BUS 306

Applied
Using Binary Integer
Programming
Management Science
Chapter 7
toUsing
Deal with
Binary
Integer
Yes-or-No Decisions
Programming

1
Applications of Binary Variables
• Since binary variables only provide two choices,
they are ideally suited to be the decision variables
when dealing with yes-or-no decisions.

• Examples:
o Should we undertake a particular fixed project?
o Should we make a particular fixed investment?
o Should we locate a facility in a particular site?

2
California Manufacturing
Company
• The California Manufacturing Company is a diversified
company with several factories and warehouses throughout
California, but none yet in Los Angeles or San Francisco.
• A basic issue is whether to build a new factory in Los Angeles
or San Francisco, or perhaps even both.
• Management is also considering building at most one new
warehouse, but will restrict the choice to a city where a new
factory is being built.

Question:
Should the California Manufacturing Company expand with
factories and/or warehouses in Los Angeles and/or San
Francisco? 3
Data for California Manufacturing

Net Present Capital

Decision Yes-or-No Decision Value Required
Number Question Variable (Millions) (Millions)
1 Build a factory in Los Angeles? x1 $8 $6
2 Build a factory in San Francisco? x2 5 3
3 Build a warehouse in Los Angeles? x3 6 5
4 Build a warehouse in San Francisco? x4 4 2
Capital Available: $10 million

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Binary Decision Variables

Decision Decision Possible Interpretation Interpretation

Number Variable Value of a Value of 1 of a Value of 0

x1 Build a factory in Do not build

1 0 or 1
Los Angeles this factory

x2 Build a factory in Do not build

2 0 or 1
San Francisco this factory
Build a warehouse
x3 Do not build
3 0 or 1 in
this warehouse
Los Angeles
Build a warehouse
x4 Do not build
4 0 or 1 in
this warehouse
San Francisco

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 Algebraic Formulation

Let x1 = 1 if build a factory in L.A.; 0 otherwise

x2 = 1 if build a factory in S.F.; 0 otherwise
x3 = 1 if build a warehouse in Los Angeles; 0 otherwise
x4 = 1 if build a warehouse in San Francisco; 0 otherwise

Maximize NPV = 8x1 + 5x2 + 6x3 + 4x4

subject to
Capital Spent: 6x1 + 3x2 + 5x3 + 2x4 ≤ 10
Max 1 Warehouse: x3 + x4 ≤ 1
Warehouse only if Factory: x3 ≤ x1
x4 ≤ x2
and
x1, x2, x3, x4 are binary variables. 6
 Spreadsheet Model
B C D E F G
3 NPV ($millions) LA SF
4 Warehouse 6 4
5
6 Factory 8 5
7
8 Capital Required
9 ($millions) LA SF
10 Warehouse 5 2 Capital Capital
11 Spent Available
12 Factory 6 3 9 <= 10
13
14 Total Maximum
15 Build? LA SF Warehouses Warehouses
16 Warehouse 0 0 0 <= 1
17 <= <=
18 Factory 1 1
19
20 Total NPV ($millions) 13

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Management’s Conclusion
• Management’s initial tentative decision had been to make $10
million of capital available.
• With this much capital, the best plan would be to build a factory
in both Los Angeles and San Francisco, but no warehouses.
• An advantage of this plan is that it only uses $9 million of this
capital, which frees up $1 million for other projects.
• A heavy penalty (a reduction of $4 million in total net present
value) would be paid if the capital made available were to be
reduced below $9 million.
• Increasing the capital made available by $1 million (to $11
million) would enable a substantial ($4 million) increase in the
total net present value. Management decides to do this.
• With this much capital available, the best plan is to build a
factory in both cities and a warehouse in San Francisco.
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Project Selection at Tazer Corp.

• Tazer Corporation is searching for a new breakthrough drug.

• Five potential research and development projects:

• Project Up: Develop a more effect antidepressant that doesn’t cause
mood swings
• Project Stable: Develop a drug that addresses depression
• Project Choice: Develop a less intrusive birth control method for women
• Project Hope: Develop a vaccine to prevent HIV infection
• Project Release: Develop a more effective drug to lower blood pressure
• $1.2 billion available for investment (enough for 2 or 3 projects)

Question:
Which projects should be selected to research and develop?
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 Data for the
Tazer Project Selection Problem

1 2 3 4 5
Up Stable Choice Hope Release
R&D 400 300 600 500 200
($million)
Success 50% 35% 35% 20% 45%
Rate
Revenue if 1,400 1,200 2,200 3,000 600
Successful
($million)
Expected 300 120 170 100 70
Profit
($million)

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Algebraic Formulation of
Tazer Project Selection

Let xi = 1 if approve project i; 0 otherwise

(for i = 1, 2, 3, 4, and 5)

Maximize P = 300x1 + 120x2 + 170x3 + 100x4 + 70x5 subject

to
R&D Budget:
400x1 + 300x2 + 600x3 + 500x4 + 200x5 ≤ 1,200 and xi are
binary (for i = 1, 2, 3, 4, and 5).

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Spreadsheet for Tazer Project Selection Problem
A B C D E F G H I J
1 Tazer Corp. Project Selection Problem
2
3
4 Up Stable Choice Hope Release Total Budget
5 R&D Investment ($million) 400 300 600 500 200 1200 <= 1200
6 Success Rate 50% 35% 35% 20% 45%
7 Revenue if Successful ($million) 1400 1200 2200 3000 600
8 Expected Profit ($million) 300 120 170 100 70 540
9
10 Do Project? 1 0 1 0 1

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Selection of Sites for Emergency Services: Caliente City
Problem
• Caliente City is growing rapidly and spreading well beyond its original
borders
• They still have only one fire station, located in the congested center of
town
• The result has been long delays in fire trucks reaching the outer part of the
city

Goal:
Develop a plan for locating multiple fire stations throughout the city

New Policy:
Response Time ≤ 10 minutes

13
 Response Time and Cost Data for
Caliente City Problem

Fire Station in Tract

1 2 3 4 5 6 7 8
Response 1 2 8 18 9 23 22 16 28
times
2 9 3 10 12 16 14 21 25
(minutes)
for a fire in 3 17 8 4 20 21 8 22 17
tract 4 10 13 19 2 18 21 6 12
5 21 12 16 13 5 11 9 12
6 25 15 7 21 15 3 14 8
7 14 22 18 7 13 15 2 9
8 30 24 15 14 17 9 8 3
Cost of Station 350 250 450 300 50 400 300 200
($thousands) 14
 Algebraic Formulation of
Caliente City Problem

Let
xj = 1 if tract j is selected to receive a fire station; 0 otherwise (j = 1, 2, … , 8)

Minimize C = 350x1 + 250x2 + 450x3 + 300x4 + 50x5 + 400x6 + 300x7 + 200x8

subject to
Tract 1: x1 + x2 + x4 ≥ 1
Tract 2: x1 + x2 + x3 ≥ 1
Tract 3: x2 + x3 + x6 ≥ 1
Tract 4: x1 + x4 + x7 ≥ 1
Tract 5: x5 + x7 ≥ 1
Tract 6: x3 + x6 + x8 ≥ 1
Tract 7: x4 + x7 + x8 ≥ 1
Tract 8: x6 + x7 + x8 ≥ 1
and xj are binary (for j = 1, 2, … , 8).
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 Spreadsheet Model for Caliente City Problem
A B C D E F G H I J K L M N
1 Caliente City Fire Station Location Problem
2
3 Fire Station in Tract
4 1 2 3 4 5 6 7 8
5 1 2 8 18 9 23 22 16 28
6 Response 2 9 3 10 12 16 14 21 25
7 Times 3 17 8 4 20 21 8 22 17
8 (Minutes) 4 10 13 19 2 18 21 6 12
9 for a Fire 5 21 12 16 13 5 11 9 12
10 in Tract 6 25 15 7 21 15 3 14 8
11 7 14 22 18 7 13 15 2 9
12 8 30 24 15 14 17 9 8 3
13
14 Cost of Station 350 250 450 300 50 400 300 200
15 ($thousands) Number
16 Covering
17 1 1 1 0 1 0 0 0 0 1 >= 1
18 Response 2 1 1 1 0 0 0 0 0 1 >= 1
19 Time 3 0 1 1 0 0 1 0 0 1 >= 1
20 <= 4 1 0 0 1 0 0 1 0 1 >= 1
21 10 5 0 0 0 0 1 0 1 0 1 >= 1
22 Minutes? 6 0 0 1 0 0 1 0 1 1 >= 1
23 7 0 0 0 1 0 0 1 1 2 >= 1
24 8 0 0 0 0 0 1 1 1 2 >= 1
25
26 Total
27 Fire Station in Tract Cost
28 1 2 3 4 5 6 7 8 ($thousands)
29 Station in Tract? 0 1 0 0 0 0 1 1 750

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