Review for exam 2

Eli Orchid can manufacture its newest pharmaceutical products in any of three
processes. One costs $14,000 per batch, requires 3 tons of one major ingredient and 1 ton
of the other, and yields 2 tons of output products. The second process costs $30,000 per
batch, requires 2 and 7 tons of the ingredients, respectively, and yields 5 tons of output
products. The third process costs $11,000 per batch, requires 9 and 2 tons of the
ingredients, respectively, and yields 1 ton of output products. Orchid wants to find the
least costly way to produce at least 50 tons of new products, given that there are 75 tons
of ingredient 1 and 60 tons of ingredient 2 on hand.
The following LP model solves the problem
Min 14000x1 + 30000x2 + 11000x3
S.T. 2x1 + 5x2 + 1x3 >= 50 (Output required)
3x1 + 2x2 + 9x3 <= 75 (Available ingredient 1)
lx1 + 7x2+ 2x3 <= 60 (Available ingredient 2)
X1, X2, X3 >= 0
Answer each of the following questions the best you can after running the model on
Solver
(a) What is the marginal cost of production (per ton of output)?
(b) How much would it cost to produce:
i) 70 tons of the new output products?
(ii) 100 tons of the new output products?
(c) How much should Orchid be willing to pay to obtain 20 more tons of Ingredient 1?
How about Ingredient 2?
(d) How cheap would the third process have to become before it might be used in an
optimal solution?
(e) How much would the cost of the 50 tons of product change if process 2 actually cost
$32,000 per batch? How about $39,000?
(f) How much would the cost of the 50 tons of product change if process 1 cost $13,000
per batch? If it cost $10,000 per batch?
(g) Suppose that the engineering department is thinking about a new process that
produces 6 tons of product using 3 tons of each of the two original ingredients. At
what cost would this new process be economical?
(h) Orchid is considering the upgrade of two processes, which will save $1000 per batch
of output in process 2 and $2000 per batch in process 3. This will cost though $3.5K.
Should Orchid pursue this investment?
(i) Orchid is trying to improve its position by increasing the required production to 55
tons while increasing the amount of the two ingredients available to 80 tons and 65
tons respectively. Answer without re-running the model (if you can): Would these
changes improve Orchids position?
2. Analyze the following time series. Compare the following four forecasting
techniques, and determine which one you would use to make a forecast.

(i) The exponential smoothing

(ii) The weighted moving average
(iii)The Holts method
(v) The linear programming model.
(a) Write down each optimized model.
(b) Perform a forecast by hand for period 61 and 62 using the template results.
(c) Show how you would calculate MAD for the first 4 periods of each technique.

Solution
X1, X2, X3 = how many batches are produced by process 1, 2, 3 respectively.
X1
5.555556
14000
2
3
1

MinCost
TotalProd
Ingredient1
Ingredient2

X2
7.777778
30000
5
2
7

X3
0
11000
1
9
2

Sumproduct
311111.1
50
32.22222
60

>=
<=
<=

50
75
60

Adjustable Cells
Cell
$B$
2
$C$
2
$D$
2

Name

Final
Value

Reduced
Cost

Objective
Coefficient

Allowable
Increase

Allowable
Decrease

X1

5.555555556

14000

1E+30

2000

X2

7.777777778

30000

5000

1E+30

X3

5666.666667

11000

1E+30

5666.666667

Constraint
R.H. Side

Allowable
Increase

Constraints
Cell
$E$
4
$E$
5
$E$
6

Name
Total Prod

Final
Value

Shadow
Price

Allowable
Decrease

50

7555.5556

50

20.2631

7.1428

Ingredient1

32.2222

75

1E+30

42.7778

Ingredient2

60

-1111.1111

60

10

35

Answers:
(a) Marginal cost of production = 311.111K/50
(b) Change the RHS of constraint 1 to 70. This value is within the range of feasibility,
and therefore: (i) the amount produced will be exactly 70 tons (although more
than 70 tons is feasible, because currently there is no slack); (ii) we can use the
shadow price to find the new cost:
New cost =311111.1K+7555.6(70-50) = 462,2231.
For 100 on the RHS we need to re-run the model.
(c) For ingredient 1 not more than 20(0) = $0. Understandably so, because there is a
slack of 42.78 tons. For ingredient 2 $1,111 per ton.
(d) Cost per batch should drop to $5,333.3 (range of optimality of the coefficient of
X3 in the objective function)
(e) The new cost of $32000 per batch for process 2, falls inside the range of
optimality of its coefficient [-M, 35000]. The optimal solution will not change so
we use it to find the new total cost. New cost = 311.1111 + (32000-30000)
(7.7778) = 326,666.7.

(f)
(g)

(h)

(i)

For a cost of $39000 (outside the range of optimality), we need to re-run the
model although we can get the feeling by observing the following changes: If
the solution were not changing, the cost would have increased to 311,111 +
(39000-30000)(7.7778) = 381111.3. However the solution will change, in order to
reduce this cost. Probably X2 < 7.7778 at the new optimal solution.
Solve the same way as in part (e). Note that we have a reduction in total cost.
We need to add a variable X4 to the model, representing the number of batches of
process 4 to run. All the constraints will change. Substitute a very large value
(such as 1000) for the cost per batch of X4, and observe the range of optimality
for this coefficient. The lower bound of this range is the cost where it becomes
economical to enter this variable to the solution with a positive value.
Two coefficients in the objective function are changing. The coefficient 30000
becomes 29000, and the coefficient 11000 becomes 9000. Applying the 100% rule
we have 1000/Infinity + 2000/5666.7 = .85 < 1. Thus, the optimal solution does
not change. If the saving (in terms of total cost) exceeds the cost of $3.5K, this
investment should be pursued. The new saving = 1000(7.7778) + 2000(0) =
7777.8 > 3500. So, the saving is greater than the cost, and therefore the upgrade
should be performed.
Three constraints are changed simultaneously. The first constraint increases from
50 to 55, the second constraint increases from 75 to 80, and the third constraint
increases from 60 to 65. Using the 100% rule we have (5/20.26)+(5/Infinity)
+(5/10) = .2468+0+.5 = .7468 < 1. Thus, the shadow prices do not change, and
can be used to recalculate the new total cost without re-running the model. The
change in the total cost is 5(7555.5556)+5(0)+5(-1111.11) = 32222.45. So, there
will be a total cost increase therefore Orchids position will not improve.