PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

LINEAR PROGRAMMING & SIMPLEX MODEL REVIEW QUESTIONS

Simplex Illustrations
A company can produce three products namely products A, B and C. The selling prices for the
products are as follows: -

Product Selling price

A 30/=
B 20/=
C 30/=

The variable costs per unit for the products are as follows:
Products A B C
Direct material 8/= 5/= 7/=
Direct labour 6/= 4/= 5/=
Variable overheads 8/= 6/= 8/=
Total variable cost 22/= 15/= 20/=

The products are produced using a machine with a capacity of 400 hour per week and each product
uses 2 hours, 3 hours and 1 hour respectively on the machine’s capacity.

There are only 150 units available in a week of a special component, which is used in producing
products A and C. Each of products A and C uses I unit of a special component.

200 kgs only of a special alloy is available in the week. Product A uses 2 kgs per unit and Product
C uses 4 kgs per unit.

There is an agreement with a trade association to produce no more than 50 units of product B in
the week.

REQUIRED
Determine the production plan, which maximizes contribution.

Steps in solving Linear Programming (LP) problem

1. Present the problem numerically and identify an objective function and constraints
2. Introduce slack variable (the variable that represents unused capacity) to replace inequalities
with equal sign
3. Formulate Initial matrix by equate objective function to Z and calling the resulting row, Row 0
All other constraints should be named as Row 1, Row 2, Row 3 etc. NB numbers should be on
the RHS and letters on the LHS
4. Try the initial basic solution for optimality. (Initial basic solution is optimal if all variables
have positive coefficient in Row 0).
5. If not optimal, we improve it by choosing an entering variable (a variable with negative
coefficient in Row 0) and make it the subject in the Row that has minimum ratio of RHS to the
coefficient of entering variable but this ratio has to be greater than 1
Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T), &
Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc (Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 /769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 1
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

❖ Step 4 and 5 are interrelated until final solution is obtained

Illustration
A company can produce three products namely products A, B and C. The selling prices for the
products are as follows: -
Product Selling price
A 30/=
B 20/=
C 30/=

The variable costs per unit for the products are as follows:
Products A B C
Direct material 8/= 5/= 7/=
Direct labour 6/= 4/= 5/=
Variable overheads 8/= 6/= 8/=
Total variable cost 22/= 15/= 20/=

The products are produced using a machine with a capacity of 400 hour per week and each
product uses 2 hours, 3 hours and 1 hour respectively on the machine’s capacity.

There are only 150 units available in a week of a special component, which is used in producing
products A and C. Each of products A and C uses I unit of a special component.

200 kgs only of a special alloy is available in the week. Product A uses 2 kgs per unit and Product
C uses 4 kgs per unit.

There is an agreement with a trade association to produce no more than 50 units of product B in
the week.

Required
Determine the production plan, which maximizes contribution.

Step 1: Present the problem numerically and identify an objective function and constraints
Let the number of unit to be produced for products A, B and C respectively be X 1, X2 and X3
Therefore the objective function will be to maximize
8X1 + 5X2 + 10X3
Subject to: -
2X1 + 3X2+X3 ≤ 400 (Machine hours constraint)
X1 + X3 ≤ 150 (Component constraint)
2X1 + 4X3 ≤ 200 (Alloy Constraint)
X2 ≤ 50 (Sales Constraint)
X1 , X2 , X3 ≥0 (Non-negative constraint)

Step 2: Introduce slack variable (the variable that represents unused capacity) to replace
inequalities with equal sign
2X1 + 3X2+X3 + S1 = 400 (Machine hours constraint)
X1 + X3 + S2 = 150 (Component constraint)
Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T), &
Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc (Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 /769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 2
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

2X1 + 4X3 + S3 = 200 (Alloy Constraint)

X2 ≤ + S4 = 50 (Sales Constraint)

Step 3: Formulate Initial matrix by equate objective function to Z and calling the resulting row,
Row 0. All other constraints should be named as Row 1, Row 2, Row 3 etc. NB numbers should be
on the RHS and letters on the LHS

Initial Matrix
Z - 8X1 - 5X2 - 10X3 =0 Row 0
2X1 + 3X2+X3 + S1 = 400 Row 1
X1 + X3 + S2 = 150 Row 2
2X1 + 4X3 + S3 = 200 Row 3
X2 + S4 = 50 Row 4

Solution variable is variable Z for Row 0 and any the variable that is in Row i but not in Row 0.

Initial Tableu
Row Solution Products Slack variables Solution
Variable X1 X2 X3 S1 S2 S3 S4 Quantity
Row 1 S1 2 3 1 1 0 0 0 400
Row 2 S2 1 0 1 0 1 0 0 150
Row 3 S3 2 0 4 0 0 1 0 200
Row 4 S4 0 1 0 0 0 0 1 50
Row 0 Z -8 -5 -10 0 0 0 0 0

Step 4: Try the initial basic solution for optimality. (Initial basic solution is optimal if all
variables have positive coefficient in Row 0). Initial Basic solution is the combination of
Solution variable and solution quantity

Initial basic solution

Row 0, Z =0
Row 1, S1 = 400
Row 2, S2 = 150
Row 3, S3 =200
Row 4, S4 = 50

Interpretation
If the company does not produce any product, it will earn a contribution margin of zero while
remaining with unused 400 machine hours, 150 units of special components and 200 units of special
alloy
Is the above solution optimal?
No, there are variable(s) with negative coefficient in Row 0
What to do? Iteration

Step 5 improve it by choosing an entering variable (a variable with negative coefficient in Row
0) and make it the subject in the Row that has minimum ratio of RHS to the coefficient of
entering variable.
Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T), &
Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc (Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 /769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 3
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

Let X1 be an entering variable (Note here, one could choose even X2 or X3

Where to pivot (make an entering variable the subject?

Row 1, = 400/2 = 200

Row 2, = 150/1 = 150
Row 3, =200/2 = 100 (make X1 the subject in this row)
Row 4, = 50/0 = undefined

make X1 the subject in this row3

2X1 + 4X3 + S3 = 200

X1 = 100 - 2X3 – 0.5S3
Substitute the value of X1 in all other Rows

Row 0
Z - 8X1 - 5X2 - 10X3 = 0
Z – 8(100 - 2X3 – 0.5S3) - 5X2 - 10X3 = 0
Z + 800 +16 X3 + 4S3)- 5X2 - 10X3 = 0
Z + 6 X3 + 4S3 - 5X2 = 800

Row 1
2X1 + 3X2+X3 + S1 = 400
2(100 - 2X3 – 0.5S3) + 3X2+X3 + S1 = 400
200 - 4 X3 - S3 + 3X2+X3 + S1 = 400
-3 X3 - S3 + 3X2 + S1 = 200

Row 2
X1 + X3 + S2 = 150
100 - 2X3 – 0.5S3 + X3 + S2 = 150
100 - X3 – 0.5S3 + S2 = 150
- X3 – 0.5S3 + S2 = 50

Row 3 (Used to make the subject, no need to substitute, just simplify

2X1 + 4X3 + S3 = 200 - Just simplify
X1 + 2X3 + 0.5S3 = 100

Row 4: No X1 so it remain as it is
X2 ≤ + S4 = 50

Second Matrix (Can also be presented in table form)

Z + 6 X3 + 4 S3 - 5X2 = 800 Row 0
-3 X3 - S3 + 3X2 + S1 = 200 Row 1
- X3 – 0.5S3 + S2 = 50 Row 2
X1 + 2X3 + 0.5S3 = 200 Row 3
X2 + S4 = 50 Row 4

Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T), &
Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc (Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 /769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 4
 PERFOMANCE MANAGEMENT (B5) COVENANT FINANCIAL CONSULTANTS LIMITED

Second basic solution

Row 0, Z = 800
Row 1, S1 = 200
Row 2, S2 = 50
Row 3, X1 =100
Row 4, S4 = 50

Interpretation
If the company produces100 units of product A and none of B and C, it will earn a contribution
margin of 800 while remaining with unused 200 machine hours, 50 units of special components.

Is the above solution optimal?

No, there are variable(s) with negative coefficient in Row 0
What to do? Improve it by iteration

Let X2 be an entering variable

Where to pivot (make an entering variable the subject?)

Row 1, = 200/3 = 200

Row 2, = 150/0 = undefined
Row 3, =200/0 = undefined (make X1 the subject in this row)
Row 4, = 50/1 = 50 (make X2 the subject in this row)

make X2 the subject in this row 4

X2 = 50- S4
Subsitute the value of X2 in all other rows

Row 0
Z + 6 X3 + 4 S3 – 5(50- S4) = 800
Z + 6 X3 + 4 S3 – 250 + S4 = 800
Z + 6 X3 + 4 S3 + S4 = 1050

Row 1
-3 X3 - S3 + 3(50 - S4) + S1 = 200
-3 X3 - S3 + 150 - S4 + S1 = 200
-3 X3 - S3 - S4 + S1 = 50

Row 2
- X3 – 0.5S3 + S2 = 50

Row 3
X1 + 2X3 + 0.5S3 = 200

Row 4
X2 + S4 = 50

Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T), &
Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc (Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 /769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 5
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Final Matrix
Z + 6 X3 + 4 S3 + S4 = 1050
-3 X3 - S3 - S4 + S1 = 50
- X3 – 0.5S3 + S2 = 50
X1 + 2X3 + 0.5S3 = 200
X2 + S4 = 50

Final basic Solution

Row 0, Z = 1050
Row 1, S1 = 50
Row 2, S2 = 50
Row 3, X1 =200
Row 4, X2 = 50

Interpretation
If the company produces 200 units of product A and 50 Units of B and none of C, it will earn a
contribution margin of 1050 while remaining with unused 50 machine hours and 50 units of special
components.

Advice
The company should produce 200 units of product A and 50 Units of B and none of C, in order to
earn a contribution margin of 1050 while remaining with unused 50 machine hours and 50 units of
special components.

Shadow Prices/Dual Prices.

The shadow price of the scarce resource is the increase or decrease in the value of the objective
function, which would be attained when one unit of the scarce resource was made available or was
reduced.

Constraints with scarce resources are said to be binding whereas those constraints with no scarce
resources are said to be non-binding. Binding constraints have shadow prices whereas non-binding
constraints do not have shadow prices because the resources are not fully utilized.

Example
Refer to the example 1 above.

Required
Determine the shadow prices and interpret the results.

Here we can use the following methods to determine the shadow prices.
(i) Arithmetic Method
➢ Elimination Method
➢ Cramer’s Rule
➢ Gauss Elimination

(ii) Dual formulation Method

Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T), &
Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc (Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 /769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 6
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Arithmetic Method (with elimination method)

When machine hours increase by 1 hour, equations will be as follows:
4X1 + 2X2 = 101 ………………………(1)
- (4X1 + 6X2 = 180) …………………….. (2)
- 4X2 = - 79

X2 = 79/4
X2 = 19.75

Substitute into equation (1)

4X1 + 2(19.75) = 101
X1 = 15.375

Substitute 15.375 for X1 and 19.75 for X2 into the objective function, we get
Z = 3,000 (15.375) + 4,000 (19.75)
Z = 125,125/=

Shadow price = 125,125 – 125,000 = 125/=.

Therefore if one machine hour is added the total contribution will increase by TShs 125/=. It follows
that if 1 extra machine hour will be available it will be bought provided its price is less than TShs
125/= because if its price is equal to TShs 125/= there will be no addition to the total contribution.

When labour hours increase by 1 hour, equations will be as follows:

4X1 + 2X2 = 100 ………………………(1)
- (4X1 + 6X2 = 181) …………………….. (2)
X2 = 20.25
X1 = 14.875

New Z will be Z = 3,000 (14.875) + 4,000 (20.25) = 125,625

Shadow price = 125,625 – 125,000 = 625/=

Arithmetic Method (with Cramer’s method)

When machine hours increase by 1 hour, equations will be as follows:
4X1 + 2X2 = 101 ………………………(1)
4X1 + 6X2 = 180 …………………….. (2)

In matrix form the equations are written as follows:

X1 X2
4 2 X1 = 101
4 6 X2 = 180

X1 = 101 2
180 6
4 2
4 6
Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T), &
Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc (Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 /769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 7
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X1 = 101 * 6 – 180 *2 = 246

4*6–4*2 16

X1 = 15.375

X2 = 4 101
4 180
16

X2 = 101 * 6 – 180 *2 = 316

4*6–4*2 16
X2 = 19.75

Substitute in the objective function, we get Z = 125,125.

Shadow price =125,125-125,000 = 125,000/=

Arithmetic Method (with Gauss Elimination method)

When machine hours increase by 1 hour, equations will be as follows:
4X1 + 2X2 = 101 ………………………(1)
4X1 + 6X2 = 180 …………………….. (2)

In matrix form the equations are written as follows:

X1 X2
4 2 X1 = 101
4 6 X2 = 180

X1 X2
4 2 X1 = 101
0 4 X2 = 79

4X2 = 79
X2 =19.75

4X1 + 2X2 = 101

4X1 + 2 (19.75) = 101
X1 =15.375
Substitute in the objective function, we get Z = 125,125
Shadow price = 125,125 – 125000 = 125/=

Dual formulation Method

Objective function Z = 3,000 X1 + 4000 X2

Subject to:
4X1 + 2X2 ≤100 ………………………(1)
4X1 + 6X2 ≤180 …………………….. (2)

NB: Show only the binding constraints.

Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T), &
Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc (Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 /769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 8
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For any LP problem model, there exists its dual/inverse formulation to the original LP problem
called primal problem which will be of an opposite nature i.e. if the primal is maximization then
the dual will be a minimization type and vice versa.

In our problem we will have:

Minimize 100 A + 180 B

Subject to: -
4 A + 4 B ≥ 3,000
2 A + 6 B ≥ 4,000

We get A = 125/=and B = 625/=. These are shadow prices for machine hours (i.e. Constraint I) and
labour hour (i.e. Constraint II)

Example 4
Refer to the example 2 above.

Required
Determine the shadow prices and interpret the results.

Solution
➢ Product C (i.e. X3) : Shadow price = TShs 6/=
This means that if a single unit of Product C were produced total contribution will fall
by TShs 6/=

➢ Alloy availability (i.e.S3) : Shadow price = TShs 4/=

This means that if one kg of alloy would be increased total contribution by TShs 4/=

➢ Sales constraint (i.e. S4) : Shadow price = TShs 5/=

This means that if the sales constraint would be shifted every extra unit of product B.
would increase the total contribution by TShs 5/=

Machine hours and special components, slack variables S1 and S2, have zero shadow prices because
there they have spare capacity

NB: Contribution can also be verified through the shadow prices of the binding constraints as
follows:

Alloy Constraint 200 kgs * TShs 4 = 800/=

Sales constraint 50 unit * TShs 5 = 250/=
Total contribution 1,050/=

Prepared By: Godson Mkaro (Jr): MSc Finance & Investment, BSc. Computer Science, ATEC II, CPBE, CPA (T), &
Goodhope Mkaro (Sr): MBA(Finance), BCOM Acc (Hons), PGD in Tax Management, CPB, CISI(UK), CPA (T)
Phone: +255 717 /769 348 616 | Email: [email protected] |Website: www.covenantfinco.com Page | 9