective is to minimize
➔ Write the constraints in terms of the decision variable

Problem Formulation Sample

XYZ Paints manufactures elegant paint shades that homeowners have wanted to buy. Currently
in demand are Shade A and Shade B, which cost $25 and $35 per bucket respectively. The
production of Shade A takes two hours and Shade B takes two and a half hours. Find the
product mix that will maximize profit, if there will only be 100 hours allotted for the production
period.

➔ Understand the problem

◆ The needed data are tabulated below, to identify the values to be used in problem
formulation

Product Production Cost Production Time Allotted Production Time

Shade A $25 2 hours

100 hours
Shade B $35 2.5 hours

➔ Describe the objective

◆ The objective of XYZ Paints is to maximize profit
➔ Describe each constraint
◆ The production time for Shade A and Shade B cannot exceed 100 hours
◆ It is impossible to produce a negative amount of buckets, so the number of buckets
produced will be greater than or equal to zero
➔ Define the decision variables
◆ DV:

23
 let x = number of buckets of Shade A to produce

y = number of buckets of Shade B to produce

➔ Write the objective in terms of the decision variable

◆ OF:

MaxZ = 25x + 35y

➔ Write the constraints in terms of the decision variable

◆ C:

2x + 2.5y ≤ 100

x ≥ 0, y ≥ 0

Practical Applications of Linear Programming

➔ Operations Management
◆ Helps in company operations like production scheduling, inventory management,
product-mix, staffing needs, and other problems.
● Constraints in Operations Management include storage space, labor, production
capacity, and more

➔ Financial Decision-Making
◆ Helps managers and companies in financial planning, allocating assets, portfolio
selection, and more.
● Portfolio selection - making investment decisions and choosing the best among
the alternatives
◆ The objective function here is maximizing return on investments, or minimizing
risks.
➔ Marketing Research
◆ Helps researchers in designing studies, analyzing data, conducting surveys, and more
◆ Used when targets and quotas for certain types of respondents are needed
◆ The objective function here is to conduct surveys that meet the client's needs but at a
minimum cost.

MODULE 4: Sensitivity Analysis on Changes in the Objective Function Coefficient (OFC)

Sensitivity or Post Optimality Analysis

➔ Analysis of the effect of change in one or more parameters (say, change in the objective
function coefficient or right-hand side) defining a linear programming model.
➔ Analysis of the effect on the optimal solution on changes in the parameters of the problem on
the current optimal solution.
◆ analysis does not begin until the optimal solution to the original linear programming
problem has been obtained.
◆ Meaning, sensitivity analysis cannot be made until optimum solution is made. Which is
why sensitivity analysis is sometimes referred to as post-optimality analysis.

24
 ◆ This is important to decision makers because real-world problems exist in a changing
environment.

● This recognizes the fact that management operates in a dynamic environment.

● Changes like costs or prices of raw materials, product demand changes,

companies purchase new machinery, stock prices fluctuate, employee turnover
occurs, availability of resources, and the like are possible as well as technological
advances affecting production processes.

➔ What if there is uncertainty about one or more values in the LP model?

◆ Sensitivity analysis allows the decision maker to ask certain “what-if” questions about the
problem.

● What effect will additional resources have on the total profit?

● What particular resources are diminished?

● What if per-unit profit contributions are increased or decreased?

○ Profit contribution – refers to the objective function coefficient 𝑐1 and 𝑐2.

○ Total profit contribution – refers to the objective function value Z.

◆ If Max Z = 𝑐1𝑥1 + 𝑐2𝑥2

● What if more efficient production processes become readily available?

Sensitivity Analysis of OFC

➔ Let the Objective Function be Max Z = 𝑐1𝑥1 + 𝑐2𝑥2:

◆ The sensitivity analysis will allow us to answer the following questions:
● Will a change in the OFC (𝑐1 𝑎𝑛𝑑 𝑐2) cause a change in the optimal solution?
● Will the optimum solution remain optimal upon changes in the OFC?
● What range of changes (range of optimality) can be made in the OFC (𝑐1 𝑎𝑛𝑑 𝑐2)
that will cause change in the optimum solution?

➔ The sensitivity analysis will allow us to answer the following questions:

◆ What will happen to the OF value Z, if available resources (RHS) are increased or
decreased?
◆ How much is the increase in the OF value Z for each additional resource (RHS) to the
constraint?
◆ How much decrease in the OF value Z for each lost in the resource to the constraint?
◆ Will the price per unit of the resource (shadow price) remain the same regardless of the
available resources?
◆ What is the range of the available resources (RHS) allowed to keep the price per unit of
the resource (shadow price) unchanged?

Graphical Sensitivity Analysis

25
 ➔ We can use the graph of an LP model to see what happens when:
1. An Objective Function Coefficient (OFC) changes, or
2. A Right-Hand Side (RHS) changes

Sensitivity Analysis on the Change in the Objective Function Coefficient (OFC)

➔ The following mathematical concepts and procedures much be recalled:

◆ Graph of the LP model
◆ Graph of linear equations (OF line) using slope-intercept form y = mx + b
◆ Understand the concepts of slopes
◆ Solution and properties of linear inequalities or complex linear inequalities.
➔ In performing the sensitivity analysis for changes in the OFC, the following question arises:
◆ How do changes made to the coefficients of the objective function Z = 𝑐1𝑥1 + 𝑐2𝑥2 affect
the optimal solution?
● Changes in the OFC (𝑐1 𝑎𝑛𝑑 𝑐2) has no effect on the feasible region.
● Changes in the OFC (𝑐1 𝑎𝑛𝑑 𝑐2) change the slope of the objective function line
(OF line).
● There is a range for each OFC (𝑐1 𝑎𝑛𝑑 𝑐2) where the current optimal corner
point (or optimum solution) remains optimal. Thus, changes in the OFC
(𝑐1 𝑎𝑛𝑑 𝑐2) have limitations to keep the optimum solution optimal called Range
of Optimality.
● If the slope changes beyond the Range of Optimality, a different corner point
will become optimal.
● If the OFC (𝑐1 𝑎𝑛𝑑 𝑐2) changes beyond that range, a new corner point becomes
optimal.

Illustration 1: Consider the LP Model and the Graphical Solution

➔ Max = 5𝑥1 + 7𝑥2

➔ s.t. 𝑥1 ≤ 6
2𝑥1 + 3𝑥2 ≤ 19

𝑥1 + 𝑥2 ≤ 8

➔ NNC: 𝑥1 , 𝑥2 ≥ 0
◆ The graph above gives the optimum solution to the LP model including the objective
function (OF) line.

26
 ◆ Remember in analytic geometry that linear equations can be graphed using any method
of linear equations (i.e., slope-intercept form).

➔ To graph the OF line:

◆ Using the slope-intercept form, the OF 5𝑥1 + 7𝑥2 can be graphed by equating the OF by
the LCM of 5 and 7 which is 35, then express the equation in slope-intercept form,
𝑥2 = 𝑚𝑥1 + 𝑏. Observe the following procedure:
5𝑥1 + 7𝑥2 = 35
7𝑥2 =− 5𝑥1 + 35
5
𝑥2 =− 7
𝑥1 + 5
5
○ Thus, the slope m = − 7
and 𝑥2 − 𝑖𝑛𝑡𝑒𝑟𝑐𝑒𝑝𝑡 = 5.
○ Therefore, the OF line is passing through (0,5) using the definition of the
slope m (rise/run), we get the second point (7,0). Move the OF line
towards the area of the feasible region until the OF line intersects the
optimum solution (5,3).

➔ Find the slope of the OF and the binding constraints:

𝑐1
◆ The slope of the objective function line Max = 𝑐1𝑥1 + 𝑐2𝑥2, 𝑖𝑠 − 𝑐2
;

◆ The slope of the first binding constraint, 𝑥1 + 𝑥2 = 8 𝑖𝑠 − 1; and

2
◆ The slope of the second binding constraint, 2𝑥1 + 3𝑥2 = 19, 𝑖𝑠 − 3
.
● OBJECTIVE FUNCTION:
Max Z = 𝑐1𝑥1 + 𝑐2𝑥2
𝑐1𝑥1 + 𝑐2𝑥2 = 𝑍
𝑐2𝑥2 = − 𝑐1𝑥1 + 𝑃
𝑐2𝑥2 −𝑐1𝑥1+𝑃
𝑐2
= 𝑐2
𝑐1 𝑃
𝑥2 = − 𝑐2
𝑋+ 𝑐2

● SLOPE OF CONSTRAINT 2:
2𝑥1 + 3𝑥2 = 19
3𝑥2 =− 2𝑥1 + 19
3𝑥2 −2𝑥1+19
3
= 3
2 19
𝑥2 = - 3
𝑥1 + 3
2
𝑠𝑙𝑜𝑝𝑒1 = - 3
● SLOPE OF CONSTRAINT 3:
𝑥1 + 𝑥2 = 8
𝑥2 =− 𝑥1 + 8

27
 𝑠𝑙𝑜𝑝𝑒1 = - 1
➔ Range of Optimality for 𝑐1:
◆ Find the range of possible values for 𝑐1 (Max 5𝑥1 + 7𝑥2, 𝑤𝑖𝑡ℎ 𝑐2 𝑠𝑡𝑎𝑦𝑖𝑛𝑔 7) such that:
● The objective function line slope lies between the slopes of the two binding
constraints.
𝑐1 2
● Inequality: − 1 ≤ − 𝑐2
≤ − 3
𝑐1 2
− 1≤ − 7
≤ − 3
𝑐1
− 7 ⎡⎢− 1 ≤ − 7 ≤ − ⎤− 7
2
3 ⎥
⎣ ⎦
14
7 ≥ 𝑐1≥ 3
14
3
≤ 𝑐1≤ 7
4. 7 ≤ 𝑐1≤ 7
[4. 7 , 7]

➔ Range of Optimality for 𝑐2:

◆ Find the range of values for 𝑐2 (With 𝑐1 𝑠𝑡𝑎𝑦𝑖𝑛𝑔 5) such that the objective function line
slope lies between that of the two binding constraints:
5 2
− 1≤ − 𝑐2
≤ − 3

− 1 ⎡⎢− 1 ≤ − 𝑐 ≤ − ⎤− 1
5 2
3 ⎥
⎣ 2 ⎦
5 2
1≥ 𝑐 ≥ 3
2
𝑐2 3
1≤ 5
≤ 2
𝑐2
5 ⎡⎢1 ≤ 5 ≤ 2 ⎤⎥ 5
3
⎣ ⎦
15
5 ≤ 𝑐2≤ 2
5 ≤ 𝑐2≤ 7. 5
[5, 7. 5]
➔ Range of Optimality for 𝑐1 𝑎𝑛𝑑 𝑐 :
2
◆ Therefore, the range of optimality for the given LP model is:
14
Range of optimality for 𝑐1: 3
≤ 𝑐1≤ 7 or [4. 7 , 7]
15
Range of optimality for 𝑐2: 5 ≤ 𝑐2≤ 2
or [5, 7. 5]

o This indicates that, from the original OF coefficients, 𝑐1 = 5 𝑎𝑛𝑑 𝑐2 = 7:

o The value 𝑐1 = 5 can be decreased to as low as 4.7 and could be increased to
as high as 7, keeping the OF line within the graphs of the two binding constraints.

28
 o The value 𝑐2 = 7 can decrease to as low as 5 and could be increased to as high
as 7.5, keeping the OF line within the graphs of the two binding constraints.

➔ Range of Optimality
◆ The range of optimality for each objective function coefficient 𝑐1 𝑜𝑟 𝑐 , provides the set of
2
values over which the current solution will remain optimal.
● Range of Optimality can be expressed as:

● Remember: the solution is kept optimal as long as the slope of the objective
function line is between the slope of the two binding constraints.
● This means that, the optimal solution (𝑥1 , 𝑥 ) remains optimal as long as the
2
graph of the OF is within the graph of the two binding constraints while changing
the OFC (𝑐1 𝑜𝑟 𝑐 ) within the range of optimality.
2
◆ In finding the range of optimality, take note of the following:

● Rotating the objective function line counterclockwise causes the slope to become
less negative, and the slope increases. When the objective function line rotates

29
 counterclockwise (slope increased) enough to coincide with line A, we obtain
alternative optimal solutions between extreme points 3 and 4.
● Any further counterclockwise rotation of the objective function line will cause
extreme point 3 to be nonoptimal. Hence, the slope of line A provides an upper
limit for the slope of the objective function line.
● Rotating the objective function line clockwise causes the slope to become more
negative, and the slope decreases. When the objective function line rotates
clockwise (slope decreases) enough to coincide with line B, we obtain alternative
optimal solutions between extreme points 3 and 2.
● Any further clockwise rotation of the objective function line will cause extreme
point 3 to be nonoptimal. Hence, the slope of line B provides a lower limit for the
slope of the objective function line.

Understanding Binding and Non-Binding Constraints

(Consider the graphical solution of Par Inc. Model below)

◆ Binding constraint is one where an optimum solution is on the line for the constraint.
Thus, if this constraint (RHS) were to be changed slightly (increased or decreased), this
optimal solution would no longer be feasible.
◆ From the diagram above, the cutting and dyeing constraint and finishing constraint are
binding.
◆ Non-binding constraint is one where no optimal solution is on the line for the
constraint. The inspection and packaging constraints are non-binding.
◆ Take note also that a binding constraint is a constraint whose RHS is exhausted (all
the resource is consumed) at the optimum solution.
◆ To determine if a constraint is binding, substitute the optimum solution (𝑥1, 𝑥2) with
the constraint.
◆ It is binding if the left-hand side is equal to the right-hand side, otherwise, non-binding.

30
Illustration 2: Solve for the range of optimality for PAR Inc., problem

➔ Par, Inc. is a small manufacturer of gold equipment and supplies whose management has
decided to move into the market for medium and high-priced golf bags, the Standard bag and
the Deluxe bag. Par, Inc.’s distributor is enthusiastic about the new product line and has agreed
to buy all the gold bags Par, Inc. produces over the next three months.
➔ After thorough investigation of the steps involved in manufacturing a golf bag, management
determined that each golf bag produced will require the following operations:
1. Cutting and dyeing
2. Sewing
3. Finishing (inserting umbrella holder, club separator, etc.)
4. Inspection and packaging

➔ Below shows the LP model and graphical solution for PAR Inc., problem:
◆ Let S = Standard bag
D = Deluxe bag

◆ LP Model for PAR Inc. problem

Max = 10𝑆 + 9𝐷
7
s.t. 10
𝑆 + 𝐷≤630 Cutting & Dyeing
1 5
2
𝑆 + 6 𝐷≤600 Sewing
2
𝑆 + 3 𝐷≤708 Finishing
1 1
10
𝑆 + 4 𝐷≤135 Inspection and Packaging
○ NNC: 𝑆 , 𝐷 ≥0

31
 ◆ The graph above shows the optimum solution (540, 252) whose OF value P = 7668.
Notice that the two binding constraints (Cutting & Dyeing and Finishing) and the OF line
intersects at the optimum solution.
◆ Inspection and Packaging (non-binding)
◆ Sewing (redundant constraint)
➔ Solve for the Range of Optimality for the Standard Bag (𝑐1): (keeping the coefficient of the
deluxe bag constant, 𝑐2 = 9)
3 𝑐1 7
◆ Inequality: − 2
≤ − 9
≤ − 10
𝑐1
− 9 ⎡⎢− ⎤− 9
3 7
2
≤ − 9
≤ − 10 ⎥
⎣ ⎦
27 63
2
≥ 𝑐1≥ 10
63 27
10
≤ 𝑐1≤ 2
6. 3≤ 𝑐1≤ 13. 5
[6.3, 13.5]

➔ Solve for the Range of Optimality for the Standard Bag (𝑐2): (keeping the coefficient of the
standard bag constant, 𝑐1 = 10)
3 10 7
◆ Inequality: − 2
≤ − 𝑐2
≤ − 10

− 1 ⎡⎢− ⎤− 1
3 10 7
2
≤ − 𝑐2
≤ − 10 ⎥
⎣ ⎦
3 10 7
2
≥ 𝑐2
≥ 10

2 𝑐2 10
3
≤ 10
≤ 7
20 100
3
≤ 𝑐2 ≤ 7
6. 67 ≤ 𝑐2 ≤ 14. 29
[6.67, 14.29]

➔ Interpretation for the Range of Optimality for PAR Inc., Problem:

◆ 6. 3≤ 𝑐1≤ 13. 5 Range of Optimality Standard Bag
◆ 6. 67 ≤ 𝑐2 ≤ 14. 29 Range of Optimality Deluxe Bag
● The range of optimality indicates that the profit contribution per standard bag
𝑐1 = 10, could be decreased to as low as 6.3 and could be increase to as high as
13.5, while the profit contribution per deluxe bag 𝑐2 = 9, could be decreased to
as low as 6.67 and could be increased to as high as 14.29.

32
MODULE 4: Graphical Method Sensitivity Analysis (RHS) and Computer Solution Sensitivity Analysis
(RHS)

Graphical Method (steps needed when changing the RHS)

➔ Determine the feasible region of the LP problem.

➔ Identify the optimal solution based on the feasible region graphically together with the maximum
profit/minimum cost.
➔ The improvement in the value of the optimal solution per unit increase (or decrease) in the
right-hand side is called the shadow price or the dual value.
➔ Graphically, a shadow price is determined by adding +1 (or -1) to the right-hand side value of
the requirement or resource being evaluated.
➔ Right-hand side ranging
◆ It involves how many additional units of the resource can be added or subtracted before
the shadow price changes.
◆ It is the process of finding the range of applicability or range of feasibility of shadow
prices.
◆ After adding (or subtracting) to the RHS, resolve for the optimal solution in terms of the
same two binding constraints.
◆ Draw the expanded part of the feasible region then identify the extreme points.
◆ With the enlarged or expanded FR, determine the change in the value of the optimal
solution/function.
◆ Determine the dual value or shadow price by subtracting the original final value of the
optimal solution/objective function & the new final value of the optimal solution.
◆ The change in the value of the optimal solution per unit increases in the right-hand side
of the constraint called the dual value/shadow price.

➔ Graphical solution of the LP problem

◆ The Redy Miks company owns a small paint factory that produces both interior and
exterior house paints for wholesale distribution. Two basic materials, A and B, are used
to manufacture the paints. The maximum availability of A is 6 tons a day; that of B is 8
tons a day. The daily requirements of the raw materials per ton of interior and exterior
paints are summarized in the following table.
Tons of Raw Material Maximum

Exterior Interior Availability

(tons)

Raw material A 1 2 6

Raw material B 2 1 8

Example 1: LP Model of Redy Miks

◆ A market survey has established that the daily demand for interior paint cannot exceed
that of exterior paint by more than 1 ton. The survey also shows that the maximum
demand for interior paint is limited to 2 tons daily. The profit contribution per ton is 3

33
 thousand for interior paint. How much exterior and interior paints should the company
produce to maximize profit?
Objective: To maximize cost, Z

Decision Let x be = tons produced daily of exterior paint

Variables: Y be = tons produced daily of interior paint

Objective Maximize z = 3,000x + 2,000y

Function:

Constraints:

RM A 𝑥 + 2𝑦≤6

RM B 2𝑥 + 𝑦≤8

D: E & I Paint 𝑦 − 𝑥≤1

D: IP 𝑦≤2

Maximize Z = 3,000x + 2,000y

Z = 3,000 (3.33) ++ 2,000 (1.33)
Z = P 12,650

Graphical Sensitivity Analysis

◆ What happens when we increase raw material A by 1 unit?

RM A = 𝑥 + 2𝑦≤6 → RM A = 𝑥 + 2𝑦≤7

34
 ➔ Steps for the solution for the expanded or enlarged FR:
◆ Find the intercepts to plot a new line in the FR
𝑥 + 2𝑦≤7 (0, 3.5) & (7, 0)
2𝑥 + 𝑦≤8 (0, 8) & (4, 0)
◆ Resolve for the value of x & y or the decision variables graphically or using elimination
method or other methods.
◆ Resolve the maximum profit/minimum cost.
◆ Solve the shadow price/dual value as a basis for sensitivity analysis. Use the formula:
𝑝𝑟𝑜𝑓𝑖𝑡𝑛𝑒𝑤 − 𝑝𝑟𝑜𝑓𝑖𝑡𝑜𝑙𝑑

Sensitivity Analysis (Graphical): Effects of Changing RHS

➔ An increase of 1 ton for Raw Material A will cause a change in the value of the optimal solution
or subjective function. Hence, there will be an increase of profit of P13,000 – P12,650 = P350.
◆ This indicates the change in the optimal objective value per unit change in the availability
of the resource (Raw material A). It provides a direct link between the model input
(resources) and its output (total profit).
◆ The change in the value of the optimal solution per unit increase in the right-handed side
of the constraint is called the dual value or shadow price.
◆ It also represents the unit worth of a resource (P350/ton). This means that a unit
increase (or decrease) in Raw Material A capacity will increase (or decrease) profit by
P350.
◆ The manufacturer should not pay more than P350/ton for an additional unit of Raw
material A.
➔ What is the extent or range of increasing or decreasing the RHS?
◆ The range of feasibility is the range over which the shadow price/dual value is
applicable. (or allowable increase or decrease in the constraint)
◆ Graphically, the range of feasibility is determined by finding the values of a right-hand
side coefficient such that the same two lines (two binding constraints) that determined
the original optimal solution continue to determine the optimal solution for the problem
and resolving the values for the decision variables.
◆ As the RHS increases, other constraints will become binding and limit the change in the
value of the objective function.
➔ Implication of the binding & non-binding constraints:
◆ A constraint is considered a binding constraint if changing it also changes the optimal
solution.
◆ Constraints that do not affect the optimal solution are non-binding solutions.
◆ Tightening the binding constraints can worsen the objective function value & loosening it
can improve the objective function value. Hence, once the optimal solution is found,
managers seek to improve the solution by finding ways to relax the constraints.
➔ Constraints & shadow prices:
◆ A binding constraint has a non-zero value while a non-binding constraint has a value
of zero.
◆ A negative shadow price indicates that the objective function will NOT improve if the
RHS is increased.

35
Example 2: Minimization (Graphical)
Corner Point Cost
◆ Let x = quantity of product A
Y = quantity of product B (0,9) P108
◆ Minimize C = P8x + P12y
◆ Subject to: 𝑥 + 3𝑦≥9 Material 1 (2,3) 52
2𝑥 + 2𝑦 ≥10 Material 2
6𝑥 + 2𝑦 ≥18 Material 3 (3,2) 48
x, y ≥ 0 (9,0) 72

Minimum cost = P48

Example 2: Minimization (Graphical Sensitivity Analysis)

➔ What happens when we decrease material 2 by 1 unit? 2𝑥 + 2𝑦 ≥10 → 2𝑥 + 2𝑦 ≥9
➔ Minimum cost = P8 (2.25) + 12 (2.25) = P45
➔ Shadow price = 𝐶𝑜𝑠𝑡𝑛𝑒𝑤 − 𝐶𝑜𝑠𝑡𝑜𝑙𝑑
= P45 – P48
= -P 3.00
◆ a decrease of 1 unit for Material 2 will cause a change in the value of the optimal
solution or objective function. Hence, there will be a decrease of cost of P3.00.
◆ it also represents the unit worth of a resource (P3/unit). This means that a unit
increase (or decrease) in material 2 capacity will increase (or decrease) cost by P3.00.

Example 1: Computer Solution (Using Solver): We will use the same problem on Redy Miks

36
➔ Computer Solution (Using Solver): Generating the Answer Report

➔ Computer Solution (Using Solver): Generating the Sensitivity Report

➔ Computer Solution (Using Solver): Sensitivity Analysis (RHS)

37
◆ In sensitivity analysis, using a computer solution using an excel solver just like in a
graphical method, the shadow price/dual value plays a significant role in the change of
the optimal value of the solution.
◆ The dual value/shadow price associated with a constraint is the change in the optimal
value of the solution per unit increase in the right-hand side of the constraint.
◆ Thus, the shadow price/dual values of P333.33 for raw material A and P1,333.33 for raw
material B tell us that an additional unit of RM A increases the value of the optimal
solution by P333.33, and an additional unit of RM B increases the value of the optimal
solution by P1,333.33.
◆ As in the graphical method, they also represent the unit worth of a resource
(P333.33/ton of RM A & P1,333.33/ton of RM B). This means that a unit increase (or
decrease) in raw material A and capacity will increase (or decrease) profit by P333.33 &
P1,333.33, respectively.
● What is the extent or range of increasing or decreasing the RHS?
○ RM A – 4 to 7 units (allowable change of RHS)
○ RM B – 6 to 12 units (allowable change of RHS)
● What will happen to the optimal solution if the RHS of RM A will be changed to 4
units?
○ Since 2 is within the allowable decrease, then the shadow price will apply.
Hence, the change in profit = 2 x P333.33 = P666.67.
○ This implies in the change of optimal profit:
◆ P12,666.67 – P666.67 = P12,000 the profit has been reduced to
P12,000 since there was a reduction of 2 units in the RHs of RM
A.

● What will happen to optimal solution if the RHS of RM B will be increased by 3

units?
○ Since 3 is within the allowable increase for RM B, then the shadow price
will apply. Hence, the change in profit = 3 x P1,333.33 = P3,999.99.
○ This implies in the change of optimal profit:
◆ P12,666.667 + P3,999.99 = P16,666.66 the profit has been
increased to P3,999.99 since there was also an increase of 3 units
in the RHS of RM B.
◆ Note: as long as the change in the RHS of the evaluated resource
is within the range of feasibility, the corresponding shadow price
will apply.
◆ If the proposed change exceeds the range, the shadow price will
no longer be valid.

◆ As observed from the picture, the shadow prices of binding constraints are non-zero
whereas the shadow prices of the non-binding constraints are both zero.
◆ The dual values of zero show that additional units of these two resources will not
improve the value of the objective function.

38
 ◆ The binding constraints (RM A & RM B) have a slack of zero, indicating that all
resources have been used. Meanwhile, a non-zero slack implies unused resources or
capacity.

Example 2: Minimization (Computer Solution)

Let x = quantity of product A
Y = quantity of product B

Minimize C = P8x + P12y

Subject to:
𝑥 + 3𝑦 ≥9 Material 1
2𝑥 + 2𝑦 ≥10 Material 2
6𝑥 + 2𝑦 ≥18 Material 3
x, y ≥ 0

39
Example 2: Minimization (Computer Solution)

The binding constraints (material 1

and material 2) have a slack of zero,
indicating that all resources have
been used. Meanwhile, material 3
has a slack of 4 which implies
unused resources or capacity for
material 3.

Example 2: Minimization (Computer Solution Sensitivity Analysis)

40
Range of Feasibility:
Material 1: 5 to 11
Material 2: 9 to 18
● What is the extent or range of increasing or decreasing the RHS?
● What will happen to the optimal solution if the RHS of material 1 will be increased
by 2 units?
○ Since 2 is within the allowable increase for material 1, then the shadow
price will apply. Hence, the change in cost = 2 x P2.00 = P4.
○ This implies in the change of optimal cost:
◆ P48 + P4 = P52 the cost has been increased to P52 since there
was also an increase of 2 units in the RHS of material 1.
◆ Note: as long as the change in the RHS of the evaluated resource
is within the range of feasibility, the corresponding shadow price
will apply.
◆ If the proposed change exceeds the range, the shadow price will
no longer be valid.

Limitations of Classical Sensitivity Analysis

➔ Classical sensitivity analysis obtained from computer output can provide useful information on
the sensitivity of the solution to changes in the model input data.
➔ However, classical sensitivity analysis provided by most computer packaged does have its
limitations.
1. Simultaneous changes in input data
2. Changes in constraint coefficients, and
3. Non-intuitive dual values

1. Simultaneous changes in input data

➔ The sensitivity analysis information in computer output is based on the assumption that
only one coefficient changes; it is assumed that all other coefficients will remain.
➔ Thus, the range analysis for the objective function coefficients is only applicable for
changes in a single coefficient.
➔ In many cases, however, we are interested in what would happen if two or more
coefficients are changed simultaneously.

𝑝𝑟𝑜𝑝𝑜𝑠𝑒𝑑 𝑐ℎ𝑎𝑛𝑔𝑒
∑ 𝑎𝑙𝑙𝑜𝑤𝑎𝑏𝑙𝑒 𝑐ℎ𝑎𝑛𝑔𝑒
≤ 100%

➔ The formula suggests that the sum of the ratios of the proposed changes of the
coefficients or RHS to allowable changes must be within 100%. Hence, we call this the
100% RULE.

➔ (For Redy Mikks problem – change in the coefficient of the objective function)
◆ Suppose unit profit for x will increase to P3,300 and unit profit for y will decrease
to 1,800, will the optimal solution remain valid?

41
 ● SOLUTION:
𝑝𝑟𝑜𝑝𝑜𝑠𝑒𝑑 𝑐ℎ𝑎𝑛𝑔𝑒
∑ 𝑎𝑙𝑙𝑜𝑤𝑎𝑏𝑙𝑒 𝑐ℎ𝑎𝑛𝑔𝑒
≤ 100%

The proposed increase for x is P3,300 – P3,000 = 300. Hence, 300/1000 = 0.3
The proposed decrease for y is P2,000 – P1,800 = 200. Hence, 200/500 = 0.4

● The sum of the two proposed ratios is 0.70 or 70% ≤ 100%.

○ This means the optimal solution remains optimal and valid but will
cause a change in the final profit.
○ Profit will be: P3,300 (3.33) + P1,800 (1.33) = P13,383 or we can
resolve this using excel solver.
○ Meanwhile, if the sum of the two ratios > 100%, then the optimal
solution may no longer be valid.

➔ (For Redy Mikks problem – change in the RHS)

◆ The 100% RULE is also applicable for simultaneous changes in the RHS.
Suppose RHS of RM A will be changed to 5 & RHS of RM B will be changed to
10. Will the shadow price remain valid?
● SOLUTION:
𝑝𝑟𝑜𝑝𝑜𝑠𝑒𝑑 𝑐ℎ𝑎𝑛𝑔𝑒
∑ 𝑎𝑙𝑙𝑜𝑤𝑎𝑏𝑙𝑒 𝑐ℎ𝑎𝑛𝑔𝑒
≤ 100%

The proposed change for the RHS of RM A: 6 – 5 = 1. Hence, ½ - 0.5.

The proposed change for the RHS of RM B: 10 – 8 = 2. Hence, 2/4 = 0.5.

● The sum of the two proposed ratios is 100% or within the 100% rule.
○ This means the shadow price will still be valid.
○ Meanwhile, if the sum of the two ratios > 100%, then the shadow
price may no longer be valid.

2. Changes in Constraint Coefficients

◆ (For Redy Mikks problem)

● The original constraint for RM B: 2x + y ≤ 8, suppose we change the numerical
coefficient of x to 1.75.
○ Classical sensitivity analysis provides no information about changes
resulting from a change in the coefficient of a variable in a constraint.
Instead, we must simply change the coefficient and rerun the
model/solver.
○ 2𝑥 + 𝑦 ≤ 8 → 1.75𝑥 + 𝑦 ≤ 8 then input this change to the solver,
it will generate a report which indicates a change in the value of x and y
as well as the value of the total profit.

42
3. Non-intuitive Dual Values
◆ Constraints with variables naturally on both the left-hand and right-hand sides often
lead to dual values that have a non-intuitive (not easily understood) explanation.

43
 CA5103: Management Science
Preliminary Examination

PRACTICE EXERCISE: THEORETICAL

Instructions: This is the first part of the practice exercises that consists of two parts: the (a) True or False and
(b) Multiple Choice. Read and analyze each statement carefully and choose the best answer for each item.
Good luck!

A. True or False. Analyze the statements listed below carefully. Write “TRUE” if the statement is correct;
otherwise, write “FALSE.”

1. In a quantitative analysis process described by Anderson et. al. (2019), the report of the
decision maker must include the recommended decision and other pertinent information about
the results.
2. A feasible solution is one that satisfies at least one of the constraints in the problem.
3. Problem solving encompasses both the identification of a problem and the action to resolve it.
4. Frederick W. Taylor is the founder of Management Science
5. According to Anderson et. al. (2019), the objective of management science is to solve the
decision making problems in both the public and private sectors by developing mathematical
models.
6. The simple linear regression model has two independent variables.
7. Cyclical Patterns shows an alternating sequence of points below and above the trend line.
8. The higher the value of any of the 3 measures, the better quality of forecast accuracy.
9. Qualitative Models are based on quantitative forecasting models/techniques that attempt to
predict the future values of a variable using only historical data on that one variable.
10. The coefficient of determination describes the percentage of the total variation in the response
variable Y that is explained by the predictor Y.
11. Linear Programming is a problem-solving technique or approach that aids managers in making
decisions.
12. The best/ feasible solution can be found in the optimal region.
13. In maximization problems, the left-most point that intersects the isocost line is the best or
optimal solution.
14. A linear programming model is composed of three main parts: The Decision Variable, Objective
Function, and Constraints.
15. A non-negativity constraint is also called a logical constraint.
𝑐1
16. The formula of getting the slope of an objective function line is 𝑐2
.
17. If the sum of the ratios of the proposed changes of the coefficients to the allowable changes
exceed 100%, we can still consider the optimal solution as valid.
18. Binding constraint indicates that all resources have been exhausted, hence, having a slack of 0.
19. Non-binding constraint indicates that there are unused resources, hence, having a non-zero
slack.
20. The standard form of an Objective Function is Z = 𝑐1𝑥1 + 𝑐2𝑥2.

44
B. Multiple Choice. Read each statement carefully and choose the letter of the best answer.

1. What is the first step in Problem Solving?

a. Define the problem
b. Choose an alternative
c. Determine the set of alternative solutions
d. Evaluate the alternatives

2. The following are the most frequently used methods except:

a. Network Models
b. Simulation
c. Markov-Process Models
d. Linear Programming

3. These are problems in which the objective is to find the best solution with respect to one
criterion.
a. Multicriteria Decision Problems
b. Qualitative Analysis
c. Decision Problems
d. Single-criterion Decision Problems

4. Decision alternatives
a. are evaluated as a part of the problem definition stage
b. refers to a graphical representation of the relationship between time and the time series
variable
c. are best generated by brain-storming
d. should be identified before the decision criteria are established

5. Management Science is also known as

a. Qualitative Analysis
b. Operations Research
c. Business Problems
d. Decision Variables

6. If data for a time series is collected on an annual basis only, which pattern does not need to be
considered?
a. Seasonal
b. Horizontal
c. Cyclical
d. Trend

7. The Delphi Method often involves the following participants except:

a. Decision Makers
b. Consumers
c. Staff Personnel
d. Respondents

45
8. It provides a perspective of the true magnitude of the forecast error.
a. Mean Absolute Deviation
b. Forecast Accuracy
c. Mean Squared Error
d. Mean Absolute Percentage Error

9. According to Stevenson (2012), these are the basic input decision processes because they
provide information on future sales, demand, etc.
a. Regression Analysis
b. Causal Models
c. Forecast
d. Time Series

10. This method selects only the weight for the most recent observation.
a. Weighted Moving Averages
b. Exponential Smoothing
c. Moving Averages
d. Mean Absolute Percentage Error

11. These variables are used to express your objective function.

a. Objective Variables
b. Constraints
c. Dependent Variables
d. Decision Variables

12. It is a way of graphing the solutions of a Linear Model wherein the optimal solution must occur
at the vertex or corner points.
a. Extreme Points Theorem
b. Graphical Representation
c. Linear Programming
d. Objective Function Line Method

13. To translate a problem from its verbal statement into its mathematical statement is called
______.
a. Sensitivity Analysis
b. Problem Formulation
c. Profit Contribution
d. Programming

14. If the given Linear Programming Model has no feasible region/area, how many solution/s does it
have?
a. 0
b. 1
c. 2
d. Infinite

46
15. The word _______ pertains to the act of choosing a course of action.
a. Problem Solving
b. Maximization
c. Minimization
d. Programming

16. This is a study concerned with the changes in coefficients which can affect the optimal solution.
a. Optimization
b. Sensitivity Analysis
c. Linear Functions
d. Problem Modeling

17. A type of constraint wherein the left-hand side and right hand side equates once the values of x
and y are substituted.
a. Objective Constraint
b. Non-binding Constraint
c. Binding Constraint
d. Slack Constraint

18. The scope of values for each objective function coefficient for which the current solution will
remain optimal.
a. Range of Possibility
b. Range of Feasibility
c. Range of Plausibility
d. Range of Optimality

19. It is called “per unit increase” or the change in the value of the optimal solution on the right-hand
side.
a. List Price
b. Shadow Price
c. Average Price
d. Maximum Price

20. What is the formula to get the shadow price for sensitivity analysis?
a. New Shadow Price - Old Shadow Price
b. Old Shadow Price - New Shadow Price
c. Old Profit - New Profit
d. New Profit - Old Profit

47
 PRACTICE EXERCISE: THEORETICAL

Instructions: This is the second part of the practice exercises which involves your critical thinking skills. To
test the learners knowledge, practice problems are provided below. Read and analyze each problem and
questions carefully. Provide your solution and highlight your final answer.

PROBLEM #1: SVT Company manufactures photo albums and photo cards to merchandise to their clients. In
producing a photo album, $200 is needed for production while $100 is needed for photocards. These products
are processed differently which is why photo albums take 3 hrs to finish while photo cards take only 1 hr to
finish. Due to limited machinery and equipment, SVT Company can only manufacture at most 20 units and with
a maximum production budget of $2,200. At the same time, machines can only take up to 30 hrs of working
time. How can we maximize profit if each unit of photo album and photo card has a profit of $150 and $100,
respectively?

1. Formulate the Linear Programming Model and label all constraints appropriately.
2. Graph the model and shade the feasible region.
3. Find the optimal solution using the method of corners.

PROBLEM #2: Sensitivity Analysis of Problem #1. Analyze it and answer the following questions below.

4. Solve and identify the binding and non binding constraints.

5. Identify the range of optimality of the 2 binding constraints.
6. What will be the new profit when the maximum units to be produced is increased by 1?

48
 ANSWER KEY
THEORETICAL: TRUE OR FALSE THEORETICAL: MULTIPLE CHOICE

1. TRUE 1. A.

2. FALSE 2. C.

3. TRUE 3. D.

4. TRUE 4. D.

5. FALSE 5. B.

6. FALSE 6. A.

7. TRUE 7. B.

8. FALSE 8. D.

9. FALSE 9. C.

10. TRUE 10. B.

11. TRUE 11. D.

12. FALSE 12. A.

13. FALSE 13. B.

14. TRUE 14. A.

15. TRUE 15. D.

16. FALSE 16. B.

17. FALSE 17. C.

18. TRUE 18. D.

19. TRUE 19. B.

20. TRUE 20. B.

49
 PROBLEM-SOLVING

1.

2.
3. Optimal Solution: x = 2 and y = 18
Maximum Profit of $2,100
4. Production Limit Cost = Binding
Maximum Production Time = Non-Binding
Maximum Units to be Produced = Binding
5. 100 ≤ 𝑐1 ≤ 200
75 ≤ 𝑐2 ≤ 150

6. $2,150

50
 SOLUTIONS

1.

2.

3.

51
 Point C:

200x + 100y = 2,200 y = 18

x + y = 20 x = 20 - y
x + y = 20
(substitution method)
x + 18 = 20
200x + 100y = 2,200
x=2
200 (20-y) + 100y = 2,200
4000 - 200y + 100y = 2,200
1,800 = 100y
y = 18

Point D:

200x + 100y = 2,200 x=8

3x + y = 30 y = 30 - 3x
3x + y = 30
(substitution method)
200x + 100y = 2,200 3(8) + y = 30
24 + y = 30
200x + 100 (30-3x) = 2,200
200x + 3000 - 300x = 2,200 y=6
800 = 100x
x=8

4.

MAXIMUM PRODUCTION MAXIMUM UNITS TO BE

PRODUCTION COST LIMIT
TIME PRODUCED

200x + 100y ≤ 2200 3x + y ≤ 30 x + y ≤ 20

200(2) + 100(18) ≤ 2200 3(2) + 18 ≤ 30 2 + 18 ≤ 20
400 + 1800 ≤ 2200 6 + 18 ≤ 30 20 ≤ 20

BINDING NOT BINDING BINDING

52
5. SLOPE OF THE BINDING CONSTRAINTS

200x + 100y = 2200 x + y = 20

100y = -200x + 2200 y = -x +20
100𝑦 −200𝑥 + 2200
100
= 100
m = -1
y = -2x + 22

m = -2

𝑐1
FORMULA: − 2 ≤ 𝑐2
≤− 1

𝑐1 𝑐1
−2≤ 𝑐2
≤− 1 −2≤ 𝑐2
≤− 1

𝑐1 150
−2≤ ≤− 1 −2≤ 𝑐2
≤− 1
100

𝑐1 150
− 100[− 2 ≤ ≤− 1] − 100 − 1[− 2 ≤ 𝑐2
≤− 1] − 1
100

200 ≥ 𝑐1 ≥ 100 150

2 ≥− 𝑐2
≥1

100 ≤ 𝑐1 ≤ 200 1 𝑐2
2
≤ 150
≤1

1 𝑐2
150[ 2 ≤ 150
≤ 1]150

75 ≤ 𝑐2 ≤ 150

53
 6.

REFERENCES

Anderson, D. R., Sweeney, DJ., Williams, T. A., Camm, J. D., Cochran, J. J., & Ohlmann, J. W. (2019). An
Introduction to Management Science: Quantitative Approaches to Decision Making. Singapore: Cengage
Learning Asia PteLtd.

Emmanuel, J. LP Sensitivity Analysis -Interpreting Excel's Solver Report. Retrieved May 8, 2017, from
https://www.youtube.com/watch?v=FzY333RdrBM.

Goemans, M. (2015, March 17). [Lecture notes on linear programming]. Department of Mathematics,
Massachusetts Institute of Technology. https://math.mit.edu/~goemans/18310S15/lpnotes310.pdf.

iTeach. Sensitivity Analysis -6 -Simultaneous Changes (Part 2/2).(2020, June 8). Retrieved from
https://www.youtube.com/watch?v=o7Y56p3-43o

54
Linear programming - sensitivity analysis - using solver. (n.d.). Brunel University London.
https://people.brunel.ac.uk/~mastjjb/jeb/or/lpsens_solver.html

Linear programming. (n.d.). NetMBA Business Knowledge Center.

https://www.netmba.com/operations/lp/#:~:text=Constraints
What is binding constraints in linear programming? - Google search. (n.d.). Google.
https://www.google.com/search?q=what+is+binding+constraints+in+linear+programming%3F&oq=what+is+bi
nding+constraints+in+linear+programming%3F&aqs=chrome..69i57j0l4.14314j1j8&sourceid=chrome&ie=UTF
-8

Miller, S.J. (2007). An Introduction to Linear Programming [Class Handout].

https://web.williams.edu/Mathematics/sjmiller/public_html/BrownClasses/54/handouts/LinearProgramming.pdf

Uy, C., et al, (2013). Quantitative Techniques in Business. S.M.A.R.T. Innovations.

What is binding constraints in linear programming? - Google search. (n.d.). Google.

https://www.google.com/search?q=what+is+binding+constraints+in+linear+programming%3F&oq=what+is+bi
nding+constraints+in+linear+programming%3F&aqs=chrome..69i57j0l4.14314j1j8&sourceid=chrome&ie=UTF
-8

Prepared by:
DELADIA, Mericq Astin
MACADATO, Rohan
SAN JUAN, Cziara Divina
TOLENTINO, Margarita Alessandra
VILLA, Thania

55