The management of a company is considering three possible new products for next

year€s product line. A decision now needs to be made regarding which products to
market and at what production levels.
Initiating the production of two of these products would require a substantial start-up
cost, as shown in the first row of the table below. Once production is under way, the
marginal net revenue from each unit produced is shown in the second row. The
third row gives the percentage of the available production capacity that would be
used for each unit produced.

Only 3 units of product 1 could be sold, whereas all units that could be produced of
the other two products could be sold. The objective is to determine the number of
units of each product to produce in order to maximize the total profit (total net revenue
minus start-up costs).
(a) Assuming that production quantities must be integers, use dynamic programming
to solve this problem.
(b) Now consider the case where the divisibility assumption holds so that the
variables representing production quantities are treated as continuous variables.
Assuming that proportionality holds for both net revenues and capacities used, use
dynamic programming to solve this problem.

Answer:Since the decisions to be made are x = production level of product , for = 1, 2,

3, the stages for a dynamic programming formulation of this problem correspond to the
three products. When making the decision for a particular product, the essential
information is the amount of production capacity still remaining, so this becomes the
current state in this formulation.
(a) At stage , let the state s be measured as the number of 20% blocks of production
capacity still available for use on the remaining products, so the possible values of s
are 0, 1, 2, 3, 4, 5, where s1 = 5, s2 = 5 – x1, and s3 = s2 – 2x2.
Using the candvalues given in the above table, the profit from producing x units of
product is easily calculated as
(x) = x – c, for = 1, 2, 3.
Therefore, using the usual dynamic programming notation presented in Sec. 11.2 of the
textbook, we have

.
Using these expressions for for = 3, then = 2, and then = 1 in turn, the
dynamic programming calculations are given below.

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For = 3,

For = 2,

For = 1,

(b) Now production quantities are treated as continuous variables. Let s be the
percentage of the capacity left for the remaining products. (Note that the units of s
now are different than in part (a), so the possible values of s now are 0 =< s =< 100
rather than 0, 1, 2, 3, 4, 5.) We now have s1 = 100, s2 = 100 -20x1, and s3 = s2 – 40x2.
For product 3: =3 /20,with =3 /20.

For product 2: ,

where .
This is linear in x2 except for the term. Therefore, we only need to examine
the endpoints of the range for x2.

If x2 = 0, we get = 2 /20.
If x2 = s2 /40, we get .
Equating these two quantities, the breakpoint is 2 =80.

So,

and .

For product 1: ,

where .
Again, this is linear in x1 except for the term. Therefore, we only need to
examine the endpoints of the range for x1.

If x1 = 0, we get = 5.5.
If x1 = 3,we get =6€3+ (40) = 5.
So, = 0 and (100) = 5.5.
With = 0, the state at stage 2 becomes s2 = 100, which leads to = 2.5 and s3 = 0,
so = 0. Therefore, the optimal solution is to produce 2.5 units of product 2, but none
of products 1 and 3, with a profit of 5.5. This is better than with the integer restriction in
part (a), as we would expect.