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Indian Institute of Management Bangalore

QUANTITATIVE METHODS II
Quiz 2
Saturday, December 3rd, 2005
Time : 90 minutes
No. of Pages : 8
No. of Questions : 3

Name ________________________
Roll No. ________________________
Section: _______________________

1. Answer all questions only in the space provided following the question.
2. Show all work on the graph and otherwise and give adequate explanations to get
credit.
3. You may use the backside of the pages for rough work only if needed. Do NOT attach
any rough work/sheets.
4. Clearly define all variables used in your formulation. Label all constraints.
Question I

[20 points]

Texaco Petroleum runs a small refinery on the Texas coast. The refinery distills crude
petroleum obtained from two sources, Saudi Arabia and Venezuela, into three main
products: gasoline, jet fuel and lubricants.
The two crudes differ in chemical composition and, therefore, yield different product
mixes. Each barrel of Saudi crude yields 0.3 barrel of gasoline, 0.4 barrel of jet fuel and
0.2 barrel of lubricants. Each barrel of Venezuelan crude yields 0.4 barrel of gasoline, 0.2
barrel of jet fuel and 0.3 barrel of lubricants. The remaining 10% of each barrel is lost in
refining.
The crudes also differ in cost and availability. Texaco can purchase up to 9000 barrels per
day from Saudi Arabia at $20 per barrel. Up to 6000 barrels per day of Venezuelan crude
is available at $15 per barrel.
Texacos contracts with independent distributors require it to produce 2000 barrels per
day of gasoline, 1500 barrels per day of jet fuel, and 500 barrels per day of lubricants.
How can these requirements be fulfilled most efficiently?
Texacos decision problem is formulated as a linear programming problem as follows:
Min 20 x1 + 15 x2
s.t. 0.3 x1 + 0.4 x2 >= 2.0 (gasoline requirement)
0.4 x1 + 0.2 x2 >= 1.5 (jet fuel requirement)
0.2 x1 + 0.3 x2 >= 0.5 (lubricant requirement)
x1
<= 9 (Saudi availability)
x2
<= 6 (Venezuelan availability)
x1, x2 >= 0
Where x1 and x2 are the barrels of Saudi and Venezuelan crude refined per day (in
thousands).

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a)

Use a graph to show the set of all feasible solutions for Texacos decision
problem. Identify it clearly.
[5 points]
The set of all feasible solutions is marked as ABCDEF on the graph

b)

Find the improving direction of the objective function and use it to find the
optimal solution(s) to the problem. Mark it/them clearly on the graph and list
it/them in the space provided below. What is the optimal objective function
value?
[5 points]
x1 = 2, x2 = 3.5
Refine 2000 barrels of Saudi and 3500 barrels of Venezuelan crude per day
Optimal OF Value = 92.5
Min Total cost = $ 92500/day

c)

Use the graph to find the range of values for the cost per barrel of Venezuelan
crude that will not affect the optimal solution(s) obtained above. [5 points]
The optimal solution is at the intersection of the Gasoline and Jet Fuel
requirement constraints. Therefore, the optimal solution will not change
as long as the slope of the OF remains between the slope of these two
constraints, i.e.
-.4/.2 <= -20/c2 and 20/c2 <= -.3/.4,
c2 >= 10 and c2 <= 26.67 for the optimal solution to not change.

d)

If the cost of Venezuelan crude changes to $10 per barrel will it affect the
optimal solution? If so, give the new optimal solution(s). Explain clearly and
show all work.
[ 5 points]
The OF = 20x1 + 10x2
This is parallel to the binding constraint for jet fuel requirement
Therefore, there will be alternate optimal solutions at the corner points
(2,3.5) and (.75,6) and all points on the line segment joining them.
The alternate optimal solutions will be:
x = *2 + (1-)*7.5
y = *.75 + (1-)*6

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Question II [20 points]
Kurla Chemicals Ltd. manufactures three types of chemicals used in pharmaceuticals:
Alpha, Beta and Chi. The monthly demand for each chemical is 300 kgs. The market
price for each chemical (on a per kilogram basis) is Rs 500 for Alpha, Rs 600 for Beta
and Rs 1000 for Chi. The raw material, code named Zeta, required to produce Alpha and
Beta can be purchased at a price of Rs 250/kg. A chemical process (call it process-1)
converts one kilogram of Zeta into one kilogram of Alpha. Similarly, another chemical
process (call it process-2) converts one kilogram of Zeta into one kilogram of Beta. A
chemical process (process-3) converts one kilogram of Alpha into 0.6 kilogram of Beta
and 0.4 kilogram of Chi at a cost of Rs 150/kg. A chemical process (process-4) converts
one kilogram of Beta to 0.8 kilograms of Chi at a cost of Rs 100/kg. Below is a model
that can be used to decide on the quantities of Alpha, Beta and Chi to sell so as to
maximize monthly profits.
Decision Variables:
ALS, BES and CHS denote the kilograms of Alpha, Beta and Chi sold.
ZA and ZB denote the kilograms of Zeta used to produce Alpha and Beta, respectively.
ZETA denotes the kilograms of Zeta purchased.
ALP and BEP denote the kilograms of Alpha and Beta that are processed further.
Model:
Maximize 500ALS + 600BES + 1000CHI 250ZETA 150ALP 100BEP
s.t.
ZETA ZA ZB = 0
ZA ALS ALP = 0
BES + BEP ZB 0.6ALP = 0
0.4ALP + 0.8BEP CHI = 0
ALS <= 300
BES <= 300
CHI <= 300
ALS, BES, CHI, ZETA, ALP, BEP, ZA, ZB are non-negative.
LINDO OUTPUT:
LP OPTIMUM FOUND AT STEP

OBJECTIVE FUNCTION VALUE

1)

348750.0

VARIABLE
VALUE
ALS
300.000000
BES
300.000000

REDUCED COST
0.000000
0.000000

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CHI
ZETA
ALP
BEP
ZA
ZB

300.000000
975.000000
0.000000
375.000000
300.000000
675.000000

0.000000
0.000000
74.999992
0.000000
0.000000
0.000000

ROW SLACK OR SURPLUS

2)
0.000000
3)
0.000000
4)
0.000000
5)
0.000000
6)
0.000000
7)
0.000000
8)
0.000000
NO. ITERATIONS=

DUAL PRICES
-250.000000
250.000000
-437.500000
250.000000
350.000000
562.500000

RANGES IN WHICH THE BASIS IS UNCHANGED:

VARIABLE
ALS
BES
CHI
ZETA
ALP
BEP
ZA
ZB
ROW
2
3
4
5
6
7
8

OBJ COEFFICIENT RANGES

CURRENT
ALLOWABLE
COEF
INCREASE
500.000000
INFINITY
600.000000
INFINITY
1000.000000
INFINITY
-250.000000
INFINITY
-150.000000
74.999992
-100.000000
INFINITY
0.000000
74.999992
0.000000
INFINITY
RIGHTHAND SIDE RANGES
CURRENT
ALLOWABLE
RHS
INCREASE
0.000000
INFINITY
0.000000
INFINITY
0.000000
675.000000
0.000000
INFINITY
300.000000
INFINITY
300.000000
INFINITY
300.000000
INFINITY

ALLOWABLE
DECREASE
250.000000
350.000000
562.500000
250.000000
INFINITY
149.999985
250.000000
68.181808

ALLOWABLE
DECREASE
975.000000
300.000000
INFINITY
300.000000
300.000000
300.000000
300.000000

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Use the LINDO output above to answer the following questions. State your answers
precisely and give adequate explanations.
a) What is the optimal production plan for Kurla Chemicals? State your answers
precisely.
[2 points]
The optimal production plan is for Kurla Chemicals to:
1.
Order 975 kgs of Zeta.
2.
Produce 300 kgs of Alpha using process-1 and 675 kgs of Beta
using process-2.
3.
375 kgs of Beta is processed further to produce 300 kgs of Chi
using process-4.
4.
As a result, 300 kgs of Alpha, 300 kgs of Beta and 300 Chi are sold.
The net profit earned is Rs 348750.
b) If the price of ZETA goes up by Rs 200, what will be the impact on the optimal
production plan? Will it change? What will be the impact on the optimal profit?
Assume that all else remains the same. Give precise reasons.
[3 points]
Currently, the coefficient of ZETA is 250 in the objective function. If the
price of Zeta goes up by Rs 200, then the coefficient of ZETA goes down to
450. Since the allowable decrease for the coefficient of ZETA is 250, the
decrease of 200 is well within the allowable decrease. Hence, when the price
of Zeta goes up to Rs 450/kg, the optimal production plan remains
unchanged.
The optimal profit will decrease. The new optimal profit will be: Rs 348750
200*975 = Rs 153750.
c) Lets suppose that a new technology has developed wherein each kilogram of
Alpha can be converted to 0.2 kilograms of Beta and 0.8 Kilograms of Chi at a
cost of Rs 100. Will it be worthwhile adopting this new technology? Why or Why
not? Assume that all else remains the same.
[4 points]
Let ALP2 be a decision variable that denotes the kgs of Alpha processed
using the new technology. In the modified LP formulation, coefficient of
ALP2 in the objective function is 100. In constraint 2 its coefficient is 1, in
constraint 3 its coefficient is 0.2 and in constraint 4 its coefficient is +0.8.
Hence, the dual constraint associated with ALP2 is:
-y2 0.2y3 + 0.8y4 >= -100, where y2, y3 and y4 are the dual variables
associated with constraints 2, 3 and 4. The optimal values of the dual
variables are: y2 = -250, y3 = 250 and y4 = -437.5. Substituting the optimal
values in the left-hand-side gives 150 < -100, violating the dual constraint.
This implies that if the modified LP is solved, ALP2 will be positive at
optimality. Hence, it would be worthwhile adopting this new technology.

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If the constraint had been non binding, then the variable in the primal had
been 0. If the constraint is binding, we cannot conclude what the value will
be. If the constraint is violated, the value will come out to be zero if the LP is
resolved.
Another way to view the incorporation of the new technology is that if ALP2
is set to 1, then cost will go up by Rs 100. At the same time,
1. constraint 2 will become: ZA ALS ALP = 1 ( = 1*ALP2)
2. constraint 3 will become: BES + BEP ZB 0.6ALP = 0.2 ( = 0.2*ALP2)
3. constraint 4 will become: 0.4ALP + 0.8BEP CHI = -0.8 ( = -0.8*ALP2)
As a result, the profit will change as: 1*-250 + 0.2*250 0.8*-437.50 = 150.
Since the benefit (Rs 150) exceeds the cost (Rs 100) for each unit of ALP2, it
would be worthwhile adopting this new technology.
d) Supposing that the demand for Beta and Chi went up by 10%, while that for
Alpha goes down by 20%. What impact will this have on the optimal production
plan? Will it change? What will be the impact on the optimal profit? Assume that
all else remains the same.
[4 points]
Currently, Alphas demand is 300, Betas demand is 300 and Chis demand is
300. With the change in the demand as described above, the demands will
become 240 for Alpha, and 330 for Beta and Chi, respectively. Using the
100% rule, one finds that Betas and Chis demand change in % terms is
30/ = 0%, while Alphas demand change is 60/300 = 20%. Since the
cumulative change is 20%<100%, the dual prices will remain the same over
the change.
Since demand (and therefore the rhs) changes, the optimal production plan
will change. The new optimal profit = Old Optimal profit + 30*Dual price of
constraint 6 + 30*Dual price of constraint 7 60*Dual price for constraint 5=
348750 + 30*350 + 30*562.5 60*250 = 361125.
e) Suppose that the availability of Zeta were limited to 1000 kgs. What impact will
this have on the optimal production plan? Will it change? What will be the impact
on the optimal profit? If one were to incorporate this as an explicit constraint in
the model, provide the tightest possible range over which its associated dual price
will remain unchanged?
[4 points]
The requirement above amounts to adding the constraint ZETA <= 1000.
Since at optimality, ZETA = 975, the above constraint would be non-binding.
Hence, the optimal production plan will not change. Neither will the optimal
profit change. The dual price associated with this constraint would be zero.
This dual price will remain unchanged over the range [975, ].

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f)

Determine the dual price associated with the first constraint of the model.
[3 points]
Let the dual variable associated with the 1st constraint be denoted as y1.
Associated with variable ZETA is a dual constraint: y1 >= -250. Since
optimal value of ZETA = 975 (not zero), due to complementary slackness
conditions, the dual constraint y1 >= -250 is binding. Hence y1 = -250. Since
the LP is a max problem, dual price for the 1st constraint = -250.

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Question III [25 points]
Institutional Food Services Company (IFS) supplies food and other products to
restaurants, schools and similar institutions. The table given below shows IFSs
projections of some relevant accounts over the next 4 weeks (in thousands of dollars).
St = projected revenue in week t from cash sales to small customers
Rt = projected accounts receivable, i.e., revenue received in week t from large customers
who buy on credit
Pt = projected accounts payable to IFSs suppliers in week t
Et = projected payroll, utility, and other expenses to be paid in week t
Cash sales and accounts receivable produce immediate income to IFSs checking account.
Expenses are immediate deductions.
Accounts payable amounts (Pt) are not actually due until week t+3 but they are discounted
by 2% if paid early in week t. If not paid in period t, the amount can be paid in period
t+3.
Projected Weekly Amount ($ 000s) for Week
Item
1
2
3
Cash Sales, St
600
750
1200
Accounts Receivable, Rt
770
1260
1400
Accounts Payable, Pt
3200
5600
6000
Expenses, Et
350
400
550

4
2100
1750
480
940

IFSs financial officer has two additional ways of dealing with his cash flows. First, the
companys bank has extended a $4 million line of credit that may be drawn upon at 0.2%
interest per week. However, the bank requires at least 20% of the outstanding borrowed
amount to be maintained (without earning interest) in IFSs checking account, i.e. in cash.
The other option is investment of excess cash in short-term money markets. IFS can earn
0.1% interest per week on amounts invested this way.
The financial officer wishes to minimize the net total cost over 4 weeks in interest and
lost discounts. He would like to maintain at least a $20,000 checking account safety
balance each period. Your task is to help him decide how to exercise the available options
by developing an appropriate linear programming model.
Define all variables clearly and label all constraints.

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Blank sheet for the formulation
Let
At - Amount borrowed (debt) in week t against line of credit, t = 1,2,3,4
Bt - Amount of debt paid off in week t, t = 1,2,3,4
Xt - Amount of accounts payable in week t delayed until week t+3 at loss of
discount, t=1,2,3,4
Yt - Amount invested in short term money markets in week t, t = 1,2,3,4
Can also define for convenience:
Ct - Cash on hand in week t, t = 1,2,3,4
Dt - Cumulative debt in week t, t = 1,2,3,4
(All amounts are in 000s).
Then the required LP formulation is:
Min 0.002 (D1 + D2 + D3 + D4) + 0.02 (X1 + X2 + X3 + X4) - 0.001 (Y1 + Y2 + Y3 + Y4)
s.t.
Ct = Ct-1 + At - Bt + 0.001 Yt-1 - Yt - 0.002Dt-1 + St + Rt - Et - 0.98(Pt - Xt) - Xt-3 ,
t=1,2,3,4 (Cash Balance)
Dt = Dt-1+ At - Bt
t=1,2,3,4 (Debt Balance)
Dt <= 4000
t=1,2,3,4 (Credit Limit)
Ct >= 0.2 Dt
t=1,2,3,4 (Bank Rule)
Ct >= 20
t=1,2,3,4 (Safety Balance)
Xt <= Pt
t=1,2,3,4 (Payable Limit)
All variables are non-negative.