Linear Programming applications in

Business and spreadsheet analysis

Saurabh Chandra
 Learning objectives:
1. Model a wide variety of linear programming
(LP) problems.
2. Understand major business application areas
for LP problems, including manufacturing,
marketing, and finance.
3. Gain experience in setting up and solving LP
problems using Excel’s Solver.
 Business applications of LP:
• Product mix
• Make-buy
• Media selection
• Marketing research
• Portfolio selection
• Shipping and transportation
• Allocation decisions
• Ingredient blending
• Multi-period scheduling
 Our first example: Flair furniture
product mix problem
TABLES (T) CHAIRS (C) LIMIT
Profit Contribution $7 $5
Carpentry 3 hrs 4 hrs 2,400
Painting 2 hrs 1 hr 1,000
Chairs 0 unit 1 unit 450
Tables 1 unit 0 unit 100

• A product mix problem

– Decide how much to make of two or more products
– Objective is to maximize profit
– Limited resources
• Flair Furniture
– Best combination of tables and chairs
 Media selection problem
• Allocating a fixed or limited budget across various
media (TV/Radio/Print)
• Objective: to maximize audience exposure
• Restrictions related to contract requirements, limited
media availability, or company policy.

• Company budget/week – Rs. 480, 000

• 4 media: TV adds/Newspaper/two types of radio adv.
• Contractual:
– at least 5 radio spots to be placed per week
– No more than Rs. 108000 to be spent on radio
Data for media mix problem:
 Problem formulation:
Decision variables:
- T = no. of 1 min. television spots taken/week
- N = no. of full-page newspaper ads
taken/week
- P = no. of 30 sec prime time radio spots/week
- A = no. of 1-minute afternoon radio
spots/week
 Mathematical formulation:
Objective:
Maximize audience coverage = 5,000T + 8,500N + 2,400P + 2,800A

subject to
T ≤ 12 (max TV spots/week)

N ≤ 5 (max newspaper ads/week)

P ≤ 25 (max 30-second radio

spots/week)
A ≤ 20 (max 1-minute radio spots/week)

48000T + 55500N + 17400P + 22800A ≤ 480000

(weekly advertising budget)

P+A ≥ 5 (min radio spots contracted)

17400P + 22800A ≤ 108000 (max dollars spent on radio)

T, N, P, A≥ 0 (non-negativity)
 Marketing Research problem:
• An MR firm handles consumer surveys
• Client – national press service conducting
political polls on issues of national interest
• Several requirements need to be fulfilled to
conduct a valid survey on US immigration laws
to counter terrorism
– Derived from statistical and other considerations
 Requirements:
• Survey at least 2300 people in the US
• Survey at least 1000 people who are 30 years of age or
younger
• Survey at least 600 people who are between 31-50
years of age
• Ensure that at least 15% of those surveyed live in a
state bordering Mexico
• Ensure that at least 50% of those surveyed who are 30
years of age or younger live in a state that does not
border Mexico
• Ensure that no more than 20% of those surveyed who
are 51 years of age or higher live in a state that
borders Mexico
 Decision variables:
B1 = number surveyed who are ≤ 30 years of age and live in a border state
B2 = number surveyed who are 31–50 years of age and live in a border
state
B3 = number surveyed who are ≥ 51 years of age and live in a border state
N1 = number surveyed who are ≤ 30 years of age and do not live in a
border state
N2 = number surveyed who are 31–50 years of age and do not live in a
border state
N3 = number surveyed who are ≥ 51 years of age and do not live in a
border state
• Cost data

COST PER PERSON SURVEYED

REGION AGE ≤ 30 AGE 31–50 AGE ≥ 51
State bordering Mexico $7.50 $6.80 $5.50
State not bordering Mexico $6.90 $7.25 $6.10
 Mathematical formulation:
Objective Function

Minimize total interview cost = $7.50B1 + $6.80B2 + $5.50B3

+ $6.90N1 + $7.25N2 + $6.10N3

subject to

B 1 + B 2 + B 3 + N 1 + N 2 + N3 ≥ 2,300 (total number surveyed)

B 1 + N1 ≥ 1,000 (persons 30 years or younger)
B 2 + N2 ≥ 600 (persons 31–50 in age)
B1 + B2 + B3 ≥ 0.15(B1 + B2 + B3+ N1 + N2 + N3) (border states)
N1 ≥ 0.5(B1 + N1) (≤ 30 years, not border state)
B3 ≤ 0.2(B3 + N3) (51+ years and border state)
B 1 , B 2 , B 3 , N 1 , N2 , N 3 ≥ 0 (nonnegativity)
 Portfolio Selection problem:
• Problem of selection of specific investments
from a wide variety of alternatives
INVESTMENT INTEREST EARNED RISK SCORE
Trade credits 7% 1.7
Corporate bonds 10% 1.2
Gold stocks 19% 3.7
Platinum stocks 12% 2.4
Mortgage securities8% 2.0
Construction loans 14% 2.9
 Limits to ensure a diverse portfolio:
• No more than 25% of total a/m invested may
be in any single type of investment
• At least 30% of the funds invested must be in
precious metals
• At least 45% must be invested in trade credits
and corporate bonds
• The average risk score of the total investment
must be 2 or less
• Decision variables

T = dollars invested in trade credit

B = dollars invested in corporate bonds
G = dollars invested in gold stocks
P = dollars invested in platinum stocks
M = dollars invested in mortgage securities
C = dollars invested in construction loans
 Mathematical Formulation
Objective function
Maximize dollars of interest earned = 0.07T + 0.10B + 0.19G
+ 0.12P + 0.08M + 0.14C
subject to
T + B + G + P + M + C ≤ 5,000,000
T ≤ 0.25(T + B + G + P + M + C)
B ≤ 0.25(T + B + G + P + M + C)
G ≤ 0.25(T + B + G + P + M + C)
P ≤ 0.25(T + B + G + P + M + C)
M ≤ 0.25(T + B + G + P + M + C)
C ≤ 0.25(T + B + G + P + M + C)
G + P ≥ 0.30(T + B + G + P + M + C)
T + B ≥ 0.45(T + B + G + P + M + C)

1.7T + 1.2B + 3.7G + 2.4P + 2.0M + 2.9C

≤2
T+B+G+P+M+C
T+B+G+P+M+C ≥0
 Book problem 1.6
Consider the problem of locating a new machine to an existing
layout consisting of 4 machines. These machines are located at
the following (x1,x2) coordinates: (3,0), (0,-3),(-2,1) and (1,4).
Formulate the problem of finding an optimal location as an LP
for each of the following cases:
a. The sum of the distances from the new machine to the
four machines is minimized. Use Manhattan distance.
b. Because of various amounts of flow between the new
machine and the existing machines, reformulate the
problem where the sum of the weighted distances is
minimized, where the weights corresponding to the four
machines are 5, 7, 3, and 1 respectively.
c. In order to avoid congestion, suppose the new machine
must be located in the square {(x1,x2): -1 <= x1 <= 2,
0<=x2<=1}. Formulate (a) and (b) with this restriction.
 BP. 1.5
A company wishes to plan its production of two items with seasonal
demands over a 12-month period. The monthly demand for item 1 is
100,000 units during the months of October, November, and December.
10,000 units during the months of January, February, March and April;
and 30,000 units during the remaining months. The demand for item 2 is
50,000 during the months from October through February and 15,000
during the remaining months. Suppose that the unit product cost of
items 1 and 2 is $5.00 and $8.00, respectively, provided that these were
manufactured prior to June. After June the unit costs are reduced to $4.5
and $7.00 because of the installation of an improved manufacturing
system. The total units of items 1 and 2 that can be manufactured during
any particular month cannot exceed 120,000 for Jan-Sept, and 150,000
for Oct-Dec. Furthermore, each unit of item 1 occupies 2 cubic feet and
each unit of item 2 occupies 4 cubic feet of inventory. Suppose maximum
total inventory space allowed is 150,000 cubic feet and holding cost is
$0.10/cubic feet. Formulate the production scheduling problem so that
the total production and inventory costs are minimized.