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Introduction To Sensitivity Analysis

- Sensitivity analysis determines how changes to objective function coefficients or right-hand side values impact the optimal solution. - The range of optimality for each coefficient is the range of values where the current solution remains optimal. The range of feasibility is the range where the shadow price applies. - Shadow prices indicate the impact of increasing right-hand side values and depend on whether the associated cost is relevant or sunk.

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Elaine Escobanez
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17 views

Introduction To Sensitivity Analysis

- Sensitivity analysis determines how changes to objective function coefficients or right-hand side values impact the optimal solution. - The range of optimality for each coefficient is the range of values where the current solution remains optimal. The range of feasibility is the range where the shadow price applies. - Shadow prices indicate the impact of increasing right-hand side values and depend on whether the associated cost is relevant or sunk.

Uploaded by

Elaine Escobanez
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Introduction to Sensitivity Analysis • Managers should focus on those objective coefficients that

have a narrow range of optimality and coefficients near the


• Sensitivity analysis (or post-optimality analysis) is used to
endpoints of the range
determine how the optimal solution is affected by changes,
within specified ranges, in:
o the objective function coefficients
o the right-hand side (RHS) values
• Sensitivity analysis is important to a manager who must
operate in a dynamic, environment with imprecise
estimates of the coefficients.
• Sensitivity analysis allows a manager to ask certain what-if
questions about the problem.

Range of Optimality

Graphically, the limits of a range of optimality are found by changing


the slope of the objective function line within the limits of the
slopes of the binding constraint lines.

Objective Function Coefficients

• Let us consider how changes in the objective function


coefficients might affect the optimal solution.
• The range of optimality for each coefficient provides the
range of values over which the current solution will remain
optimal.
Shadow Price

• Graphically, a shadow price is determined by adding +1 to


the right-hand side value in question and then resolving for
the optimal solution in terms of the same two binding
constraints.
• The shadow price for a nonbinding constraint is 0.
• A negative shadow price indicates that the objective.
• function will not improve if the RHS is increased.

Relevant Cost and Sunk Cost

• A resource cost is a relevant cost if the amount paid for it is


dependent upon the amount of the resource used by the
decision variables.
• Relevant costs are reflected in the objective function
coefficients.
• A resource cost is a sunk cost if it must be paid regardless of
Right-Hand Sides the amount of the resource actually used by the decision
• Let us consider how a change in the right-hand side for a variables.
constraint might affect the feasible region and perhaps • Sunk resource costs are not reflected in the objective
cause a change in the optimal solution. function coefficients.
• The improvement in the value of the optimal solution per Cautionary Note on the Interpretation of Shadow Prices
unit increase in the right-hand side is called the shadow
price or dual value, • Resource Cost is Sunk
• The range of feasibility is the range over which the shadow
The shadow price is the maximum amount you should be willing to
price is applicable.
pay for one additional unit of the resource.
• As the RHS increases, other constraints will become binding
and limit the change in the value of the objective function. • Resource Cost is Relevant

The shadow price is the maximum premium over the- normal cost
that you should be willing to pay for one unit of the resource.
Range of Feasibility

• The range of feasibility for a change in the right-hand side


value is the range of values for this coefficient in which the
original dual price remains constant.
• Graphically, the range of feasibility is determined by finding
the values of a right-hand side coefficient such that the
same two lines that determined the original optimal
solution continue to determine the optimal solution for the
problem.

Example 2: Olympic Bike Co.

Olympic Bike is introducing two new lightweight bicycle frames, the


Deluxe and the Professional, to be made from special aluminum and
steel alloys. The anticipated unit profits are $10 for the Deluxe and
$15 for the Professional.

The number of pounds of each alloy needed per frame is


summarized on the next slide.
Optimal Solution

According to the output:

x, (Deluxe frames) = 15

X2 (Professional frames) 17.5

Objective function value = $412.50

Range of Optimality

Question

Suppose the profit on deluxe frames is increased to $20. Is the


above solution still optimal? What is the value of the objective
function when this unit profit is increased to $20?

Range of Optimality and 100% Rule

100% rule states that simultaneous changes in objective function


coefficients will not change the optimal solution as long as the sum
of the percentages of the. Change divided by the corresponding
maximum allowable change in the range of optimality for each Range of Optimality
coefficient does not exceed 100%.
Question

If the unit profit on deluxe frames were $6 instead of $10, would


the optimal solution change?

Answer

The output states that the solution remains optimal as long as the
objective function coefficient of X, is between 7.5 and 22.5. Because
6 is outside this range, the optimal solution would change.

Range of Optimality and 100% Rule

The 100% rule states that simultaneous changes in objective


function coefficients will not change the optimal solution as long as
the sum of the percentages of the. Change divided by the
corresponding maximum allowable change in the range of
optimality for each coefficient does not exceed 100%.

Range of Optimality and 100% Rule

Question

If simultaneously the profit on Deluxe frames was raised to $16 and


the profit on Professional frames was raised to $17, would the
current solution be optimal?
Range of Feasibility and Sunk Costs

Question

Given that aluminum is a sunk cost, what is the maximum amount


the company should pay for 50 extra pounds of aluminum?

Answer

Because the cost for aluminum is a sunk cost, the shadow price
provides the value of extra aluminum. The shadow price for
aluminum is $3.125 per pound and the maximum allowable increase
is 60 pounds. Because, 50 is in this range, the $3.125 is valid. Thus,
the value of 50 additional pounds is = 50($3.125) = $156.25.

Range of Feasibility and Relevant Costs

Question

If aluminum were a relevant cost, what is the maximum amount the


company should pay for 50 extra pounds of aluminum?
Answer

If aluminum were a relevant cost, the shadow price would be the


amount above the normal price of aluminum the company would be
willing to pay. Thus, if initially aluminum cost $4 per pound, then
additional units in the range of feasibility would be worth $4+
$3.125 $7.125 per pound.

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