Chap02 Decision Modelling Using Spreadsheet

Spreadsheet Modeling
& Decision Analysis

A Practical Introduction to
Management Science
5th edition
Cliff T. Ragsdale
Chapter 2
Introduction to Optimization
and Linear Programming
Introduction
 We all face decision about how to use
limited resources such as:
– Oil in the earth
– Land for dumps
– Time
– Money
– Workers
Mathematical Programming...
 MP is a field of operations research that
finds the optimal, or most efficient, way of
using limited resources to achieve the
objectives of an individual of a business.
 a.k.a. Optimization
Applications of Optimization
 Determining Product Mix
 Manufacturing
 Routing and Logistics
 Financial Planning
Characteristics of
Optimization Problems
 Decisions
 Constraints
 Objectives
General Form of an Optimization Problem
MAX (or MIN): f0(X1, X2, …, Xn)
Subject to: f1(X1, X2, …, Xn)<=b1
:
fk(X1, X2, …, Xn)>=bk
:
fm(X1, X2, …, Xn)=bm
Note: If all the functions in an optimization are linear,

the problem is a Linear Programming (LP) problem
Linear Programming (LP) Problems
MAX (or MIN): c1X1 + c2X2 + … + cnXn

Subject to: a11X1 + a12X2 + … + a1nXn <= b1
:
ak1X1 + ak2X2 + … + aknXn >=bk
:
am1X1 + am2X2 + … + amnXn = bm
An Example LP Problem
Blue Ridge Hot Tubs produces two types of hot

tubs: Aqua-Spas & Hydro-Luxes.
Aqua-Spa Hydro-Lux
Pumps 1 1
Labor 9 hours 6 hours
Tubing 12 feet 16 feet
Unit Profit $350 $300
There are 200 pumps, 1566 hours of labor,

and 2880 feet of tubing available.
5 Steps In Formulating LP Models:
1. Understand the problem.

2. Identify the decision variables.
X1=number of Aqua-Spas to produce
X2=number of Hydro-Luxes to produce
3. State the objective function as a linear
combination of the decision variables.
MAX: 350X1 + 300X2
5 Steps In Formulating LP Models
(continued)
4. State the constraints as linear combinations of

the decision variables.
1X1 + 1X2 <= 200 } pumps
9X1 + 6X2 <= 1566 } labor
12X1 + 16X2 <= 2880} tubing
5. Identify any upper or lower bounds on the
decision variables.
X1 >= 0
X2 >= 0
LP Model for
Blue Ridge Hot Tubs
MAX: 350X1 + 300X2

S.T.: 1X1 + 1X2 <= 200
9X1 + 6X2 <= 1566
12X1 + 16X2 <= 2880
X1 >= 0
X2 >= 0
Solving LP Problems:
An Intuitive Approach
 Idea: Each Aqua-Spa (X1) generates the highest unit
profit ($350), so let’s make as many of them as possible!
 How many would that be?
– Let X2 = 0
1st constraint: 1X1 <= 200
2nd constraint: 9X1 <=1566 or X1 <=174
3rd constraint: 12X1 <= 2880 or X1 <= 240
 If X2=0, the maximum value of X1 is 174 and the total
profit is $350*174 + $300*0 = $60,900
 This solution is feasible, but is it optimal?
 No!
Solving LP Problems:
A Graphical Approach
 The constraints of an LP problem

defines its feasible region.
 The best point in the feasible region is
the optimal solution to the problem.
 For LP problems with 2 variables, it is
easy to plot the feasible region and find
the optimal solution.
X2
Plotting the First Constraint
250
(0, 200)
200
boundary line of pump constraint
X1 + X2 = 200
150
100
50
(200, 0)
0
0 50 100 150 200 250 X1
Plotting the Second Constraint
X2
(0, 261)
250
boundary line of labor constraint
200 9X1 + 6X2 = 1566
150
100
50
(174, 0)
0
0 50 100 150 200 250 X1
Plotting the Third Constraint
X2
250
(0, 180)
200
150
boundary line of tubing constraint
12X1 + 16X2 = 2880
100
Feasible Region
50
(240, 0)
0
0 50 100 150 200 250 X1
X2 Plotting A Level Curve of the
Objective Function
250
200
(0, 116.67) objective function

150
350X1 + 300X2 = 35000
100
50 (100, 0)
0
0 50 100 150 200 250 X1
A Second Level Curve of the
X2 Objective Function
250
(0, 175) objective function

200
350X1 + 300X2 = 35000
objective function
150 350X1 + 300X2 = 52500
100
(150, 0)
50
0
0 50 100 150 200 250 X1
Using A Level Curve to Locate
X2 the Optimal Solution
250
objective function
200
350X1 + 300X2 = 35000
150
optimal solution
100
objective function
350X1 + 300X2 = 52500
50
0
0 50 100 150 200 250 X1
Calculating the Optimal Solution
 The optimal solution occurs where the “pumps” and “labor”
constraints intersect.
 This occurs where:
X1 + X2 = 200 (1)
and 9X1 + 6X2 = 1566 (2)
 From (1) we have, X2 = 200 -X1 (3)
 Substituting (3) for X2 in (2) we have,
9X1 + 6 (200 -X1) = 1566
which reduces to X1 = 122
 So the optimal solution is,
X1=122, X2=200-X1=78
Total Profit = $350*122 + $300*78 = $66,100
Enumerating The Corner Points
X2
250 Note: This technique will not work if
the solution is unbounded.
obj. value = $54,000
200 (0, 180)

150
(80, 120)

100
(122, 78)
50
obj. value = $0 obj. value = $60,900
(0, 0) (174, 0)
0
0 50 100 150 200 250 X1
Summary of Graphical Solution
to LP Problems
1. Plot the boundary line of each constraint

2. Identify the feasible region
3. Locate the optimal solution by either:
a. Plotting level curves
b. Enumerating the extreme points
Understanding How Things Change
See file Fig2-8.xls
Special Conditions in LP Models
 A number of anomalies can occur in LP
problems:
– Alternate Optimal Solutions
– Redundant Constraints
– Unbounded Solutions
– Infeasibility
Example of Alternate Optimal Solutions
X2
250
objective function level curve
200 450X1 + 300X2 = 78300
150
100
alternate optimal solutions

50
0
0 50 100 150 200 250 X1
Example of a Redundant Constraint
X2
250
boundary line of tubing constraint
200
boundary line of pump constraint
150
boundary line of labor constraint

100
Feasible Region
50
0
0 50 100 150 200 250 X1
Example of an Unbounded Solution
X2
1000 objective function
X1 + X2 = 600 -X1 + 2X2 = 400
800
objective function
X1 + X2 = 800
600
400
200
X1 + X2 = 400
0
0 200 400 600 800 1000 X1
Example of Infeasibility
X2
250
200 X1 + X2 = 200
feasible region for

150 second constraint
100
feasible region
50 for first constraint
X1 + X2 = 150
0
0 50 100 150 200 250 X1
Important ”Behind the Scenes”
Assumptions in LP Models
2-30
Proportionality and Additivity
Assumptions
 An LP objective function is linear; this
results in the following 2 implications:
 proportionality: contribution to the objective
function from each decision variable is
proportional to the value of the decision
variable. e.g., contribution to profit from
making 4 aqua-spas (4$350) is 4 times the
contribution from making 1 aqua-spa ($350)
2-31
Assumptions (cont.)
 Additivity: contribution to objective function
from any decision variable is independent of
the values of the other decision variables.
E.g., no matter what the value of x2, the
manufacture of x1 aqua-spas will always
contribute 350 x1 dollars to the objective
function.
2-32
Assumptions (cont.)
 Analogously, since each constraint is a
linear inequality or linear equation, the
following implications result:
 proportionality: contribution of each
decision variable to the left-hand side of
each constraint is proportional to the value
of the variable. E.g., it takes 3 times as
many labor hours (93=27 hours) to make
3 aqua-spas as it takes to make 1 aqua-
spa (91=9 hours) [No economy of scale]
2-33
Assumptions (cont.)
 Additivity: the contribution of a decision
variable to the left-hand side of a constraint is
independent of the values of the other
decision variables. E.g., no matter what the
value of x1 (no. of aqua-spas produced), the
production of x2 hydro-luxes uses x2 pumps,
6x2 hours of labor,
16x2 feet of tubing.
2-34
More Assumptions
 Divisibility Assumption: each decision
variable is allowed to assume
fractional values
 Certainty Assumption: each parameter
(objective function coefficient cj, right-
hand side constant bi of each
constraint, and technology coefficient
aij) is known with certainty.
2-35
End of Chapter 2

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Spreadsheet Modeling

& Decision Analysis

Note: If all the functions in an optimization are linear,

MAX (or MIN): c1X1 + c2X2 + … + cnXn

Blue Ridge Hot Tubs produces two types of hot

There are 200 pumps, 1566 hours of labor,

1. Understand the problem.

4. State the constraints as linear combinations of

MAX: 350X1 + 300X2

 The constraints of an LP problem

200 9X1 + 6X2 = 1566

(0, 116.67) objective function

(0, 175) objective function

obj. value = $64,000

obj. value = $66,100

1. Plot the boundary line of each constraint

alternate optimal solutions

boundary line of labor constraint

feasible region for

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