Chapter 3
Linear Programming: Sensitivity Analysis and Interpretation
of Solution
Case Problem 1: Product Mix
Note to Instructor: The difference between relevant and sunk costs is critical. The cost of the shipment of
nuts is a sunk cost. Practice in applying sensitivity analysis to a business decision is obtained. You may
want to suggest that sensitivity analyses other than the ones we have suggested be undertaken.
1. Cost per pound of ingredients
Almonds $7500/6000 = $1.25
Brazil $7125/7500 = $.95
Filberts $6750/7500 = $.90
Pecans $7200/6000 = $1.20
Walnuts $7875/7500 = $1.05
Cost of nuts in three mixes:
Regular mix: .15($1.25) + .25($.95) + .25($90) + .10($1.20) + .25($1.05) = $1.0325
Deluxe mix .20($1.25) + .20($.95) + .20($.90) + .20($1.20) + .20($1.05) = $1.07
Holiday mix: .25($1.25) + .15($.95) + .15($.90) + .25($1.20) + .20($1.05) = $1.10
2. Let R = pounds of Regular Mix produced
D = pounds of Deluxe Mix produced
H = pounds of Holiday Mix produced
Note that the cost of the five shipments of nuts is a sunk (not a relevant) cost and should not affect
the decision. However, this information may be useful to management in future pricing and
purchasing decisions. A linear programming model for the optimal product mix is given.
The following linear programming model can be solved to maximize profit contribution for the nuts
already purchased.
Max 1.65R + 2.00D + 2.25H
s.t.
0.15R + 0.20D + 0.25H 6000 Almonds
0.25R + 0.20D + 0.15H 7500 Brazil
0.25R + 0.20D + 0.15H 7500 Filberts
0.10R + 0.20D + 0.25H 6000 Pecans
0.25R + 0.20D + 0.20H 7500 Walnuts
R 10000 Regular
D 3000 Deluxe
H 5000 Holiday
R, D, H 0
CP - 9
Chapter 3
Optimal Objective Value
61375.00000
Variable Value Reduced Cost
R 17500.00000 0.00000
D 10625.00000 0.00000
H 5000.00000 0.00000
Constraint Slack/Surplus Dual Value
1 0.00000 8.50000
2 250.00000 0.00000
3 250.00000 0.00000
4 875.00000 0.00000
5 0.00000 1.50000
6 7500.00000 0.00000
7 7625.00000 0.00000
8 0.00000 -0.17500
Objective Allowable Allowable
Coefficient Increase Decrease
1.65000 0.35000 0.15000
2.00000 0.20000 0.10769
2.25000 0.17500 Infinite
RHS Allowable Allowable
Value Increase Decrease
6000.00000 583.33333 610.00000
7500.00000 Infinite 250.00000
7500.00000 Infinite 250.00000
6000.00000 Infinite 875.00000
7500.00000 250.00000 750.00000
10000.00000 7500.00000 Infinite
3000.00000 7625.00000 Infinite
5000.00000 4692.30769 5000.00000
3. From the dual values it can be seen that additional almonds are worth $8.50 per pound to TJ.
Additional walnuts are worth $1.50 per pound. From the slack variables, we see that additional
Brazil nut, Filberts, and Pecans are of no value since they are already in excess supply.
4. Yes, purchase the almonds. The dual value shows that each pound is worth $8.50; the dual value is
applicable for increases up to 583.33 pounds.
CP - 10
Solutions to Case Problems
Resolving the problem by changing the right-hand side of constraint 1 from 6000 to 7000 yields the
following optimal solution. The optimal solution has increased in value by $4958.34. Note that
only 583.33 pounds of the additional almonds were used, but that the increase in profit contribution
more than justifies the $1000 cost of the shipment.
Optimal Objective Value
66333.33333
Variable Value Reduced Cost
R 11666.66667 0.00000
D 17916.66667 0.00000
H 5000.00000 0.00000
Constraint Slack/Surplus Dual Value
1 416.66667 0.00000
2 250.00000 0.00000
3 250.00000 0.00000
4 0.00000 5.66667
5 0.00000 4.33333
6 1666.66667 0.00000
7 14916.66667 0.00000
8 0.00000 -0.03333
Objective Allowable Allowable
Coefficient Increase Decrease
1.65000 0.10000 0.65000
2.00000 1.30000 0.02353
2.25000 0.03333 Infinite
RHS Allowable Allowable
Value Increase Decrease
7000.00000 Infinite 416.66667
7500.00000 Infinite 250.00000
7500.00000 Infinite 250.00000
6000.00000 250.00000 1790.00000
7500.00000 250.00000 250.00000
10000.00000 1666.66667 Infinite
3000.00000 14916.66667 Infinite
5000.00000 10529.41176 5000.00000
5. From the dual values it is clear that there is no advantage to not satisfying the orders for the Regular
and Deluxe mixes. However, it would be advantageous to negotiate a decrease in the Holiday mix
requirement.
CP - 11
Chapter 3
Case Problem 2: Investment Strategy
1. The first step is to develop a linear programming model for maximizing return subject to constraints
for funds available, diversity, and risk tolerance.
Let G = Amount invested in growth fund
I = Amount invested in income fund
M = Amount invested in money market fund
The LP formulation and optimal solution found using The Management Scientist are shown.
MAX .18G +.125I +.075M
S.T.
1) G + I + M < 800000 Funds Available
2) .8G -.2I -.2M > 0 Min growth fund
3) .6G -.4I -.4M < 0 Max growth fund
4) -.2G +.8I -.2M > 0 Min income fund
5) -.5G +.5I -.5M < 0 Max income fund
6) -.3G -.3I +.7M > 0 Min money market fund
7) .05G + .02I -.04M < 0 Max risk
Optimal Objective Value
94133.33333
Variable Value Reduced Cost
G 248888.88889 0.00000
I 160000.00000 0.00000
M 391111.11111 0.00000
Constraint Slack/Surplus Dual Value
1 0.00000 0.11767
2 88888.88889 0.00000
3 71111.11111 0.00000
4 0.00000 -0.02000
5 240000.00000 0.00000
6 151111.11111 0.00000
7 0.00000 1.16667
Objective Allowable Allowable
Coefficient Increase Decrease
0.18000 Infinite 0.03000
0.12500 0.02000 0.58833
0.07500 0.10500 0.06000
CP - 12
Solutions to Case Problems
RHS Allowable Allowable
Value Increase Decrease
800000.00000 Infinite 800000.00000
0.00000 88888.88889 Infinite
0.00000 Infinite 71111.11111
0.00000 133333.33333 106666.66667
0.00000 Infinite 240000.00000
0.00000 151111.11111 Infinite
0.00000 6400.00000 8000.00000
Rounding to the nearest dollar, the portfolio recommendation for Langford is as follows.
Amount
Fund: Invested
Growth $248,889
Income 160,000
Money Market 391,111
Total $800,000
Yield = 94,133 / 800,000 = .118
The portfolio yield is .118 or 11.8%.
Note that the portfolio yield equals the dual value for the funds available constraint.
2. If Langford’s risk index is increased by .005 that is the same as increasing the right-hand side of
constraint 7 by .005 (800,000) = 4000. Since this amount of increase is within the right-hand-side
range, we would expect an increase in return of 1.167 (4000) = 4668. The revised formulation and
new optimal solution are shown below. Except for rounding, the value has increased as predicted;
the new optimal allocation is
Amount
Fund: Invested
Growth $293,333
Income 160,000
Money Market 346,667
Total $800,000
The portfolio yield becomes 98,800/800,000 = .124 or 12.4%
MAX .18G +.125I +.075M
S.T.
1) G + I + M < 800000
2) .8G -.2I -.2M > 0
3) .6G -.4I -.4M < 0
4) -.2G +.8I -.2M > 0
5) -.5G +.5I -.5M < 0
6) -.3G -.3I +.7M > 0
7) .045G + .015I-.045M < 0
CP - 13
Chapter 3
Optimal Objective Value
98800.00000
Variable Value Reduced Cost
G 293333.33333 0.00000
I 160000.00000 0.00000
M 346666.66667 0.00000
Constraint Slack/Surplus Dual Value
1 0.00000 0.12350
2 133333.33333 0.00000
3 26666.66667 0.00000
4 0.00000 -0.02000
5 240000.00000 0.00000
6 106666.66667 0.00000
7 0.00000 1.16667
3. Since .16 is in the objective coefficient range for the growth fund return, there would be no change
in allocation. However, the return would decrease by (.02) ($248,889) = $4978.
A decrease to .14 is outside the objective function coefficient range forcing us to resolve the
problem. The new formulation and optimal solution is as follows.
MAX .14G +.125I +.075M
S.T.
1) G + I + M < 800000
2) .8G -.2I -.2M > 0
3) .6G -.4I -.4M < 0
4) -.2G +.8I -.2M > 0
5) -.5G +.5I -.5M < 0
6) -.3G -.3I +.7M > 0
7) .05G + .02I-.04M < 0
Optimal Objective Value
85066.66667
Variable Value Reduced Cost
G 160000.00000 0.00000
I 293333.33333 0.00000
M 346666.66667 0.00000
Slack/Surplus Dual Value
CP - 14
Solutions to Case Problems
Constraint
1 0.00000 0.10633
2 0.00000 -0.01000
3 160000.00000 0.00000
4 133333.33333 0.00000
5 106666.66667 0.00000
6 106666.66667 0.00000
7 0.00000 0.83333
4. Since the current optimal solution has more invested in the growth fund than the income fund,
adding this requirement will force us to resolve the problem with a new constraint. We should
expect a decrease in return as is shown in the following optimal solution.
MAX .18G +.125I +.075M
S.T.
1) G + I + M < 800000
2) .8G -.2I -.2M > 0
3) .6G -.4I -.4M < 0
4) -.2G +.8I -.2M > 0
5) -.5G +.5I -.5M < 0
6) -.3G -.3I +.7M > 0
7) .05G + .02I-.04M < 0
8) G - I < 0
Optimal Objective Value
93066.66667
Variable Value Reduced Cost
1 213333.33333 0.00000
2 213333.33333 0.00000
3 373333.33333 0.00000
Constraint Slack/Surplus Dual Value
1 0.00000 0.11633
2 53333.33333 0.00000
3 106666.66667 0.00000
4 53333.33333 0.00000
5 186666.66667 0.00000
6 133333.33333 0.00000
7 0.00000 1.03333
8 0.00000 0.01200
Note that the value of the solution has decreased from $94,133 to $93,067. This is only a decrease
of 0.2% inyield. Since the yield decrease is so small, Williams may prefer this portfolio for
Langford.
CP - 15
Chapter 3
5. It is possible a model such as this could be developed for each client. The changed yield estimates
would require a change in the objective function coefficients and resolving the problem if the change
was outside the objective coefficient range.
Case Problem 3: Truck Leasing Strategy
1. Let xij = number of trucks obtained from a short term lease signed in month i for a period of j
months and yi = number of trucks obtained from the long-term lease that are used in month i
Monthly fuel costs are 20 ($100) = $2000.
Monthly Costs for Short-Term Leased Trucks
Note: the costs shown here include monthly fuel costs of $2000.
Decision Variables Cost
x11 , x21 , x31 , x41 $4000 + $2000 = $6000
x12 , x22 , x32 2 ($3700 + $2000) = $11,400
x13 , x23 3 ($3225 + $2000) = $15,675
x14 4 ($3040 + $2000) = $20,160
Monthly Costs for Long-Term Leased Trucks
Since Reep Construction is committed to the long-term lease and since employees cannot
be laid off, the only relevant cost for the long-term leased trucks is the monthly fuel cost of
$2000.
LINEAR PROGRAMMING PROBLEM
MIN
6000X11+11400X12+15675X13+20160X14+6000X21+11400X22+15675X23+6000X31+
11400X32+6000X41+2000Y1+2000Y2+2000Y3+2000Y4
S.T.
1) 1X11+1X12+1X13+1X14+1Y1=10
2) 1X12+1X13+1X14+1X21+1X22+1X23+1Y2=12
3) 1X13+1X14+1X22+1X23+1X31+1X32+1Y3=14
4) 1X14+1X23+1X32+1X41+1Y4=8
5) 1Y1<1
6) 1Y2<2
7) 1Y3<3
8) 1Y4<1
CP - 16
Solutions to Case Problems
Optimal Objective Value
203660.00000
Variable Value Reduced Cost
X11 0.00000 1515.00000
X12 0.00000 1725.00000
X13 3.00000 0.00000
X14 6.00000 0.00000
X21 0.00000 810.00000
X22 0.00000 210.00000
X23 1.00000 0.00000
X31 1.00000 0.00000
X32 0.00000 915.00000
X41 0.00000 1515.00000
Y1 1.00000 0.00000
Y2 2.00000 0.00000
Y3 3.00000 0.00000
Y3 1.00000 0.00000
Constraint Slack/Surplus Dual Value
1 0.00000 4485.00000
2 0.00000 5190.00000
3 0.00000 6000.00000
4 0.00000 4485.00000
5 0.00000 -2485.00000
6 0.00000 -3190.00000
7 0.00000 -4000.00000
8 0.00000 -2485.00000
Objective Allowable Allowable
Coefficient Increase Decrease
6000.00000 Infinite 1515.00000
11400.00000 Infinite 1725.00000
15675.00000 210.00000 915.00000
20160.00000 915.00000 210.00000
6000.00000 Infinite 810.00000
11400.00000 Infinite 210.00000
15675.00000 210.00000 1515.00000
6000.00000 915.00000 810.00000
11400.00000 Infinite 915.00000
6000.00000 Infinite 1515.00000
2000.00000 2485.00000 Infinite
CP - 17
Chapter 3
2000.00000 3190.00000 Infinite
2000.00000 4000.00000 Infinite
2000.00000 2485.00000 Infinite
RHS Allowable Allowable
Value Increase Decrease
10.00000 1.00000 6.00000
12.00000 1.00000 1.00000
14.00000 Infinite 1.00000
8.00000 3.00000 6.00000
1.00000 6.00000 1.00000
2.00000 1.00000 1.00000
3.00000 1.00000 3.00000
1.00000 6.00000 1.00000
2. The total cost associated with the leasing plan is $203,660.
3. If Reep Construction is willing to consider the possibility of layoffs, we need to include driver costs
of $3200 per month. Replacing the coefficients for y1, y2, y3, and y4 in our previous linear program
with $5200 and resolving resulted in the following leasing plan:
Month Length of Lease (Months)
Leased 1 2 3 4
1 0 0 3 7
2 0 0 1
3 0 0
4 0
In addition, in month 2, one of the trucks from the long-term leases was used and in month 3 three
of the trucks from the long-term leases were used. The total cost of this leasing plan is $224,620.
To see what effect a no layoff policy has, we can set y1 = 1, y2 = 2, y3 = 3, y4 = 1 and
resolve the linear program using objective coefficients of $5200 for y1 , y2 , y3 , and y4 . The
new optimal solution forces us to use all the available trucks from the long-term lease; the
optimal leasing plan is shown below.
Month Length of Lease (Months)
Leased 1 2 3 4
1 0 0 3 6
2 0 0 1
3 1 0
4 0
The total cost associated with this solution is $226,060. Thus, if Reep maintains their current
policy of no layoffs they will incur an additional cost of $226,060 - $224,620 = $1,440.
CP - 18
