Business Analytics

Linear Optimization Models

Lecture # 11

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TOPICS to be COVERED
01 Problems Understanding

02 A Simple Maximization Problem

03 Sensitivity Analysis

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 Diet problem
I am always curious to consume right amount of foods for
meeting the daily requirement
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 Diet problem
Chocolate is so costly, , Milk too, I am trying to minimize the cost but
satisfy the daily requirement of several nutrients

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 Decision Variables

Units of wheat consumed every day =X

Units of rice consumed every day =Y

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I have daily requirement of several
nutrients

Daily
Requirem
ent
Carbs 20
Proteins 15
Vitamins 3
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I have daily requirement of several
nutrients

Wheat Rice

Carbs/unit 5 7
Proteins/unit 4 2
Vitamins/unit 2 1
Cost/unit 100 200
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 constraints
5X + 7Y ≥ 20
4X + 2Y ≥ 15
2X + Y ≥ 3
X≥ 0
Y≥ 0

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 Objective

minimize 100X +200Y

different choices for determining which might be “best.” Function

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 Exercise (10 mins)

Design your own scenario of optimization:

• Decision Variable,
• Constraint
• Objective function

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 Linear Programming

• Many management decisions involve trying to make the

most effective use of limited resources
– Machinery, labor, money, time, warehouse space, raw materials
• Linear programming (LP) is a widely used mathematical
modeling technique designed to help managers in planning
and decision making relative to resource allocation
• In this sense, programming refers to modeling and solving
a problem mathematically

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 LP Properties and Assumptions

PROPERTIES OF LINEAR PROGRAMS

1. One objective function
2. One or more constraints
3. Objective function and constraints are linear

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 Formulating LP Problems

• Formulating a linear program involves developing a

mathematical model to represent the managerial problem
• The steps in formulating a linear program are
1. Completely understand the managerial problem being
faced
2. Identify the objective and constraints
3. Define the decision variables
4. Use the decision variables to write mathematical
expressions for the objective function and the
constraints

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 Exercise
• Consider the following typical applications of optimization and identify
objective functions and constraints
1. A manufacturer wants to develop a production schedule and an inventory policy
that will satisfy demand in future periods. Ideally, the schedule and policy will
enable the company to satisfy demand and at the same time minimize the total
production and inventory costs.
2. 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.
3. A marketing manager wants to determine how best to allocate a fixed advertising
budget among alternative advertising media such as web, radio, television,
newspaper, and magazine. The manager would like to determine the media mix
that maximizes advertising effectiveness.
4. A company has warehouses in a number of locations. Given specific customer
demands, the company would like to determine how much each warehouse should
ship to each customer so that total transportation costs are minimized.

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A SIMPLE MAXIMIZATION
PROBLEM

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 ABC Furniture Company
• The ABC Furniture Company produces inexpensive tables and
chairs.
• Processes are similar in that both require a certain amount of
hours of carpentry work and in the painting and varnishing
department.
• Each table takes 4 hours of carpentry and 2 hours of painting and
varnishing.
• Each chair requires 3 of carpentry and 1 hour of painting and
varnishing.
• There are 240 hours of carpentry time available and 100 hours of
painting and varnishing.
• Each table yields a profit of $70 and each chair a profit of $50 .

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 ABC Furniture Company
• The company wants to determine the best combination of
tables and chairs to produce to reach the maximum profit

HOURS REQUIRED TO
PRODUCE 1 UNIT
(T) (C) AVAILABLE HOURS
DEPARTMENT TABLES CHAIRS THIS WEEK
Carpentry 4 3 240

Painting and varnishing 2 1 100

Profit per unit

$70 $50

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 ABC Furniture Company

The objective is to
Maximize profit
The constraints are
1.The hours of carpentry time used cannot exceed 240 hours per
week
2.The hours of painting and varnishing time used cannot exceed 100
hours per week
The decision variables representing the actual
decisions we will make are
T = number of tables to be produced per week
C = number of chairs to be produced per week

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 ABC Furniture Company

• We create the LP objective function in terms of T and C

Maximize profit = $70T + $50C
• Develop mathematical relationships for the two
constraints
• For carpentry, total time used is
(4 hours per table)(Number of tables produced)
+ (3 hours per chair)(Number of chairs produced)
• We know that
Carpentry time used ≤ Carpentry time available
4T + 3C ≤ 240 (hours of carpentry time)
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 Flair Furniture Company
 Similarly
Painting and varnishing time used
≤ Painting and varnishing time
available
2 T + 1C ≤ 100 (hours of painting and varnishing time)
This means that each table produced requires two hours of
painting and varnishing time

 Both of these constraints restrict production

capacity and affect total profit

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 ABC Furniture Company

• Similarly
Painting and varnishing time used
≤ Painting and varnishing time
available
2 T + 1C ≤ 100 (hours of painting and varnishing time)

This means that each table produced requires two hours of

painting and varnishing time

• Both of these constraints restrict production capacity and affect

total profit
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 Graphical Solution to an LP Problem

 The easiest way to solve a small LP problems

is with the graphical solution approach
 The graphical method only works when there
are just two decision variables.
 When there are more than two variables, a
more complex approach is needed as it is not
possible to plot the solution on a two-
dimensional graph
 The graphical method provides valuable
insight into how other approaches work.

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Graphical Representation of a Constraint
C

100 –
– This Axis Represents the Constraint T ≥ 0
80 –
Number of Chairs

–
60 –
–
40 – This Axis Represents the
– Constraint C ≥ 0
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables

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Graphical Representation of a Constraint
• The first step in solving the problem is to
identify a set or region of feasible
solutions
• To do this we plot each constraint
equation on a graph
• We start by graphing the equality portion
of the constraint equations
4T + 3C = 240
• We solve for the axis intercepts and draw
the line

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 Graphical Representation of a Constraint
When ABC produces no tables, the carpentry
constraint is
4(0) + 3C = 240
3C = 240
C = 80
Similarly for no chairs
4T + 3(0) = 240
4T = 240
T = 60
This line is shown on the following graph

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Graphical Representation of a Constraint
C
Graph of carpentry constraint equation
100 –
–
80 – (T = 0, C = 80)
Number of Chairs

–
60 –
–
40 –
–
(T = 60, C = 0)
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables

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Graphical Representation of a Constraint
 Any point on or below the constraint plot
C will not violate the restriction
 Any point above the plot will violate the
100 – restriction
–
80 –
Number of Chairs

–
60 –
–
(30, 40) (70, 40)
40 –
–
20 –
– (30, 20)
–| | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables

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Graphical Representation of a Constraint
• The point (30, 40) lies on the plot and exactly
satisfies the constraint
4(30) + 3(40) = 240
• The point (30, 20) lies below the plot and satisfies
the constraint
4(30) + 3(20) = 180
• The point (30, 40) lies above the plot and does not
satisfy the constraint
4(70) + 3(40) = 400

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Graphical Representation of a Constraint
C

100 – (T = 0, C = 100)
–
80 – Graph of painting and varnishing
Number of Chairs

– constraint equation
60 –
–
40 –
–
(T = 50, C = 0)
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables

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Graphical Representation of a Constraint

• To produce tables and chairs, both departments must

be used
• We need to find a solution that satisfies both
constraints simultaneously
• A new graph shows both constraint plots
• The feasible region (or area of feasible solutions) is
where all constraints are satisfied
• Any point inside this region is a feasible solution
• Any point outside the region is an infeasible solution

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Graphical Representation of a Constraint
• For the point (30, 20)
Carpentry 4T + 3C ≤ 240 hours available

constraint (4)(30) + (3)(20) = 180 hours used
Painting 2T + 1C ≤ 100 hours available 
constraint (2)(30) + (1)(20) = 80 hours used

 For the point (70, 40)

Carpentry 4T + 3C ≤ 240 hours available

constraint (4)(70) + (3)(40) = 400 hours used 
Painting 2T + 1C ≤ 100 hours available
constraint (2)(70) + (1)(40) = 180 hours used 

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 Isoprofit Line Solution Method
• Once the feasible region has been graphed, we need to
find the optimal solution from the many possible solutions
• The speediest way to do this is to use the isoprofit line
method
• Starting with a small but possible profit value, we graph the
objective function
• We move the objective function line in the direction of
increasing profit while maintaining the slope
• The last point it touches in the feasible region is the
optimal solution

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 Isoprofit Line Solution Method
C  Isoprofit line at $2,100
100 –
–
80 –
Number of Chairs

–
60 –
–
(0, 42) $2,100 = $70T + $50C
40 –
–
(30, 0)
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Figure 7.6 Number of Tables

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 Isoprofit Line Solution Method
• For ABC Furniture, choose a profit of $2,100
• The objective function is then
$2,100 = 70T + 50C
• Solving for the axis intercepts, we can draw the graph
• This is obviously not the best possible solution
• Further graphs can be created using larger profits
• The further we move from the origin, the larger the profit
will be
• The highest profit ($4,100) will be generated when the
isoprofit line passes through the point (30, 40)

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Isoprofit Line Solution Method
C  Four isoprofit lines
100 –
–
$3,500 = $70T + $50C
80 –
Number of Chairs

– $2,800 = $70T + $50C

60 –
– $2,100 = $70T + $50C
40 –
– $4,200 = $70T + $50C
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables

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Isoprofit Line Solution Method
C  Optimal solution to the
100 – Flair Furniture problem
–
80 –
Maximum Profit Line
Number of Chairs

–
60 – Optimal Solution Point
– (T = 30, C = 40)
40 –
– $4,100 = $70T + $50C
20 –
–
|– | | | | | | | | | | |
0 20 40 60 80 100 T
Number of Tables

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 Corner Point Solution Method
• A second approach to solving LP problems employs
the corner point method
• It involves looking at the profit at every corner
point of the feasible region
• The mathematical theory behind LP is that the
optimal solution must lie at one of the corner
points, or extreme point, in the feasible region
• For ABC Furniture, the feasible region is a four-
sided polygon with four corner points labeled 1, 2,
3, and 4 on the graph

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 Corner Point Solution Method
C  Four corner points of the
100 – feasible region
2 –
80 –
Number of Chairs

–
60 –
–
3
40 –
–
20 –
–
1 |– | | | | | | | | | | |
0 20 40
4 60 80 100 T
Number of Tables

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 Corner Point Solution Method
Point 1 : (T = 0, C = 0) Profit = $70(0) + $50(0) = $0
Point 2 : (T = 0, C = 80) Profit = $70(0) + $50(80) = $4,000
Point 4 : (T = 50, C = 0) Profit = $70(50) + $50(0) = $3,500
Point 3 : (T = 30, C = 40) Profit = $70(30) + $50(40) = $4,100

 Because Point 3 returns the highest profit, this is the

optimal solution
 To find the coordinates for Point 3 accurately we
have to solve for the intersection of the two constraint
lines
 The details of this are on the following slide

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 Corner Point Solution Method
 Using the simultaneous equations method, we multiply
the painting equation by –2 and add it to the carpentry
equation
4T + 3C = 240 (carpentry line)
– 4T – 2C = –200 (painting line)
C = 40
 Substituting 40 for C in either of the original equations
allows us to determine the value of T
4T + (3)(40) = 240 (carpentry line)
4T + 120 = 240
T = 30

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Summary of Graphical Solution Methods
ISOPROFIT METHOD
1. Graph all constraints and find the feasible region.
2. Select a specific profit (or cost) line and graph it to find the slope.
3. Move the objective function line in the direction of increasing profit (or
decreasing cost) while maintaining the slope. The last point it touches in the
feasible region is the optimal solution.
4. Find the values of the decision variables at this last point and compute the
profit (or cost).
CORNER POINT METHOD
1. Graph all constraints and find the feasible region.
2. Find the corner points of the feasible reason.
3. Compute the profit (or cost) at each of the feasible corner points.
4. select the corner point with the best value of the objective function found in
Step 3. This is the optimal solution.

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THANK YOU

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