Revenue and Cost Model

Linear Programming

Dr. Kishore Morya

Problem Solving
Problem solving is a process of identifying a
difference between the actual and desired
state of affairs and then taking action to
resolve the difference

Problem should be important enough to justify

cost, time, and efforts of careful analysis
Steps in Problem Solving
• Identify and define the problem
• Determine the set of alternative solutions
• Determine the criterion or criteria that will used to
evaluate the alternatives
• Evaluate the alternatives
• Choose an alternative
• Implement the skeleton alternative
• Evaluate the results to determine whether a
satisfactory solution has been obtained
Decision Making
Decision Making is the term generally associated
with the first five steps of the problems
solving process

First step is to identify and define the problem

Decision Making ends with the choosing of an

alternative, which the act of making decision
Example
• Assume that you want to get employed. You
like a position that will lead to a satisfying
career.
• Suppose that your job research has resulted in
offers from companies in
­ Rochester – New York
­ Dallas – Texas
­ Greensboro – North Carolina
­ Pittsburgh - Pennsylvania
Alternatives for your decision problems

• Accept the position in Rochester

• Accept the position in Dallas
• Accept the position in Greensboro
• Accept the position in Pittsburgh
Determining the Criteria

• Starting Salary
• Potential of Advancement
• Location of the Job

One criterion – Single-Criterion Decision Problems

More than one criterion – Multi-criteria Decision

Problems
Evaluate Each of the Alternatives

Alternatives Starting Salary Potential for Job Location

Advancement

Rochester $38500 Average Average

Dallas $36000 Excellent Good
Greensboro $36000 Good Excellent
Pittsburgh $37000 Average Good

You are now ready to make choice!

Are you?
The Choice is Difficult
The criteria are probably not all equally
important, and no alternative is “best” with
regards to all criteria

If you select any choice, let it be alternative 3

Alternative 3 thus referred to as the decision

Quantitative Analysis and Decision Making
Pr • Define the Problem
• Identify the Alternatives
ob
-
- • Determine the criteria
• Evaluate the Alternatives Decision Making
le
m
• Choose an Alternative
So
l-

• Implement the Decision

Decision
-vi • Evaluate the Results

• Results are according to expectation, stop the process

- • Otherwise go back to the first stage
ng
Quantitative analysis and Decision Making

Qualitative
Structuring the problem Analysis

Identify Summary
Define Determin Make the
the and
the e the Decision
alternativ Evaluation
problem Criteria
es

Quantitative
Analysis

Analysing the problem

Model Development
• Iconic Model
­ Physical replicas of real model, a scale model of an
airplane is a representation of a real airplane
• Analog Model
­ Do not have the physical appearance as the object
being modeled
• Mathematical Model
­ Representation of a problem by a system of
symbols and mathematical relationships or
expressions
Model…

• Objective Function
P = 10x
x represents the quantity sold
$10 is the profit per unit sold
P is the total profit
• Constraints
­ 5 hours are required to produce each unit
­ 40 hours of production time is available
Production Time constraint is given by
5x ≤ 40
Complete Mathematical Model
Maximize P = 10x

s. t.
5x ≤ 40 constraints
x≥0
Model of Cost, Revenue, Profit,
• Cost and Volume Model
C(x) = 3000 + 2x
x = production volume in units
C(x) = total cost of producing x units
• Revenue and Volume Model
R(x) = 5x
x = sales volume in units
R(x) = total revenue associated with selling x units
• Profit and Volume Model
P(x) = R(x) – C(x)
= 5x – (3000 + 2x) = - 3000 + 3x
 Business Analytics Techniques
1. Marketing Analytics
1. Data Visualization 2. Supply Chain Analytics
2. Qualitative Data Analysis 3. Finance Analytics
3. Quantitative Data Analysis 4. HR Analytics
4. Linear Programming
5. Retail Analytics
6. Risk Analytics
5. Decision Analysis
6. Forecasting
7. Stock Control
1. Big Data
8. Simulation 2. Facebook Analytics
9. Network Modelling 3. Social Website
10. Waiting Line or Queuing Models Analytics
11. Goal Programming
12. Dynamic Programming
13. Markov Process Models
Python, R, C, C++,
Artificial Intelligence, Machine Learning,
Tensorflow, Neural
Deep Learning
Network
 Linear Programming
Linear Programming is a problem solving approach
developed to help managers make decisions
e.g.
GE Capital uses Linear Programming to help
determine optimal lease structuring.
Marathon Oil Company uses Linear Programming for
Gasoline blending and to evaluate the economics
of new terminal or pipelines
Situations where LP can be used
• A manufacturer wants to develop a production
schedule and an inventory policy that will satisfy sales
demand in future periods. Ideally, the schedule and
policy will enable company to satisfy demand and at
the time minimize the total production and inventory
costs

• A financial analyst must select an investment

portfolio from a variety of stock and bond investment
alternatives. The analyst would like to establish the
portfolio that maximizes the return on investment
• A marketing manager wants to determine how best to
allocate a fixed advertising budget among alternative
advertising media such as radio, television,
newspaper, and magazine. The manager would like to
determine the media mix that maximizes advertising
effectiveness.
• A company has warehouses in number of locations
throughout Unites States. For a set of customer
demand, the company would like to determine how
much each warehouses should ship to each customer
so that transportation costs are minimized.
Commonality
• Maximizing
• Minimizing
Some quantity

Objective of LP is to Maximize or Minimize some

quantity.
Maximizing
• Par, Inc. is a small manufacturer of golf equipment
and supplies.
• Management has decided to move in to the
market for medium and high priced golf bags
• Par’s distributor is enthusiastic about the new
product line and has agreed to buy all the golf
bags Par produces over the next three months.
After a thorough investigation of the steps
involved in manufacturing a golf bag, managers
determined that each golf bag produced will
require the following operations
Par, Inc.

• Cutting and Dying the Material

• Sewing
• Finishing (inserting umbrella holder, club
separators, etc)
• Inspection and Packaging
Production Requirements per golf bag

Department Production time (Hours) Total Time

Available
Standard Bag Deluxe Bag (Hours)
Cutting and Dying 7/10 1 630
Sewing ½ 5/6 600
Finishing 1 2/3 708
Inspection and Packaging 1/10 1/4 135

Profit Contribution

Standard Bag $10/unit

Deluxe Bag $ 9/unit

Problem Formulation
• Understanding the Problem Thoroughly
• Describe the Objective
• Describe each constraint
­ Constraint 1
­ Constraint 2
­ Constraint 3
­ Constraint 4
• Define the decision variables
• Write the objective in terms of the decision
variables
• Write the constraint in terms of the decision
variables

Mathematical Statement of the Par, Inc. Problem

Max 10S + 9D
subject to (s.t.)
7/10 S + 1 D ≤ 630
1/2 S + 5/6 D ≤ 600
1S + 2/3 D≤ 708
1/10 S + 1/4 D ≤ 135
S, D ≥ 0
A Simple Minimization Problem
• M & D Chemicals produces Product A & Product B
that are sold to companies manufacturing both
soaps and laundry detergents. Based on an
analysis of current inventory levels and potential
demand for the coming month, M & D chemical
management specified that the combined
production for Product A and B must total at least
350 gallons.

Separately, a major customer’s order for 125

gallons of product A must also be satisfied
• Product A requires 2 hrs of processing time per
gallon and product B requires 1 hr of processing
time per gallon. For the coming month, 600 hrs
of processing time are available.

• M & D’s objective is to satisfy these

requirements at a minimum total production
cost. Production costs are $2 per gallon for
product A and $3 per gallon for product B.
• Objective Function
Min. Z = 2x1 + 3x2
Constraints
s. t.
x1 ≥ 125 Customer Order’s Constraint
x1 + x2 ≥ 350 Production Constraint
2x1 + x2 ≤ 600 Processing Time Constraint

x1, x2 ≥ 0
• Infeasibility
No solution to the linear programming problem satisfies
all the constraints, including the non-negativity
conditions. Graphically, infeasibility means that a feasible
region does not exist; that is no points satisfy all the
conditions
• Unbounded
The solution to a maximizing linear programming problem
is unbounded if the value of the solution may be made
infinitely large without violating any of the constraints. For
a minimization problem, the solution is unbounded if the
value may be infinitely small.