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Binary variable: A binary variable is a 0-1 variable that must equal 0 or 1. Usually, a 0-1
variable corresponds to an activity that either is or is not undertaken. If the 0-1 variable is equal
to 1, then the activity is undertaken; if it is equal to 0, the activity is not undertaken.
Changing cells Binary variable for each investment (1 = Invest, 0= do not invest)
Set target cell Maximize sum of NPV of selected investments
Constraint Total cash required <= $15,000
Sensitivity analysis: Solver table for budget from $15,000 to $25,000 in increments of $1000
Extensions:
Condition Add constraint
At most two investments can be selected Sum of 0-1 variables <= 2
If investment 2 is selected, then 0-1 variable for investment 1 >= 0-1 variable for
investment 1 must also be selected investment 2
Either investment 1, or 2 or both must be Sum of the 0-1 variables for investment 1 and 2 >=1
selected
Either investment 1 or 2, but not both Sum of the 0-1 variables for investments 1 and 2 =1
must be selected
Two-Period Capital Budgeting Model (CapitalBudgeting2.xls)
The following table shows investments when cash is required over two years. The available
budget for year 1 is $14,000 and for year 2 is $4,500.
Cash required Cash required
Investment in year 1 in year 2 NPV
1 5000 2000 16000
2 2500 1500 8000
3 3500 2000 10000
4 6500 0 20000
5 7000 500 22000
6 4500 1500 12000
7 3000 0 8000
The only change to the previous model required is an additional budget constraint for year 2.
Resource available: 4000 hours of labor and 4500 square yards of cloth
Changing cells Binary variable for each product (1 = Produce, 0= do not produce)
Production quantity for each product
Set target cell Maximize total profit
Constraints Labor hours used < Labor hours available
Square yards of cloth used <= Square yards of cloth available
Unit produced <= Logical upper limit (0 if the product is not
selected, otherwise limited by the smaller of labor hours and
cloth availability.
Extension:
At least three types of clothing is Sum of 0-1 variables>= 3
produced at positive level of at least 100 A logical minimum production level of 100 for each
type of clothing
Example 6.3 Manufacturing at Dorian Auto (EitherOrManufacturing.xls)
The company produces three types of cars and two types of minivans. Each automobile has a
minimum production level if it is chosen for production.
Changing cells Binary variable for each vehicle (1 = Produce, 0= do not produce)
Production quantity for each vehicle
Set target cell Maximize total profit
Constraints Labor hours used < Labor hours available
Tons of steel used <= Tons of steel available
Unit produced <= Logical upper limit (0 if the product is not selected,
otherwise limited by the smaller of labor hours and steel availability.
Units produced >= Logical lower limit (0 if the vehicle is not chosen,
given minimum value if chosen
United Copiers sells copy machines in 11 cities. Service center must be located in 3 of these 11
cities and each city must be assigned to one of the three service centers. Set target cell is to
minimize total distance traveled from service centers to cities annually.
Given data: Table of distances and number of service trips required at each city
Changing cells Binary variable for each city (1 = Selected for service center, 0= not
selected)
Binary variable for assigning each city to one of the potential service
centers i.e. all 11 cities (1 = assigned, 0= not assigned)
Set target cell Minimize annual distance traveled = distance between a city and the
service center to which the city is assigned times number of trips per year
Constraints Total cities selected for service center <= 3
Number of service centers to which a given city is assigned = 1
A city can be assigned to a service center in a city only if a service
center is located in that city
Sensitivity: How will the annual distance traveled vary if the number of service centers is
anywhere between 1 and 11?
Given data: Customer order bids (quantity and price), and distances between each pair of cities.
Assume plant capacity of 2500 pounds per month. Fixed cost operating a plant is $60,000.
Production cost is $10.25 per pound. Shipping cost is $0.02 per pound per mile.
Changing cells Binary variable for each city (1 = Selected for production, 0= not
selected)
Binary variable for assigning each customer order to one of the
potential plants i.e. all 8 cities (1 = assigned, 0= not assigned)
Set target cell Maximize monthly profit = Sum of bid prices accepted – Production cost
x Quantity produced – Shipping cost x quantity shipped x distance – Fixed
operating cost of number of plants selected for production
Constraints Number of plants to which a given customer order is assigned <= 1
(Note: “<=” allows for an order to be not fulfilled)
A customer order can be assigned to a plant in a city only if a plant is
selected for production
Sensitivity: How much larger Miami’s bid would need to be before it is accepted?