Chapter: Mathematical Modelling in Quantitative Analysis

Course: Quantitative Analysis for Decision Making

Lecture 2

Week: 2nd (23rd September)

Dr. Waqas Ahmed

Department of Operations and Supply Chain
NUST Business School (NBS)
National University of Sciences & Technology, Islamabad, Pakistan
Chapter Topics
»Dr. Waqas Ahmed

 Performing a Break-Even Analysis

 Model Formulation
 Advantages of Mathematical Modeling
 Linear Programming Model Overview
 A Maximization Model Problem
 A Minimization Model Problem

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 »Dr. Waqas Ahmed

Model Building: Break-Even Analysis (1 of 9)

■ Used to determine the number of units of a product to sell or

produce that will equate total revenue with total cost.

■ The volume at which total revenue equals total cost is called

the break-even point.

■ Profit at break-even point is zero.

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Model Building: Break-Even Analysis (2 of 9) »Dr. Waqas Ahmed

Model
Components

ixed Cost (cf) - costs that remain constant regardless of number of units
produced.

ariable Cost (cv) - unit production cost of product.

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Model Building: Break-Even Analysis (3 of 9) »Dr. Waqas Ahmed

Model
Components
TC  c f  vcv
v plus
otal Cost (TC) - total fixed cost p total variable cost.

Z  vp - (c f  vcv )

otal Revenue- volume multiplied

Z  byvp price
- c f  vcv

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 »Dr. Waqas Ahmed

Example: Western Clothing Company

Fixed Costs: cf = $10000
Variable Costs: cv = $8 per pair
Price : p = $23 per pair
Volume: v = 500 pairs

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Model Building: Break-Even Analysis (4 of 9) »Dr. Waqas Ahmed

Computing the Break-Even Point

The break-even point is that volume at which total revenue
equals total cost and profit is zero:
vp  c f  vcv  0
v( p  cv )  c f

cf
The break-even v
point p  cv

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Model Building: Break-Even Analysis (5 of 9) »Dr. Waqas Ahmed

Example: Western Clothing Company

Fixed Costs: cf = $10000

Variable Costs: cv = $8 per pair
Price : p = $23 per pair

The Break-Even Point is:

v = (10,000)/(23 -8)
= 666.7 pairs
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Model Building: Break-Even Analysis (6 of 9) »Dr. Waqas Ahmed

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 »Dr. Waqas Ahmed

Class Assignment
1. Engro
food makes and sells an Ice-cream. The selling price is $30 and it cost $10 to produce the
ice-cream. 5 liters of milk is required to make the Ice-cream. And Company has 100 liters of
milk. Determine the number of units to produce to make the most profit, given the limited
amount of milk available.

2. The
Willow Furniture Company produces tables. The fixed monthly cost of production is $8,000,
and the variable cost per table is $65. The tables sell for $180 a piece.
a. For a
monthly volume of 300 tables, determine the total cost, total revenue, and profit.
b.
Determine the monthly break-even volume for the Willow Furniture Company
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 »Dr. Waqas Ahmed

Sensitivity Analysis

he study of changes on a management science

model is called sensitivity analysis that is, seeing
how sensitive the model is to changes.

ensitivity analysis sees how sensitive a

management model is to changes. © Dr. Waqas Ahmed 11
 »Dr. Waqas Ahmed

What happens if the price is increased from $23 to $30

Break-even model with an increase in

price © Dr. Waqas Ahmed 12
 »Dr. Waqas Ahmed

What happens if the variable cost is increased from $4 to

$12

Break-even model with an increase in variable

cost © Dr. Waqas Ahmed 13
Break-Even Analysis: Excel Solution (1 of 4) »Dr. Waqas Ahmed

Formula for v,
break-even point,
=D4/(D8-D6)

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Solvers to get the output (solution) of a »Dr. Waqas Ahmed

constructed model

Ways to get the output of MS models

 Use programming language such as C++ to make a program

 Use a commercial package

 LINO, CPLEX, MPExpress, MINOS etc.
 Use a general purpose package
 EXCEL
 Use your hands and head...

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 »Dr. Waqas Ahmed

Break-Even Analysis: Excel QM Solution (2 of 4)

Click on “Add-
Ins”, then the
menu of Excel
QM modules

Enter model
parameters in
cells
B10:B13

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Break-Even Analysis: Excel QM Solution (3 of 4)
»Dr. Waqas Ahmed

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 »Dr. Waqas Ahmed

Break-Even Analysis: QM for Windows Solution (4 of 4)

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Advantages of Mathematical Modeling
»Dr. Waqas Ahmed

1. Models can accurately represent reality

2. Models can help a decision maker formulate problems
3. Models can give us insight and information
4. Models can save time and money in decision making and problem
solving
5. A model may be the only way to solve large or complex problems
in a timely fashion
6. A model can be used to communicate problems and solutions to
others
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 Linear Programming: An Overview »Dr. Waqas Ahmed

 Objectives of business decisions frequently involve maximizing

profit or minimizing costs.
 Linear programming uses linear algebraic relationships to
represent a firm’s decisions, given a business objective, and
resource constraints.
 Steps in application:
1. Identify problem as solvable by linear programming.
2. Formulate a mathematical model of the unstructured problem.
3. Solve the model.
4. Implementation

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 Model Components »Dr. Waqas Ahmed

ecision variables - mathematical symbols representing levels of activity of a firm.

bjective function - a linear mathematical relationship describing an objective of

the firm, in terms of decision variables - this function is to be maximized or
minimized.

onstraints – requirements or restrictions placed on the firm by the operating

environment, stated in linear relationships of the decision variables.

arameters - numerical coefficients and constants used in the objective function

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Summary of Model Formulation Steps »Dr. Waqas Ahmed

Step 1 : Clearly define the decision variables

Step 2 : Construct the objective function

Step 3 : Formulate the constraints

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LP Model Formulation »Dr. Waqas Ahmed

A Maximization Example (1 of 4)

roduct mix problem - Beaver Creek Pottery Company

ow many bowls and mugs should be produced to maximize

profits given labor and materials constraints?
Resource Requirements

Labor Clay Profit

Product
roduct resource requirements
(Hr./Unit) and unit profit:
(Lb./Unit) ($/Unit)

Bowl 1 4 40
Mug 2 3 50

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LP Model Formulation »Dr. Waqas Ahmed

A Maximization Example (2 of 4)

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LP Model Formulation »Dr. Waqas Ahmed

A Maximization Example (3 of 4)

Resource 40 hrs of labor per day

Availability: 120 lbs of clay
Decision x1 = number of bowls to produce per day
Variables: x2 = number of mugs to produce per day

Objective Maximize Z = $40x1 + $50x2

Function: Where Z = profit per day
Resource 1x1 + 2x2  40 hours of labor
Constraints: 4x1 + 3x2  120 pounds of clay

Non-Negativity x1  0; x2  0
Constraints:
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LP Model Formulation »Dr. Waqas Ahmed

A Maximization Example (4 of 4)
Complete Linear Programming Model:

Maximize Z = $40x1 + $50x2

subject to: 1x1 + 2x2  40

4x1 + 3x2  120
x1, x2  0

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 Feasible Solutions »Dr. Waqas Ahmed

A feasible solution does not violate any of the constraints:

Example: x1 = 5 bowls
x2 = 10 mugs
Z = $40x1 + $50x2 = $700

Labor constraint check: 1(5) + 2(10) = 25 < 40 hours

Clay constraint check: 4(5) + 3(10) = 70 < 120 pounds

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 »Dr. Waqas Ahmed

LP Model Formulation – Minimization (1 of 8)

 Two brands of fertilizer available - Super-gro, Crop-quick.

 Field requires at least 16 pounds of nitrogen and 24 pounds
of phosphate.
 Super-gro costs $6 per bag, Crop-quick $3 per bag.
 Problem: How much of each brand to purchase to minimize
total cost of fertilizer given following data ?
Chemical Contribution

Nitrogen Phosphate
Brand
(lb/ bag) (lb/ bag)
Super-gro 2 4
Crop-quick 4 3

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 »Dr. Waqas Ahmed

LP Model Formulation – Minimization (2 of 8)

Fertilizing farmer’s field

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 »Dr. Waqas Ahmed

LP Model Formulation – Minimization (3 of 8)

Decision Variables:
x1 = bags of Super-gro
x2 = bags of Crop-quick

The Objective Function:

Minimize Z = $6x1 + 3x2
Where: $6x1 = cost of bags of Super-Gro
$3x2 = cost of bags of Crop-Quick

Model Constraints:
2x1 + 4x2  16 lb (nitrogen constraint)
4x1 + 3x2  24 lb (phosphate constraint)
x1, x2  0 (non-negativity constraint)
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Problem Statement »Dr. Waqas Ahmed

Example Problem No. 1 (1 of 3)

■ Hot dog mixture in 1000-pound batches.
■ Two ingredients, chicken ($3/lb) and beef ($5/lb).
■ Recipe requirements:
at least 500 pounds of “chicken”
at least 200 pounds of “beef”
■ Ratio of chicken to beef must be at least 2 to 1.
■ Determine optimal mixture of ingredients that will minimize
costs.

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Solution »Dr. Waqas Ahmed

Example Problem No. 1 (2 of 3)

Step 1:
Identify decision variables.
x1 = lb of chicken in mixture
x2 = lb of beef in mixture
Step 2:
Formulate the objective function.
Minimize Z = $3x1 + $5x2
where Z = cost per 1,000-lb batch
$3x1 = cost of chicken
$5x2 = cost of beef
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Solution »Dr. Waqas Ahmed

Example Problem No. 1 (3 of 3)

Step 3:
Establish Model Constraints
x1 + x2 = 1,000 lb
x1  500 lb of chicken
x2  200 lb of beef
x1/x2  2/1 or x1 - 2x2  0
x1, x2  0
The Model: Minimize Z = $3x1 + 5x2
subject to: x1 + x2 = 1,000 lb
x1  500
x2  200
x1 - 2x2  0
x1,x2  0 © Dr. Waqas Ahmed 33
 »Dr. Waqas Ahmed

Assignment 1

(Due date is 30th September till start of class time,

6:15 pm)

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 »Dr. Waqas Ahmed

Thank you! Any Questions

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