Advertising media alternatives for the Relax-and-Enjoy Lake

Liner Programming Development Corporation:

Applications in
Marketing, Finance, and
Operations Management
Unit 6.2

Marketing Applications

Media Selection The decision to be made is how many times to use each
medium. We begin by defining the decision variables:
 One application of linear programming
 LP can be used to help marketing managers DTV = number of times daytime TV is used
allocate a fixed budget to various advertising media ETV = number of time evening TV is used
 The objective is to maximize reach, frequency, and DN = number of times daily newspaper is used
quality of exposure SN = number of times Sunday newspaper is used
 Restrictions on the allowable allocation usually R = number of times radio used
arise during consideration of company policy,
contract requirements, and media availability Each daytime TV (DTV) advertisement is rated at 65
exposure quality units. Evening TV is rated at 90
Relax-and-Enjoy Lake Development Corporation is exposure quality units, daily newspaper (DN) rated at 40
developing a lakeside community at a privately owned exposure quality units, Sunday newspaper (SN) is rated
lake. at 60 exposure quality units, and radio (R) is rated at 20
exposure quality units.
The primary market for the lakeside lots and homes
includes all middle and upper-income families within
approximately 100 miles of the development

Relax-and-Enjoy employed the advertising firm of

Boone, Phillips, and Jackson (BP&J) to design the
promotional campaign.

BP&J collected data on the number of potential

customers reached, the cost per advertisement, the
maximum number of times each medium is available,
and the exposure quality rating for each of the five
media. With the objective of maximizing the total exposure
quality units for the overall media selection plan, the
The quality rating is measured in terms of an exposure objective function becomes
quality unit, a measure of the relative value of one
advertisement in each of the media. This measure,
Max 65 DTV +90 ETV + 40 DN + 60 SN +20 R
 Exposure quality
based on BP&J’s experience in the advertising business,
takes into account factors such as audience We now formulate the constraints for the model from
demographics (age, income, and education of the information given:
audience reached), image presented, and quality of the
advertisement.
The optimal solution to this five-variable, nine-constraint linear The client’s contract called for MSI to conduct 1000
programming model is shown: interviews under the following quota guidelines:
1. Interview at least 400 households with children.
2. Interview at least 400 households without
children.
3. The total number of households interviewed
during the evening must be at least as great as
the number of households interviewed during
the day.
4. At least 40% of the interviews for households
with children must be conducted during the
evening.
5. At least 60% of the interviews for households
without children must be conducted during the
evening.
Because the interviews for households with children take
The optimal solution calls for advertisements to be additional interviewer time and because evening
distributed among daytime TV, daily newspapers, interviewers are paid more than daytime interviewers,
Sunday newspapers, and radio. The maximum number the cost varies with the type of interview. Based on
of exposure quality units is 2370, and the total number of previous research studies, estimates of the interview
customers reached is 61,500. costs are as follows:

In formulating the linear programming model for the MSI

problem, we utilize the following decision-variable
notation:
Marketing Research DC = the number of daytime interviews of
 A firm conducts marketing research to learn about households with children
consumer characteristics, attitudes, and preferences EC = the number of evening interviews of
 Marketing research services include designing the households with children
study, conducting surveys, analyzing data collected, DNC = the number of daytime interviews of
and providing recommendations for the client households without children
ENC = the number of evening interviews of
 In the research design phase, targets or quotas may
households without children
be established for the number and types of
respondents to be surveyed
The objective function:
 The marketing research firm’s objective is to conduct
survey so as to meet the client’s needs at a Min20 DC +25 EC +18 DNC +20 ENC
minimum cost
The constraint requiring a total of 1000 interviews is:
Market Survey, Inc. (MSI) specializes in evaluating
consumer reaction to new products, services, and DC + EC+ DNC + ENC=1000
advertising campaigns. A client firm requested MSI’s
assistance in ascertaining consumer reaction to a The five specifications concerning the types of interviews
recently marketed household product. are as follows:

During meetings with the client, MSI agreed to conduct o Households with children
door-to-door personal interviews to obtain responses DC + EC ≥ 400
from households with children and households without o Households without children
children. In addition, MSI agreed to conduct both day DNC + ENC ≥ 400
and evening interviews.
o At least as many evening interviews as day Consider Welte Mutual Funds, Inc., located in New York
interviews: City. Welte just obtained $100,000 and is looking for
EC + ENC ≥ DC+ DNC investment opportunities for these funds. Based on
or Welte’s current investments, the firm’s top financial
−DC + EC −DNC+ ENC ≥ 0 analyst recommends that all new investments be made
in the oil industry, steel industry, or in government
o At least 40% of interviews of households with
bonds. Specifically, the analyst identified five investment
children during the evening
opportunities and projected their annual rates of return.
EC ≥ 0.4(DC + EC )
or
−0.4 DC + 0.6 EC ≥ 0
o At least 60% of interviews of households without
children during the evening
ENC ≥0.6 (DNC+ ENC)
or
−0.6 DC +0.4 ENC ≥ 0
o The non-negativity requirements Management of Welte imposed the following guidelines:
DC , EC , DNC , ENC ≥ 0 1. Neither industry (oil or steel) should receive
The 4-variable, 6-constraint LP problem formulation is: more than $50,000
2. Government bonds should be at least 25% of
the steel industry investments
3. The investment in Pacific Oil, the high-return but
high-risk investment, cannot be more than 60%
of the total oil industry investment
What portfolio recommendations – investments and
amounts should be made for the available $100,000?
Let:
A = dollars invested in Atlantic Oil
P = dollars invested in Pacific Oil
Optimal Solution: Minimum total cost = $20,320 M = dollars invested in Midwest Steel
H = dollars invested in Huber Steel
G = dollars invested in government bonds
The objective function for maximizing the total return for
the portfolio is

Max 0.073 A +0.103 P+ 0.064 M + 0.075 H+ 0.045G

Financial Application The complete linear programming model for the Welte Mutual
funds investment problem:
 LP can be used in financial decision-making that
involves capital budgeting, make-or-buy, asset
allocation, portfolio selection, financial planning, and
more
 Portfolio selection problems involve choosing
specific investments – for example, stocks and
bonds – from variety of investment alternatives
 This type of problem is faced by managers of banks,
mutual funds, and insurance companies
 The objective function usually is maximization of
expected return or minimization of risk
 The constraints usually take the form of restrictions
on the type of permissible investments, state laws,
company policy, maximum permissible risk, and so
on.
Here is the computer solution to the linear programming model assumed that any funds not invested in bonds will be
for the Welte Mutual Funds investment problem: placed in savings and earn interest at an annual rate of
4%.
Define the Decision Variables
F = the total dollars required to meet the
retirement plan’s eight-year obligation
B1 = units of bond 1 purchased at the beginning
of year 1
B2 = units of bond 2 purchased at the beginning
of year 1
B3 = units of bond 3 purchased at the beginning
of year 1
S = amount placed in savings at the beginning of
The optimal solution to the linear programming model for the
year i for i =1, …, 8
Welte Mutual Funds investment problem is:
Define the Objective Function
The objective function is minimize the total dollars
needed to meet the retirement plan’s eight-year
obligation:

Min F
Define the Constraints
A key feature of this type of financial planning problem is
that a constraint must be formulated for each year of the
planning horizon.
Its form is:
Financial Planning
Hewlitt Corporation established an early retirement ( funds available at the beginning of the ye ar ) −( funding invest
program as part of its corporate restricting. At the close
of the voluntary sign-up period, 68 employees had A constraint must be formulated for each tear of the
elected early retirement. As a result of these early planning horizon in the following form:
retirements the company incurs the following obligations
over the next eight years:

The cash requirements (in thousand of dollars) are due

at the beginning of each year.
The corporate treasurer must determine how much
money must be set aside today to meet the eight yearly
financial obligations as they come due. The financing
plan for the retirement program includes investments in
government bonds as well as saving. The investments in Optimal solution to the 12-variable, 8-constraint LP
government bonds are limited to three choices: problem:
Minimum total obligation = $1,728,794

The government bonds have a par value of $1000,

which means that even with different prices each bond
pays $1000 at maturity. The rates shown are based on
the par value. For purposes of planning, the treasurer Operations Management Application
 LP can be used in operations management to aid The problem for Janders is to determine how many units
in decision-making about product mix, production of each component to manufacture and how many units
scheduling, staffing, inventory control, capacity of each component to purchase.
planning, and other issues.
 An important application of LP is multi-period- We define the decision variables as follows:
planning such as production scheduling BM = number of bases manufactured
 Usually, the objective is to establish an efficient, BP = number of bases purchased
low-cost production schedule for one or more FCM = number of Financial cartridges manufactured
products over several time periods. FCP = number of Financial cartridges purchased
 Typical constraints include limitations on TCM = number of Technician cartridges manufactured
production capacity, labor capacity, storage space, TCP = number of Technician cartridges purchased
and more. FTM = number of Financial tops manufactured
FTP = number of Financial tops purchased
The Janders Company markets various business and TTM = number of Technician tops manufactured
engineering products. Currently, Janders is preparing to TTP = number of Technician tops purchased
introduce two new calculators: one for the business
market called the Financial Manager and one for the One additional variable is needed to determine the hours
engineering market called the Technician. of overtime that must be scheduled:
Each calculator has three components: a base, an OT = number of hours of overtime to be scheduled
electronic cartridge, and a faceplate or top. The same
base is used for both calculators, but the cartridges and The complete formulation of the Janders make-or-buy problem
tops are different. All components can be manufactured with all decision variables greater than or equal to zero is
by the company or purchased from outside suppliers.
Here are the manufacturing costs and purchase prices for
Janders calculator components:

The optimal solution of the Janders make-or-buy problem is

Company forecasters indicate that 3000 Financial

Manager calculators and 2000 Technician calculators
will be needed. However, manufacturing capacity is
limited. The company has 200 hours of regular
manufacturing time and 50 hours of overtime that can be
scheduled for the calculators. Overtime involves a
premium at the additional cost of $9 per hour.

The optimal solution of the Janders make-or-buy problem is