Module 1: The Linear Programming Technique in Decision-making

Learning Objectives:

At the end of this topic students will be able to:

1. understand and apply the theory of Linear Programming in decision

making.

2. identify various mathematical techniques and the process of using it in

various business situations

INTRODUCTION
In real business situation, the entrepreneur has numerous goals to meet.
But not all of these projects can be undertaken due to limited resources. He
needs to identify only some that could generate him bigger income. He may
consider putting up a manufacturing firm where the rate of return could be
somewhere in the range between 18% - 30% or go into lending which may earn
him more but the risk is high because a collateralized lending would restrict
demand thus making profit highly limited. It may also be advisable to invest in
government issued securities if he wants to provide total security for his
investment hence it is fully guaranteed by the national government against any
loss.

The selection process that requires him to choose between alternative

investment decisions is a tough job. Due to the presence of very slim variations
as to rate of return and risks, and margin for error is very slim as well, every
decision maker really faces a very tough job. Generally, for him to carve a good
and productive decision, he must have some knowledge about the business in
terms of theory and occurrences, but most importantly, his sound mind and
rational understanding of economic and political events.

Management science today did introduce some mathematical tools to help

managers cope with his predicament in making business decisions. Few of these
can be mentioned as follows: Bayesian theorem, Network Analysis,
Transportation Method and the topic for this lesson- Linear Programming
technique

THE LINEAR PROGRAMMING METHOD

This is a mathematical technique that specifies the best possible

alternative to efficient use of company’s resources. The application of this
technique is subject to the presences of the following conditions:

Prepared by: Dr. Leopoldo F.T. Bragas

CBA Faculty
 Module 1: The Linear Programming Technique in Decision-making

a. The objective that need to be attained is clearly specified

For example the goal of higher profit from the employment of

company’s resources

b. There must be alternative courses of action

This can be explained by the choices open for the firm in terms of
where to use its resources. For example if machines are used to produce
slippers rather than shoes, how much profit can he generate from
producing certain quantities of these two products?

c. Resources of the firm must be in limited supply

d. The Firm’s objective function can be expressed mathematically

LINEAR PROGRAMMING AND ITS APPLICATION IN PRODUCTION

PROBLEM

1.1. The problem description

The manufacturer of trucks and cars is confronted with the problem about
quantities of each of the two products to produce. He has currently at his
disposal the following resources and quantities:

Man-hours 1600
Machine hours 1800

1.2. Resources Requirement and profit per unit

Trucks require 20 man-hours and 3 machine hours

Cars need 10 man-hours and 6 machine hours

Profits from each product per unit are P30,000 and P80,000 respectively.

The variables and objective function

X1 = number of trucks manufactured per day

Prepared by: Dr. Leopoldo F.T. Bragas

CBA Faculty
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 Module 1: The Linear Programming Technique in Decision-making

X2 = number of cars manufactured per day

Z = profit from the two products per day

We can state the profit function in equation form as;

Z =30,000X1+ 80,000X2

And the objective function, to maximize profit

Max Z =30,000X1+ 80,000X2

Subject to the following constraints:

That the company has available resources for the above production namely;

Labor hours = 1,600

Machine hours = 1,800

The resource constraints can be written mathematically as

10X1+ 6X2 ≤ 1600 for labor

20X1+ 3X2 ≤ 1800 for machine-hours

THE MODEL

The production problem of the entrepreneur can be identified as X1 units

of trucks and X2 units of cars such that quantities of these two products affect
profit. We can write the model as

Max Z =30,000X1+ 80,000X2

Subject to the following constraints;

1) 10X1+ 6X2 ≤ 1600

2) 20X1+ 3X2 ≤ 1800

3) X1 ≥ 0

Prepared by: Dr. Leopoldo F.T. Bragas

CBA Faculty
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 Module 1: The Linear Programming Technique in Decision-making

4) X2 ≥ 0

The problem about how much of each of the two products to produce to
attain the possible highest profit can be solved by means of the following
procedure:

1. 10X1+ 6X2 ≤ 1600 labor hours

2. 20X1+ 3X2 ≤ 1800 machine hours

Firstly, we need to transform the inequalities into equality, thus

(1.) 10X1+ 6X2 = 1600

(2.) 20X1+ 3X2 = 1800

Multiplying equation 1 by -2, we obtain

(3.) -20X1 - 12X2 = - 3200

Adding equation (3) to equation (2), we obtain

-20X1 - 12X2 = - 3200

20X1 + 3X2 = 1800

--------------------------------------
- 9X2 = -1400

Thus,

(4.) X2 = 155.5

Substituting X2 = 155.5 into equation (2), we obtain

20X1+ 3X2 = 1800

20X1+ 3(155.5) = 1800

20X1+ 466.5 = 1800

X1 = 66.68

Prepared by: Dr. Leopoldo F.T. Bragas

CBA Faculty
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 Module 1: The Linear Programming Technique in Decision-making

Going back to the main objective function;

Max Z = 30,000X1+ 80,000X2

Z = 2,000,400 + 12,440,000

=14,440,400

This means that a profit of P 14,440,400 can be attained if the firm

produces 66.6 units of cars and 155.5 units of trucks. This level of profit is the
most to attain among the possible combination of firm resources.

THE GRAPHICAL METHOD

The graphical method is another way to find solution to a linear

programming problem. This can be done through the following procedure; firstly,
quantity for cars and trucks should be determined for each equation and plotted
jointly in graph.

1.) 10X1+ 6X2 = 1600

10(0) + 6X2 = 1600

X2 =266.6

10X1+ 6 X2 = 1600

X1 = 160

(2.) 20(0) + 3X2 = 1800

X2 = 600

20X1+ 3(0) = 1800

X1 = 90

10X1+ 6X2 = 1600

Prepared by: Dr. Leopoldo F.T. Bragas

CBA Faculty
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 Module 1: The Linear Programming Technique in Decision-making

X1
300

250

200

150

100

50

0 X2
50 100 150 200 250 300

20X1+ 3X2 ≤ 1800

20(0)+ 3X2 ≤ 1800

X2 ≤ 600
20X1+ 3(0) ≤ 1800

20X1+ 3(0) ≤ 1800

X1 ≤ 90

(2.) 20(0) + 3X2 = 1800

X1
600

500

400

300

Prepared by: Dr. Leopoldo F.T. Bragas

CBA Faculty
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 Module 1: The Linear Programming Technique in Decision-making

200

100

0 X2
100 200 300 400 500 600

X1
600

500

400

300

200

100

0 X2
100 200 300 400 500 600

The darken portion indicates the possible quantities of cars and trucks that
can be possibly produced but point A provides greater profit for the firm.

REFERENCES:

1. Churchman, C.W. et al: Introduction to Operation Research, New York: John Wiley &
Sons Inc. 1957
rd
2. Hillier, F.C. and C.J. Lieberman: Introduction to Operation Research 3 edition San
Francisco : Holden Day Inc. 1980
th
3. Levin R. et al : Quantitative Approaches to Management 5 edition McGraw Hill, Inc.
1982

Prepared by: Dr. Leopoldo F.T. Bragas

CBA Faculty
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 Module 1: The Linear Programming Technique in Decision-making

EXERCISE 1:

If a firm has 1000 man hours of labor available and 800 machines hours which of
the two products it shall consider most?

a. Furniture > profit = 100 pesos each

b. Garments >profit = 75 pesos each

Resources Requirements:

Furniture > 8 man-hours of labor and 12 machine hours

Garments >3man-hours of labor and 18 machine hours

Prepared by: Dr. Leopoldo F.T. Bragas

CBA Faculty
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