BA 452 Lesson B.

5 Binary Indicator Variables

1
Readings
Readings

Chapter 7
Integer Linear Programming


BA 452 Lesson B.5 Binary Indicator Variables
2
Overview
Overview

BA 452 Lesson B.5 Binary Indicator Variables
3
Overview
Machine Use Indicators are binary variables where 0 indicates no use and 1
indicates positive use. They are part of a simple linear model of the fixed cost
of machine use.
Resource Allocation Problems with Fixed Costs trade off the advantage of using
a variety of inputs to conform to fixed resources with the positive fixed cost of
using each input.
Product Mix Problems with Fixed Costs trade off the advantage of producing a
variety of goods to conform to fixed resources with the positive fixed cost of
producing each good.
Make or Buy Decisions with Fixed Costs trade off the lower unit cost of
producing a good yourself with the positive fixed cost of production.
Relational Constraints such as either project i or project j is completed or both
project i and project j are completed can be written as linear constraints in
binary indicator variables.
Capital Budgeting Problems maximize the net present value or net return from
a selection of projects that each require a fixed amount of capital. Relational
constraints are often imposed.
BA 452 Lesson B.5 Binary Indicator Variables
4
Tool Summary
Use binary variables to indicate whether an activity, such as a
production run, is undertaken.
Write a multiple-choice constraint: The sum of two or more binary
variables equals 1, so any feasible solution choose one variable to
equal 1.
Write a mutually-exclusive constraint: The sum of two or more binary
variables is at most 1, so any feasible solution chooses at most one
variable to equal 1. All variables could equal 0.
Write a conditional constraint: An inequality constraint so that one
binary variable cannot equal unless certain other binary variables
also equal 1.
Write a corequisite constraint: An equality constraint of binary
variables, so are either both 0 or both 1.









Tool Summary
BA 452 Lesson B.5 Binary Indicator Variables
5
Machine Indicators
Machine Indicators
BA 452 Lesson B.5 Binary Indicator Variables
6
Overview

Machine Use Indicators are binary variables where 0 indicates no use
and 1 indicates positive use. They are part of a simple linear model of
the fixed cost of machine use.

For example, consider a standard Resource Allocation Problem with
Machines, where the maximum machine resource available is 20.
Suppose fixed setup costs of using a machine restrict machine use X
so either X = 0 or 6 < X < 20. But either X = 0 or 6 < X < 20 is not a
linear constraint. To make either X = 0 or 6 < X < 20 a linear
constraint, introduce binary variable Y and replace the standard
resource constraint X < 20 with 6Y < X < 20Y. The linear constraints
6Y < X < 20Y can be satisfied in one of two ways. On the one hand, if
Y = 0, then the constraints read 6(0) < X < 20(0) and so are satisfied
only by X = 0. On the one hand, if Y = 1, then the constraints read 6(1)
< X < 20(1) and so are satisfied only by 6 < X < 20.



Machine Indicators
BA 452 Lesson B.5 Binary Indicator Variables
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Question: Ji-Yang Plastic makes plastic parts in Taiwan
used in automobiles and computers. One of its major
contracts involves the production of plastic printer cases
for a computer companys portable printers. The printer
cases can be produced on two injection molding machines.
The M-100 machine has a production capacity of 25 printer
cases per hour, and the M-200 machine has a production
capacity of 40 printer cases per hour. Both machines use
the same chemical to produce the printer cases; the M-100
uses 40 pounds of raw material per hour, and the M-200
uses 50 pounds per hour.




Machine Indicators
BA 452 Lesson B.5 Binary Indicator Variables
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The computer company asked Ji-Yang to produce as many
of the cases as possible during the upcoming week; it will
pay $18 for each case. However, next week is a regularly
scheduled vacation period for most of Ji-Yangs production
employees. During this time, annual maintenance is
performed on all equipment. Because of the downtime for
maintenance, the M-100 is only available for at most 15
hours, and the M-200 for at most 10 hours.





Machine Indicators
BA 452 Lesson B.5 Binary Indicator Variables
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The supplier of the chemical used in the production
process informed Ji-Yang that a maximum of 1000 pounds
of the chemical material will be available for next weeks
production; the cost for this raw material is $6 per pound.
In addition to the raw material cost, Ji-Yang estimates that
the hourly cost of operating the M-100 and the M-200 are
$50 and $75, respectively.






Machine Indicators
BA 452 Lesson B.5 Binary Indicator Variables
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However, because of the high setup cost on both
machines, management requires that, if a machine is used
at all, it must be used for at least 5 hours.

(That last constraint makes the fixed cost of producing with
a machine equal to the cost of using the machine for 5
hours.)





Machine Indicators
BA 452 Lesson B.5 Binary Indicator Variables
11
Answer:
Define decision variables:
M1 = number of hours spent on the M-100 machine
M2 = number of hours spent on the M-200 machine
Total revenue = 18(25) M1 + 18(40) M2 = 450 M1 + 720
M2
Total cost = 6(40) M1 + 6(50) M2 + 50 M1 + 75 M2 = 290
M1 + 375 M2




Machine Indicators
BA 452 Lesson B.5 Binary Indicator Variables
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Mixed binary formulation
Define objective:
Maximize (profit = revenue-cost) 160 M1 + 345 M2
Define constraints:
M1 < 15 (M-100 maximum)
M2 < 10 (M-200 maximum)
40M1 + 50 M2 < 1000 (Raw Material)
M1 > 5 U1 (M-100 minimum, if M1 > 0)
M2 > 5 U2 (M-200 minimum, if M2 > 0)
15U1 > M1 (so U1 = 1 if M1 > 0)
10U2 > M2 (so U2 = 1 if M2 > 0)
M1, M2 > 0 and U1, U2 binary (0 or 1)





Machine Indicators
BA 452 Lesson B.5 Binary Indicator Variables
13
Mixed binary formulation




Machine Indicators
BA 452 Lesson B.5 Binary Indicator Variables
14
Mixed binary solution
Use M1 for 12.5 hours, and M2 for 10 hours.




Machine Indicators
BA 452 Lesson B.5 Binary Indicator Variables
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Resource Allocation with Fixed
Cost

Resource Allocation with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
16
Overview

Resource Allocation Problems with Fixed Cost trade off the advantage of using
a variety of inputs to conform to fixed resources with the positive fixed cost of
using each input. The simplest way to model those fixed costs in a linear
program is with binary (0 or 1) variables used as indicators, where 0 values
indicate no production and 1 indicates positive production.

For example, consider a standard Resource Allocation Problem, where for one
of the inputs, the maximum resource available is 10, and the cost of using X is
3X. Now suppose there is an added fixed setup costs of 15. To model those
fixed costs in a linear program, introduce binary variable Y, replace the
resource supply constraint X < 10 with X < 10Y, and add the cost term 15Y so
total cost becomes 3X + 15Y. The constraint X < 10Y can be satisfied in one
of two ways. On the one hand, if X = 0, then the constraint reads 0 < 10Y and
so can be satisfied by Y = 0, and so total cost = 3X. On the one hand, if X > 0,
then the constraint X < 10Y can only be satisfied by Y = 1, and so total cost =
3X + 15.
Resource Allocation with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
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Question: A businessman is considering opening a small
specialized trucking firm. To make the firm profitable, it is
estimated that it must have a daily trucking capacity of at
least 12 tons. Two types of trucks are appropriate for the
specialized operation. Their characteristics and costs are
summarized in the table below. Note that each large truck
require 2 drivers for long-haul trips. There are 8 potential
drivers available and there are facilities for at most 4 trucks.
Resource Allocation with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
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The businessman's objective is to minimize the total cost
outlay for trucks.

Capacity Drivers
Truck Cost (tons) Needed
Small $10,000 2 1
Large $30,000 4 2

Formulate and graphically solve a linear programming
model for this problem. How many of each type of truck
should be used?
Reformulate the problem if the trucking firm incurs a fixed
setup cost of $2 if it uses any positive quantity of small
trucks, and a fixed setup cost of $4 if it uses any positive
quantity of large trucks?

Resource Allocation with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
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Answer:
Let S = the number of small trucks used
Let L = the number of large trucks used

Min 10000S + 30000L
s.t. 2S + 4L > 12 (capacity constraint)
S + 2L < 8 (driver constraint)
S + L < 4 (facility constraint)
S, L > 0

A graph of the feasible set and iso-value lines shows the
optimal solution occurs where the first and third constraints
bind (the second constraint is redundant). Solving the
binding form of those two constraints yields the optimal
solution: S = 2, L = 2.


Resource Allocation with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
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Question: How would the formulation change if the trucking
firm incurs a fixed setup cost of $2 if it uses any positive
quantity of small trucks, and a fixed setup cost of $4 if it
uses any positive quantity of large trucks?


Resource Allocation with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
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Answer:
Let SS = 1 if Small Trucks are used; 0 if not
Let SY = 1 if Large Trucks are used; 0 if not
Objective: Min 10000S + 30000L + 2SS + 4SY
Input Constraints:
2S + 4L > 12 (capacity constraint)
S + 2L < 8 (driver constraint)
S + L < 4 (facility constraint)
S, L > 0

Setup Constraints (given input constraints imply S < 4, L <
4):
S < 4SS
L < 4SL
Resource Allocation with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
22
Product Mix with Fixed Cost

Product Mix with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
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Overview

Product Mix Problems with Fixed Cost trade off the advantage of producing a
variety of goods to conform to fixed resources with the positive fixed cost of
producing each good. The simplest way to model those fixed costs in a linear
program is with binary (0 or 1) variables used as indicators, where 0 values
indicate no production and 1 indicates positive production.

For example, consider a standard Product Mix Problem, where for one of the
outputs, the maximum production demanded is 10, and the cost of producing X
is 3X. Now suppose there is an added fixed setup costs of 15. To model those
fixed costs in a linear program, introduce binary variable Y, replace the demand
constraint X < 10 with X < 10Y, and add the cost term 15Y so total cost
becomes 3X + 15Y. The constraint X < 10Y can be satisfied in one of two
ways. On the one hand, if X = 0, then the constraint reads 0 < 10Y and so
can be satisfied by Y = 0, and so total cost = 3X. On the one hand, if X > 0,
then the constraint X < 10Y can only be satisfied by Y = 1, and so total cost =
3X + 15.
Product Mix with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
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Question: Iron Elegance seeks to maximize profit by
making two products from steel. It just received this
month's allocation of 19 pounds of steel. It takes 2 pounds
of steel to make a unit of product 1, and 3 pounds of steel
to make a unit of product 2. The physical plant has the
capacity to make at most 6 units of product 1, and at most
8 units of total product (product 1 plus product 2).

Product 1 sells for price 7, has marginal cost 2, and fixed
cost 3. Product 2 sells for price 8, has marginal cost 1, and
fixed cost 2.

Formulate a linear program to maximize profit.


Product Mix with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
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Answer: A mixed integer linear program can be set up to
solve this problem. Binary variables are used to indicate
whether or not we setup to produce the two products.
Let x
1
and x
2
denote this month's production level of
product 1 and product 2.
y
1
= 1 if x
1
> 0; y
1
= 0 if not
y
2
= 1 if x
2
> 0; y
2
= 0 if not


Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
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The total monthly profit =
(profit per unit of product 1) x (monthly production of
product 1)
+ (profit per unit of product 2) x (monthly production of
product 2)
= (7-2)x
1
+ (8-1)x
2
- 3y
1
- 2y
2
Maximize total monthly profit: Max 5x
1
+ 7x
2
- 3y
1
- 2y
2

Product Mix with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
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Here is a mathematical formulation of constraints.
The total amount of steel used during monthly production =
(steel used per unit of product 1) x (monthly production of product 1)
+ (steel used per unit of product 2) x (monthly production of product 2)
= 2x
1
+ 3x
2

That quantity must be less than or equal to the allocated 19 pounds
of steel (the inequality < in the constraint below assumes excess
steel can be freely disposed; if disposal is impossible, then use
equality =) :
2x
1
+ 3x
2
< 19
The constraint that the physical plant has the capacity to make at
most 6 units of product 1 is formulated
x
1
< 6
The constraint that the physical plant has the capacity to make at
most 8 units of total product (product 1 plus product 2) is
x
1
+ x
2
< 8

Product Mix with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
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Given resource constraint 2x
1
+ 3x
2
< 19 implies x
1
<
19/2 and x
2
< 19/3, setup indicators
x
1
< (19/2) y
1

x
2
< (19/3) y
2

Product Mix with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
29
Adding the non-negativity and binary constraints
complete the formulation.
Max 5x
1
+ 7x
2
- 3y
1
- 2y
2


s.t. x
1
< 6
2x
1
+ 3x
2
< 19
x
1
+ x
2
< 8

x
1
< (19/2) y
1
x
2
< (19/3) y
2


x
1
> 0 and x
2
> 0
y
1
= 0 or 1
y
2
= 0 or 1
Objective
function
Standard
constraints
Non-negativity
Product Mix with Fixed Cost
Setup
constraints
Binary
BA 452 Lesson B.5 Binary Indicator Variables
30
The Management Scientist can solve this mixed integer
linear program of 2 binary variables Yi and 2 continuous
variables Xi.

Product Mix with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
31
Make or Buy with Fixed Cost

Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
32
Overview

Make or Buy Decisions with Fixed Cost trade off the lower unit cost of
producing a good yourself with the positive fixed cost of production.
The simplest way to model those fixed costs in a linear program is with
binary (0 or 1) variables used as indicators, where 0 values indicate no
production and 1 indicates positive production.

For example, consider a standard Make or Buy Decision, where the
maximum production demanded is 10, and the cost of producing X is
3X. Now suppose there is an added fixed setup costs of 15. To model
those fixed costs in a linear program, introduce binary variable Y,
replace the demand constraint X < 10 with X < 10Y, and add the cost
term 15Y so total cost becomes 3X + 15Y. The constraint X < 10Y
can be satisfied in one of two ways. On the one hand, if X = 0, then the
constraint reads 0 < 10Y and so can be satisfied by Y = 0, and so total
cost = 3X. On the one hand, if X > 0, then the constraint X < 10Y can
only be satisfied by Y = 1, and so total cost = 3X + 15.
Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
33
Question: Sony produces remote controllers for both
televisions and DVD players. Each controller consists of
three subassemblies that are made by Sony --- a base, a
cartridge, and a keypad. Both controllers use the same
base subassembly, but different cartridge and keypad
subassemblies.

Sonys sales forecast is that 7000 TV controllers and 5000
DVD controllers will be needed to satisfy demand during
the upcoming Christmas season. Because only 500 hours
of in-house manufacturing time is available, Sony considers
buying some, or all, of the subassemblies from outside
suppliers.


Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
34
If Sony makes a subassembly, it incurs a fixed setup cost
as well as a variable manufacturing cost. For each
subassembly, the following are the fixed setup costs, the
manufacturing time, the manufacturing costs, and the
purchase costs:


Subassembly Setup Cost ($) Manufacturing
Time per Unit
(min.)
Manufacturing
Cost per Unit
($)
Purchase Cost
per Unit ($)

Base 1000 0.9 0.40 0.65
TV cartridge 1200 2.2 2.90 3.45
DVD cartridge 1900 3.0 3.15 3.70
TV keypad 1500 0.8 0.30 0.50
DVD keypad 1500 1.0 0.55 0.70
Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
35
Formulate a linear program to determine the optimal
production and purchase of each subassembly.


Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
36
Answer: A mixed integer linear program can be set up to
solve this problem. Binary variables are used to indicate
whether or not we setup to produce the subassemblies.
SB = 1 if bases are produced; 0 if not
STVC = 1 if TV cartridges are produced; 0 if not
SVCRC = 1 if VCR cartridges are produced; 0 if not
STVP = 1 if TV keypads are produced; 0 if not
SVCRP = 1 if VCR keypads are produced; 0 if not


Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
37
Continuous variables are used for the number of units
made or purchased.
BM = Number of bases made
BP = Number of bases purchased
TVCM = Number of TV cartridges made
TVCP = Number of TV cartridges purchased
VCRCM = Number of VCR cartridges made
VCRCP = Number of VCR cartridges purchased
TVPM = Number of TV keypads made
TVPP = Number of TV keypads purchased
VCRPM = Number of VCR keypads made
VCRPP = Number of VCR keypads purchased


Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
38
Minimize cost
(manufacturing cost)
0.4BM+2.9TVCM+3.15VCRCM+0.3TVPM+0.55VCRPM
(purchase cost)
+0.65BP+3.45TVCP+3.7VCRCP+0.5TVPP+0.7VCRPP
(setup cost)
+1000SB+1200STVC+1900SVCRC+1500STVP+1500SVC
RP



Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
39
Demand constraints
1) BM+BP=12000
2) TVCM+TVCP=7000
3) VCRCM+VCRCP=5000
4) TVPM+TVPP=7000
5) VCRPM+VCRPP=5000


Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
40
Manufacturing time constraint (in minutes)
6) 0.9BM+2.2TVCM+3VCRCM+0.8TVPM+1VCRPM <
30000
Setup indicators (given demand constraints)
7) BM-12000SB < 0
8) TVCM-7000STVC < 0
9) VCRCM-5000SVCRC < 0
10) TVPM-7000STVP < 0
11) VCRPM-5000SVCRP < 0
Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
41
The Management Scientist can solve this mixed integer
linear program of 5 binary variables and 10 continuous
variables.

Make or Buy with Fixed Cost
BA 452 Lesson B.5 Binary Indicator Variables
42
Relational Constraints

Relational Constraints
BA 452 Lesson B.5 Binary Indicator Variables
43
Overview

Relational Constraints such as either project i or project j is
completed or both project i and project j are completed
can be written as linear constraints in binary indicator
variables.
Relational Constraints
BA 452 Lesson B.5 Binary Indicator Variables
44
Binary variables can allow mathematical formulations of
some intricate verbal descriptions.
Let x
i
and x
j
represent binary variables designating
whether projects i and j have been completed (1 means
completed, 0 means not completed).
The constraint either project i or project j is completed
is formulated x
i
+ x
j
> 1. In particular, x
i
+ x
j
> 1 if both
projects are completed (both variables equal 1)
That is the standard use of or in quantitative or
mathematical work. It is the inclusive or.
For another example, if you are told your friend is either
at the snack bar or on the tennis court, then you are told
the truth if your friend is on the tennis court.

Relational Constraints
BA 452 Lesson B.5 Binary Indicator Variables
45
The constraint either project i or project j is completed,
but not both is formulated x
i
+ x
j
= 1. In particular, x
i
+ x
j

= 1 is false if both projects are completed (both variables
equal 1).
The relation x
i
+ x
j
= 1 is sometimes called the
exclusive or.
There is debate over whether the English word or is
inclusive or exclusive.
Some say you may have coffee or tea is an example of
an exclusive or. But it turns out that or is not a logical
or at all because you may have coffee or tea is not
considered true if you can only have coffee.
In this class, or will only mean the inclusive or.
Relational Constraints
BA 452 Lesson B.5 Binary Indicator Variables
46
Summary
Let x
i
be a binary variables that is 1 if project i is done; x
j
likewise.
x
i
+ x
j
= 1 means either project i or project j is done, but not both
x
i
+ x
j
< 1 means project i and project j are not both done
x
i
+ x
j
< 1 means project i and project j will not both be done
x
i
+ x
j
> 1 means at least one of project i or project j is done
x
i
< x
j
means if project i is done, then project j is done
x
i
> x
j
means project i is done if project j is done
x
i
< x
j
means project i is done only if project j is done
x
i
= x
j
means project i is done if, and only if, project j is done
x
i
< x
j
means project i will not be done unless project j is done
x
i
< x
j
means project i will not be done unless project i and project j
are done






Relational Constraints
BA 452 Lesson B.5 Binary Indicator Variables
47
Question: Springer Verlag, a publisher of college textbooks,
must decide which new books to adopt and publish next
year. The books under consideration are described in the
first column below, along with their expected three-year
sales in the second column:

Book Sales John Susan Monica
Business Math 20 12 40 X
Finite Math 32 9 24 X
General Statistics 17 16 X 30
Mathematical Statistics 10 7 X 24
Business Statistics 25 8 X 16
Finance 18 X X 14

Relational Constraints
BA 452 Lesson B.5 Binary Indicator Variables
48
Three individuals in the company can be assigned to these
projects, all of whom have varying amounts of time
available. John has 60 days, Susan has 52 days, and
Monica has 43 days. The days required by each person to
complete each project are showing in the third, fourth, and
fifth columns above. For example, if the business calculus
book is published, it will require 30 days of Johns time and
40 days of Susans time. (X means 0 time.)

Relational Constraints
BA 452 Lesson B.5 Binary Indicator Variables
49
Springer Verlag will not publish more than two statistics
books in a single year. And one of the math books must be
published, but not both. And the business math will be
published only if the finance is published. And the general
statistics will be published if the finite math is published.
And the mathematical statistics and the finance will not
both be published.

Formulate a model to decide which books should be
published to maximize sales.

Relational Constraints
BA 452 Lesson B.5 Binary Indicator Variables
50
Answer:


where 1 is the business calculus book, 2 is the finite math
book, .

Here is a binary programming model for maximizing
projected sales (thousands of units) subject to the
restrictions mentioned.


Relational Constraints
BA 452 Lesson B.5 Binary Indicator Variables
51
Relational Constraints
Max 20x1 + 32x2 + 17x3 + 10x4 + 25x5 + 18x6
s.t.
12x1 + 9x2 + 16x3 + 7x4 + 8x5 < 60 John
40x1 + 24x2 < 40 Susan
30x3 + 24x4 + 16x5 + 14x6 < 40 Monica
x3 + x4 + x5 < 2 No. of Stat Books
x1 + x2 = 1 Math Book
x1 - x6 < 0 Only if
x2 - x3 < 0 If
x4 + x6 < 1 Not both
BA 452 Lesson B.5 Binary Indicator Variables
52
Capital Budgeting

Capital Budgeting
BA 452 Lesson B.5 Binary Indicator Variables
53
Capital Budgeting
Overview

Capital Budgeting Problems maximize the net present
value or net return from a selection of projects that each
require a fixed amount of capital. Relational constraints are
often imposed.



BA 452 Lesson B.5 Binary Indicator Variables
54
Question: Frys Electronics is planning to expand its sales
operation by offering new electronic appliances. The
company has identified seven new product lines it can
carry.

Initial Floor Space Exp. Rate
Product Line Invest. (Sq.Ft.) of Return

1. TV/VCRs $ 6,000 125 8.1%
2. TVs 12,000 150 9.0
3. Projection TVs 20,000 200 11.0
4. VCRs 14,000 40 10.2
5. DVD Players 15,000 40 10.5
6. Video Games 2,000 20 14.1
7. Home Computers 32,000 100 13.2
Capital Budgeting
BA 452 Lesson B.5 Binary Indicator Variables
55
Fry's has decided that they should not stock projection
TVs unless they stock either TV/VCRs or TVs. Also,
they will not stock both VCRs and DVD players, and
they will stock video games if they stock TVs. Finally,
the company wishes to introduce at least three new
product lines.

If the company has $45,000 to invest and 420 sq. ft. of
floor space available, formulate an integer linear
program for Fry's to maximize its overall expected
return.
Capital Budgeting
BA 452 Lesson B.5 Binary Indicator Variables
56
x
j

Define the Decision Variables
= 1 if product line j is introduced;
= 0 otherwise.
Product line 1 = TV/VCRs
Product line 2 = TVs
Product line 3 = Projection TVs
Product line 4 = VCRs
Product line 5 = DVD Players
Product line 6 = Video Games
Product line 7 = Home Computers
Capital Budgeting
BA 452 Lesson B.5 Binary Indicator Variables
57
Invest. Space Return
1. $ 6,000 125 8.1%
2. 12,000 150 9.0
3. 20,000 200 11.0
4. 14,000 40 10.2
5. 15,000 40 10.5
6. 2,000 20 14.1
7. 32,000 100 13.2

Define the Objective Function
Maximize total expected return:
Max .081(6000)x
1
+ .09(12000)x
2
+
.11(20000)x
3
+ .102(14000)x
4
+
.105(15000)x
5
+ .141(2000)x
6
+
.132(32000)x
7

Capital Budgeting
BA 452 Lesson B.5 Binary Indicator Variables
58
Invest. Space Return
1. $ 6,000 125 8.1%
2. 12,000 150 9.0
3. 20,000 200 11.0
4. 14,000 40 10.2
5. 15,000 40 10.5
6. 2,000 20 14.1
7. 32,000 100 13.2
1. Constrain total investment by $45,000:
6x
1
+ 12x
2
+ 20x
3
+ 14x
4
+ 15x
5
+ 2x
6
+ 32x
7
< 45
2. Constrain space by 420 square feet: 125x
1
+150x
2

+200x
3
+40x
4
+ 40x
5
+ 20x
6
+ 100x
7
< 420
3. Stock projection TVs only if stock TV/VCRs or TVs:
x
1
+ x
2
> x
3
or x
1
+ x
2
- x
3
> 0
4. Do not stock both VCRs and DVD players:
x
4
+ x
5
< 1
5. Stock video games if they stock TV's: x
2
- x
6
< 0
6. Introduce at least 3 new lines:
x
1
+ x
2
+ x
3
+ x
4
+ x
5
+ x
6
+ x
7
> 3

Capital Budgeting
BA 452 Lesson B.5 Binary Indicator Variables
59
Interpretation:
Introduce:
TV/VCRs, Projection TVs, and
DVD Players
Do Not Introduce:
TVs, VCRs, Video Games, and
Home Computers
Total Expected Return:
$4,261
Surplus:
$4,000 Investment
55 square feet of space
Capital Budgeting
BA 452 Lesson B.5 Binary Indicator Variables
60
BA 452 Quantitative Analysis
End of Lesson B.5