PRODUCT MIX DECISIONS

PRODUCT MIX DECISIONS

 No Company would be keen to market a single

product, unless it is a monopoly product. Most
of the Companies will be dealing with
multiple products. In order to optimize the
profits, it is essential for the company to
determine, as to the right kind of product mix,
in terms of Quantities produced.
BECAUSE OF……

 Demand constraints
 Commitment to produce multiple products.
 To absorb the risk of producing only one
product.
 To expand the customer base.
 To utilize the resources.
 Decisions that concern the relative amounts of each
type of product or service that, given demand and
resource constraints, will maximize total profits.
 For example, if the firm can sell as much as it can
produce and has a single resource constraint, the
decision rule is to maximize the contribution
margin per unit of the constrained resource.
 However, given multiple constraints, the decision is
more difficult and more sophisticated techniques
must be used, such as linear programming for
example.
 Linear Programming (LP)

A model consisting of linear relationships

representing a firm’s objective and resource constraints

LP is a mathematical modeling technique used to

determine a level of operational activity in order to
achieve an objective, subject to restrictions called
constraints

LP-
5
Linear Programming (LP) USE

 There are five common types of decisions in

which LP may play a role
 Product mix
 Ingredient mix
 Transportation
 Production plan
 Assignment
LP Problems in : Product
Mix
 Objective
To select the mix of products or services that
results in maximum profits for the planning period
 Decision Variables
How much to produce and market of each product
or service for the planning period
 Constraints
Maximum amount of each product or service
demanded; Minimum amount of product or
service policy will allow; Maximum amount of
resources available
 EXAMPLE 1

Processing time in hours per unit…

Product Dept I Dept II Dept III Inspecti Shippin Unit Min Max
on g Profit Sales Sales
A 0.14 0.60 0.20 0.04 0.10 42 150 250
B 0.10 0.40 0.20 0.04 0.10 40 200 400
C --- 0.20 0.10 0.04 0.12 36 360 500
Hrs of 160 320 160 80 80
Capacit
y

The example above gives details of a company processing three

products, A, B, C in three departments to finish each product. The
processing time is shown in hours per unit of product, up to
shipping.
Here we are making assumptions, that the time taken for processing
are linear and fixed costs are already taken into account in the
Product costs.
Formulate LP…..
 Three products A,B,C are to be produced
 Let X1 be the Quantity of A to be produced
 Let X2 be the Quantity of B to be produced
 Let X3 be the Quantity of C to be produced
 If the profit from the sale of one unit of each product is Rs42, Rs40 and Rs36 respectively,
then to MAXIMIZE PROFIT,
OUR OBJECTIVE function is
Max Z = 42X1 + 40X2 + 36X3, SUBJECT TO CONSTRAINTS:
0.14X1+0.10X2 <=160
0.60X1+0.40X2+0.20X3 <=320
0.20X1+0.20X2+0.10X3 <=160
0.04X1+0.04X2+0/04X3 <=80
0.10X1+0.10X2+0.12X3 <=80
X1>=150 , X1<=250
X2>=200, X2<=400
X3>=360, X3<=500
X1,X2 and X3 are all non-negative
 SOLUTION (obtained from computer package)
 Z = Rs 28016
 X1=168
 X2=200
 X3=360

NOTE: Out of the 11 constraints, only 3 constraints satisfied as

strict equalities.

10X1+10X2+12X3<=80( Shadow price =420)-shipping Dept

X2 >=200(Shadow price =(-2)
X3 >=360(Shadow price =(-14.4)
 INFERENCE
 What can be inferred be the shadow prices is that
these three constraints, which are strict equalities,
have dual variables, that are obtained in Computer
solution. It means, that, say for instance, if one UNIT
of time is increased in Shipping Dept, the
contribution to the profit increases by Rs420.
Thus the dual variable of shadow price gives us a
valuable information, as to which capacity to increase
and which not to touch. Thus for X2,X3, If we reduce
them by one unit, then the profits will go down by -2
or by 14.4 units respectively
SHADOW PRICE

 The shadow price is the amount that the objective

function value would change if the named
constraint changed by one unit
 It is the maximum price that management is willing
to pay for an extra unit of a given limited resource.
 For example, if a production line is already operating
at its maximum 40 hour limit, the shadow price
would be the maximum price the manager would be
willing to pay for operating it for an additional hour,
based on the benefits he would get from this change.
EXAMPLE…..
 For instance if you have a constraint that limits the amount of
labor available to 40 hours per week.
 The shadow price will tell you how much you would be willing to
pay for an additional hour of labor.
 If your shadow price is $10 for the labor constraint, for instance,
you should pay no more than $10 an hour for additional labor.
- Labor costs of less than $10/hour will increase the
objective value;
- Labor costs of more than $10/hour will decrease the
objective value.
- Labor costs of exactly $10 will cause the objective
function value to remain the same.
GOAL PROGRAMMING
Goal Programming
 Goal programming may be used to solve linear
programs with multiple objectives, with each objective
viewed as a "goal".
 In goal programming, di+ and di- , deviation variables,
are the amounts a targeted goal i is overachieved or
underachieved, respectively.
 The goals themselves are added to the constraint set
with di+ and di- acting as the surplus and slack variables.
 One approach to goal programming is to satisfy goals
in a priority sequence. Second-priority goals are
pursued without reducing the first-priority goals, etc.
 Goal Programming
 For each priority level, the objective function is
to minimize the (weighted) sum of the goal
deviations.
 Previous "optimal" achievements of goals are
added to the constraint set so that they are not
degraded while trying to achieve lesser priority
goals.
 Goal Programming Approach
Step 1: Decide the priority level of each goal.
Step 2: Decide the weight on each goal.
If a priority level has more than one goal, for each
goal i decide the weight, wi , to be placed on the
deviation(s), di+ and/or di-, from the goal.
Step 3: Set up the initial linear program.
Min w1d1+ + w2d2-
s.t. Functional Constraints,
and Goal Constraints
Step 4: Solve the current linear program.
If there is a lower priority level, go to step 5.
Otherwise, a final solution has been reached.
Goal Programming Approach
Step 5: Set up the new linear program.
Consider the next-lower priority level goals and
formulate a new objective function based on these
goals. Add a constraint requiring the achievement of
the next-higher priority level goals to be maintained.
The new linear program might be:
Min w3d3+ + w4d4-
s.t. Functional Constraints,
Goal Constraints, and
w1d1+ + w2d2- = k
Go to step 4. (Repeat steps 4 and 5 until all priority
levels have been examined.)
Example: Innex Corporation
Innex Corporation manufactures two
products, A and B. Product A requires five
hours on machine 1 and two hours on
machine 2; product B requires two hours on
machine 1 and four hours on machine 2. The
weekly capacities of machine 1 and 2 are fifty
hours and forty-eight hours, respectively.
Example: Innex Corporation
The company has three goals which are given
below:
Priority 1: Minimize underachievement of a total
production of ten units per week (Goal 1)
Priority 2: Minimize underachievement of
producing 8 units of product A weekly. (Goal 2)
Priority 3: Minimize underachievement of
producing thirteen units of product B weekly.
(Goal 3)
Example: Innex Corporation
 Variables
x1 = number of units of A produced weekly
x2 = number of units of B produced weekly
di- = amount the right hand side of goal i is deficient
di+ = amount the right hand side of goal i is exceeded
 Constraints
5x1 + 2x2 < 50
2x1 + 4x2 < 48
Example: Innex Corporation
 Goals
(1) 10 total production weekly:
x1 + x2 + d1- - d1+ = 10
(2) 8 units product A weekly:
x1 + d2- - d2+ = 8
(3) 13 units product B weekly:
x2 + d3- - d3+ = 13
Non-negativity:
x1, x2, di-, di+ > 0 for all i
Example: Innex Corporation
 Formulation Summary

Min P1(d1-) + P2(d2-) + P3(d3-)

s.t. 5x1 +2x2 < 50
2x1 +4x2 < 48
x1 + x2 +d1- -d1+ = 10
x1 +d2- -d2+ = 8
x2 +d3- -d3+ = 13
x1, x2, d1-, d1+, d2-, d2+, d3-, d3+ > 0
Example: Innex Corporation
x2
Constraints and Goal Graphed
25 5x1 + 2x2 < 50

x1 = 8
x2 = 13

13
x1 + x2 = 10

(8,5)
2x1 + 4x2 < 48

x1
8 10 25
Example: Conceptual Products
Conceptual Products is a computer
company that produces the CP400 and the
CP500 computers. The computers use
different mother boards produced in
abundant supply by the company, but use the
same cases and disk drives. The CP400
models use two floppy disk drives and no zip
disk drives whereas the CP500 models use
one floppy disk drive and one zip disk drive.
Example: Conceptual Products

The disk drives and cases are bought from

vendors. There are 1000 floppy disk drives,
500 zip disk drives, and 600 cases available to
Conceptual Products on a weekly basis. It
takes one hour to manufacture a CP400 and
its profit is $200 and it takes one and one-half
hours to manufacture a CP500 and its profit is
$500.
Example: Conceptual Products
The company has three goals which are given
below:
Priority 1: Meet a state contract of 200 CP400
machines weekly. (Goal 1) Priority 2:
Make at least 500 total computers weekly.
(Goal 2)
Priority 3: Make at least $250,000 weekly.
(Goal 3)
Example: Conceptual Products
 Variables
x1 = number of CP400 computers produced weekly
x2 = number of CP500 computers produced weekly
di- = amount the right hand side of goal i is deficient
di+ = amount the right hand side of goal i is exceeded
 Functional Constraints
Availability of floppy disk drives: 2x1 + x2 < 1000
Availability of zip disk drives: x2 < 500
Availability of cases: x1 + x2 < 600
Example: Conceptual Products
 Goals
(1) 200 CP400 computers weekly:
x1 + d1- - d1+ = 200
(2) 500 total computers weekly:
x1 + x2 + d2- - d2+ = 500
(3) $250(in thousands) profit:
.2x1 + .5x2 + d3- - d3+ = 250
Non-negativity:
x1, x2, di-, di+ > 0 for all i
Example: Conceptual Products
 Objective Functions

Priority 1: Minimize the amount the state

contract is not met: Min d1-
Priority 2: Minimize the number under 500
computers produced weekly: Min d2-
Priority 3: Minimize the amount under
$250,000 earned weekly: Min d3-
 Example: Conceptual
Products
Formulation Summary
Min P1(d1-) + P2(d2-) + P3(d3-) + P4(d4+)
s.t. 2x1 +x2 < 1000
+x2 < 500
x1 +x2 < 600
x1 +d1- -d1+ = 200
x1 +x2 +d2- -d2+ = 500
.2x1+ .5x2 +d3- -d3+ = 250
x1, x2, d1-, d1+, d2-, d2+, d3-, d3+, d4-, d4+ > 0
Example: Conceptual
Products
 Graphical Solution, Iteration 1
To solve graphically, first graph the
functional constraints. Then graph the first
goal: x1 = 200. Note on the next slide that
there is a set of points that exceed x1 = 200
(where d1- = 0).
Example: Conceptual Products
x2
 Functional Constraints and Goal 1 Graphed
1000 2x1 + x2 < 1000

800 Goal 1: x1 > 200

x2 < 500
600 x1 + x2 < 600

400
Points Satisfying
Goal 1
200

x1
200 400 600 800 1000 1200
Example: Conceptual Products

 Graphical Solution, Iteration 2

Now add Goal 1 as x1 > 200 and graph Goal
2:
x1 + x2 = 500. Note on the next slide that there
is still a set of points satisfying the first goal
that also satisfies this second goal (where d2-
= 0).
 Example: Conceptual
Products
Goal 1 (Constraint) and Goal 2 Graphed
x2

1000 2x1 + x2 < 1000

800 Goal 1: x1 > 200

x2 < 500
600 x1 + x2 < 600

400
Points Satisfying Both
Goals 1 and 2
200
Goal 2: x1 + x2 > 500

200 400 600 800 1000 1200 x1

Example: Conceptual Products

 Graphical Solution, Iteration 3

Now add Goal 2 as x1 + x2 > 500 and Goal 3:
.2x1 + .5x2 = 250. Note on the next slide that no
points satisfy the previous functional constraints
and goals and satisfy this constraint.
Thus, to Min d3-, this minimum value is achieved
when we Max .2x1 + .5x2. Note that this occurs at
x1 = 200 and x2 = 400, so that .2x1 + .5x2 = 240 or
d3- = 10.
 Example: Conceptual Products
x2

1000
 Goal 2 (Constraint)
2x + x < 1000
and Goal 3 Graphed
1 2

800 Goal 1: x1 > 200

x2 < 500
600 x1 + x2 < 600
(200,400)

400 Points Satisfying Both

Goals 1 and 2
200 Goal 2: x1 + x2 > 500
Goal 3: .2x1 + .5x2 = 250

200 400 600 800 1000 1200 x1

End of Goal Programming