131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

Linear programming

basic requirements

objective function well defined mathematically alternative courses of action constraints must also be expressed mathematically variables must be interrelated resources must be in limited supply graphical algebraic simplex

methods

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

Linear programming

is used to consider

decisions involving two limiting factors

using graphical approach

decisions involving more than two limiting factors

simplex method will be more appropriate

business applications

planning production to maximise profit mixing ingredients to minimise costs minimise resources used or maximise efficiency

131-639901-01 Accounting for Managerial Decision

Lecture 1

-1-

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

Linear programming

graphical method

example
Alfred Ltd is preparing its plan for the coming month. It manufactures two products, the flaktrap (x) and the saptrap (y). Details as follows. Amount per unit Flaktrap Saptrap Price/Rate Selling price () 125 165 Raw materials (kg) 6 4 5 / kg Labour (hours) - skilled 10 10 3 / hr - semi-skilled 5 25 3 / hr

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

Linear programming

graphical method

example (continued)
The companys variable overhead rate is 1 per labour hour (for both skilled and semi-skilled labour). The supply of skilled labour is limited to 2,000 hours per month and the supply of semi-skilled labour is limited to 2,500 hours per month. At the selling prices indicated, maximum demand for flaktraps is expected to be 150 units per month and the maximum demand for saptraps is expected to be 80 units per month. The directors of Alfred Ltd believe that demand for each product could be increased by advertising.

131-639901-01 Accounting for Managerial Decision

Lecture 1

-2-

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

Linear programming

graphical method

formulating the constraints

labour constraints : 10x + 10y 2,000 (skilled labour) 5x + 25y 2,500 (semi-skilled labour) demand constraints : x 150 y 80 non-negativity : x0 y0

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

Linear programming

graphical method

determine the objective function

contribution per unit Amount () per unit Selling price Raw materials cost Labour cost Variable overhead Contribution objective function : z = 35x + 5y Flaktrap 125 ( 30) ( 45) ( 15) 35 Saptrap 165 ( 20) (105) ( 35) 5

131-639901-01 Accounting for Managerial Decision

Lecture 1

-3-

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

10x + 10y = 2,000

(y)
x = 150

180 160 140 120 100

objective function A z = 35x + 5y 60

80 40 20

y = 80

BC D E 100
5x + 25y = 2,500

200

300

400

(x)
Lecture 1

131-639901-01 Accounting for Managerial Decision

Problems of Resources Constraints and Linear Programming

Linear programming

graphical method

further example
Greenfields is a family-operated business that manufactures fertilisers. One of its products is a liquid plant feed into which certain additives are put to improve effectiveness. Every 10,000 litres of this feed must contain at least 480g of additive A, 800g of additive B and 640g of additive C. Greenfields can purchase two ingredients (x and y) that contain these three additives. This information, together with the cost of each ingredient, is given below as follows:

131-639901-01 Accounting for Managerial Decision

Lecture 1

-4-

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

Linear programming

graphical method

further example (continued)

Ingredient X Ingredient Y Additive A 2g 8g Additive B 5g 10 g Additive C 10 g 4g Cost per litre 25 50 Both ingredients require specialist storage facilities and as such no more than 120 litres of each can be held in stock at any one time.

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

Linear programming

graphical method

further example (continued)

Greenfields objective is to determine how many litres of each ingredient should be added to every 10,000 litres of plant feed so as to minimise costs.

131-639901-01 Accounting for Managerial Decision

Lecture 1

-5-

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

( x1 ) 180 160
5x1 + 10x2 = 800 2x1 + 8x2 = 480 x2 = 120

140 120 100

x1 = 120 R V U T 10x1 + 4x2 = 640 S

objective function 80 z = 25x1 + 50x2

60 40 20 0 0 40 80

120

160

( x2 )
Lecture 1

131-639901-01 Accounting for Managerial Decision

Problems of Resources Constraints and Linear Programming

Linear programming

binding constraint

most crucial constraint that limits the solution exists when a minimum constraint is not binding exists when a maximum constraint is not binding an increase in value which would be created by having available one additional unit of a limiting resource at its original cost
Lecture 1

surplus

slack

shadow price

131-639901-01 Accounting for Managerial Decision

-6-

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

Linear programming

simplex method

example
Woodhurst manufactures four different types of coffee table. Each type of table requires time (in hours) for the cutting of the component parts, for assembly and for finishing. The data in the table below has been collected for the year now being planned.
Table Small Medium Large Ornate Capacity Cutting 2 2 1 6 3,000 Assembly Finishing Contribution 5 1 60/unit 4 4 123/unit 3 5 135/unit 2 3 90/unit 9,000 4,950 Lecture 1

131-639901-01 Accounting for Managerial Decision

Problems of Resources Constraints and Linear Programming

Linear programming

simplex method

example (continued)
Owing to other commitments, no more than a total of 1,800 coffee tables can be made in any given year. Also, market analysis reveals that the annual demand for the companys small coffee table is at least 800. The company wishes to determine how many of each type of coffee table it should produce in the coming year to maximise contribution.

formulating the problem

z = total contribution in earned in the coming year x1, x2, x3, x4 = the number of (small, medium, large and ornate resp.) coffee tables to be produced in the year

131-639901-01 Accounting for Managerial Decision

Lecture 1

-7-

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

Linear programming

simplex method

formulating the constraints

cutting assembly finishing capacity non-negativity minimum supply : 2x1 + 2x2 + 1x3 + 6x4 : 5x1 + 4x2 + 3x3 + 2x4 : 1x1 + 4x2 + 5x3 + 3x4 : x1 + x2 + x3 + x4 : x1 , x2 , x3 , x4 : x1 3,000 9,000 4,950 1,800 0 800

maximise contribution
z = 60x1 + 123x2 + 135x3 + 90x4

131-639901-01 Accounting for Managerial Decision

Lecture 1

Problems of Resources Constraints and Linear Programming

Linear programming

simplex method

solution
Variable
X1 X2 X3 X4

Value
950 250 600 0

Relative Loss
0 0 0 48

Constraint
1 2 3 4 5

Slack / Surplus
0 1,450 0 0 150

Worth
9 0 21 21 0 Lecture 1

131-639901-01 Accounting for Managerial Decision

-8-