Lesson 3

Linear Programming

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Linear programming

We have discussed limiting factor with ONLY ONE

constraint. However, when there is more than 1
limiting factor, linear programming will be used to
determine the optimum production plan.
Basically, there are 2 possible scenario concerning
multiple limiting factor which requires different
approaches:
1. Where company produces only 2 products
– use linear programming
2. Where company produces more than 2
products – simplex method will be used

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Linear programming

Definition of linear programming

Linear programming – ‘the use of a series
of linear equations to construct a
mathematical model with the objectives to
obtain optimal solution to a complex
operational problem, which may involve
the production of a number of products in
an environment in which there are many
constraints’.

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Linear programming

Uses of linear programming

In the area of business, it is used in:
a)Planning production to maximize profit
b)Mixing ingredients to minimize cost
c) Selecting a portfolio of investments to
maximize worth
d)Transportation of goods that minimize
distance etc.

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Linear programming
The graphical approach to linear programming
The steps in graphical method are as follows:
1. Define variables
2. Establish objective function
3. Establish constraints
4. Draw a graph of the constraints
5. Establish the feasibility region
6. Determine the optimal product mix
7. There are 2 methods on how to determine the optimal
product mix:
8. By adding an iso-contribution line and sliding it along
the feasible area
9. Using the simultaneous equation method

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Linear programming
Example 1: (Contribution maximizing product mix)
PCK Sdn Bhd manufactures two products, X and Y. Both
products pass through two production departments,
mixing and shaping. The organization’s objective is to
maximize contribution to fixed costs.
Product X is sold for RM1.50 whereas product Y is priced
at RM2. There is unlimited demand for product X but
demand for Y is limited to 13,000 units per annum. The
machine hours available in each department are
restricted to 2,400 per annum. Other relevant data are as
follows:

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Linear programming
Machine hours required Mixing Shaping
hrs hrs
Product X 0.06 0.04
Product Y 0.08 0.12
Variable cost per unit
Product X RM1.30
Product Y RM1.70
Required:
Determine the production plan that maximizes the
company’s profit and the resultant profit.

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Linear programming
Solution
Step 1:Define variables

Step 2:Establish objective function

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Linear programming
Step 3:Establish constraints
Demand for product Y,
Mixing dept capacity,
Shaping dept capacity,

Step 4: Determine optimum production plan

Optimum production point is the intersection
between_____________ line and ____________ line.
Using scientific calculator, the optimum production plan
is________________________.

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Linear programming
4.Draw a graph of the constraints
5.Establish the feasibility region
6.Determine the optimal product mix
7.There are 2 methods on how to determine the optimal product
mix:
By adding an iso-contribution line and sliding it along the feasible
area
Using the simultaneous equation method

Notes:
Slack – if a resource which has a maximum availability is not
binding at the optimal solution, there will be a slack
Surplus – if a minimum quantity of a resource must be used, in the
optimal solution, mare than this quantity is being used, there is a
surplus on the minimum requirement.

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Linear programming
Example 2: Minimizing costs
BS has undertaken a contract to supply a customer with at
least 260 units in total of two products, X and Y, during the
next month. At least 50% of the total output must be units of X.
The products are each made by two grades of labour, as
follows:
X (hrs) Y(hrs)
Grade A labour 4 6
Grade B labour 4 2

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Linear programming
Although additional labour can be made available at
short notice, the company wishes to make use of 1,200
hours of grade A labour and 800 hours of grade B labour
which have already been assigned to working on the
contract next month. The total variable cost per unit is
RM120 for X and RM100 for Y.
BS wishes to minimize expenditure on the contract next
month.
Required:
Calculate the number of units of X and Y that should be
supplied in order to meet the terms of the contract.

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Linear programming

Solution
Step 1:Define variables

Step 2:Establish objective function

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Linear programming
Step 3:Establish constraints

Step 4: Determine optimum production plan

Optimum production point is the intersection
between_____________ line and ____________ line.
Using scientific calculator, the optimum production plan
is________________________.

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Linear programming
Sensitivity analysis and the calculation of
shadow prices
Once a graphical linear programming solution
has been found, it should be possible to provide
further information by interpreting the graph
more fully to see what would happen if certain
values in the scenario were to change:
a) What if the contribution from one product
was RM1 lower than expected?
b) What if the sales price of another product
was raised by RM2?; etc

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Linear programming
 We use the shadow price to carry out sensitivity
analysis on the availability of a limiting factor.

 A shadow price of a resource which is a limiting

factor on production is the amount by which total
contribution would fall if organization were
deprived of one unit of the resource. The shadow
price will also indicate by which the total contribution
would rise if organization were able to obtain one extra
unit of the resource, provided that the resource
remains an effective constraint on production and
provided also that the extra unit of resource can be
obtained at its normal variable cost.

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Linear programming
 To compute the shadow price of a constraint, you are
required to compute the changes in the contribution if
one unit of the constraint is increased or decreased.

Example 4: Shadow price and multiple constraint

scenario:
Using example 1, calculate the shadow price of shaping
department machine time.

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Linear programming
Solution:
Increasing the shaping department’s hour will result change
the optimum production plan.
The revised optimum production point is the intersection
between_____________________________ line and
___________________________line.
Using scientific calculator, the optimum production plan
is________________________.
RM
Existing contribution
Revised contribution ________
Shadow Price ________

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Linear programming
Interpretation of the shadow price:
The shadow price represents the additional contribution
that will be earned when an extra unit of the scarce
resource is made available. When there is a possibility to
acquire such additional resources, the shadow price is
the benchmark for the maximum amount that the
company should additionally pay to acquire it.
For example, if the existing cost of shaping hours is
assumed to be RM5, therefore the maximum amount that
the company should pay to acquire additional shaping
hours would be ___________________________

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Linear programming

Slack resources – Slack resources refer to

the surplus of resources which arises when
the “constraint” is not a binding constraint at
the optimum production plan. To compute the
slack of the resources, one has to compare:
1)The total resources required for a
“constraint”
2)The total resources available.

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ACCA F5 2014 JUNE

Tablet Co makes two types of tablet computer, the

Xeno (X) and the Yong (Y). X currently generates a
contribution of $30 per unit and Y generates a
contribution of $40 per unit. There are three main
stages of production: the build stage, the program
stage and the test stage. Each of these stages
requires the use of skilled labour which, due to a
huge increase in demand for tablet computers over
recent months, is now in short supply. The following
information is available for the two products:

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ACCA F5 2014 JUNE

Stage Xeno (X) Yong (Y)

  Minutes per unit Minutes per unit
Build ($10 per hour) 24 20
Program ($16 per hour) 16 14
Test ($12 per hour) 10 4

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ACCA F5 2014 JUNE
Tablet Co is now preparing its detailed production plans
for the next quarter. During this period it expects that the
skilled labour available will be 30,000 hours (1,800,000
minutes) for the build stage, 28,000 hours (1,680,000
minutes) for the program stage and 12,000 hours
(720,000 minutes) for the test stage. The maximum
demand for X and Y over the three-month period is
expected to be 85,000 units and 66,000 units
respectively. Fixed costs are $650,000 per month.
Due to rapid technological change, the company holds
no inventory of finished goods.

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ACCA F5 2014 JUNE
Required:
(a) On the graph paper provided, use linear
programming to calculate the optimum number of each
product which Tablet Co should make in the next quarter
assuming it wishes to maximise contribution. Calculate
the total profit for the quarter.
(b) Calculate the amount of any slack resources arising
as a result of the optimum production plan and explain
the implications of these amounts for decision-making
within Tablet Co.

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(a) Optimum production plan
Define the variables
Let x = number of units of Xeno to be produced.
Let y = number of units of Yong to be produced.
Let C = contribution.
State the objective function
C = 30x+ 40y
State the constraints
Build time: 24x + 20y ≤ 1,800,000
Program time: 16x + 14y ≤ 1,680,000
Test time: 10x + 4y ≤ 720,000
Non-negativity constraints: x, y ≥ 0
Sales constraints x ≤ 85,000
y ≤ 66,000

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ACCA F5 2014 JUNE
Draw the graph
Build time:
If x = 0, y = 1,800,000/20 = 90,000
If y = 0, x = 1,800,000/24 = 75,000
Program time:
If x = 0, y = 1,680,000/14 = 120,000
If y = 0, x = 1,680,000/16 = 105,000
Test time:
If x = 0, y = 720,000/4 = 180,000
If y = 0, x = 720,000/10 = 72,000

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ACCA F5 2014 JUNE
Solve using the iso-contribution line
If y = 40,000, C = 40,000 x $40 = $1,600,000
If C = $1,600,000 and y = 0, x = $1,600,000/$30 =
53,333·33

(YOU ARE REQUIRED TO DRAW A GRAPH TO

IDENTIFY THE FEASIBLE AREA AND THE OPTIMUM
PRODUCTION PLAN)
 

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Prepared by: Simson Loong 28
ACCA F5 2014 JUNE
Moving the iso-contribution line out to the furthest point on the
feasible region, the optimum production point is b. This is the
intersection of the build time constraint and the sales constraint
for y. Solving the simultaneous equations for these two
constraints:
y = 66,000
24x + 20y = 1,800,000
(Using calculator, x = 20,000; y = 66,000)
C = (20,000 x $30) + (66,000 x $40)
= $600,000 + $2,640,000 = $3,240,000
Fixed costs = 3 x $650,000 = $1,950,000.
Therefore profit = $1,290,000.

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ACCA F5 2014 JUNE
(b) Slack resources
Test time used = (20,000 x 10)/60 + (66,000 x 4)/60 = 7,733
hours. Therefore slack hours = 12,000 – 7,733= 4,267 hours.
Program time used = (20,000 x 16)/60 + (66,000 x 14)/60 =
20,733 hours. Therefore slack hours = 28,000 – 20,733 =
7,267 hours.
The slack values for test time and program time mean that
there are 4,267 and 7,267 hours of each respective
department’s time unutilised under the optimum production
plan. If possible, this time could be used by the organisation
elsewhere or subcontracted out to another company.

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Limitations of Linear Programming

 Divisibility of projects may not be realistic.

 Constraints are unlikely to be completely fixed and
precise as shown in the mathematical model.
 Not all relevant information can be quantified.
 All the information for the model may not be available.
 All the relationships contained within the formulation
may not be linear.
 All the potential investment opportunities may not be
identified and included in the analysis.
 The model cannot incorporate uncertainty.

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