Anderson Sweeney Williams Camm Cochran Fry Ohlmann

An Introduction to
Management Science, 15e
Quantitative Approaches to Decision Making

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 Chapter 4: Linear Programming Applications
in Marketing, Finance, and Operations Management

4.1 - Marketing Applications

4.2 - Financial Applications
4.3 - Operations Management Applications

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 Marketing Applications (1 of 10)

Media Selection
• One application of linear programming in
marketing is media selection.
• LP can be used to help marketing managers
allocate a fixed budget to various advertising
media.
• The objective is to maximize reach, frequency,
and quality of exposure.
• Restrictions on the allowable allocation usually
arise during consideration of company policy,
contract requirements, and media availability.

3
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 Marketing Applications (2 of 10)

Relax-and-Enjoy Lake Development Corporation is

developing a lakeside community at a privately owned
lake.
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.

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 Marketing Applications (3 of 10)

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.
The quality rating is measured in terms of an exposure
quality unit, a measure of the relative value of one
advertisement in each of the media. This measure, based
on BP&J’s experience in the advertising business, takes
into account factors such as audience demographics (age,
income, and education of the audience reached), image
presented, and quality of the advertisement.

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 Marketing Applications (4 of 10)

Advertising media alternatives for the Relax-and-Enjoy

Lake Development Corporation:
Number of Maximum
Potential Times
Customers Cost ($) per Available per Exposure
Advertising Media Reached Advertisement Month* Quality Units
1. Daytime TV (1 min), station WKLA 1000 1500 15 65

2. Evening TV (30 sec), station WKLA 2000 3000 10 90

3. Daily newspaper (full page), 1500 400 25 40

The Morning Journal
4. Sunday newspaper magazine 2500 1000 4 60
(1/2 page color), The Sunday Press
5. Radio, 8:00 a.m. or 5:00 p.m. news 300 100 30 20
(30 sec), station KNOP

*The maximum number of times the medium is available is either the maximum number of times the advertising medium
occurs (e.g., four Sundays per month) or the maximum number of times BP&J recommends that the medium be used.

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 Marketing Applications (5 of 10)

The decision to be made is how many times to use each

medium. We begin by defining the decision variables:
DTV = number of times daytime TV is used
ETV = number of times evening TV is used
DN = number of times daily newspaper is used
SN = number of times Sunday newspaper is used
R = number of times radio is used

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 Marketing Applications (6 of 10)

Each daytime TV (DTV) advertisement is rated at 65 exposure

quality units. Evening TV (ETV) is rated at 90 exposure quality units,
daily newspaper (DN) rated at 40 exposure quality units, Sunday
newspaper (SN) rated at 60 exposure quality units, and radio (R)
rated at 20 exposure quality units.
Number of Maximum
Potential Times
Customers Cost ($) per Available per Exposure
Advertising Media Reached Advertisement Month* Quality Units
1. Daytime TV (1 min), station WKLA 1000 1500 15 65
2. Evening TV (30 sec), station WKLA 2000 3000 10 90
3. Daily newspaper (full page), 1500 400 25 40
The Morning Journal
4. Sunday newspaper magazine 2500 1000 4 60
(1/2 page color), The Sunday Press
5. Radio, 8:00 a.m. or 5:00 p.m. news 300 100 30 20
(30 sec), station KNOP
*The maximum number of times the medium is available is either the maximum number of times the advertising medium
occurs (e.g., four Sundays per month) or the maximum number of times BP&J recommends that the medium be used.

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 Marketing Applications (7 of 10)

With the objective of maximizing the total exposure quality units

for the overall media selection plan, the objective function
becomes
Max 65DTV + 90ETV + 40DN + 60SN + 20R Exposure quality

We now formulate the constraints for the model from the

information given:

1500 DT  3000 ETV  400 DN  1000SN  100 R  30, 000 Budget

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 Marketing Applications (8 of 10)

The optimal solution to this five-variable, nine-constraint linear

programming model is shown here.
Optimal Objective Value = 2370.00000
Variable Value Reduced Cost
DTV 10.00000 0.00000
ETV 0.00000 -65.00000
DN 25.00000 0.00000
SN 2.00000 0.00000
R 30.00000 0.00000

Constraint Slack/Surplus Dual Value

1 5.00000 0.00000
Media
2 10.00000 0.00000
Availability
3 0.00000 16.00000
4 2.00000 0.00000 Budget
5 0.00000 14.00000
6 0.00000 0.06000 Television
Restrictions
7 0.00000 -25.00000
8 3000.00000 0.00000
Audience
9 11500.00000 0.00000 Coverage

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 Marketing Applications (9 of 10)

The optimal solution calls for advertisements to be distributed

among daytime TV, daily newspaper, Sunday newspaper, and
radio. The maximum number of exposure quality units is 2370,
and the total number of customers reached is 61,500.
Media Frequency Budget
Daytime TV 10 $15,000
Daily newspaper 25 10,000
Sunday newspaper 2 2,000
Radio 30 3,000
$30,000

Exposure quality units = 2370

Total customers reached = 61,500

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 Marketing Applications (10 of 10)

Marketing Research
• A firm conducts marketing research to learn about
consumer characteristics, attitudes, and preferences.
• Marketing research services include designing the study,
conducting surveys, analyzing data collected, and
providing recommendations for the client.
• In the research design phase, targets or quotas may be
established for the number and types of respondents to
be surveyed.
• The marketing research firm’s objective is to conduct the
survey so as to meet the client’s needs at a minimum
cost.

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 Marketing Research (1 of 8)

Market Survey, Inc. (MSI) specializes in evaluating consumer

reaction to new products, services, and advertising campaigns.
A client firm requested MSI’s assistance in ascertaining
consumer reaction to a recently marketed household product.
During meetings with the client, MSI agreed to conduct door-to-
door personal interviews to obtain responses from households
with children and households without children. In addition, MSI
agreed to conduct both day and evening interviews.

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 Marketing Research (2 of 8)

The client’s contract called for MSI to conduct 1000 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.

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 Marketing Research (3 of 8)

Because the interviews for households with children take

additional interviewer time and because evening
interviewers are paid more than daytime interviewers,
the cost varies with the type of interview. Based on
previous research studies, estimates of the interview
costs are as follows:

Interview Cost
Household Day Evening
Children $20 $25
No children $18 $20

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 Marketing Research (4 of 8)

In formulating the linear programming model for the MSI

problem, we utilize the following decision-variable notation:

DC = the number of daytime interviews of households

with children
EC = the number of evening interviews of households
with children
DNC = the number of daytime interviews of households
without children
ENC = the number of evening interviews of
householdswithout children

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 Marketing Research (5 of 8)

The objective function:

Min 20 DC  25EC  18DNC  20 ENC
The constraint requiring a total of 1000 interviews is:
DC  EC  DNC  ENC  1000

The specifications concerning the types of interviews:

• Households with children: DC  EC  400

• Households without children: DC  ENC  400

• At least as many evening interviews as day interviews
EC  ENC  DC  DNC or  DC  EC  DNC  ENC  0

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 Marketing Research (6 of 8)

The specifications concerning the types of interviews:

• At least 40% of interviews of households with children
during the evening:
EC  0.4( DC  EC ) or  0.4 DC  0.6 EC  0

• At least 60% of interviews of households without

children during the evening:
ENC  0.6( DC  ENC ) or  0.6 DC  0.4 ENC  0

• The non-negativity requirements:

DC , EC , DNC , ENC  0

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 Marketing Research (7 of 8)

The 4-variable, 6-constraint LP problem formulation is:

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 Marketing Research (8 of 8)

Optimal Solution: Minimum total cost = $20,320

Number of Interviews
Household Day Evening Totals
Children 240 160 400
No children 240 360 600
Totals 480 520 1000

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 Financial Applications (1 of 8)

• 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 a
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.

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 Financial Applications (2 of 8)

• Portfolio selection problems involve situations in which a

financial manager must select specific investments—for
example, stocks and bonds—from a variety of
investment alternatives.
• The objective function for portfolio selection problems
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.

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 Financial Applications (3 of 8)

Consider Welte Mutual Funds, Inc., located in New York City.

Welte just obtained $100,000 and is looking for investment
opportunities for these funds. Based on Welte’s current
investments, the firm’s top financial analyst recommends that
all new investments be made in the oil industry, steel industry,
or in government bonds. Specifically, the analyst identified five
investment opportunities and projected their annual rates of
return. Investment Projected Rate of Return (%)
Atlantic Oil 7.3
Pacific Oil 10.3
Midwest Steel 6.4
Huber Steel 7.5
Government bonds 4.5

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 Financial Applications (4 of 8)

Management of Welte imposed the following guidelines:

1. Neither industry (oil or steel) should receive 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?

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 Financial Applications (5 of 8)

Let:
A = dollars invested in Atlantic Oil
P = dollars invested in Pacific Oil
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 0.073A + 0.103P + 0.064M + 0.075H + 0.045G

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 Financial Applications (6 of 8)

The complete linear programming model for the Welte Mutual

Funds investment problem:

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 Financial Applications (7 of 8)

Here is the computer solution to the linear programming

model for the Welte Mutual Funds investment problem:
Optimal Objective Value =8000.00000

Variable Value Reduced Cost

A 20000.00000 0.00000
P 30000.00000 0.00000
M 0.00000 -0.01100
H 40000.00000 0.00000
G 10000.00000 0.00000

Constraint Slack/Surplus Dual Value

1 0.00000 0.06900
2 0.00000 0.02200
3 10000.00000 0.00000
4 0.00000 -0.02400
5 0.00000 0.03000

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 Financial Applications (8 of 8)

The optimal solution to the linear programming model for the

Welte Mutual Funds investment problem is:
Expected Annual
Investment Amount Return
Atlantic Oil $20,000 $1460
Pacific Oil 30,000 3090
Huber Steel 40,000 3,000
Government bonds 10,000 450
Totals $100,000 $8000

Exposure annual return of $8000

Overall rate of return = 8%

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 Financial Planning (1 of 7)

Hewlitt Corporation established an early retirement program

as part of its corporate restructuring. At the close of the
voluntary sign-up period, 68 employees had elected early
retirement. As a result of these early retirements, the company
incurs the following obligations over the next eight years:

Year 1 2 3 4 5 6 7 8

$ Required 430 210 222 231 240 195 225 255

The cash requirements (in thousands of dollars)

are due at the beginning of each year.

29
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 Financial Planning (2 of 7)

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 savings. The investments in government bonds are
limited to three choices:

Bond Price Rate (%) Years to

Maturity

1 $1150 8.875 5

2 1000 5.500 6
3 1350 11.750 7

30
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 Financial Planning (3 of 7)

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 assumed that any funds
not invested in bonds will be placed in savings and earn
interest at an annual rate of 4%.

31
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 Financial Planning (4 of 7)

Define the Decision Variables

F = 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 year i
for i = 1, . . . , 8

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 Financial Planning (5 of 7)

Define the Objective Function

The objective function is to 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. It’s form is:
(Funds available at the beginning of the year)
- (Funds invested in bonds and placed in savings)
= (Cash obligation for the current year)

33
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 Financial Planning (6 of 7)

Define the Constraints

A constraint must be formulated for each year of the planning
horizon in the following form:
Year 1: F  1.15 B1  1B2  1.35B3  S1  430
Year 2 : 0.08875 B1  0.055 B2  0.1175 B3  1.04 S1  S2  210
Year 3 : 0.08875 B1  0.055 B2  0.1175 B3  1.04 S2  S3  222
Year 4 : 0.08875 B1  0.055 B2  0.1175 B3  1.04 S3  S4  231
Year 5 : 0.08875 B1  0.055 B2  0.1175 B3  1.04 S4  S5  240
Year 6 : 1.08875 B1  0.055 B2  0.1175 B3  1.04 S5  S6  195
Year 7 : 1.055 B2  0.1175 B3  1.04 S6  S7  225
Year 8 : 1.1175B3  1.04 S7  S8  255

34
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 Financial Planning (7 of 7)

Optimal solution to the 12-variable, 8-constraint LP problem:

Minimum total obligation = $1,728,794

Bond Units Purchased Investment Amount

1 B1 = 144.988 $1150(144.988) = $166,736

2 B2 = 187.856 $1000(187.856) = $187,856

3 B3 = 228.188 $1350(228.188) = $308,054

35
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 Operations Management Applications (1 of 8)

• LP can be used in operations management to aid in

decision-making about product mix, production scheduling,
staffing, inventory control, capacity planning, and other
issues.
• An important application of LP is multi-period planning such
as production scheduling.
• Usually the objective is to establish an efficient, low-cost
production schedule for one or more products over several
time periods.
• Typical constraints include limitations on production
capacity, labor capacity, storage space, and more.

36
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 Operations Management Applications (2 of 8)

The Janders Company markets various business and

engineering products. Currently, Janders is preparing to
introduce two new calculators: one for the business market
called the Financial Manager and one for the engineering
market called the Technician.
Each calculator has three components: a base, an electronic
cartridge, and a faceplate or top. The same base is used for
both calculators, but the cartridges and tops are different. All
components can be manufactured by the company or
purchased from outside suppliers.

37
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 Operations Management Applications (3 of 8)

Here are the manufacturing costs and purchase prices for

Janders calculator components:

Cost per Unit

Manufacture
Component (regular time) Purchase
Base $0.50 $0.60
Financial cartridge $3.75 $4.00
Technician cartridge $3.30 $3.90
Financial top $0.60 $0.65
Technician top $0.75 $0.78

38
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 Operations Management Applications (4 of 8)

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.
Manufacturing
Component Time
Base 1.0
Financial cartridge 3.0
Technician cartridge 2.5
Financial top 1.0
Technician top 1.5

39
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 Operations Management Applications (5 of 8)

The problem for Janders is to determine how many units of each

component to manufacture and how many units of each
component to purchase. We define the decision variables as
follows: BM = number of bases manufactured
BP = number of bases purchased
FCM = number of Financial cartridges manufactured
FCP = number of Financial cartridges purchased
TCM = number of Technician cartridges manufactured
TCP = number of Technician cartridges purchased
FTM = number of Financial tops manufactured
FTP = number of Financial tops purchased
TTM = number of Technician tops manufactured
TTP = number of Technician tops purchased

One additional decision variable is needed to determine the hours

of overtime that must be scheduled:
OT = number of hours of overtime to be scheduled

40
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 Operations Management Applications (6 of 8)

The complete formulation of the Janders make-or-buy problem

with all decision variables greater than or equal to zero is

41
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Operations Management Applications (7 of 8)

The optimal solution of the Janders make-or-buy

problem is
Optimal Objective Value = 24443.33333
Variable Value Reduced Cost
BM 5000.00000 0.00000
BP 0.00000 0.01667
FCM 666.66667 0.00000
FCP 2333.33333 0.00000
TCM 2000.00000 0.00000
TCP 0.00000 0.39167
FTM 0.00000 0.03333
FTP 3000.00000 0.00000
TTM 0.00000 0.09500
TTP 2000.00000 0.00000
OT 0.00000 4.00000

(CONTINUED)

42
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license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 Operations Management Applications (8 of 8)

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

Constraint Slack/Surplus Dual Value

1 0.00000 0.58333
2 0.00000 4.00000
3 0.00000 3.50833
4 0.00000 0.65000
5 0.00000 0.78000
6 50.00000 0.00000
7 0.00000 -0.08333

43
© 2019 Cengage. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
 End of Presentation: Chapter 4

44
© 2019 Cengage. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.