Sensitivity Analysis

Introduction
• Real world problems exist in changing environment.
• Prices of raw materials, demand, available production times change
• In the formulation – coefficients/RHS values change
• Sensitivity analysis provides us the information needed to respond to
such changes without requiring the complete solution of revised
problem.
• Sensitivity Analysis/post optimality analysis is the study of how the
changes in the coefficients of an optimization model affect the
optimal solution.
• Change in coefficient of objective function
• Change in the right-hand side value of constraint
Case 1: Changes in the right-hand side of
the constraint
• Dual Values/Shadow Prices/ Marginal Values: Change in the optimal value of the
solution per unit increase in the right-hand side of the constraint.
• All other coefficients remain same
• The shadow price is valid within the allowable increase and decrease
Case 2 – Changes in the Coefficient of
Objective Function
• Reduced Cost: dual value for the non-negativity constraint associated
with the variable
• Within the allowable increase and decrease , the current solution
remains optimal.
Sunk costs and Relevant Costs
• Sunk cost: cost that is not affected by the decision made. It will be
incurred no matter what values the decision variables assume
• Not reflected in the objective function
• When cost of a resource is sunk, the dual value can be interpreted as the
maximum amount the company should be willing to pay for one additional
unit of the resource.
• Relevant cost: one that depends on the decision made. The amount
of relevant cost will vary depending on the values of the decision
variables.
• When cost of a resource is relevant, the dual value can be interpreted as the
maximum premium over the normal cost the company should be willing to
pay for one additional unit of the resource.