Chapter 3

Applications of Linear and

Integer Programming
Models - 1

1
3.1 The Evolution of Linear Programming
Models in Business and Government
• Many examples are presented that demonstrate
the successful application of linear and integer
programming.
• Our goals are to:
– Examine potential application areas
– Develop good modeling skills
– Illustrate the use of spreadsheets to generate results
– Interpret properly and analyze spreadsheet results

2
 Examples of Linear Programming
Models in Business and Government
• An optimal portfolio
• Optimal scheduling of personnel
• An optimal blend of raw crude oils
• A minimized cost diet
• An operation and shipping pattern
• The optimal production levels

3
 Examples of Linear Programming
Models in Business and Government
• The optimal assignment of fleets to flights
• How to best expand a communication network
• An efficient air-pollution control system
• An agricultural resource allocation plan
• The set of public projects to select

4
3.2 Building Good Linear and Integer
Programming Models
• Three important factors may affect the
successful process of building good models:
– Familiarity
– Simplicity
– Clarity

5
 Summation Variables / Constraints

• Many times the use of summation variables

(representing the sum of all or of part of the
decision variables) along with the summation
constraints associated with them, may simplify
models’ formulation.
• See the following example.

6
 Summation Variables / Constraints

• Example
– Three television models are to be produced.
– Each model uses 2, 3, and 4 pounds of plastic
respectively.
– 7000 pounds of plastic are available.
– No model should exceed 40% of the total quantity
produced.
– The profit per set is $23, $34, and $45 respectively.
– Find the production plan that maximizes the profit.
7
 Summation Variables / Constraints

• Solution
Max 23X1 + 34X2 + 45X3
S.T. 2X1 + 3X2 + 4X3 
Without summation variables With summation variables
X1  .4(X1 + X2 + X3) X1 + X2 + X3 = X4
X2 .4(X1 + X2 + X3) X1  .4X4
X3  .4(X1 + X2 + X3) X2 .4X4
X3  .4X4
X1, X2, X3  X1, X2, X3 
8
 Summation variables/constraints –
TV production spreadsheet

=SUM(B2:D2)
Total production

Decision
Variables

Percentag
e
Constraint
Plastic
s
Constraint
9
A checklist for building linear models
– Formulate a relationship / function in words
before formulating it in mathematical terms.
(Expression) [Has some relation to] (Another expression or constant)

A + 2B   2A + B +10
– Bring the expression to the form:
(Expression) [Relation] (Constant)

-A +B   10
10
A checklist for building linear models
– Keep the units on both sides of the expressions
consistent
– Use summation variables when appropriate
– Indicate which variables are
 Non-negative
 Integers
 Binary

11
 3.4 Applications of Linear Programming
Models
• The modeling of real
problems is illustrated in
this section.
• Examples include:
– Production
– Purchasing
– Finance
– Cash flow accounting

12
 3.4 Applications of Linear Programming
Models
• The modeling of real • Emphasis is given to:
problems is illustrated in – Various application area,
this section. – Model development,
– Spreadsheet design,
• Examples include:
– Analysis and
– Production interpretation
– Purchasing of the output.
– Finance
– Cash flow accounting

13
 3.4.1 Production Scheduling Models
• These models can assist managers in making
decision regarding the efficient utilization of
scarce resource.
• Applications include:
– Determining production levels
– Scheduling shifts
– Using overtime
– The cost effectiveness of adding resources

14
 Galaxy Industries Expansion Plan

• Galaxy Industries is planning to increase its production

and include two new products
• Data
– Up to 3000 pounds of plastic will be available.
– Regular time available will be 40 hours.
– Overtime available will be 32 hours .
– One hour of overtime costs $180 more than one hour of
regular time.
15
 Galaxy Industries Expansion Plan
• Data - continued
– Two new products will be introduced:
• Big Squirts The old products are:
• Soakers • Space rays
• Zappers
– Marketing requirements:
• Space Rays should account for exactly 50% of total
production.
• No other product should account for more than 40% of total
production.
• Total production should increase to at least 1000 dozen per
week. 16
 Galaxy Industries Expansion Plan
• Data - Continued Plastic
Plastic Production
Production
Product
Product Profit
Profit (lbs)
(lbs) Time
Time(min)
(min)
Space
SpaceRays
Rays $16
$16 22 33
Zappers
Zappers $15
$15 11 44
Big
BigSquirts
Squirts $20
$20 33 55
Soakers
Soakers $22
$22 44 66

• Management wants to maximize the Net Weekly Profit.

• A weekly production schedule must be determined.

17
 Galaxy Industries Expansion Plan
– Solution
• Decision Variables.

X1 = number of dozen Space Rays,

X2 = number of dozen Zapper,
X3 = number of dozen Big Squirts
X4 = number of dozen Soakers, to be produced weekly
X5 = number of hours of overtime to be scheduled
18
 Galaxy Industries Expansion Plan
– Solution
• Objective Function

– The total net weekly profit from the sale of products,

less the extra cost of overtime, to be maximized.

Maximize 16X1 +15X2 +20X3+22X4 - 180X5

19
 Galaxy Industries Expansion Plan
– Solution
• Constraints
[ Amount of plastic used 3000 :
2X1 + X2 + 3X3 + 4X4 3000

[Number of production minutes] 

[Number of ( regular time + overtime) minutes available] :
3X1 + 4X2 + 5X3 + 6X4 2400 + 60X5, or
3x1+ 4X2 + 5X3 + 6X4 - 60X5 2400

[Overtime hours used] 32 : X4 32

[Zappers produced] 200 : X2 200

20
Galaxy Industries Expansion Plan
– Solution

Introduce the summation Variable X6, that helps

in setting up the production mix constraints
X6 = total weekly production (in dozens ),
X6 = X1+X2+X3+X4, or
X1+X2+X3+X4 -X6 =0

21
Galaxy Industries Expansion Plan
Weekly production of Space Rays 50% of total production
X1 0.5X6

Weekly production of Zappers 40% of total production

X2 0.4X6

Weekly production of Big Squirts 40% of total production

X3 0.4X6

Weekly production of Soakers 40% of total production

X4 0.4X6

Total production is at least 1000

X6 1000 22
 Galaxy Industries Expansion Plan
The Complete Mathematical Model

Max 16X1 + 15X2 + 20X3 + 22X4 – 180X5

S.T. 2X1 + 1X2 + 3X3 + 4X4 
3X1+ 4X2 + 5X3 + 6X4 – 60X5  2400
X5 32
1X2 200
X1 + X2 + X3 + X4 - - X6 = 0
X1 -.5X6 = 0
X2 -.4X6 = 0
X3 -.4X6 = 0
Xj are non-negative
X4 -.4X6 = 0 23
Galaxy Industries Expansion Plan
=SUM(B4:E4)

Percentage
Constraints
SUMPRODUCT($B$4:$F$4,B6,F6)
Drag to G7:G10

24
 Galaxy Industries Expansion Plan
Microsoft Excel Sensitivity Report
Worksheet: [Galaxy Expansion.xls]Galaxy Expansion Input

Adjustable Cells
Final Reduced Objective Allowable Allowable
Cell Name Va lue Cost Coefficient Increase Decrease
$B$4 Space Rays 565 0 16 4 12
$C$4 Zappers 200 0 15 0.5 1E+30
$D$4 Big Squirts 365 0 20 1E+30 0.571428571
$E$4 Soakers 0 -2.5 22 2.5 1E+30
$F$4 O/T Hours 32 0 -180 1E+30 90

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Va lue Price R.H. Side Increase Decrease
$C$4 Zappers 200 0 0 1E+30 252
$D$4 Big Squirts 365 0 0 1E+30 87
$E$4 Soakers 0 0 0 1E+30 452
$B$4 Space Rays 565 5 0 486.6666667 91.57894737
$G$7 Platistic Total 2425 0 3000 1E+30 575
$G$8 Prod. Min. Total 2400 4.5 2400 920 520
$G$9 Overtime Hours Total 32 90 32 15.33333333 8.666666667
$G$10 Contract Total 200 -0.5 200 280 89.23076923
$G$4 Total Production 1130 0 1000 130 1E+30 25
3.4.2 Portfolio Models
• Portfolio models are usually designed to:
– Maximized return on investment,
– Minimize risk.
• Factors considered include:
– Liquidity requirements,
– Long and short term investment goals,
– Funds available.

26
 Jones Investment
• Charles’ Evaluation
Potential
Potential Expected
Expected Jones's
Jones's Liquidity
Liquidity Risk
Risk
Investment
Investment Return
Return Rating
Rating Analysis
Analysis Factor
Factor
Savings
SavingsAccount
Account 4.0%
4.0% AA Immediate
Immediate 00
Certificate
CertificateofofDeposite
Deposite 5.2%
5.2% AA 5-year
5-year 00
Atlantic
AtlanticLighting
Lighting 7.1%
7.1% BB++ immediate
immediate 25
25
Arkansas
ArkansasREIT
REIT 10.0%
10.0% BB immediate
immediate 30
30
Bedrock
BedrockInsurance
InsuranceAnnuity
Annuity 8.2%
8.2% AA 1-year
1-year 20
20
Nocal
NocalMining
MiningBond
Bond 6.5%
6.5% B+
B+ 1-year
1-year 15
15
Minicomp
MinicompSystems
Systems 20.0%
20.0% AA immediate
immediate 65
65
Antony
AntonyHotel
Hotel 12.5%
12.5% CC mediate
mediate 40
40
27
 Jones Investment
• Portfolio goals
– Expected annual return of at least 7.5%.
– At least 50% invested in “A-Rated” investments.
– At least 40% invested in immediately liquid investments.
– No more than $30,000 in savings accounts and
certificates of deposit.
• Problem summary
– Determine the amount to be placed in each investment.
– Minimize total overall risk.
– Invest all $100,000.
– Meet the investor goals (diversify). 28
 Jones Investment – Solution
• Variables Risk function
Xi = the amount allotted to each investment;
Total investment
• The Mathematical Model

Minimize 25X3+30X4+20X5+15X6+65X7 + 40X8 Return

ST:
X1+ X2+ X3+ X4+ X 5+ X 6 + X7+ X8 = 100,000
.04X1+.052X2+.071X3+.10X4+.082X5+.056X6+.27X7+.125X8  7500
X1+ X2 + X5 + X7  50,000
X1+ X 3+ X 4 + X7  40,000 Savings/
X1+ X2  30,000 Certificate
All the variables are non-negative A - Rate Liquid 29
 Jones Investment - Spreadsheet

=SUMPRODUCT(B5,B12,C5:C12)

=SUM(B5:B12)
=SUMPRODUCT(B5,B12,D5:D12)

=B5+B6

=SUMIF(E5:E12,"A",B5:B12)
=SUMIF(F5:F12,"Immediate",B5:B12)30
 Jones Investment - Spreadsheet
Recommend Portfolio for Frank Baklarz
Portfolio Amount = 100,000
INVESTMENT AMOUNT Risk Factor Expected Return Rating Liquidity
Savings Account 17333.33 0 0.040 A Immediate
Certificate of Deposit 12666.67 0 0.052 A 5-Year
Atlantic Lighting 0 25 0.071 B+ Immediate
Arkansas REIT 22666.67 30 0.100 B+ Immediate
Bedrock Insurance Annuity 47333.33 20 0.082 A 1-Year
Nocal Mining Bond 0 15 0.065 B+ 1-Year
Minicomp Systems 0 65 0.200 A Immediate
Antony Hotels 0 40 0.125 C Immediate
TOTAL INVESTMENT 100000
TOTAL RISK 1626666.667
REQUIREMENTS
Total Expected Return 7500 MIN 7500
Total in A-rated Investments 77333.33333 MIN 50000
Total in Liquid Investments 40000 MIN 40000
Total in Savings and Certificates of Deposit 30000 MAX 30000 31
 Jones Investment - Spreadsheet
Microsoft Excel Sensitivity Report
Worksheet: [Jones.xls]Jones Investment Input

Adjustable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease
$B$5 Savings Account AMOUNT 17333.33333 0 0 1.176470588 0.5
$B$6 Certificate of Deposit AMOUNT 12666.66667 0 0 0.5 1.176470588
$B$7 Atlantic Lighting AMOUNT 0 4.666666667 25 1E+30 4.666666667
$B$8 Arkansas REIT AMOUNT 22666.66667 0 30 0.384615385 1.176470588
$B$9 Bedrock Insurance Annuity AMOUNT 47333.33333 0 20 0.425531915 0.5
$B$10 Nocal Mining Bond AMOUNT 0 0.666666667 15 1E+30 0.666666667
$B$11 Minicomp Systems AMOUNT 0 1.666666667 65 1E+30 1.666666667
$B$12 Antony Hotels AMOUNT 0 1.666666667 40 1E+30 1.666666667

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$B$13 TOTAL INVESTMENT AMOUNT 100000 -7.333333333 100000 4634.146341 6341.463415
$D$16 Total Expected Return Expected Return 7500 333.3333333 7500 520 380
$D$17 Total in A-rated Investments Expected Return 77333.33333 0 50000 27333.33333 1E+30
$D$18 Total in Liquid Investments Expected Return 40000 4 40000 21111.11111 28888.88889
$D$19 Total in Savings and Certificates of Deposit Expected
30000
Return -10 30000 17333.33333 6333.333333
32
3.4.3 Public Sector Models
• Governments in the public sector are charged with
distributing resources for the public good.
• The public good can be measured by
– Traditional objectives (i.e. cost minimization),
– Specific functions developed to measure the public
satisfaction or preference.
• The constraints represent (among others)
– Resource availability,
– Social issues (diversity, equality)
33
 St. Joseph Inspection Problem

• St. Joseph Public Utility Commission needs to

inspect and report utility problems in a flood area.

Experts are assigned Three types of inspection

to inspect:
will be conducted:
• Homes
• Offices • Electrical
• Plants • Gas
• Insulation
34
 St. Joseph Inspection Problem
• Problem Summary
– St. Joseph Public Utility Commission needs to determine
the number of homes, office complexes, and plants to be
inspected.

– The objective is to maximize the total number of structures

inspected, under certain requirements.

35
 St. Joseph Inspection Problem
• Data
– Requirements
• At least eight offices and eight plants must be inspected.
• At least 60% of the inspections should involve private
homes.
– Resources
• At most, 120 hours can be allocated for electrical
inspections.
• At most 80 hours can be allocated for gas inspection.
• At most 100 consulting hours can be allocated for
insulation inspection. 36
St. Joseph Inspection Problem – Solution
• Variables
– X1, X2, X3 = number of homes, office complexes, and industrial plants to be
inspected, respectively.
– X4 = a summation variable: The total number of structures to be inspected.

• The Complete Mathematical Model

Maximize X4
ST:X1 + X2 + X3 - X4 = 0 (Summation)
X2  8 (Min. Office)
X3  8 (Min. Plants)
X1 -.6X4  0 (At least 60% Homes)
2X1 + 4X2 + 6X3  120 (Electrical)
1X1 + 3X2 + 3X3  80 (Gas)
3X1 + 2X2 + 1X3  100 (Insulation)
X1, X2, X3 0 37
St. Joseph Inspection Problem – Solution

38
St. Joseph Inspection Problem – Solution
Infeasible Solution

The problem is properly formulated,

but there is no feasible solution to the problem.
Here is why...
39
 St. Joseph Inspection Problem
spreadsheet

Even when the smallest number allowed of offices and

plants are inspected, the number of houses that can be
inspected with the given resources is too small.
Here is the reasoning.

40
 St. Joseph Inspection Problem –
the infeasibility
• Recall that X2  8 and X3  8.
• Let X2 = 8 (offices) and X3 = 8 (plants). That is, take their minimum
feasible value.
• Hours used on electrical inspection for offices and plants are 4(8) +
6(8) = 80.
• Hours left over to inspect houses are 120 – 80 = 40,
thus at most 40/2 = 20 houses can be inspected.
• Total number of structures inspected is 8+8+20=36, of which
houses are only 20/36 = 55.55%
• This is less than the 60% required.
41
St. Joseph Inspection Problem – Solution
Suppose the commission would accept 6 offices and 6 plants.
St. Joseph's Public Utility Commission
HOURS PER UNIT
INSPECTIONS MINIMUM ELECTRICAL GAS INSULATION
HOUSE 27 24 2 1 3
OFFICE 6 6 4 3 2
PLANT 7 6 6 3 1

TOTAL 40 HOURS USED 120 66 100

AVAILABLE 120 80 100

The revised problem

42
3.4.4 Purchasing Modeling
• These models can consider:
– Demand
– Budget
– Cash flow
– Advertising
– Inventory restrictions.
• In solving purchasing problems, we attempt to balance
customer satisfaction with resource utilization by the
business enterprise.
43
Euromerica Liquor Purchasing Problem

• Euromerica Liquors purchases and distributes

a number of wines to retailers.
• There are four different wines to be ordered.
• Requirements
– Order at least 800 of each type.
– Order at least twice as many domestic bottles as
imported bottles.
44
 Euromerica Liquor Purchasing Problem
• Data:
Wine
Wine Country
Country Cost
Cost Selling
SellingPrice
Price
Napa
NapaGold
Gold U.S.
U.S. $2.50
$2.50 $4.25
$4.25
Cayuga
CayugaLake
Lake U.S.
U.S. $3.00
$3.00 $4.50
$4.50
Seine
SeineSoir
Soir France
France $5.00
$5.00 $8.00
$8.00
Bella
BellaBella
Bella Italy
Italy $4.00
$4.00 $6.00
$6.00

• Management wishes to determine how many bottles

of each type to order.
• The objective is to maximize the total profit from
purchasing and distributing the wine bottles. 45
Euromerica Liquor Purchasing Problem
– Solution
• Variables
X1 = bottles of Napa Gold purchased
X2 = bottles of Cayuga Lake purchased
X3 = bottles of Seine Soir purchased
X4 = bottles of Bella Bella purchased.

46
 Euromerica Liquor Purchasing Problem
– Solution
• The Mathematical Model
Maximize 1.75X1 + 1.50X2 + 3X3 + 2X4
ST:
X1 800
X2  800
X3 800
$4.25 - $2.50 = $1.75
X4  800
X1 + X2 - 2X3 - 2X4  0
X1, X2, X3, X4  0
[Domestic wines] [ Are at least]
[ Twice the imported wines] 47
Euromerica Liquor Purchasing Problem
– Solution

48
Euromerica Liquor Purchasing Problem
– Solution

An Unbounded solution

49
 Euromerica Liquor Purchasing Problem –
Revised Solution
The revised model: Given budget, limited supply, and limited demand
Maximize 1.75X1+ 1.50X2+ 3X3+ 2X4
ST:
X1  800
X2  800
X3  800
X4  800
X1 + X2 - 2X3 - 2X4 0
2.50X1+ 3.00X2+ 5X3+ 4X4  28000 (Budget)
X1 3600 (Napa)
X3 2400 (Seine)
X 1+ X 2+ X 3 + X4 10000 (Total)
X1 , X 2 , X 3 , X 4  0 50
 Euromerica Liquor Purchasing Problem
– Solution
EUROMERICA LIQUORS
Country Wine Bottles Cost Selling Price Unit Profit Total Profit
US Napa Gold 3600 $2.50 $4.25 $1.75 $6,300.00
US Cayuga Lake 1963.636 $3.00 $4.50 $1.50 $2,945.45
France Seine Soir 1981.818 $5.00 $8.00 $3.00 $5,945.45
Italy Bella Bella 800 $4.00 $6.00 $2.00 $1,600.00

Total Domestic 5563.636 Total Profit $16,790.91

Total Import 2781.818
Total Purchased 8345.455 Purchase Limit 10000

Total Cycle Cost 28000 Cycle Budget $28,000

51
 Solution Summary

Wine
Wine Bottles
Bottles Cases
Cases Cost
Cost Profit
Profit
Napa
Napa Gold
Gold 3600
3600 300
300 9000
9000 6300
6300
Cayuga
Cayuga Lake
Lake 1968
1968 164
164 5904
5904 2952
2952
Seine
Seine Soir
Soir 1980
1980 165
165 9900
9900 5940
5940
Bella
Bella Bella
Bella 804
804 67
67 3216
3216 1608
1608
Total
Total 8352
8352 696
696 28020
28020 16800
16800

52
3.4.5 Blending Models
• Blending models were successfully implemented first by
the oil industry.
• Blending problems have the following characteristics:
– Each of several products have certain specifications that
must be met.
– The products can be produced by blending various
components, each with different properties of its own.
– The problem is to find the least costly (most profitable) blends
that meet the requirements and specifications of all the
products.

53
 United Oil Company
• United Oil blends two input streams of crude oil
– Alkylate
– Catalytic Cracked.

• The outputs of the blending process are

– Regular gasoline.
– Mid-Grade gasoline.
– Premium gasoline.

54
 United Oil Company
• Restrictions

– Weekly supply of Crude oil is limited.

– Contracted weekly demand for commercial gasoline has to be met.

– To classify gasoline as Regular, Mid-Grade, or Premium, certain

levels (specifications) of octane and vapor pressure must be met.

• Profit per barrel of each type of commercial gasoline depends

on the blend it was made of.
55
 United Oil Company
• Data
Crude Oil Product Data
Octane Vapor Cost Weekly
Product Rating Pressure per Barrel Supply (barrels)
Alkylate 98 5 $19 15000
Catalytic- Cracked 86 9 $16 15000

Blended Gasoline Data

Minimum Maximum Selling Price
Gasoline Octane Rating Vapor Pressure Per Barrel Demand
Regular 87 9 $18 12000
Mid-Grade 89 7 $20 7500
Premium 92 6 $23 4500
56
 United Oil Company

• Problem Summary
– Determine how many barrels of catalytic cracked to blend into
regular, mid – grade, and premium each week.

– Maximize total weekly profit.

– Remain within raw gas availability.

– Meet contract requirements.

– Produce gasoline blends that meet the octane and vapor pressure
requirements. 57
 United Oil Company – Solution
• Decision Variables

X1, X2, X3 = number of barrels of Alkylate blended

each week into Regular, Mid-Grade, and Premium gas respectively.

Y1, Y2, Y3 = number of barrels of Catalytic Cracked blended each

week into Regular Mid-Grade, and Premium respectively.

R, M, P = barrels of Regular, Mid-Grade, Premium

respectively, produced weekly (summation variables).

58
 United Oil Company – Solution
• The Mathematical Model
Max –1X1 + 1X2 + 4X3 +2Y1 +4Y2 + 7Y3
1X1 +1X2 +1X3 15000
1Y1 +1Y2 +1Y3 150001X1 +1Y1 -R =0
1X2 +1Y2 -M = 0
1X1 +1Y1 -P = 0
5xR1 + 9Y1 12000 –9R 0
M 7500 Click+for
5X 9Ymore – 7M
2 2
P 4500 constraints
0
98X1 + 86Y1 87R  0 5X3 + 9Y3 –
98X2 + 6P 86Y2  0
89M 0
98XAll+ the variables
3
are non-negative
86Y 92P
3 0
59
 United Oil Company – Solution
United Oil Company
INPUTS OUTPUTS
CRUDES RECOMMENDED BLENDED AMOUNTS
Availible Octane Vap. Pr. Cost/bbl Regular Midgrade Premium Total
Alkylate 15000 98 5 $19 Alkylate 1000 3750 10250 15000
Catalytic Cracked 15000 86 9 $16 Catalytic Cracked 11000 3750 250 15000
TOTAL 12000 7500 10500 30000

GASOLINES Profits
Required Min Oct.MAX V.P. Price/bbl Regular Midgrade Premium Total
Regular 12000 87 9 $18 Alkylate ($1,000) $3,750 $41,000 $43,750
Midgrade 7500 89 7 $20 Catalytic Cracked $22,000 $15,000 $1,750 $38,750
Premium 4000 92 6 $23 TOTAL $21,000 $18,750 $42,750 $82,500

Performance Measures
Regular Midgrade Premium
Octane 87 92 97.71429
Vapor Pressure 8.666667 7 5.095238

60
 United Oil Company – Solution
United Oil Company
INPUTS OUTPUTS
Total Profit
Vapor Pr. ConstraintsCRUDES RECOMMENDED BLENDED AMOUNTS
Availible Octane Vap. Pr. Cost/bbl Regular Midgrade Premium Total
(Hidden)
Alkylate 15000 98 5 $19 Alkylate 1000 3750 10250 15000
Catalytic Cracked 15000 86 Octane
9 Constraints
$16 Catalytic Cracked 11000 3750 250 15000
Decision
(Hidden) TOTAL 12000 7500 10500 30000
Variables
GASOLINES Profits
Required Min Oct.MAX V.P. Price/bbl Regular Midgrade Premium Total
Regular 12000 87 9 $18 AlkylateBlended Requirements
($1,000) $3,750 $41,000 $43,750
Midgrade 7500 89 7 $20 Catalytic Cracked $22,000 $15,000 $1,750 $38,750
Premium 4000 92 6 $23 TOTAL $21,000 $18,750 $42,750 $82,500

Performance Measures
Regular Midgrade Premium
Crude Availability
Octane 87 92 97.71429
Vapor Pressure 8.666667 7 5.095238

61
Appendix 3.2 (CD): Cash Flow Models
• These models cover a planning horizon of several
periods.
• Linking constraints secure the proper transfer of
quantities from one period to the next one. The form of
these constraints is:
Amount this period = Amount last period +
Inflow for the period – Outflow for the period
• These models are useful for accounting analysis.

62
Appendix 3.2 (CD): Cash Flow Models

• For example:
Casht = Casht-1 + [Interest paid]t – [Loan repaid]t
110 = 100 + 30 – 20

110
100 +30

t-1 t
-20

63
 The Powers Group Cash Flow Problem

• Data
– There are $9 million available for short-term investments over a
period of five months (it is now January 1).
– There are three possible investments.
– Interest earned on each investment is:
• 0.7% over two months for two month term account.
• 1.5% over three months for three months construction loan.
• 0.2% per one-month period for passbook saving account.
– Funds invested in term account are not liquid before the term ends.
– Interest earned on investment before it is matured is calculated
proportionately to the term rate.

64
 The Powers Group Cash Flow Problem

• Objective function
– Maximize the book value at the end of May.
• Constraints
– No more than $4 million should be invested in any one of the
three short term investments.
– Total investment each month in the liquid passbook account
should be at least $2 million.
– Cash available at the end of each month should be at least
$3.5 million.
– Cash available at the end of May should be at least $5 million.
65
 The Powers Group Cash Flow Problem
– Solution
• Decision variables
– Tj = the amount of funds invested in the 2 month term
account at the beginning of month j = 1, 2,…, 6 (j=1, Jan.)
– Cj = the amount of funds invested in construction loan at the
beginning of month j = 1, 2,…, 6 (j=1, Jan.)
– Pj = the amount of funds invested in passbook saving account
at the beginning of month j = 1, 2,…, 6 (j=1, Jan.)
– Summation variables: see next slide

66
The Powers Group Cash Flow Problem
– Solution
Summation variables
TTj = TTj-1 –Tj-2 + Tj

TCj = TCj-1 – Cj-3 + Cj

TPj = Pj

67
 The Powers Group Cash Flow Problem
– Solution
• Objective function
Book value consists of cash, and proportionate interest
paid on investments before maturity.

1.007T4 + 1.0035T5 + 1.015C3 + 1.010C4 + 1.005C5 +1.002P5

Half of the full two months interest is considered at the end of May
for a 2-month term investment made at the
beginning of May.
.0035 .0035
May 1 June 1 68
 The Powers Group Cash Flow Problem
– Solution
• Constraints
– Not more than $4,000,000 can be invested in any investment
TTj 4,000,000;TCj 4,000,000TPj 4,000,000
– Total in Passbook Saving is at least $2,000,000
TPj 2,000,000
– Total investment at the beginning of each month = cash
available for investment at the end of the previous month.
Tj + Cj + Pj = Lj-1 Then, Lj 3,500,000for j=Feb, March, …)
and L1 = 9,000,000. Also L5 5,000,000

69
The Powers Group Cash Flow Problem -
spreadsheet =Sum(I6:I8)
Drag back to E5:H5

=1.007*H6+1.015*G7+1.002*I8
Drag back to E9:H9

=H13+I6-G6
=1.007*H6+1.0035*I6+1.015*G7+
=H14+I&7-G7
1.01*H7+1.005*I7+1.002*I8
=I8=(I16 – E18)/E18*(12/5)
DragDrag back
back to E16:H16
to column E:H
70
Appendix 3.3 (CD):
Data Envelopment Analysis Models
• In these models the relative efficiency of facilities
with similar goals and objectives is studied.
• The relative efficiency is calculated as a ratio
of outputs to inputs.

Relative efficiency = Weighted sum of outputs

Weighted sum of inputs

71
 Sir Loin Restaurants - DEA

• KATTLECORP Inc. owns and operates four

restaurants located in different states.
• The restaurants are of different size,
personnel, and traffic density.
• KATTLECORP wishes to determine which
restaurant operates efficiently.

72
 Sir Loin Restaurants - DEA

• To calculate efficiency KATTLECORP needs to

compare input to output in each restaurant

• Input • Output
– Capacity – Gross revenue
– # of employees – % of returning customers
– Population around – Food rating

73
 Sir Loin Restaurants - DEA

• Data
INPUTS TAMPA ATLANTA MOBILE COLUMBIA
Capacity 213 265 157 152
# Employees 52 65 40 48
Service Area 650000 900000 200000 275000
OUTPUTS
Population within 10 miles around the TAMPA ATLANTA
restaurant location MOBILE COLUMBIA
Gross Revenue 604000 663000 375000 354000
% Repeat 89 85 94 88
Food Rating 7.3 6.8 9.1 7.5

Customer survey: 1. Would you return to this restaurant?

2. Rate the food on a scale of 0 – 10.

74
 Sir Loin Restaurants – Solution

• Decision variables
– X1, X2, X3 = relative input weight for capacity, number
of employee, and service area
respectively

– Y1, Y2, Y3 = relative input weight for gross revenue,

repeat business, and food rating
respectively

75
 Sir Loin Restaurants – Solution

• Objective function
Maximize the efficiency for the Columbia restaurant
354000Y1+ 88Y2+ 7.5Y3
Max , which becomes
152X1+ 48X2+ 275000X3
Since we maximize the
ratio, the denominator can
Max 354000Y1+ 88Y2+ 7.5Y3 be selected as equal to 1,
without loss of generality.
S.T. 152X1+ 48X2+ 275000X3 = 1,
and other constraints shown next…
76
 Sir Loin Restaurants – Solution
• Constraints
– We have already established that
152X1+ 48X2+ 275000X3 = 1
– In general, we require that the efficiency of each restaurant is
not greater than 1.
Output/input 1, or, Output Input
– 604000Y1+89Y2+7.3Y3  213X1+52X2+650000X3 (Tampa)
663000Y1+85Y2+6.8Y3 265X1+ 5X2+900000X3 (Atlanta)
375000Y1+94Y2+9.1Y3 157X1+40X2+200000X3 (Mobile)
354000Y1+88Y2+7.5Y3  152X2+48X2+275000X3 (Columbia)
All the variables are non-negative
77
Sir Loin Restaurants - Spreadsheet

=SUMPRODUCT($F$4:$F$6,E4:E6)
Drag back to B7:D7

=SUMPRODUCT($F$10:$F$12,E10:E12)
Drag back to B13:D13
78
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79