ST # 8

Recall the production from section 1.3:

Max 10x
St.
5x < 40
X >0
Suppose the firm in this example considers a second product that has a unit profit of
$5 and requires 2 hours for each unit produced. Assume total production capacity
remains 40. Use y as the number of unit of products 2 produced.
a. Show the mathematical model when both products are considered
simultaneously.
Max 10x+5y
St.
5x+2y<40
x>0, 7>0
b. Identify the controllable and uncontrollable inputs for this model:
Controllable inputs are x & y (X represents # of units products for product 1 and y
represents # of units produced for product 2.
c. Draw the flow chart of the input-output process for this model (see Figure
1.5).

Uncontrollable
inputs

Profit per unit

Labor hours per unit
40 labor-hours
capacity

Value for the Max 10x+5y Profit = 10x+5y

production quantity St. 5x+2y<40
X>0, & y>0 Time used =
= (x+y)
5x+2y<40
Controllable input Mathematical Model Output

d. What are the optimal solution value of x and y

 x= 0, 2y<40, so y<40/2, y<20 so profit for product y = 20*5 = 100
y= 0, 5x<40, so x<40/5, x<8 so profit for product x = 10*8 = 80

e. Is the model developed a deterministic or a stochastic? Explain:

Since all uncontrollable inputs of the problem are known, the model is
deterministic.

ST # 9: suppose we modify the production model from section 1.3 to obtain the
following mathematical model:
Max 10 x
St. ax<40
X>0
Where (a) is the number of hours required for each unit produced. With a=5, the
optimal solution is x=8. If we have a stochastic model with a=3, a=4, or a=6 as
the possible values for the number of hours required per unit, what is the
optimal values for x?

Hours required available hours maximum output (X)

3.00 40.00 13.33
4.00 40.00 10.00
5.00 40.00 8.00
6.00 40.00 6.67

What problems does this stochastic model cause?

Stochastic models are more difficult to analyze. Uncontrollable variables in
stochastic models depends on other uncontrollable factors. Such as raw
material, quality of machine, skilled workers. In the above example its difficult
to predict or analyze the situation correctly or realistically.

ST # 10: A retail store in Des Moines, lowa, receives shipments of a particular

product from Kansas City and Minneapolis. Let
X=units of product received from Kansas City
Y=unit of product received from Minneapolis
a. Write an expression for the total units of product received by the retails store
in Des Moines.
a. P(#s) = X+Y
 b. Shipment from Kansas City cost $0.20 per unit, and shipments from
Minneapolis cost $0.25 per unit. Develop an objective function representing
the total cost of shipments to Des Moines.
a. Total cost of shipments = $0.20 x + $0.25 Y

c. Assuming the monthly demand at the retail store is 5000 units. Develop a
constraint that requires 5000 units to be shipped to Des Moines.
Shipment of units >5000
d. No more than 4000 units can be shipped from Kansas City and no more than
3000 units can be shipped from Minneapolis in a month. Develop constrains
to model this situation.
X+Y<7000 or X<4000, Y<3000
e. Of course, negative amounts cannot be shipped. Combine the objective
function and constraints developed to state a mathematical model for
satisfying the demand at the Des Moines retail store at minimum cost.
X>0, y>0
Minimum cost = 4000x+1000y
ST#11: for most products, higher prices result in a decreased demand, whereas
lower prices result in an increased demand. Let
D=annual demand for a product in units
P=price per unit
Assume that a firm accepts the following price-demand relationship as being
realistic:
D=800-10p
Where p must be between $20 and $70.
a. How many units can firm sell at the $20 per-unit price? At the $70 per unit
price.
For $20 d=800 (10*20) = 800-200=600
For $70 d=800 (10*70) =800-700=100
b. Show the mathematical model for the total revenue (TR), which is the annual
demand multiplied by the unit price.
TR=(800-10p)*p or demand multiplied by Price
c. Based on other considerations, the firms management will only consider
price alternatives of $30, $40, and $50. Use your model from part (b) to
determine the price alternative that will maximize the total revenue.

A B C D
column C Revenue
formula Qty A*C
30 =(800- 500 15000
 (10*A3))
40 =800-(10*a4) 400 16000
50 300 15000

d. What are the expected annual demand and total revenue according to your
recommended price?
400 unit the annual demand with 16000 revenue.
ST# 12: The ONeil Shoe Manufacturing Company will produce a special-style shoe if
the order size is large enough to provide a reasonable profit. For each special-style
order, the company incurs a fixed cost of $1000 for the production setup. The
variable cost is $30 per pair and each pair sells for $40.
a. Let x indicate the number of pairs of shoes produced. Develop a
mathematical model for the total cost of producing x pairs of shoes.
Total cost = fixed cost + variable cost
Total cost = 1000 + (30x) where x represent pair of shoes
b. Total profit = total revenue total cost therefore p= 40x (1000+(30x)),
P=40x-1000-30x, p=10x-1000

c. Breakeven point
Total cost=total revenue
40x=1000+30x, 40x-30x=1000, 10x=1000, x=100

100*40= (30*100) +1000, 4000=4000

ST#13: Micromedia offers computer training seminars on a variety of topics. In the

seminars each student works at a personal computer, practicing the particular
activity that the instructor is presenting. Micromedia is currently planning a two-day
seminar on the use of Microsoft Excel in statistical analysis. The projected fee for
the seminar is $300 per student. The cost for the conference room, instructor
compensation, lab assistants, and promotion is $400. Micromedia rents computers
for its seminars at a cost of $30 per computer per day.
a. Develop a model for the total cost to put on the seminar let x represent the
number of students who enroll the seminar.
Total cost = fixed cost + variable costs, = 4800 + 30*2x

b. Develop a model for the total profit if x students enroll in the seminar.
Total profit = total revenue total costs, = 300x-(4800+30x*2)
c. Micromedia has forecasted an enrollment of 30 students for the seminar. How
much profit will be earned if their forecast is accurate?
Total profit = 300*30 (4800+30*2*30) , = 9000-4800-1800, = 9000-
6600, = 2400
 d. Compute the breakeven point
Total revenue = total cost, 300x=4800+60x, 300x-60x=4800, 240x=4800,
x=4800/240,
Breakeven point = 20
ST#14: Eastern publishing company is considering publishing a paperback
textbook on spread-sheet applications for business. The fixed cost of
manuscript preparation, textbook design, and production setup is estimated
to be $80000. Variable production and material costs are estimated to be $3
per book. Demand over the life of the book is estimated to be 4000 copies.
The publisher plans to sell the text to college and university bookstores for
$20 each.
a. What is the breakeven point
For breakeven total revenue = total cost
Total cost = 80000+ 3x
Total revenue = 20x
80000+3x=20x, 20x-3x=80000, 17x=80000, x=80000/17, = 4706 books
b. What profit or loss can be anticipated with a demand of 4000 copies?
Total revenue for 4000 copies = 4000*20=80000
Total cost for 4000 copies = (4000*3) +80000=92000
Total loss =$12000
c. With a demand of 4000 copies, what is the minimum price per copy that
publisher must charge to breakeven.
Total cost for 4000 copies = 92000, so 92000/4000=$23
d. If the publisher believes that the price per copy could be increased to
$25.95 and not affect the anticipated demand of 4000, what would you
recommend? What profit or loss can be anticipated?
Since demand is not effected, I would recommend increase in price
Since breakeven price for 4000 units was $23, therefore $25.95 will
generate profit.

Total revenue = 4000*25.95 = 103800 minus total cost 92000 =

$11800 profit
ST#15: preliminary plans are underway for the construction of new stadium for a
major league baseball team. City officials question the number and profitability of
the luxury corporate boxes planned for the upper deck of the stadium. Corporations
and selected individuals may buy the boxes for $100000 each. The fixed
construction cost for the upper-deck area is estimated to be $1500000, with a
variable cost of $50000 for each box constructed.
a. What is the breakeven point for the number of luxury boxes in the new
stadium?
For breakeven point
 1500000 + 50000x = 100000x, 1500000=100000x-50000x, 1500000
= 50000x
X=1500000/50000, x= 30 boxes
b. Preliminary drawings for the stadium show that space is available for the
construction of up to 50 luxury boxes. Promoters indicate that buyers are
available and that all 50 could be sold if constructed. What is your
recommendation concerning the construction of luxury boxes? What profit is
anticipated
If the project is for all 50 boxes sellable, then I would recommend
construction of boxes, since the price is not effected and breakeven point was
20.
For profit we need : Total revenue total costs
Total revenue = 50*100000 = 5000000
Total cost = 1500000 + (50*50000) = 1500000 + 2500000 = 4000000
Profit = 1000000

ST#16: Financial Analysts inc., is an investment firm that manages stock

portfolios for a number of clients. A new client requested that the firm handle
an 80000 portfolio. As an initial investment strategy, the client would like to
restrict the portfolio to a mix of the following:

Stock Price/share Estimated annual Maximum possible

return/share investment
Oil Alaska $50 $6 $50000
Southwest $30 $4 $45000
Petroleum

Let
X=number of shares of Oil Alaska
Y=number of shares of southwest Petroleum
a. Develop the objective function, assuming that the client desires to
maximize the total annual return:
a. Step 1 compare return on investment by annual return/share price
$6/50 = 12% 4/30 = 13.33%
Preference should be given to SP shares
Therefore f (?) = 1500*4 + 900*6, =6000 +3600
= 9600
b. Show the mathematical expression for each of the following three
constraints:
1. Total investment funds available are $80000
50x+30y<80000
 2. Maximum oil Alaska investment is $50000
50x<50000
3. Maximum southwest Petroleum investment is $45000.
30<45000

Note: X>0, Y>0

17. Models of inventory systems frequently consider the relationships among a
beginning inventory, a production quantity, a demand or sales, and ending
inventory. For a given production period j, let
Sj-1 = ending inventory from the previous period (beginning inventory for period j)
Xj=production quantity in period j
Dj = demand in period j
Sj = ending inventory for period j

a. Write the mathematical relationship or model that shows ending

inventory as a function of beginning, production and demand.
Ending inventory = Sj-1 + Xj - Dj
b. What constraint should be added if production capacity for period j
is given by Cj?
Sj- Sj-1 < Cj or Xj < Cj or d j < Sj-1 + Cj
c. What constrain should be added if inventory requirement for period
j mandate an end inventory of at least I j ?
Ij > Sj-1 + Xj - Dj