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Quantitative Methods

For Business

Management

Quantitative Methods

Lecturer

Africa Nazarene University

Africa Nazarene University

THE AUTHORS

SUMMARY CONTENTS

CHAPTER 1 SET THEORY AND COUNTING NUMBERS 1

CHAPTER 4 ALGEBRA 63

CHAPTER 15 LINEAR PROGRAMMING 274

CONTENTS

CHAPTER 1 SET THEORY AND COUNTING

Introduction 1

Intersection of Sets 3

Venn diagram 4

Principle of counting 6

Application of Venn 8

Practice Problem 11

Introduction 15

Number line 15

Integers 16

Gradients 21

Practice Problem 23

Equation of Straight 25

Practice Problem 30

Sketching a Graph 31

Points of intersection 33

Practice Problem 36

CHAPTER 3 SIMULTANEOUS LINEAR

Elimination method 38

Practice Problem 39

Practice Problem 41

Practice Problem 45

Demand Function 47

Supply Function 49

Practice Problem 52

Equilibrium 55

Practice Problem 62

CHAPTER 4 ALGEBRA

Introduction 63

Practice Problem 63

Practice Problem 64

Practice Problem 64

Practice Problem 65

Solving linear inequalities 66

Practice Problem 66

Practice Problem 68

Intersecting Regions 69

Practice Problem 72

Introduction 75

Operations of problem 76

Expanding 78

Practice Problem 79

Introduction 81

Evaluating permutations 82

Practice Problem 82

Combination 83

Practice Problem 83

Introduction 84

Types of matrices 84

Square matrix 84

Identity matrix 85

Column Vector 85

Null vectors 85

Practice Problem 86

Operation of Matrices 87

Additional of matrix 87

Subtraction of matrix 88

Scalar multiplication 88

Matrix transportation 89

Multiplication of matrix 90

Practice Problem 90

Application in Business 92

Practice Problem 94

Inversion of Matrices 95

Introduction 155

Introduction 167

Practice Problem 192

Discriminant 229

Introduction 241

Total Revenue 241

Profit 244

Introduction 250

Introduction 274

Formulating a linear programming 282

Introduction 293

Introduction 313

CHAPTER 19 TRANSPORTATION MODEL

Introduction 343

Degeracy 369

Introduction 378

Introduction 406

Annual cost of holding the stock 408

SET THEORY AND

CHAPTER 1 COUNTING NUMBERS

Learning Objectives

At the end of this section the students should be able to:

• Drawing of the Venn diagram.

• Identify elements of sets

• Identify the different symbols used in the sets

• Apply Venn diagram to the world of business today

A set is a collection of objects or elements. A set of student may contain students who are male

and female and also students registered for different degree programs. The set brace { } are

used enclose numbers belonging to the set.

A set containing of numbers1, 2,3, 4, 5, 6, 7, 8, 9 and 10may be written as follow

{1, 2, 3, 4, 5, 6, 7,8, 9,10}

Elements are numbers contained in a set. The above is a set of number 1 up to 10.

When writing down the set of multiples of 4

The listings of the multiples can be done as follows.

{4, 8, 12, 16, 20, 24 …}

Notice that there has been a pattern established and the last three dots indicate the patterns

continue to the last term which could be the nth term.

Consider listing the multiples of 4 which are less than 100

Instead of listing all the elements the three dots can be used to show where there is a pattern.

When we wish to show that a particular number belong to a particular set we use the following

symbol. Thus if we have a set of prime numbers less than ten

{2, 3, 5, 7}

CHAPTER 1 Set theory and counting number 2

Thus to show that an element belong to a set of prime numbers less than ten {2, 3, 5, 7}

We can write as follows

5 ∈ {2, 3, 5, 7}

5 is an element of the set containing 2, 3, 5 and 7. Also 3∈{2, 3, 5, 7}

If we want to show that an element is not an element of the above set we place slash through

the symbol as follows

11 ∉{2, 3, 5, 7}

When naming sets we use capital letter for example let the above set be A, written as follows

A={2, 3, 5, 7}

then 3 ∈ A and 11∉ A

Two sets are equal if they contain the same elements for example A= {1, 2, 3} and B= {3, 2, 1}all

contain exactly the same elements and are equal.

In symbols it is written as follows

{1, 2, 3}={3, 2, 1}

Sets that do not contain exactly the same elements are not equal. For example set C = {4, 5, 6}

and D = {7, 8, 9} are not equal.

In symbols it can be written as follows

{4, 5, 6} ≠ {7, 8, 9}

¥= {0,1, 2, 3, 4, 5,...}

- used to represent set of natural numbers ,

- represent positive and negative integer, = {+4, +3, +2, +1, -1, -2, -3, -4}

- represent a set of rational numbers, = {1.2, 1.3, 1.4, 1.5}

- represent set of real numbers- ={

CHAPTER 1 Set theory and counting number 3

Intersection of Sets

We say that the intersection of two set A and B is written as follows

A ∩ B which means the elements that are contained in both A and B. For example if set A

contain {1, 2, 3, 4, 5} and set B contains the following elements { 2, 4, 6, 8, 10}

A = {1, 2, 3, 4, 5}

B = {2, 4, 6, 8, 10}

Then the intersection is written as follows,

A ∩ B = {2, 4}

Example 1.1

G = {4, 5, 6, 7, 8. 9} and H = { 1, 3, 5, 7}

the intersection is given by

G ∩ H = {5, 7}

The set containing all elements in A and B is called Union of set A and B and it is represented by

the following symbol A ∪ B given as follows A ∪ B = {1, 2, 3, 4, 5, 6, 8, 10}

Consider set C which is a set containing odd numbers {3, 5, 7, 9} and a set D which contain

multiple of 2 {2, 4, 6, 8.10}

Then there is no intersection C ∩ D Such a set with no members, is called an empty set , it is

represented by ∅

Thus the above example is written as C ∩ D = ∅

In most case there are some elements which are contained in a particular question or topic.

Such sets are represented by the symbol ∪ it is called the universal set.

On the same not all elements of the universal set that are not contained in set A are called

compliment of set A which are written as A' (complement set of A)

For example given the following universal set = { 3, 4, 5, 6, 7, 8, 9} and that A = {5, 6, 7}

the compliment of A is the set of

A' = {3, 4, 8, 9}

CHAPTER 1 Set theory and counting number 4

Consider set E is also a member of set F, then E is called a subset of F.

For example E = {4, 5, 6, 7} is a subset of { 3, 4, 5, 6, 7, 8, 9, 10} the symbol is written as follows E

⊂F

In set the notation n(A) is used to represent the number of elements in set A

Venn Diagram

A Venn diagram contains of a rectangle which encloses all the elements contained in the

universal sets and circles which represent the sets and subsets.

Example 1.2

Representing this on Venn diagram is as follows

The intersection will be A ∩ B = {2, 6} Point of

intersection

A∩B

A 1, 3, 4, 7 2, 6 8, 9, 10 B

CHAPTER 1 Set theory and counting number 5

Example1.3

Consider the following Set C which is {3, 5, 7, 9} and set C is a subset of set D { 1, 2, 3, 4, 5, 6, 7,

8. 9} then drawing the Venn diagram is draw as follows

C ∪ D = {1, 2, 3, 4, 5, 6, 7, 8, 9}

U = {1, 2, 3, 4, 5, 6, 7, 8, 9}

D 2, 4, 6, 8 1, 3, 5

C

7, 8

Example 1.4

Given that E = {1, 2, 3, 4, 5, 6, 7, } and 8, 9 and 10 are not contained are compliments of E that is

E' ={8, 9, 10} this can be drawn as shown in the Venn diagram.

E

E'

E 1,2, 3, 4, 5. 6,7

s E'

8, 9, 10

Two sets which have no elements in common are said to be disjoined sets. For example set

K = { 12, 13, 14, 17} and H = {11, 15, 16, 18, 19 }

CHAPTER 1 Set theory and counting number 6

H 11,15,16,18,19 K 12,13,14,17

Principle of counting

Consider set A if we denote the number of elements in set A as discussed earlier we can

symbolically write it as n(A)

If set A is given by A = {1, 2, 3, 4} the we denote the number of elements contained in set A to

be n(A) = 4 and if another set B is given by B = {a, b, c, d, e, f, g, h, h, I, j, k} then n(B) = 11

If set C is an empty set or null set then C = ∅ and can be denoted by n(C) = 0.

Principle of Inclusion-Exclusion

Let consider two set A and B

A = {a, b, c, d, e, f, g, h}

B = {b, d, f, k, l, m}

Then the universal set will be

A = {a, b, c, d, e, f, g, h, k, l, m} then n(A) = 11

A ∩ B = {d, d, f} then A ∩ B = 3

A = {a, b, c, d, e, f, g, h} then n (A) = 8

B = {b, d, f, k, l, m} then n (B) = 6

In general we can use the Inclusion-Exclusion principle which states that given two sets the

number of the union is equal to the number of the first set plus the number of the second set

minus the intersection of the two sets

n(A ∪ B) = n(A) + n(B) – n(A ∩ B)

To explain this further lets consider the above example

n(A ∪ B) = 11 n(A) = 8 n(B) = 6 n(A ∩ B) = 3

n(A ∪ B) = n(A) + n(B) – n(A ∩ B)

11 = 8 + 6 – 3

CHAPTER 1 Set theory and counting number 7

Example 1.5

In the year 2009, five hundred students graduated in Africa Nazarene University. Of these 500

students, 310 had degrees in business of any sort, 238 had undergraduate degrees in business

and 184 had master’s degree in business.

Required

How many students had both undergraduate and master degree in business?

Solution

Let

A = {students with an undergraduate degree in business}

B = {students with masters degree in business}

Then

A ∪ B = {students with at least on degree in business}

A ∩ B = {students with both undergraduate and masters in business}

So n(A) = 238 n(B) = 184 n(A ∪ B) = 310

The question is asking as to check for the n(A ∩ B). By Inclusion-Exclusive principle we have

n(A ∪ B) = n(A) + n(B) – n(A ∩ B)

310 = 238 +184 - n(A ∩ B).

n(A ∩ B) = 112

Sets Operation

A ∪B = B ∪A = Commutative law for Union

A ∩B = B∩A = Commutative law for intersection

A ∪ (B ∪ C) = (A ∪ B) ∪ C = Associative law for union

A ∪ (B ∪ C) = (A ∪ B) ∪ C = Associative law for intersection

A ∪ (B ∩ C) = (A ∪ B) ∩ (A ∪ C) = Distributive law for union

A ∩ (B ∪ C) = (A ∩ B) ∪ (A ∩ C) = Distributive law for intersection

( A ∪ B)C =AC ∩ B C

CHAPTER 1 Set theory and counting number 8

Application of Venn

Example 1.7

A survey conducted of 600 students at Africa Nazarene University produced the following

results.

190 of the students read Daily Mirror;

180 of the students read Telegraph newspaper;

500 read Magazines;

130 read Daily Mirror and Telegraph newspaper;

110 read the Telegraph newspaper and Magazines;

130 read Daily Mirror and Magazines:

90 read all three.

a. How many students read none of the publication?

b. How many read magazines

c. How many read Daily Mirror and the Telegraph newspaper , but not Magazine.

Solution

Let letter D represent the Daily Mirror

Let letter T represent Telegraph Newspaper

Let letter M represent the Magazines

Thus

The number of sets in Daily mirror are n(D) = 190

The number of sets in Telegraph Newspaper are n(s) = 180

The number of sets in Magazines are n(M) = 500

The number of elements of intersection of Daily Mirror and Telegraph Newspaper

n(D ∩ S) = 130

The number of elements of intersection of telegraph Newspaper and Magazines

n(S ∩ M) = 110

CHAPTER 1 Set theory and counting number 9

The number of elements of intersection of Daily mirror and Magazines n(D ∩ M) = 130

Intersection of the three n(D ∩ S ∩ M) = 90

Those who read Daily Mirror and Magazines only are 130- 90 = 40

Those who read Daily nation and telegraph Newspaper 130 – 90 = 40

Those that read Telegraph Newspaper and Magazines only = 110 – 90 =20

190 – 90 – 40 – 40 = 20

Those students who read telegraph Newspaper are

180 – 90 – 40 – 20 = 30

Those students that read Magazines only

500 – 90 – 40 – 2- = 350

Total number of students who read the three publications are

90 + 40 + 40 +20 +30 + 20 + 350 = 590

600 – 590 = 10 students

D ∪S∪ M =600

M

350

40

20

D 20 90 S

40 30

Answers

a. None of the publication 600 – 590 =10

b. Magazine only 350

c. Daily mirror and Telegraph but not Magazine 40

CHAPTER 1 Set theory and counting number 10

Example1.8

Infotell a research firm collected the following information about particular buying behavior of

certain families and gave the following information;

150 families bought food, clothes and luxuries;

250 families bought food and luxuries;

420 families bought food;

200 families bought clothes and food;

60 families bought luxuries and clothes, but not food;

40 families bought luxuries, but neither food nor clothes;

100 families bought none of the three;

180 families bought clothes but not luxuries.

How many families were surveyed?

How man families bought clothes?

How many families bought luxuries but not clothes?

How many families did not bring luxuries?

How many families bought food or costumes?

Solution

Let letter F represent food

let letter C represent clothes

Let letter L represent luxuries

Thus

The intersection of the three n(F ∩ C ∩ L) = 150

The number of set in food is n(F) = 420

The intersection of Food and Luxuries n(F ∩ L) = 250

The intersection of food and clothes n(F ∩ C) = 200

We have no intersection of clothes and luxuries n(L ∩ C)

CHAPTER 1 Set theory and counting number 11

U = 750

Clothes

130

50

60

150

Food 120 Luxuries

100 40

50 + 150 + 60 + 130 = 390

100 + 40 = 140

750 – 100 – 120 – 130 = 400

750 – 100 – 40 = 610

Practice Problem

1. In certain college club of Abel, Ang, Ban, Charles and Debal are doing a accounting

majors with Ang and Debal being student representative. Gor, Batt, Hesh, Ila and Joy are

choir members with Ila and Joy doing degree courses.

Use set A to represent club members, set B choir members, set C student

Representatives, set D accounting major students.

a) Specify element of the element of the four sets A, B, C and D

b) Draw a Venn diagram representing sets A, B, C and D

c) Identify members of the following sets and state in words the implication of

d) A ∩ C, D ∪ C and D ∩ C

e) Establish a universal set of the student’s membership.

2. In a study on the pass rate of CPA sec IV class, 60 candidates passed QT, 80 passed FA III

and 50 passed law II. 20 passed QT and FAIII, 15 passed Law II and FAIII, 25 passed QT

and Law II while 10 passed all the three subjects.

a) What is the total number of candidates in the class?

b) If a candidate who fails one subject is referred, how many candidates were

referred?

CHAPTER 1 Set theory and counting number 12

3. The main daily newspapers in Town K are: A, B and C. The management of one dailies is

concerned about low sales volume of their paper. In a recent survey of 1000 families in

the town K the numbers that the various newspapers were found to be as follows:-

Newspaper No. of Readers

The people 280

The people and East Africa Standard 80

The East Africa Standard 300

The People and Daily Nation 100

The Daily Nation 420

The East Africa Standard and Daily Nation 50

All the three newspaper 30

b) Determine the number of families who did not read any of the three

c) Advice the manager of a car dealing business which newspaper to advertise in

order to reach the largest audience.

4. The manager of Karibu Café kept a record of his customers’ breakfast orders for one

week. He discovered the following:

180 ordered Hot dog

150 ordered Hamburger

100 ordered Samosa and Hot dog

80 ordered Samosa and Hamburger

60 ordered Hot dog and Hamburger

30 ordered Samosa , Hot dog and Hamburger.

a) Who ordered Samosa only,

b) Who ordered Hot dog only,

c) Who ordered Hamburger only,

d) Who ordered Samosa and Hot dog only,

e) Who ordered Samosa and Hamburger only,

f) Who ordered Hot dog and Hamburger only.

5. Some enrolment totals Africa Nazarene University for the 1st trimester 2011/2012 are

the following;

640 enrolled in Management Mathematics I

310 enrolled in Christian Beliefs

90 enrolled in both Business Statistics and Management Mathematics I

CHAPTER 1 Set theory and counting number 13

60 enrolled in both Business Statistics and Christian Beliefs

200 enrolled in both Management Mathematics I and Christian Beliefs

50 enrolled in all three courses

a) Business Statistics only

b) Management mathematics I only,

c) Business Statistics and Management Mathematics I and not Christian Beliefs,

d) Christian Beliefs only,

e) Christian Beliefs and Management Mathematics I but not Business Statistics,

f) Christian Beliefs and Business Statistics, but not Management Mathematics I.

6. Suppose set A has 8 elements, set B has 12 elements and set C has 10 elements.

A n B n C are 4, 2, 3, and 1 respectively.

Determine the number of elements in A n B’ n C’, B n A’ n C’ and C n A’ n B’.

8. A study by Strategic Research Consultants on the cause of business failure of 1500 micro

enterprise firms gave the following results:

110 failed due to lack of capital and inexperienced management

140 failed due to lack of capital and a poor location

230 failed due to inexperienced management only

150 failed due to inexperienced management and a poor location

60 failed due to all the three

80 failed due to other causes but not any of the three.

a) Present the information above in a Venn diagram and determine the number of

micro enterprise firms that failed due to:

b) A poor location only

c) At least two of the causes mentioned above

d) Exactly one of the causes

9. A milling company ran an advertising campaign to popularize its products. After a month

the marketing department conducted a survey to gauge the success of the campaign.

They interviewed 250 people. Out of the 250, 70 had not seen the adverts. 130 of those

who saw the adverts had bought their products. In total 160 people bought the

CHAPTER 1 Set theory and counting number 14

company’s products. How many of the interviewees neither saw the adverts nor bought

the company’s products?

10. A certain publisher is interested in the reading habits of the people in a certain small

city. A survey indicates that the number of subscribers ( in thousands) to the Time

magazine is 25, the number of subscribers Economist is 18 and the number of

subscribers to the East African is 12. The number of subscribers to both Time and

Economist is 10, the number subscribing to both Time and the East African is 1, and the

number subscribing to both Economist and the East African is 2. The number of people

with subscriptions to all three magazines is 1.

11. The following represent 450 workers and the mode of transport that the use regularly

Train 290

Public transport 350

Boda Boda 290

All three 200

Both train and Boda Boda 210

Both train and public transport 250

Boda boda and Public transport 280

Determine:

b) How many used at least two type of transport

c) How many used boda boda only

12. In Mombasa city, three newspapers A, B and the C. A survey shows that 30% of the

population of the city read A. B is read by355 read C and 155 read both the A and B. 5%

read both A and the C, 6% read both the A and the C and 2% read all the three.

a) Draw a Venn diagram to represent the information

b) What percentage of the city dwellers read none of the papers

c) How many read at least two of the papers

d) Africa Nazarene wants to advertise in two newspapers. Which two newspaper

would give them the best coverage

CHAPTER 2 LINEAR EQUATIONS

Learning Objectives

At the end of this chapter the student should be able to do the following:

• Simple addition, subtraction, multiplication and division of positive and

negative numbers;

• Perform simple operation on a number line;

• Identifying and plotting points on Cartesian plane;

• Getting gradient of a line;

• Drawing a line on Cartesian plane using gradient and its intercept;

• Solving simultaneous linear equations.

Number line

A number line is a horizontal line with both negative and positive numbers. Generally as

student of mathematics if you cant understand the number line you miss the point of

mathematics.

A number line consist of integers.

{ 1, 2, 3, 4, 5, 6, 7, } These numbers are called counting numbers or natural numbers.

In general between two integers are rational numbers.

For instance between 1 and 2 there are 1.2, 1.5, 1.8, .1.9.

These numbers can be written in ratios as follows respectively.

6 3 9 19

, , ,

5 2 5 10

Thus rational numbers are numbers that can be expressed in ratio of integers.

Numbers that are not rational are called irrational numbers. For instance irrational numbers

are.

π , 2, 6, 7, 10, 12

CHAPTER 2 Linear equations 16

Integers

When you think of integer it better to think of zero, whole numbers which are positive

and negative. Always when you think of a number line consider it as made of integers.

For instance 23, 1 ,457 -128, -2367 are all integers, but numbers like3/5,0.0001, 2.23004,

and -4.3 are not.

In general we that an integer is a set of {-5,-4,-3,-2,-1, 0, 1, 2, 3, 4, 5, } the three dots

means you keep on going both directions.

The relationships between these two numbers can be expressed as follows.

x< y

In general this means x is on the left of y in the number line. We read this as x is less

than y

Sometime x and y is written as

x≤ y

Which means x is less than or equal to y .It coincides on the number line.

Again x and y can be written as follows

x> y

This means that x is greater than y and that x is on right of y on the number line.

This means that x is greater than y or equal to y and that it coincides on the number line

x≥ y

Addition and Subtraction.

To add or subtract numbers in a number line we think of walking forward and backwards

f h h k f d

Example 2.1

Evaluate

i) -3 – 4

ii) -7 + 10

iii) -5 + 4

Solution

To evaluate

-3 - 4

It will be x (+y)

You at point (-3) you move 4 units or steps on your left or backwards

CHAPTER 2 Linear equations 17

Figure 1.1

Count 4 units or steps on left

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3

Thus -3 - 4 = -7

To evaluate

-7 + 10

In terms of x and y it x +y

At point (-7) you move 1steps forward. Picture this that you own your friend 7 sweets and now

you have just brought 10 sweets if you give your friend 7 sweets you are left with 3 sweets.

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 5 6

Thus -7 + 10 = 3

CHAPTER 2 Linear equations 18

To evaluate

-5 + 4

In general x + y

At point (-5) you move 4 steps forward.

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 5 6

Thus -5 + 4 = -1

Practice Problems

-1+ 6

-2 - 3

4-8

–9+3

CHAPTER 2 Linear equations 19

Multiplication of numbers involving negatives and positives one must note following order

of multiplication.

( − × − = + ) negative × negative = positive

( − × + = − ) negative × positive = negative

( + × − = − ) positive × negative = negative

( + × + = + ) positive x positive = positive

From the above rule we evaluate the following respectively.

3 × -5=-15

-4 × 4=-16

-5 × -6=30

7 × 9=63

( − ÷ + = − ) negative ÷ positive = negative

( + ÷ − = − ) positive ÷ negative = negative

( + ÷ + = + ) positive ÷ positive = positive

Gradients

Evaluate

−3 × 6 × −9 × 2

−18

CHAPTER 2 Linear equations 20

Solution

−3 × 6 × −9 × 2 = −324

324

= −18

−18

Any given line has two of the points which one can use to plot a line. These are called the

coordinates. Coordinates are inform of x and y. Consider line PQ, the line has two points P (x, y)

and Q (x, y).

This line can plotted in graph on x on the horizontal axis and y on the y axis this is called as the

Cartesian plane.

O is the intersection of the x-axis and y- axis and is called the origin that is the point with the

coordinates (0, 0)

Figure 1.4

Vertical axis

or y- axis

CHAPTER 2 Linear equations 21

Gradients

The change on the y-axis over the change of the x-axis is called gradient.

We can think of the gradient of a line is the measure of its steepness or angle of slope.

If we have two points the gradient of the line is defined as the vertical change divided by the

horizontal change.

In general if we have point A ( x1, y1 ) and B ( x2 , y2 ) the gradient of the line segment AB is given

as follows.

From the line AB we can express this as:

Change in y (y distance) ∆y

Change in x (x distance) =

∆x

∆( y2 − y1 )

(Where ∆ is the Greek capital D ‘Delta’ which is used to mean

∆( x2 − x1 )

change)

Diagrammatically the line AB can be represented as bellow on Cartesian plane.

Figure 1.5

Change in y (∆y )

y-axis

A( x1 y1 ) Change in x (∆x)

x-axis

CHAPTER 2 Linear equations 22

Example 2.2

Consider three points A, B, and C .A(0,3), B ( 2, 4) and C (10, 8)

Find the gradient of AB and BC.

What can you say about the points.

Solution

=

Change in x (horizontal distance) ∆x

Figure 1.6

9 C (10, 8)

8

7

6

5 B (2, 4)

4

3

A (0, 3)

2

1

1 2 3 4 5 6 7 8 9 10

∆y 4 − 3 1

= =

∆x 2 − 0 2

Taking point AB, A(0,3),and B (2,4) we can also obtain the gradient

∆y 8 − 4 4 1

= = =

∆x 10 − 2 8 2

CHAPTER 2 Linear equations 23

∆y 8 − 4 4 1

= = =

∆x 10 − 2 8 2

What we can see is that the gradient is the same .Thus A, B, and C are points on a straight line.

In general any two pairs of a point selected they give the same gradient

Figure 1.7

9 C (10, 8)

8

7

B (2, 4)

6

5

4

3 A (0, 3)

2

1

1 2 3 4 5 6 7 8 9 10

Practice Problem

(2, 3) and (7, 6)

(-2, 7 ) and (-1, -1 )

(4, 4)and (5, 7 )

2. If point (1, 1 ) and (4, 7) and (5, y) are point on a straight line find the value of y.

CHAPTER 2 Linear equations 24

4. The four corners of quadrilateral are (1, 1), (2, 2), (4, 3), and (5, 3). Show that the

quadrilateral is trapezium.

5.Let points A, B and C have coordinates respectively .If A ( x1, y1 ) , B ( x2 , y2 ) and C ( x3 , y3 ) are on

straight line show that

0

y1 x2 − y2 x1 + y2 x3 + y3 x2 + y3 x1 − y1 x3 =

CHAPTER 2 Linear equations 25

Equation of Straight

The gradient is the steepness or the slope of line, curve, or arc. When we have the gradient of a

straight line we can be able to find the equation given any particular point that it passes

through.

The standard form of the equation of a straight line is give by

y mx + c

=

In general given point ( x, y ) and the gradient is m then taking another point of the line ( x1, y1 )

we can express m in terms of y

∆( y − y1 )

=m

∆( x − x1 )

y − y1

( x − x1 ) m( x x1 )

=−

x − x1

The equation can be expressed as follows using the points (x, y) and (4, 2)

y−4

= −2

x−2

y − y1 = m( x − x1 )

y mx + c

=

y mx + c

=

CHAPTER 2 Linear equations 26

Example 1

Find the gradient of the line through the points (4, 7), (5, 9)

Solution

∆y 9 − 7 2

= = = 2

∆x 5 − 4 1

Taking any point for instance along the line (4, 7)

y−7

=2

x−4

y−7

( x − 4) 2( x 4)

=−

x−4

y − 7 = 2x − 8

y = 2x − 8 + 7

y 2x −1

=

This is an equation of a positive gradient when plotting the graph the line moves from left to

right upwards.

CHAPTER 2 Linear equations 27

Figure 1.8

9

8

7 Positive gradient

6

5

4

3

2 y 2x −1

=

1

-1 1 2 3 4 5 6 7 8 9 10

Find the equation of line passing through the following points (2, 4) and (1, 6)

The gradient is given as

Solution

=

Change in x (horizontal distance) ∆x

Example 2

∆y 6 − 4 2

= = = −2

∆x 1 − 2 −1

CHAPTER 2 Linear equations 28

y − 4 =−2( x − 2)

y − 4 =−2 x + 4

y =−2 x + 4 + 4

y= −2 x + 8

Plotting the graph the line moves (slopes) from top left to right downwards. This kind of line is

called negative gradient.

9

Figure 1.9

8

7

6

5 Negative gradient

4

3

2 y=−2 x + 8

1

1 2 3 4 5 6 7 8 9 10

Example 2.3

The gradient of the line passing through these points

The equation we obtain is supposed to be inform of = y mx + c

∆y 2 − 2 0

= = = 0

∆x 7 − 4 3

Thus taking any point along the line we obtain the following equation

y−2

= 0 taking point (4, 2)

x−4

CHAPTER 2 Linear equations 29

Thus taking any point on the line (x, y) and taking point (4, 2)

We get the following

y − 2= 0( x − 4)

y−2= 0

y=2

Figure 2.0

9

8

7 Zero or horizontal

6 gradient

5

4

3

2

y=2

1

1 2 3 4 5 6 7 8 9 10

Suppose you have two points (4, 2) and (4, 6) the gradient is

∆y 6 − 2 4

= = = ∞

∆x 4 − 4 0

x = 1, 2,3, 4...........

CHAPTER 2 Linear equations 30

Figure 2.1

98 Vertical gradient

7

6

5

4

x = 1, 2,3, 4,5...n

3

2

1

1 2 3 4 5 6 7 8 9 10

Practice Problem

Gradient 2 through (5, 6)

Gradient -3 through (1, 2)

Gradient 0 through (2, 5)

Gradient ∞ through (1, 1)

1

Gradient through (3, 3)

2

Through (2, 4) and (6, 8)

Through (1, 1) and (0, 9)

Through (1, 3) and (2, 3)

Through (1, 2) and (1, 5)

Find the gradient of the following lines

a) y = −2 x + 4

b) 5 =

y 15 + 10

c) 3 x + 6 y + 3 =0

d) 3 y − x − 1 =4

e) 2=x 6y + 7

3. A straight line goes through the points (a, 0) and (0, b) show that the equation

x y

written as + = 1

a b

CHAPTER 2 Linear equations 31

Sketching a Graph

When sketching a graph of a straight line there are two ways which can be used.

Method 1

Given a range of −2 ≤ x ≤ 4

In general you consider −2 ≤ x ≤ 4 as the distance of the x-axis.

First make sure that the line is in the format =

y mx + c

So we get

y= −2 x + 8

For instance point (-2, 12), (-1, 10) and so on the Cartesian plane

Figure 2.2

8

7

6

5

4

3

2 y=−2 x + 8

1

1 2 3 4 5 6 7 8 9 10

CHAPTER 2 Linear equations 32

Method 2

This an alternative method which student consider to be the simple

Using the same equation of 2 x + y = 8 plot the graph using method 2

Solution

Setting x = 0 you get

2(0) + y =8

0+ y = 8

y =8

Also setting y = 0 we can obtain the value of x as follows

2x + 0 =8

2x = 8

x=4

Using these coordinates (0, 8) which give the y-intercept that is where the line cuts on intersect

with the y axis on the Cartesian plane.

The coordinates of (4, 0) this is where the line will intersects with the x-axis called the x-

intercepts.

Figure 2.3

y − Intercept

8

7

6

5

4 y=−2 x + 8

3

2

x − Intercept

1

1 2 3 4 5 6 7 8 9 10

CHAPTER 2 Linear equations 33

This is the easiest method in algebra but remember if you are looking for accurate point it is

necessary to use a graph paper or solve the simultaneous equation.

Practice Problem

Find the coordinate of the two points of the following lines and hence sketch their graphs.

i) x − 4y =

8

ii) 3x − 4 y =

7

iii) − x + 2y =6

Points of intersection

A point of intersection is where two or more straight line cut each other or meets.

We will be dealing with simultaneous equation with two or more unknowns. In general a point

of intersection gives the solution of any given simultaneous equations.

Example 2.4

3x + 4 y =

18.............................(i )

6x − 3y =3...............................(ii )

Required

CHAPTER 2 Linear equations 34

Plot the point on a graph.

Solution

From the previous topic we are already familiar with how to get the points

Take the first equation

3x + 4 y =

18.............................(i )

It passes through the point (0, 4.5) and (6, 0)

6x − 3y =3...............................(ii )

The second equation passes through points (0, -1) and (0.5, 0)

These two line sketched on a graph the point of intersection is (2, 3)

Always when you have gotten the solution it is better to verify whether you have gotten the

right solution by substituting the values.

By doing this you are assured of minimizing common mistakes that students make not that they

didn’t know but they overlooked. I call these mathematical remedy.

Figure 2.4

8

7

6x − 3y =

3

6

5

4 Point of

intersection (2,3)

3

2

3x + 4 y =

18

1

-1 1 2 3 4 5 6 7 8 9 10

CHAPTER 2 Linear equations 35

However some simultaneous equation that has no point of intersection that means that they

have no solution.

Example 2.5

2x + 4 y = 11................................(i )

6 x + 12 y =33..............................(ii )

Solution

Using either of the methods discussed earlier for our case let use the second method.

Taking equation

2x + 4 y =

11................................(i )

When x = 0 we get

2(0) + 4 y + 11

4 y = 11

y = 2.75

So we have points (0, 2.75)

Also when y = 0

2 x + 4(0) =11

2 x = 11

x = 5.5

The second point on the line is (5.5, 0)

Considering the second equation

6 x + 12 y =33..............................(ii )

When x = 0

6(0) + 12 y =33

12 y = 33

y = 2.75

The first point on the second line is (0, 2.75)

When we set y = 0

6 x + 12(0) =33

6 x = 33

x = 5.5

CHAPTER 2 Linear equations 36

With the above points we can draw a graph

Figure 2.5

6 x + 12 y =

633

5 Coincidental lines

4

3

2

1

1 2 3 4 5 6 7 8 9 10 2x + 4 y =

11

The above lines on the same line and are called coincident line

Practice Problem

5 x + 10 y =25 5x − 7 y =9

a) b)

15 x + 30 y =75 x− y = 3

7x + 9 y =

3

b)

2x − 5 y =

16

SIMULTANEOUS LINEAR

CHAPTER 3 EQUATIONS

Learning Objectives

• Solving a system or two equation using substitution and elimination

method;

• Solve a system of 3 unknown s using elimination method;

• Solve a system of simultaneous equation of more than 3 unknowns

using Gauss method;

• Detect when the system of the above equation has no solution;

• Detect when the system of the above equation has more solution that is

infinite;

Example 3.1

3x + 4 y =18.............................(i )

6x − 3y = 3...............................(ii )

The coefficient of the first equation (i) of x is 3 and the coefficient for the second equation for

the second equation (ii) of x is 6

We can multiply the equation (i) by 2 so that we can eliminate x by subtracting equation (ii)

from the result of equation (i)

= 3 x + 4 y 18................................(i )..... × 2

= 6 x − 3 y 3..................................(ii ).... ×1

The result of equation (i) we subtract equation (ii)

x cancel when

subtracted

6x + 8 y =

36 Subtract equation (ii) from (i)

6x − 3y =3

CHAPTER 3 Simultaneous Linear equations 38

11 y = 33

y=3

For instance let’s take equation (i)

3x + 4 y =

18.............................(i )

We substitute y = 3

3 x + 4(3) = 18

3 x + 12 = 18

3=x 18 − 12

3x = 6

x=2

Remember the mathematical remedy check whether the value satisfy the equation

There are four stages we are supposed to remember when using the elimination method.

Stage 1

Add or subtract a multiple of one equation to from the other to eliminate x or y depending on

your choice of elimination.

Stage 2

Solve the resulting equation for x or y

Stage 3

Substitute the value of x or y into one of the original equation to deduce x or y.

Stage 4

Mathematical remedy ,check the values whether they satisfy the equations.

CHAPTER 3 Simultaneous Linear equations 39

3x + 4 y =

18.............................(i )

6x − 3y = 3...............................(ii )

We can choose which unknown value to substitute

For instance let make x the subject of the equation (i)

3x + 4 y =18.............................(i )

4

Use 6 − y as your value of x to substitute from equation (ii)

3

6x − 3y = 3.............................(ii )

4

6 6 − y − 3y = 3

3

36 − 8 y − 3 y =

3

36 − 11 y = 3

−11 y =− 3 36

−11 y = −33

y=3

With the value of y = 3 our x = 2

The above method is called substitution method.

Practice Problem

6x − 4 y =

8

a)

2x − 4 y =

4

6 x + 10 y =

38

b)

4 y − 4 y + 22 =

0

3x + 2 y =

10

c)

−x + 2 y =8

CHAPTER 3 Simultaneous Linear equations 40

unknowns

When solving a simultaneous equation with three unknowns it is important to understand that

you must derive other two equations from the three equations to get equation (iv) and (v)

Example

Consider the following systems

2 x + 6 y − 2 z = 8..................................................(i )

4 x + 2 y + 2 z = 20................................................(ii )

6 x − 2 y + 2 z = 8...................................................(iii )

Take the first two equations (i) and (ii)

2 x + 6 y − 2 z = 8......................................................(i )

4 x + 2 y + 2 z = 20.....................................................(ii )

To get

2 x + 6 y − 2 z = 8......................................................(i ).......... × 2

4 x + 2 y + 2 z = 20.....................................................(ii )

4 x + 12 y − 4 z = 16

x cancel

out 4 x + 2 y + 2 z = 20

10 y − 6 z = −4.......................................................(iv)

Using the (i) and the (iii) equation to obtain the (v) equation

2 x + 6 y − 2 z = 8.........................................................(i )

6 x − 2 y + 2 z = 20........................................................(iii )

2 x + 6 y − 2 z = 8.........................................................(i )......... × 3

6 x − 2 y + 2 z = 20........................................................(iii )

CHAPTER 3 Simultaneous Linear equations 41

6 x + 18 y − 6 z = 24

Y 6 x − 2 y + 2 z = 20

cancels 20 y − 8 z = 4.......................................................(v)

Now taking equation (iv) and (v) we can use either of elimination on substitution method to

solve for y and z

10 y − 6 z = −4.......................................................(iv)

20 y − 8 z = 4.......................................................(v)

20 y − 12 z = −8

20 y − 8 z = 4

20 y − 12 z = −8

20 y − 8 z = 4

− 4 z = −12

z=3

20 y − 8(3) = 4

20 y = 4 + 24

20 y = 28

28

y=

20

y = 1.4

When you have the values of y and z we can substitute our original three equation the value

of x by taking any of the equation.

Taking equation (i)

CHAPTER 3 Simultaneous Linear equations 42

2 x + 6(1.4) − 2(3) = 8

2 x + 8.4 − 6 = 8

2 x = 8 − 8.4 + 6

2 x = 5.6

x = 2.8

Practice Problem

x + y + z =1

a) 2 x + 3 y + 3 z = 4

3x + 2 y + 5 z = 6

8q − 3s + 2t = 20

b) 6q + 3s + 12t = 35

4q + 11 y + 11 =33

2a − 3b + 10c =3

c) −a + 4b + 2c =20

5a + 2b + c =−12

three unknown

Example 3.2

x1 + x2 + 3 x3 − x4 =

2.......................................(i )

2 x1 + x2 − 3 x3 + x =0.....................................(ii )

3 x1 + x2 + x3 + x4 =−2...................................(ii

CHAPTER 3 Simultaneous Linear equations 43

Solution

Replace equation (ii) with equation (i) time 2

x1 + x2 + 3 x3 − x4 2.......................................(i )..... × 2

=

2 x1 + x2 − 3 x3 + x =0.....................................(ii )

2 x1 + 2 x2 + 6 x3 − 2 x4 =

4.......................................(i )

2 x1 + x2 − 3 x3 + x =0.............................................(ii )

2 x1 + 2 x2 + 6 x3 − 2 x4 =

4...........................................(i )

2 x1 + x2 − 3 x3 + x = 0.................................................(ii )

3 x2 − 9 x3 + 3 x4 = −4..........................................(iv)

x1 + x2 + 3 x3 − x4 2...........................................(i )........ × 3

=

3 x1 + x2 + x3 + x4 =−2.........................................(iii )

3 x1 + 3 x2 + 9 x3 − 3 x4 =

6...........................................(i )

3 x1 + x2 + x3 + x4 = −2...............................................(iii )

4 x2 − 8 x3 + 4 x4 = −8..........................................(v)

We can take equation (i), (iv) and (v) to replace equation (ii) and (iii) respectively. Now instead

of writing (iv) and (v) we are going to use (ii) and (iii)

3 x1 + 3 x2 + 9 x3 − 3 x4 =6...........................................(i )

3 x2 − 9 x3 + 3 x4 =−4..........................................(ii )

4 x2 − 8 x3 + 4 x4 =

−8..........................................(iii )

1

To eliminate x 2 we divide equation (ii) by 3 or multiply by and equation (iii) by 4

4

CHAPTER 3 Simultaneous Linear equations 44

1

3 x2 − 9 x3 + 3 x4 =

−4..........................................(ii ) ……… ×

3

We obtain the following

4

x 2 − 3 x3 + x 4 = −

3

1

In the (iii) equation when we divide both sides by

4

1

4 x 2 − 8 x3 + 4 x 4 = −8..........................................(iii )............. ×

4

x 2 − 2 x3 + x 4 = −2........................................................(iii )

Replace the (iii) equation with the (ii) by getting the difference

x 4 cancels

x 2 cancels

4

− 3 x3 − −2 x3 = − − −2

3

2

x3 = −

3

2 4

x 2 − 3(− ) + x 4 = −

3 3

10

x2 = − − x4

3

preference.

Substitute for x3 and x 2 in the first equation

CHAPTER 3 Simultaneous Linear equations 45

10 2

x1 − − − x 4 + 3 − − x 4 = 2

3 3

10

x1 + + x 4 − 2 − x 4 = 2

3

10

x1 + − 2 = 2

3

10

x1 + − 2 − 2 = 0

3

10

x1 + − 4 = 0

3

10 − 12

x1 + =0

3

2 2

x1 − = 0 ⇒ x1 = 0 +

3 3

2

x1 =

3

2 10

Using equation (i) can get the value of x 4 having the values of x1 = , x 2 = − − x 4 and

3 3

2

x3 −

3

x1 − x 2 + 3 x3 − x 4 = 2

x1 − x 2 + 3 x3 − x 4 = 2

2 10 2

− − − x 4 − 3 − − x 4 = 2

3 3 3

2 10

+ +x

3 3

Practice Problem

Find the values of x1, x 2 , x3 and x 4 from the following linear systems

x1 − x 2 − x3 + x 4 = 1

x1 + 2 x 2 + x3 = 1

2 x1 + x 2 − x 4 = 3

− x1 + x 2 − x3 + x 4 = 0

APPLICATION OF LINEAR

EQUATION TO BUSINESS

Learning Objectives

• Identify and draw a linear demand equation.

• Identify and draw a linear supply equation.

• Determine the equilibrium price and quantity for and quantity for single

product or good

• Determine the equilibrium price and quantity for two ,three or more

than three products

The application of linear equations in business is also called demand and supply analysis

Demand Functions

Demand function is an equation that shows the relationships between the quantity demanded

and other factors like tastes, presence of substitute and price

We are going to concentrate on price as a factor that affect demand.

Remember the formulae we had of y = mx + c

The value of y depends on the value of x thus y is called the dependent variable.

The value of x on the other hand does not depend on y but determines y thus in general it is

called independent variable.

When we replace y by P which represent the price and x replaced by Q which is the price.

We can introduce parameter or constants that is a and b

In general the equation will be as follows.

P = aQ + b

The demand function has a negative gradient

a is the gradient and b is the y intercept.

Plotting the graph it slopes from bottom left to top right upwards .The demand curve has

negative slope coefficient that is − a

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 47

Figure 2.6

P=

−aQ + b

Price ∆y Change in x

∆y

= −a

∆x

Change in x (∆x)

Quantity

Demand Function

The marketing management of Beta shoe company noticed that on a certain month the safari

boots cost KES 1000 ,the customers bought 600 pairs and the cost was KES 1600, 300 pairs were

bought.

Assuming the demand function is a linear function calculate

The line that passes through the points

Sketch the graph

Find the change in

a) P when Q = 700

b) Q when P = 2000

Solution

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 48

=

− −2

=

∆(300 − 600) 300

Taking any point lets take point (300, 1600)

P − 1600

= −2

Q − 300

P − 1600

(Q − 300) −2(Q − 300)

=

Q − 300

P=

−2Q + 2200

P=

Sketching the graph we are going to use the following coordinate. Remember the previous

method we were using to get the coordinates.

When P = 0 the value of Q is 1100 so the coordinates are (1100, 0)

On the other hand when Q = 0 , P is equal to 2200 hence the coordinates are (0, 2200).

We plot the graph as follows.

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 49

Figure 2.7

2200

P=

Quantity 1100

Supply Function

The equation of supply consists of the ratio or relationships between the quantity supplied and

factors that affect supply such as price. In this course we are going to look at the price as our

major factor that affects supply.

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 50

Figure 2.8

P aQ + b

=

Price ∆y Change in y

∆y

=a

∆x

Change in x (∆x)

Quantity

The supply curve move from bottom left to upwards right as shown by the figure 2.8 above. The

supply curve has a positive slope coefficient that is a

Example 3.6

In a Datacom offer the sales manager observed that when the price of a flash disk 1GB was fixed

at KES 400 the quantity supplied was 250 and when the price changed to KES 250 the quantity

supplied was 200. Assuming that price was the only factors that affected supply and other

factors remains constants.

Calculate

the slope

Obtain the equation that passes through these points.

Sketch the graph of the equation obtained.

Hence find the value of

i) P when Q = 400

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 51

Solution

= =3

∆(250 − 200) 30

We obtain the equation passing through points (400, 250) and (250, 200) by taking (Q, P) and

any point as follows.

∆( P − 250)

=3

∆(Q − 200)

P 3Q + 50

=

Hence using the equation P = 3Q + 50 we can be able to find the value of P when Q = 400

P 3Q + 50

=

Q = 400

Substitute Q by 400

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 52

=P 3(400) + 50

=P 1200 + 50

P = 1250

Also given the value of P = 650 we can obtain the value of Q as follows using the same

equation. P = 3Q + 50

Substitute P with the value given of 650

P 3Q + 50

=

P = 650

650

= 3Q + 50

650 − 50 = 3Q + 50 − 50

600 = 3Q

200 = Q

Practice Problem

1. Suppose a certain commodity has the following linear demand and supply. When the

price is 7500 the quantity is 100uniits, when the price is 4625 the quantity is 750 units and

when the price is 2525 the quantity is 100 units, when the price is 1525 the quantity is 200

units

a) Obtain the linear equation that go through the points given above, clearly explain

which is the demand and supply curve.

b) Equilibrium price and quantity.

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 53

2. At a unit price of sh. 16,000, the demand of a product is 300 units and at a unit price of

sh.48,000 the demand is 100 units. At a unit price of sh. 30,000 the supply is 550 units

and at a unit price of sh. 50,000, the supply is 650 units.

3. The quantity demanded per month of product is 250 units when the unit price KES 1400.

The quantity demanded per month is 1000 units when the unit price is KES 1100. The

suppliers will market 750 units if the price is KES 600 or lower but will supply 2250 units

if the price is KES 800. Both the demand and supply functions are known to be linear

b) Find the supply equation

c) Find the equilibrium price and quantity

d) Illustrate the demand and equation on a graph paper

4. Recently the government liberalized the consumer prices of maize. For the last six

months, the Economic Institute have been keeping the average monthly price and

quantity of maize consumed and supplied per bag in Kenya, The table shows this data;

15 6 20

14 8 18

13 10 16

12 12 14

11 14 12

10 16 10

b) Determine the equilibrium price and quantity

5. The sales manager of Akamba Wood Carvings Ltd finds that he can sell 45 pieces per

week at a price of KES 80 per item, but if he changes the price to KES 100 per item he

can sell only 40 pieces per week. The production manager determines that the total

production cost of 45 items per week is KES 3,000 and that of 40 items per week is KES

2800

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 54

a) Assuming that the unit price is linear function of the quantity sold determine the

profit function.

b) Assuming the total production cost per week is a linear function of the quantity

produced, determine the cost function.

c) Calculate the level of sales that will maximize the weekly revenue.

d) Calculate the level of sales that will maximize the weekly profit

e) Determine the corresponding profit per item sold the weekly profit maximized.

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 55

Equilibrium

This is the state where the supply and demand are equal in other words it occurs when quantity

demanded is equal to the quantity supplied.

To get the equilibrium price and quantity we just equate the two linear functions of supply and

demand.

A graphical representation would look like one below.

Figure 2.9

Supply equation

Price Equilibrium

P

Demand equation

Quantity

Example 3.7

Given the price is KES 9500 the quantity is 3000 units also when the price is KES 6625 the

quantity is 2750 units.

When the price is KES 4525 the quantity is 2100 units. Also when the price KES 2525 the

quantity is 2200 units.

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 56

Required

a) Obtain the linear functions that passes through the points

b) Identify which of the two equations is demand and supply functions.

c) Calculate the equilibrium price and quantity

d) Sketch the graph of the equations.

Solution

= = 11.5

3000 − 2750 250

P − 9500

= 11.5

Q − 3000

=P 11.5Q − 25000

The above is supply function since the Q coefficient 11.5 is positive thus we can write this one as

P = 11.5QS − 25000

Taking the other points in part (ii) we can obtain the slope just as we did in the first part.

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 57

= = −20

∆(2100 − 2200) − 100

P − 4525

= −20

Q − 2100

P − 4525 =

−20(Q − 2100)

P − 4525 =

−20Q + 42000

P − 4525 + 4525 =

−20Q + 42000 + 4525

−20Q + 46525

P=

The equation is a demand function since the coefficient of Q is negative that means it slopes

from top left to bottom right and can be expressed as follows.

P = −20QD + 46525

With our equations we can get the equilibrium price and quantity by equating them both.

−31.5Q =

−71525

−71525

Q=

−31.5

Q = 2271

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 58

P = 11.5QS − 25000

P = 1116.5

When plot the graph of the two linear equation it appears as follows.

Example 3.8

Suppose a certain commodity has the following linear demand and supply

When the price is 7500 the quantity is 100uniits, when the price is 4625 the quantity is 750 units

and when the price is 2525 the quantity is 100 units, when the price is 1525 the quantity is 200

units

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 59

Obtain the linear equation that go through the points given above, clearly explain which is the

demand and supply curve.

Solution

Change in price ∆P

a) =

Change in quantity ∆Q

= = = 11.5

∆Q 1000 − 750 280

P − 7500

= 11.5

Q − 1000

=P 11.5Q − 4000

The above is supply function because of the positive co-efficient of Q which is 11.5

Change in price ∆P

=

Change in quantity ∆Q

= = = −10

∆Q 100 − 200 −100

P − 1525

= −10

Q − 200

−10 ( Q − 200 )

P − 1525 =

CHAPTER 3 Linear equations: Application Linear equation to business 60

P − 1525 =

−10Q + 2000

P=

−10Q + 3525

P=

11.5Q − 4000 =

−10Q + 3525

21.5Q = 7525

Q = 350

=P 11.5Q − 4000

=P 4025 − 4000

P = 25

Example 3.9

At a unit price of KES 16,000, the demand of a product is 300 units and at a unit price of KES

48,000 the demand is 100 units. At a unit price of KES 30,000 the supply is 550 units and at a

unit price of KES 50,000, the supply is 650 units.

Determine the market equilibrium point

CHAPTER 4 Linear equations: Application Linear equation to business 61

Solution

Demand function

= = = −160

∆Q 100 − 300 −200

P − 48000

= −160

Q − 100

−160 ( Q − 100 )

P − 48000 =

P − 48000 =

−160Q + 16000

P=

−160Q + 64000

Supply demand

= = = 200

∆Q 650 − 550 100

P − 30,000

= 200

Q − 550

P=

200Q − 110,000 + 30,000

=P 200Q − 80,000

CHAPTER 3 Simultaneous Linear equations: Application Linear equation to business 62

200Q − 80,000 =

−160Q + 64000

360Q = 144000

Q = 400

=P 80000 − 80000

P=0

Practice Problem

−12QD + 360

P=

P QD + 87

=

Where P, QS and QD represent the price, quantity supplied and quantity demanded

respectively.

Calculate the equilibrium price and quantity.

Find the value of P when the quantity of supply changes to 300

ALGEBRA

CHAPTER 4

Learning Objectives

• Identify the symbols <,>, ≤, and ≥

• Operating of inequalities.

• Multiplying of brackets.

• Operations of fractions that is multiplying and dividing , adding and

subtracting.

• Operation of algebraic fractions

Introduction

A number line which we met at the beginning of the chapter can be used to decide whether a

number is greater than or less than.

The symbols

< means it is less than

> means it is greater than

≤ means it is less than or equal to

≥ it means it is greater than or equal to

Consider the number line below

Practice Problem

8 ≥ -3 d) -2 ≥ -5 g) 7 > 0 > 12

15 ≤ 13 e) -7 ≤ 6 ≤ 10 h) -5 ≥ 0

CHAPTER 4 Algebra 64

Practice Problem

x>5 c) x < −3 e) y ≥ 16

y ≤3 d) y > −32 f) y ≤8

Practice Problem

Note

One can convert two simple linear inequalities into a compound inequality

Example 4.1

x ≤ 3 and x ≥ −7 ⇒ −7≤ x ≤3

CHAPTER 4 Algebra 65

Practice Problem

2

6≥x and x ≥ −4 b) x< and x ≥ −5

3

Note

For < and > circle the number

Practice Problem

Illustrate the following sets on a number line

d) − x ≤ −6 e) x ≥ 2x − 6 f) x > −12

1≤ x ≤7 b) 0 < x ≤ 8 c) −3 < x ≤ 8

CHAPTER 4 Algebra 65

Example 4.2

Solve

2x − 4 < 2

1

3− x ≥6

5

Solution

2x – 4 < 2

2x < 6

X <3

1

3− x ≥6

5

1

− x ≥9

5

− x ≥ 45

x ≤ −45

Note

Dividing the unknown by a negative value, the inequality sign changes.

Practice Problem

Solve the following inequalities and illustrate the solution on a number line

a)8 – 4x ≤ 2 b) 5 + 3x ≤ 8 + 4x

CHAPTER 4 Algebra 67

c) 3x – 7 < 2 d) 3x – 2 ≥ x – 6

1 1

x +1≥ 5 h) 3 − x ≤ 5

2 2

Example 4.3

Solve

3x + 1 > 13

2x – 4 ≤ 8

Solution

Again 2x – 4 ≤ 8 ⇒ 2x ≤ 12

⇒4 < x ≤ 6

Solve

-6 < 1 – 2x ≤ 8

CHAPTER 4 Algebra 68

Solution

The inequality can be reduced to two inequalities that is – 6 < 1 – 2x and 1 – 2x ≤ 8 and then

solved separately.

– 6 < 1 – 2x

-7 < -2x

3.5 > x

Again

1 – 2x ≤ 8

-2x ≤ 7

x≥ 3.5

⇒ -3.5 ≤ x 3.5

Practice Problem

x + 7 > 53 x+5>3

a) b)

x − 10 < 3 x −1 ≤ 5

1

x −3≤1 x +6>3

c) 2 d)

2x − 3 ≤ 5

x +7>3

1 1

e) 4 x + 2 ≤ x + 5 < 2 x + 9 f) x +1< x +2 ≤ x +2

2 8

Note

For < and > use broken line

CHAPTER 4 Algebra 69

Practice Problem

c) y > −3 d) 0 ≤ y < 6

e) x ≥ 12 f) −1 ≤ x ≤ 4

g) x ≥ 4, y < 2 h) y < 0

a) 2 x + y > 2 b) 5x + 2y ≤ 4

c) x + y ≥ 0 d) 8=

x 2y ≥ 6

e) 3=

x 4y ≤ 6 f) 3y − x ,5

g) y − x ≤ 2 g) 12=

x 3y > 9

Intersecting Regions

x= y > 0 y+x<4

x <3 b) y > 2

y>0 x +2 > 0

CHAPTER 4 Algebra 70

2x + y < 5 2x + y < 6

c) y < x + 3 d) x ≤ 2

y>0 y≤5

4 x − 3y < 6

y−x<0

e) x < 3 f)

y<5

y ≤6

The manager of caribou café has sufficient money to buy 100 crates of soft drinks of type x and

y. He wants to buy at least twice as many crates of type x as type y. he wants to buy maximum

80 crates of type x and at least 10 crates of type y.

Write down all the inequalities based on these facts.

Represent them on a graph.

The profit on a crate of type x is KES 120 and that of type y is KES 100. Find the number of crates

of each type that he should buy to make maximum profit and calculate this maximum profit.

Solution

x + y ≤ 100................................................................... ( i )

x ≥ 2y.......................................................................... ( ii )

x ≤ 80.......................................................................... ( iii )

y ≥ 10........................................................................... ( iv )

We need to get the points for equation (i) and (ii) because the rest can be drawn directly

CHAPTER 4 Algebra: Application of linear inequalities 71

x + y ≤ 100................................................................... ( i )

points x y

0 100

100 0

x ≥ 2y.......................................................................... ( ii )

points x y

20 10

40 20

100 x ≤ 80

80

60

x ≥ 2y

40

20

y ≥ 10

x + y ≤ 100

20 40 60 80 100

Profit

= 120 x + 100y

A = 120 ( 20 ) + 100 (10 ) = 3400

B = 120 ( 80 ) + 100 (10 ) = 10600

C = 120 ( 80 ) + 100 ( 20 ) = 11600

D = 120 ( 66 ) + 100 ( 33) = 11220

CHAPTER 4 Algebra: Application of linear inequalities 72

Practice Problem

1. For an in-service course in business management, at least four but not more than 9

workers are to be chosen. The ratio of the number of male workers to the number of

female workers must be less than 2:1 and there must be more males than females

2. A car park is to be laid for x matatus and y buses. Matatus are allowed 10 sq. meters of

space and buses 20 sq. metres, and there is only 500 sq meters available. Not more than

40 vehicles are allowed at a time. There are always both types of vehicles parked and at

the most 15 buses are allowed at a time. Write down all the inequalities based on these

facts. The parking charge for the matatus is KES 150 and that for the bus is KES 200 per

day. Find how many vehicles of each type should be parked on the lot in order to obtain

3. The manager of a company wishes to buy two types of machines A and B. Machine A

costs 1000 and B costs 750.he must buy at least one of each type. The total expenditure

on the machine is not to exceed 7500.machine A helps him cut down hi production cost

by KES 15 a week and B by KES 10 a week. How many of each type must he buy to make

a maximum savings?

4. Suppose you are the sport manager and you have been requested to build a rectangular

playing field x metres long and y metres wide. The perimeter of the field must be more

than 500 m but less than 700m. The length of the field must be less than twice its width

CHAPTER 4 Algebra: Application of linear inequalities 73

and the area of the field must not be more than 2500 square metres. Write down

5. A farmer has 70 acres of land available for growing maize and beans. The cost per

hectare for growing maize is KES 3000 and that for beans is KES 2000 and he has only

KES 18000. The labour per ha is 2 man-days for the maize and 4 man-days for the beans

6. The manager of a theatre wishes to divide the seats available into two classes A and B.

There are not more than 120 seats available; there must be at least twice as many B

class seats as there are A class seats; Class A seats are priced at KES 300 each and class B

at KES 200 each and at least KES 20000 should be collected at each show to meet the

expenses.

b) Find the number of seats for each class that will give maximum profit

c) Calculate maximum profit

d) Find the least number of seats that must be sold in order to incur no loss.

7. A factory operates on two types of machines as shown below;

available

Floor space required 2 3 18

Number of men needed to 4 3 24

operate it

There are more machines of type X than those of type Y. if the profit from using machine

X is KES 400 per hour and that from using machine Y is KES 800 per hour, find graphically,

CHAPTER 4 Algebra: Application of linear inequalities 74

the number of machines of each type that should be in sue to give maximum profit per

hour and find this maximum profit.

8. A farmer has 50 acres of land which he plans to plant maize and beans. Each acre of

maize requires 6 people and each acre of beans require 2 people to work on it. He has at

least 60 people available. He must plant at least 10 acres of beans. The profit on maize is

KES 2000 per acre. If he plants x acre of maize and y acres of beans.

a) Write down 4 inequalities of x and y to describe his plan

b) Represent the 4 inequalities graphically

c) Determine the acreage for each crop for maximum profit.

BINOMIAL

CHAPTER 5 THEOREM

Learning Objectives

At the end of this section the students should be able to:

n = 1, 2,3, 4,5, 6, 7,...n we can expand this as listed below.

CHAPTER 5 Binomial theorem 76

1 1

1 2 1

1 3 3 1

1 4 6 4 1

1 5 10 10 5 1

1 1

1 2 1

1 3 3 1

1 4 6 4 1

1 5 10 10 5 1

1 6 15 20 15 6 1

1 5 10 10 5 1

1 5 10 10 5 1

1 6 15 20 15 6 1

There are forms of binomial expansion that is positive integral values of the form ( x + y ) n and

negative integral values of the format ( x − y ) n

Expanding using the positive integer

CHAPTER 5 Binomial theorem 77

Example 5.1

Getting the coefficient from the Passcal's triangle as follows

Example 5.2

Solution

CHAPTER 5 Binomial theorem 78

Multiplying

Example 5.3

Solution

When we are expanding the form ( x + y ) n with x = 4 , y = 6 x and n = 5 thus we can expand

as follows;

CHAPTER 5 Binomial theorem 79

Example 5.4

(1.2)3

(0.9)3

Solution

(1 + x) 3 =+

1 3x + 3x 2 + x 3

This means that thus everywhere there is x in our expression we substitute with

0.2

(1 + 0.2)3 =+

1 3 x + 3 x2 + x3

x = 0.2

1 + 3(0.2) + 3(0.2) 2 + (0.2) 3

1 + 0.6 + 0.12 + 0.008

= 1.728

This means that x = −0.1

(1 - 0.1) 3 =+

1 3x + 3x2 + x3

x = -0.1

1 + 3( -0.1) + 3(-0.1) 2 + (- 0.1)3

1 - 0.3 + 0.03 - 0.001

= 0.729

CHAPTER 5 Binomial theorem 80

Practice Problem

(a) (3 x + y )7

(b) (2 p − 3q )10

2 6

(c) (m − )

m

Using Binomial expansion expand the following (1 + 4 x)5 . Hence evaluate the following (1.004)5

PERMUTATIONS

CHAPTER 6

& COMBINATIONS

Learning Objectives

At the end of this section the students should be able to:

Use the n! (factorial)

Multiplication of permutation

Express in factorial notation

Express in factors

Simplification of permutation

Let think of numbers 1, 2, and 3 if these numbers were written in a vertical way or column way

we would obtain six different arrangements as listed below.

123

132

213

231

312

321

From the above arrangement, each arrangement is a possible or likely permutation of the

numbers 1. 2 and 3 and thus we can say that there are six permutations that we can obtain from

the three numbers.

In general there three operations that can be done as follows

This can be written in as for any natural number n ;

n ! = n (n -1)(n - 2)...(3)(2)(1)

n ! is read as n factorial

Thus given 7! = 7 × 6 × 5 × 4 × 3 × 2 × 1 the same case to 4! = 4 × 3 × 2 × 1

CHAPTER 6 Permutation & Combinations 82

Example 6.1

Evaluate

8!× 4

6!

9!

3!× 3

10!

2!× 5!

Solution

8!× 4 8 × 7 × 6 × 5 × 4 × 3 × 2 × 1 × (4)

= 224

6! 6 × 5 × 4 × 3 × 2 ×1

10! 9 × 8 × 7 × 6 × 5 × 4 × 3 × 2 ×1

= 20160

2!× 3 3 × 2 × 1 × (3)

10! 9 × 8 × 7 × 6 × 5 × 4 × 3 × 2 ×1

= 15120

2!× 5! 2 ×1× 5 × 4 × 3 × 2 ×1

Note that we can use dot instead of multiplication sign for example in number (1) above

8!.4 8.7.6.5.4.3.2.1.(4)

= = 224

6! 6.5.4.3.2.1

Practice Problem

1 Evaluate:

5! ii) 8! iii) 16! iv) 19!

CHAPTER 6 Permutation & Combinations 83

3!6! 14! 7!

v) vi) (3!) 2 vii) viii)

9! 5!4! 3!(2!) 2

2 Express in factorial notation

6×3

i) 5.4.3.2.1 ii) 7.9 iii) 11.7.9.2 iv)

2 ×1

7× 4×3

v)

3 × 2 ×1

Express in factors

Combination

n n n!

If is the number of combinations of n elements taken r at a time then =

r r (n − r )r !

Example 6.2

A club in certain university wants to form committees of 3 people from a group of 8 people.

How many committees can be formed?

Solution

8 8! 8.7.6.5.4.3.2.1

= = = 56

3 5!3! 5.4.3.2.1.3.2.1

Practice Problem

In a drama club in certain university wants to form committees of 5 people from a group of

12people. How many committees can be formed?

MATRICES

CHAPTER 7 ALGEBRA

Learning Objectives

At the end of this section the students should be able to:

Define a matrix order

Identify types of matrices

Identify elements in matrix

Determine the column of a matrix

Determine the row of matrix

A matrix is a rectangular array of elements. Elements are always real valued numbers.

Example of matrices.

a a12 1 0

a) 11 b)

a21 a22 0 1

Types of matrices

a) Square matrix

This is the matrix of the order n × n where n represent the rows and n represents the number

of column.

2 4

8 0

CHAPTER 7 Matrices Algebra 85

b) Identity matrix

Where all elements on principle diagonal are one in unity while others are zero.

1 0 0

1 0 0 1 0

0 1 and

0 0 1

d) Column Vector

4

5

7

e) Null vectors

All elements are zero be it in any order of the matrix for our case we use 2 × 2 matrix

0 0 0

0 0

0 0 and also 3 × 3 matrix 0 0 0

0 0 0

CHAPTER 7 Matrices Algebra 86

Practice Problem

Identify the following types of matrices

1 3 −2 0

3 −1 −7 1

[2 8 0 3] c)

1 −2 −2 5

−3 −4 1 2

1 0 0

0 0

0 0 d) 0 1 0

0 0 1

OPERATION OF MATRICES

Learning Objectives

At the end of this section the students should be able to:

Understand the different types of matrices.

Add and subtract matrices.

Use scalar to multiply matrices.

Operation of matrices multiplication.

1) Additional of matrix

a b e f

Taking two matrices A and B g

c d h

a + e b + f

We add A + B =

c + g d + h

Example 7.1

3 3 2 3 3 + 2 3 + 3 5 6

A and B the we add

= A+ B =

1 5 6 0 1 + 6 5 + 0 7 5

CHAPTER 7 Matrices Algebra: Operation of Matrices 88

2) Subtraction of matrix

a b e f

Again if we have two matrices C and D we subtract as follows

c d g h

a−e b− f

C−D=

c − g d − h

3 3 2 3

Example C and D then C-D is given as follows

1 5 6 0

3− 2 3− 3 1 0

C−D =

=

1 − 6 5 − 0 −5 5

3) Scalar multiplication

result is matrix in which the element is multiplied by real numbers

3 2

A = 1 1 And multiplying with a scalar of 2

2 0

2×3 2× 2 6 4

2 A = 2 ×1 2 ×1 = 2 2

2× 2 2× 0 4 0

Example 7.2

Suppose the supply below announces a 10% increase on both the purchase and delivery of

these item what is the new unit cost matrix.

CHAPTER 7 Matrices Algebra: Operation of Matrices 89

6 4 2

1 1 0.5

An 10% increase means that the new unit cost are the former cost plus 0.1 the former cost that

is the new cost are 0.1 former cost matrix .

New cost matrix 1.10A

1.10 A =

1.1×1 1.1×1 1.1× 0.5

=

1.1 1.1 0.55

4) Matrix transportation

Given a matrix A when column and row of a matrix are interchanged to create a new matrix B

we say that A and B are transpose of each other.

2 1 4 2

A = 2 2 0 2

4 1 0 6

A transpose is written as AT

2 2 4

1 2 1

A =

T

4 0 0

2 2 6

Example 7.3

1 3 2

X =

4 1 2

CHAPTER 7 Matrices Algebra: Operation of Matrices 90

X transpose is written as X T

1 4

X = 3 1

T

2 2

5) Multiplication of matrix

This is a product of two matrix given A is m × n and matrix B is n × p . The matrix product AB is a

m× p

In multiplication of matrices, the number of column of matrix A must be equal to the number of

rows of matrix B.

Example

3 4

a b c d

Given that matrix X = 2 5 and C =

e f g h

6 10

Find XC

Before multiplying the matrices we must know the order of each matrix .

Matrix X = 3 × 2 and C= 2 × 4

The two matrixes must be compatible that is the number of column of the

first matrix must be equal to the number of row of the second matrix, the

product of the two matrices will be order of 3 × 4

CHAPTER 7 Matrices Algebra: Operation of Matrices 91

3 4

2 5 a b c d

e f g h

6 10

Practice Problem

2 3 1

A = 1 1 1 B = [1 0 6]

−3 0 −2

2 3

c= D=[ −1 −1]

3 2

0 2 1 1

3 0 1 6

E=

1 1 0 7

1 2 2 0

a) AT , BT , C T , DT , E T

b) A − B, B − C , D − E

c) A + B, C + D

d) BA, DC

CHAPTER 7 Matrices Algebra: Operation of Matrices 92

Application in Business

Example 7.4

ABC Ltd produces toy at two locations. They have an order to make stuffed animals. The

quantities of each type of animal to be produced at each plant may be expressed as 2 × 3

production p thus,

Nairobi 500 800 1300

P=

Mombasa 400 400 700

The amount and type of material (in cubic feet) required to manufacture each of animal may be

represented by 3 × 3 activity matrix A . thus

Pandas 1.5 30 5

A = Dolls 2 35 8

Birds 2.5 25 15

Determine:

Find the amount of each type of material required for each plant

Solution

1.5 30 5

Nairobi 500 800 1300

2 35 8

Mombasa 400 400 700

2.5 25 15

Nairobi

CHAPTER 7 Matrices Algebra: Operation of Matrices 93

1.5

[500 800 1300] 2 = ( 500 ×1.5) + (800 × 2 ) + (1300 × 2.5)= 5600

2.5

30

[500 800 1300] 35 =

( 500 × 30 ) + (800 × 35) + (1300 × 25) = 75,500

25

5

[500 800 1300] 8 = ( 500 × 5) + (800 × 8) + (1300 ×15)= 28, 400

15

Mombasa

1.5

[ 400 400 700] 2 = ( 400 ×1.5) + ( 400 × 2 ) + ( 700 × 2.5)= 3250

2.5

30

[ 400 400 700] 35 = ( 400 × 30 ) + ( 400 × 35) + ( 700 × 25) = 43500

25

5

[ 400 400 700] 8 = ( 400 × 5) + ( 400 × 8) + ( 700 ×15)= 15700

15

Nairobi 5600 75500 28400

=

Mombasa 3150 43500 15700

CHAPTER 7 Matrices Algebra: Operation of Matrices 94

Practice Problem

1. Purity fashion makes trousers at two locations. They have an order to make ladies jeans

trousers.

Athi River 600 1000 1200

Industrial area 1400 700 1100

The amount and type of material in cubic meter required to make each type of trouser may be

represented by 3 by 3 activity matrix A as below.

pencil 1.5 0.3 10

hipstar 2.5 0.35 5

3.0 0.25 20

Find the amount of each type of material required for each plant.

A group operates a chain of filling stations in each of which are employed cashiers, attendants

and mechanics as show.

L arg e Medium Small

Cashier

4 2 1

Attendants

12 6 3

Mechanics

6 4 2

INVERSION OF MATRICES

Learning Objectives

• Determine where there a matrix is singular or non singular;

Let consider a square matrix which have the same number or rows and columns. When we

multiply

AI = A and IA = A

1 0

I=

0 1

The matrix is called identity matrix and it is equal to number 1 in ordinary mathematics.

Consider another matrix represented by letter A

Where

CHAPTER 7 Matrices Algebra: Inversion of Matrices 96

a b

A=

c d

To determine the matrix A −1 which is the inverse of A we can perform the following operation.

1 a b

A −1 =

ad − bc c d

AA −1 = I and A −1A = I

students look at it as very difficult but here is how we obtain the inverse of A given

a b

A=

c d

First we interchange the numbers in the diagonal that is formed by the first number in the

matrix as follows

Interchanging “a”

d b

A= and “d”

c a

Second change the signs of the remaining diagonal that is made of the second number. If the

number are positive change signs to negative and vice versa

d −b Change signs to

A=

−c a negative

To obtain the determinant we multiply numbers in the first diagonal subtract the numbers in

the second diagonal

ad − bc

Then we are supposed to get the reciprocal of the determinant

1

ad − bc

CHAPTER 7 Matrices Algebra: Inversion of Matrices 97

Here we have obtained a scalar which we are supposed to multiply the matrix that we

interchanged and changed sign

To obtain

1 d −b

ad − bc −c a

When determinant of any matrix is zero that is A = 0 the is said to be singular matrix and when

the matrix has a determinant that of a number or non zero determinant it is said to be non-

singular matrix

Example 7.5

Determine the inverse of the following matrices and comment whether they are singular or non

singular.

2 3

A=

3 2

6 4

B=

3 2

3 7

C=

2 5

Solution

Let begin by calculating the determinant of matrix A

2 3

det(A) or A = =( 2 × 2 ) − ( 3 × 3) =−

4 9=−5

3 2

We can see that A ≠ 0 thus matrix A has a inverse and is a non-singular matrix

1

Since we have the determinant we need to get the reciprocal of -5 as −

5

Following the steps we need to interchange the first diagonal which is made of numbers 2 and 2

CHAPTER 7 Matrices Algebra: Inversion of Matrices 98

Interchanging 2

and 2

2 3

A=

3 2

A=

−3 2 negative

Finally multiply the above matrix with the scalar matrix obtain

1 2 −3 − 2 5 3 5

− =

5 −3 2 3 5 2 5

− 2 5 3 5 2 3 1 0

3 5 2 5 3 2 = 0 1

6 4

B=

3 2

6 4

B= = ( 6 × 2 ) − ( 4 × 3) = 12 − 12 = 0

3 2

From the above operation we can see that B = 0 hence it has no inverse and is

Singular matrix

3 7

C=

2 5

CHAPTER 7 Matrices Algebra: Inversion of Matrices 99

3 7

C= = ( 3 × 5 ) − ( 7 × 2 ) = 15 − 14 = 1

2 5

Thus this is a non-singular matrix and we can obtain its inverse.

First get the reciprocal of the determinant which is on 1

Second interchange the first diagonal of 3 and 5

5 7

C= Interchanging 3

2 3 and 5

5 −7 Change signs to

C= negative

−2 3

1 5 −7 5 −7

=

1 −2 3 −2 3

Practice Problem

Find the determinant of the following and hence the inverse of the following matrices

9 3

K=

6 2

7 5

L=

4 3

CHAPTER 7 Matrices Algebra: Inversion of Matrices 100

5 5

M=

4 3

We have been dealing with square matrix that is 2× 2 now we need to consider a 3× 3 matrix.

The same concept of identity matrix applies but need to consider some technicality that applies.

Considering a matrix A which is 3 × 3 with the following elements

A = m 21 m 22 m 23

m31 m32 m33

Since there are nine elements we can obtain nine cofactors from the matrix. We can define

cofactor as the determinant of 2× 2 which is obtained a row and a column as shown below.

To obtain the cofactor of m11 we need to delete the first row and the first column and the

multiplication of the first diagonal minus second diagonal of the remainder gives the cofactor of

m11

A = m 21 m 22 m 23 Delete the first

row and column

m31 m32 m33

m 22 m 23

M11 = = ( m 22 )( m33 ) - ( m 23 )( m32 )

m32 m33

A = m 21 m 22 m 23 Delete the first row

m31 m32 m33 and second column

m 21 m 23

=M12 = ( m 21 )( m31 ) − ( m 23 )( m31 )

m31 m31

CHAPTER 7 Matrices Algebra: Inversion of Matrices 101

The row will remain deleted and then move to the line to the last column which is deleted

A = m 21 m 22 m 23 Delete the first row

and third column

m31 m32 m33

m 21 m 22

M13 = = ( m 21 )( m32 ) - ( m 22 )( m31 )

m31 m32

To get the cofactors in the second row we delete the second row and the first column.

A = m 21 m 22 m 23 Delete the second

m31 m32 m33 row and first column

m12 m13

M 21 = = ( m12 )( m33 ) - ( m13 )( m32 )

m32 m33

The second row remains deleted and now we need also to delete the second column.

A = m 21 m 22 m 23 Delete the second row

m31 m32 m33 and second column

m11 m13

M 22 = = ( m11 )( m33 ) - ( m13 )( m31 )

m31 m33

The second row is still deleted and now we need to delete the third column so as to obtain the

cofactor of M 23

CHAPTER 7 Matrices Algebra: Inversion of Matrices 102

A = m 21 m 22 m 23 Delete the second row

and third column

m31 m32 m33

m11 m12

M 23 = = ( m11 )( m32 ) - ( m12 )( m31 )

m31 m32

Finally we perform the same operation in the third row and delete it and delete also the first

column to obtain M 31

Delete the third row

A = m 21 m 22 m 23 and first column

m31 m32 m33

m12 m13

M 31 = = ( m12 )( m 23 ) - ( m13 )( m 22 )

m 22 m 23

To obtain M 32 we need to delete the third row and the second column.

Delete the third row

A = m 21 m 22 m 23 and second column

m31 m32 m33

m11 m13

M 32 = = ( m11 )( m 23 ) - ( m13 )( m 21 )

m 21 m 23

To obtain M 33 we need to delete the third row and the third column

A = m 21 m 22 m 23 Delete the third row

and third column

m31 m32 m33

CHAPTER 7 Matrices Algebra: Inversion of Matrices 103

m11 m12

M 33 = = ( m11 )( m 22 ) - ( m12 )( m 21 )

m 21 m 22

+ − +

− + −

+ − +

This just as we were doing in a square matrix where we were changing the signs were simply

multiply or adding a prefix of the signs below in the matrix

+ −

− +

Example 7.6

1 1 1

B = 4 1 2

5 3 4

Solution

B B22 B23

21

B31 B32 B33

CHAPTER 7 Matrices Algebra: Inversion of Matrices 104

We start by getting the cofactors of B11 by deleting the first row and column and multiply the

diagonals

B = 4 1 2 row and column

5 3 1

1 2

B11 = =1(1) − 2 ( 3) =−

1 6 =−5

3 1

To get B12 we delete the first row and the second column

B = 4 1 2 and second column

5 3 1

4 2

B12 = 4 (1) − 2 ( 5 ) =−

= 4 10 =

−6

5 1

B13

is obtained by deleting the first row and the third column and multiply the remainder

diagonally.

1 1 1

B = 4 1 2 Delete the first row

and third column

5 3 1

4 1

B13 = = 4 ( 3) − 1( 5 ) = 12 − 5 = 7

5 3

CHAPTER 7 Matrices Algebra: Inversion of Matrices 105

We now can move to the second row in which to obtain B21 we need to delete the second row

and first column

1 1 1

B = 4 1 2 Delete the second

row and first column

5 3 1

1 1

B21 = =1(1) − 1( 3) =1 − 3 =−2

3 1

Similarly we delete the second row and the second column to get B22

1 1 1

B = 4 1 2 Delete the second row

5 3 1 and second column

1 1

B22 = =1(1) − 1( 5 ) =−

1 5 =−4

5 1

To obtain B23 we need to delete the second row and the third column

1 1 1

B = 4 1 2 Delete the second row

5 3 1 and third column

1 1

B23 = =1( 3) − 1( 5 ) =3 − 5 =−2

5 3

Finally we move to the third row where first we need to obtain B31

1 1 1

B = 4 1 2

5 3 1 Delete the third row

and first column

CHAPTER 7 Matrices Algebra: Inversion of Matrices 106

1 1

B31 = = 1( 2 ) − 1(1) = 2 − 1 = 1

1 2

B32 is obtained by deleting the third row and the second column

B = 4 1 2 and second column

5 3 1

1 1

B32 = =1( 2 ) − 1( 4 ) =2 − 4 =−2

4 2

B33 is the last cofactor and can be obtained by deleting the third row and column

1 1 1

and third column

B = 4 1 2

5 3 1

1 1

B33 = =1(1) − 1( 4 ) =−

1 4 =−3

4 1

The cofactor was represented by B21 B22 B23 and we can replace with the figures we

B31 B32 B33

obtained as

−5 −6 7

−2 −4 −2

1 −2 −3

+ − +

We need to place a prefix of the following signs − + −

+ − +

CHAPTER 7 Matrices Algebra: Inversion of Matrices 107

+ − + −5 −6 7 −5 6 7

− + − −2 −4 −2 = 2 −4 2

+ − + 1 −2 −3 1 2 −3

Example 7.7

2 6 3

C = −5 1 −2

7 −3 1

Solution

C11 C 12 C13

C = C21 C22 C23

C31 C32 C33

We can combine the finding the cofactors and putting the prefix of the signs

2 6 3 + − +

C = −5 1 −2 and − + −

7 −3 1 + − +

The fist sign is +

1 −2

C11 = =1(1) − ( −2 )( −3) =1 − 6 =−5

−3 1

CHAPTER 7 Matrices Algebra: Inversion of Matrices 108

−5 −2

C12 = = − 5 (1) − ( −2 ) 7 =−5 + 14 =9

7 1

−5 1

C13 = =−5 ( −3) − 1( 7 ) =15 − 7 =8

7 −3

6 3

C21 = = 6 (1) − 3 ( −3) = 6 + 9 = 15

−3 1

2 3

C22 = = 2 (1) − 3 ( 7 ) = 2 − 21 =

−19

7 1

2 6

C23 = = 2 ( −3) − 6 ( 7 ) = − 6 − 42 =−48

7 −3

6 3

C31 = = 6 ( −2 ) − 3 (1) = − 12 − 3 =−15

1 −2

2 3

C32 = =2 ( −2 ) − 3 ( −5 ) =−4 + 15 =11

−5 −2

2 6

C33 = = 2 (1) − 6 ( −5 ) = 2 + 30 =32

−5 1

−5 9 8

15 −19 −48

−15 −11 32

+ − + −5 9 8

− + − 15 −19 −48

+ − + −15 −11 32

CHAPTER 7 Matrices Algebra: Inversion of Matrices 109

−5 −9 8

= −15 −19 48

−15 11 32

Practice Problem

Find the cofactors of the following matrices

1 2 3

D = 4 5 6

7 8 9

3 −2 −3

E = 3 −3 3

4 7 −8

Example 7.8

Now that we have learned how to determine the cofactors we need to get the determinant and

the inverse of a 3 × 3 by

Taking the cofactors of the example we had previously

−5 6 7

2 −4 2

1 2 −3

Method 1

Multiply the corresponding row or column of the original matrix and the cofactor matrix

CHAPTER 7 Matrices Algebra: Inversion of Matrices 110

1 1 1 −5 6 7

The original matrix B = 4 1 2 and the cofactor matrix 2 −4 2

5 3 1 1 2 −3

When we take the first row of the original matrix, we should also take the first row of the

cofactors matrix and multiply

B =1( −5 ) + 1( 6 ) + 1( 7 ) =−5 + 6 + 7 =8

When we pick every corresponding row or column we are supposed to get the same

determinant of 8.

Let take the first column

B =1( −5 ) + 4 ( 2 ) + 1( 5 ) =−5 + 8 + 5 =8

Method 2

1 1 1

Taking the same matrix B = 4 1 2 we can use any row or column for our case let use the

5 3 1

third row.

1 1 1 1 1 1

B =5 −3 +1

1 2 4 2 4 1

Remember here we must consider the signs since we took the third row we take the signs in the

third row

CHAPTER 7 Matrices Algebra: Inversion of Matrices 111

+ − +

− + −

+ − +

B = 5 (1) − 3 ( −2 ) + 1( −3) = 5 + 6 − 3 = 8

Example 7.9

2 6 3

C = −5 1 −2

7 −3 1

Given the cofactors are

−5 −9 8

−15 −19 48

−15 11 32

Taking any row or column we are supposed to multiply with the corresponding row or column.

When we take the first row in the original matrix we should also take the first in the cofactor

matrix

7 ( 15 ) + ( 3)11 + 32 =

C =− −105 + 33 + 32 =

−40

CHAPTER 7 Matrices Algebra: Inversion of Matrices 112

3 ( 8 ) + ( −2 ) 48 + 32 =

C= 24 − 96 + 32 =

−40

Method 3

2 6 3

C = −5 1 −2

7 −3 1

Add

Example 7.10

4x + 5 y =

60

3x + 3 y =

39

Solution

Let first arrange it into matrix form

3 =

3 −3 −3 4 y −3 −3 4 39

1 0 x 1 −5 3 60

0 =

1 y −1 4 3 39

CHAPTER 7 Matrices Algebra: Inversion of Matrices 113

Det 4 ( 3) − 5 ( 3) =

12 − 15 =

−3

3 5

3 4

3 −5

−3 4

3 3 −3 −3 4 y = −3 −3 4 39

1 0 x −1 5 3 60

0 1 y = 1 −4 3 39

x ( −1× 60 ) + ( 5 3 × 39 )

y = 1× 60 + −4 3 × 39

( ) ( )

x −60 + 65

y = 60 − 52

x 5

y = 8

x=5

y=8

CHAPTER 7 Matrices Algebra: Inversion of Matrices 114

Example 7.11

x+ y+z = 6

4x + y + 2z = 12

5x + 3 y + z =14

Solution

1 1 1 x 6

4 1 2 y = 12

5 3 1 z 14

The second step is getting the inverse where we need to find the cofactor matrix

The cofactor of this matrix had already been calculated as

−5 −6 7

−2 −4 −2

1 −2 −3

When we take the cofactor and place the prefix of the signs + or – the matrix is referred as

adjugate matrix

−5 −6 7 + − +

−2 −4 −2 − + −

1 −2 −3 + − +

To get

CHAPTER 7 Matrices Algebra: Inversion of Matrices 115

−5 6 7

2 −4 2

1 2 −3

To solve for system we need to transpose the adjugate matrix. Transposing is changing rows

into columns or column into rows as seen earlier in the introduction of the matrices

−5 6 7

2 −4 2

1 2 −3

−5 2 1

6 −4 2

7 2 −3

Now that we had the determinant is 8

−5 2 1 1 1 1 x −5 2 1 6

1 1

6 −4 2 4 1 2 y = 6 −4 2 12

8 8

7 2 −3 5 3 1 z 7 2 −3 14

1 0 0 x −5 2 1 6

0 1 = 1

0 y 6 −4 2 12

8

0 0 1 z 7 2 −3 14

x −5 6 7 6

y 1

8 2 −4 2 12

=

z 1 2 −3 14

CHAPTER 7 Matrices Algebra: Inversion of Matrices 116

x ( −5 × 6 ) + ( 6 × 2 ) + (1×14 )

y= 1 6 × 6 + −4 ×12 + 2 ×14

8 ( ) ( ) ( )

z ( 7 × 6 ) + ( 2 ×12 ) + ( −3 ×14 )

x −30 + 12 + 14

y= 1 36 − 48 + 28

8

z 42 + 24 + 42

x 8

y = 1 16

8

z 24

x 88 1

y = 2

=

16 8

z 24 8 3

=x 1=y 2=z 3

Example 7.12

5 x − 10 y − 5 z =

−25

−2 x + 3 y − 4 z =60

−6 x − 7 y − 8 z =−20

Solution

CHAPTER 7 Matrices Algebra: Inversion of Matrices 117

−2 3 −4 y =

60

−6 −7 −8 z −20

5 −10 −5

−2 3 −4

−6 −7 −8

3 −4

A11 = = −52

−7 −8

−2 −4

A12 = = −8

−6 −8

−2 3

=A13 = 32

−6 −7

−10 −5

=A 21 = 45

−7 −8

5 −5

A 22 = = −70

−6 −8

5 −10

A 23 = = −95

−6 −7

−10 −5

=A 31 = 55

3 −4

CHAPTER 7 Matrices Algebra: Inversion of Matrices 118

5 −5

A 32 = = −30

−2 −4

5 −10

=A 33 = 5

−2 3

−52 −8 32

45 −70 −95

55 −30 5

−52 −8 32 + − + −52 8 32

− + − =

45 −70 −95 −45 −70 95

55 −30 5 + − + 55 30 5

Let get the determinant using the first row of the original matrix and cofactor matrix

8 −70 30

32 95 5

1 1

8 −70 30 −2 3 −4 = y 8 −70 30 60

−500 −500

32 95 5 −6 −7 8 z 32 95 5 −20

CHAPTER 7 Matrices Algebra: Inversion of Matrices 119

0 = 1

1 0 y −500 8 −70 30 60

0 0 1 z 32 95 5 −20

1

= y −500 8 −70 30 60

z 32 95 5 −20

1

= y −500 ( 8 × −25 ) + ( −70 × 60 ) + ( 30 × −20 )

z ( 32 × −25 ) + ( 95 × 60 ) + ( 5 × −20 )

x −2500

1

y −500 −5000

=

z 5000

x −2500 −500

y =

−5000 −500

z 5000 −500

x 5

y = 10

z −10

x= 5 y = 10 z = −10

CHAPTER 7 Matrices Algebra: Inversion of Matrices 120

Practice Problem

Solve for x using matrix method

3x + 3 y + z =7

−2 x + 10 y − 5 z = 5

x − 11 y + 2 y = 12

x + 2 y + 3z = 7

2 x + 5 y + 3z =19

2 x + 6 y + 8z = 24

APPLICATION OF MATRICES

Learning Objectives

Understand what is meant by input-output analysis through;

• Determining the technical coefficient matrix

• Determine the final demand given the total output matrix

• Determine the total output matrix given final demand

• Use Leontief model to solve practical business problem

• Understand the transition matrices

• Use Markov model to solve problem in business world

Input-output model is an application of matrix that has been successfully used to describe

mathematics model used to analyze how industries depend on each other in an economic

system. Here when we talk about the industry we are referring to the industries and consumers

or households.

Industries depend on each other by some industry using industries product as raw materials as

well as for external use by the consumers.

The output produced by the industries for consumers is called the final or external demand

Industry use each others output and we refer this as the intermediate output

Input-output analysis can be seen as the flow of industries that produce and use goods. Some of

the goods produced are used in the industry processes that are consumed internally and some

are used by the outsiders that is externally.

The input-output model most popular because it can handle large number of variables as

required to describe an economic situation.

CHAPTER 7 Matrices Algebra: Application of Matrices 122

Example 7.13

Let’s consider two industries that is industry 1 and Industry 2 and that one unit worth of output

of industry 1 requires 20% worth of industry 1 and 30% of industry 2. One unit worth of output

of industry 2 requires 60% industry 1 and 40% of industry 2

This can be presented by the figure 1.1 below

Figure 1.1

Output

Industry 1 Industry 2

Input Industry 1 0.2 0.5

Industry 2 0.3 0.4

Solution

The above information can be represented inform of a matrix A by just writing it the way it is as

given below

Technology matrix or

0.2 0.5 technical coefficient matrix

A=

0.3 0.4

The above matrix A is called the technology matrix or technical coefficient matrix

In general if we assume that 1200 units is required in industry 1 rather than one unit then we

can express the above as follows.

0.2 ×1200 =

240 Units of industry 1

0.3 ×1200 =

360 Units of industry 2

When we look at the output some has been left out for internal demand which amount to 600

units.

CHAPTER 7 Matrices Algebra: Application of Matrices 123

Again if we consider 1000 units are required in industry 2 then we can calculate the need

internal demand.

0.5 ×1000 =

500 Units of industry 1

0.4 ×1000 =

400 Units of industry 2

The remainder which is 100 units is used by the industry 2 for their internal demand.

Example 7.14

a a12

A = 11

a13 a14

Let assume that this represent the technical matrix for two industries

Solution

Then let have d1 and d 2 represent the final demand for the two industries

The final demand for the first industry can be expressed as follows

a11 + a12 + d 2

When we use x1 is the total output that meets the requirement then we express

x1 = a11 + a12 + d 2

When we have x1

x1 = a21 + a22 + d 2

CHAPTER 7 Matrices Algebra: Application of Matrices 124

When we express this in matrix notation then we can express the above as follows

x1 a11 a12 x1 d1

= x a +

2 21 a22 x2 d 2

x Ax + d

=

Where x is the total output vector and d is the final demand vector

In the introduction we noted that the input-output can be used to represent various variables

In general if we had three industries as given below with the output of x

ai 2 x1 Used by industry 2

ai 3 x1 Used by industry 3

When we have a combination of these industries it can be represented in the matrix notation as

Where i = 1, 2,3,...n

x a x d

2 21 a22 a23 . . . a2 n 2 2

x3 =a31 a32 a33 . . . a3n x3 d3

. . . . . . .

.. .. .

.

.

.

.

. .

. ..

xn an1 an 2 an 3 . . . ann xn d n

Example 7.15

Suppose we consider a two sector economy Agriculture and Transport and assume that their

production in capacity. Agriculture total production is used as below

400 units is used by Agriculture, 900 units by transport and 300 units is left for external

consumers

Transport production total output is 400 units is used by Agriculture, 300 units by transport

while 500 units is left foe external consumers

CHAPTER 7 Matrices Algebra: Application of Matrices 125

If the final demand is 100 units for Agriculture and 80 units for transport sector

Solution

We can represent the above information into a table form

Figure 1.1

Output

Agriculture Transport Final Total

demand output

Agriculture 800 400 400 1600

Input

The technological matrix can be obtained by dividing the first column by 1600 and the second

column by 1200

A=

400 1600 600 1200

0.5 0.25

A=

0.25 0.5

Ax = Total internal consumption

0.5 0.25

A=

0.25 0.5

CHAPTER 7 Matrices Algebra: Application of Matrices 126

1600

x=

1200

0.25 0.5 1200 = 1000

The internal consumption is 1100 units for Agriculture and 1000 units by Transport

If the final demand is written in matrix notation

100

d=

80

Let’s get the Leontief inverse from what we call the Leontief Model

I−A

0 1 − 0.25 0.5 =

−0.25 0.5

−1

Using x= ( I − A ) d

=

0.1875 −0.25 0.5 80 15

= =

0.1875 15 15 0.1875 80

160

= The final demand for Agriculture is 160 units and 80 units for Transport

80

CHAPTER 7 Matrices Algebra: Application of Matrices 127

Example 7.16

An economy has two sectors A and B, each unit of A requires 0.3 units of A and 0.5 units of B.

Each unit of B output require input of 0.3 units of A and 0.2 units B. Determine the level of

output that will satisfy the final demand of 780 units of A and 520 units of B

Solution

A B

A 0.3 0.5

B 0.3 0.2

Let’s calculate I − A

0 1 − 0.3 0.2 =

−0.3 0.8

Det

= ( 0.7 × 0.8) − ( −0.3 × −0.2

= ) 0.5

−1

1 0.7 −0.5

0.5 −0.3 0.8

0.5 −0.3 0.8 182

1 286 572

=

0.5 182 364

CHAPTER 7 Matrices Algebra: Application of Matrices 128

A = 572 units

B = 364 units

Example 7.17

Figure 1.1

Output

X Y Final demand

X 400 400 200

Input

Calculate the technology matrix, assuming that total output is just sufficient to meet the total

internal consumption and final demand

Solution

X = AX + D

That is

x Ax + d

=

Y;XY = 100 + 150 + 250 = 500

Technology matrix

400 1000 400 500

100 1000 150 500

CHAPTER 7 Matrices Algebra: Application of Matrices 129

0.4 08

A=

0.1 0.3

Example 7.18

Given that an economy of certain country consists of three sectors; Mining (M), Textiles (T) and

Chemicals (C). The input-output matrix for the economy is given by

Figure 1.2

Output

Mining Chemicals Textile

Mining 0.4 0.1 0.1

Textile 0.1 0.4 0.3

Input

Determine the amount of mining goods are consumed in the production of KES 50 million worth

of chemical goods

Determine the total input required to produce one unit of mining products

Determine the amount in shillings required to produce KES 100 millions of chemical products

Among the sectors which one consumes the greatest mining products and which consumes the

least

What is the final output given that the sectors are required to meet an external demand of KES

672 million, KES 224 million and KES 448 from the mining , textile and chemicals sector

respectively

Calculate the total internal consumption to meet the above demand

CHAPTER 7 Matrices Algebra: Application of Matrices 130

Solution

To produce one unit of the chemical goods requires 0.1 units of mining product

M C T

M 0.4 0.1 0.1

C 0.1 0.4 0.3

T 0.2 0.2 0.2

50 × 0.1 =

5 millions

7 units

0.8

0.8 ×100 =

80 millions

0.1 0.4 0.3

0.2 0.2 0.2

−1

CHAPTER 7 Matrices Algebra: Application of Matrices 131

1 0 0

I = Is the identity matrix I = 0 1 0

0 0 1

0.4 0.1 0.1

A = Is the 3 x 3 matrix under consideration A = 0.1 0.4 0.3

0.2 0.2 0.2

I − A = 0 1 0 − 0.1 0.4 0.3

0 0 1 0.2 0.2 0.2

I − A = −0.1 0.6 −0.3

−0.2 −0.2 0.8

−1

A = −0.1 0.6 −0.3 =

−0.2 −0.2 0.8

0.6 −0.3

A11 =

+ 0.42

=

−0.2 0.8

−0.1 −0.3

A12 =

− 0.14

=

−0.2 0.8

−0.1 0.6

A13 =

+ 0.14

=

−0.2 −0.2

−0.1 −0.1

A 21 =

− 0.1

=

−0.2 0.8

CHAPTER 7 Matrices Algebra: Application of Matrices 132

0.6 −0.1

A 22 =

+ 0.46

=

−0.2 0.8

0.6 −0.1

A 23 =

− 0.14

=

−0.2 −0.2

−0.1 −0.1

A 31 =

+ 0.09

=

0.6 −0.3

0.6 −0.1

A 32 =

− 0.19

=

−0.1 −0.3

0.6 −0.1

A 33 =

+ 0.35

=

−0.1 0.6

0.1 0.46 0.14

0.09 0.19 0.35

The determinant can be obtained through talking any row or column with its corresponding row

and column

Let take the first row

= ) 0.14 0.224

1

0.14 0.46 0.19

0.224

0.14 0.14 0.35

We were given that

CHAPTER 7 Matrices Algebra: Application of Matrices 133

672

d = 224

448

x = (I - A) d

−1

x = Total output

A= Matrix of technical coefficients

(I − A) =Leontief matrix

(I − A)

−1

Inverse of the Leontief matrix

=

D = Final demand or external demand

1

x= 0.14 0.46 0.19 224

0.224

0.14 0.14 0.35 448

1

=x ( 0.14 × 672 + 0.46 × 224 + 0.19 × 448)

0.224

( 0.14 × 672 + 0.14 × 224 + 0.35 × 448 )

344.96

1

x= 282.24

0.224

282.24

344.96 0.224

x = 282.24 0.224

282.24 0.224

1540

x = 1260 That is 1540 millions in Mining, 1260 in chemicals and 1260 in textiles.

1260

CHAPTER 7 Matrices Algebra: Application of Matrices 134

However when the student is not asked for determinant there is another alternative method

which we are going evaluate

Alternative approach

We need still need to get the identity minus the matrix I − A

I − A = 0 1 0 − 0.1 0.4 0.3

0 0 1 0.2 0.2 0.2

I − A = −0.1 0.6 −0.3

−0.2 −0.2 0.8

Given that

672

d = 224

448

(I − A) x =

d

224

−0.1 0.6 −0.3 x2 =

−0.2 −0.2 0.8 x3 448

−0.1x1 + 0.6 x2 − 0.3 x3 = 224

−0.2 x1 − 0.2 x2 + 0.8 x3 =448

This will yield the same results and give the following answers

=x1 1540

= x2 1260

= x3 1260

CHAPTER 6 Matrices Algebra: Application of Matrices 135

x−d =AX

1260 − 224 =

1036

1260 448 812

1036 millions in chemicals

812 millions in textile

Example 7.19

A manufacturing company is made of three industries namely steel rolling factory, iron melting

factory and Copper processing factory. The total output of steel, iron and copper is 500, 1000

and 1500 million shillings respectively. The final demand for steel, iron and copper is 150

million, 250 million and 400 million respectively. Out of what steel factory produces 200 million

is for its own use, 50 million is used by iron and 100 million is used by cooper processing factory.

Iron melting factory uses 200 million for its own production, 250 million by steel and 300 million

by copper. Copper processing factory uses 400 million for its own use, the rest 400 million and

300 million to steel and iron respectively. The final demand is expected to rise for steel and iron

by 50 million and for cooper to fall by 100 million, determine the new demand.

Determine the technical coefficient matrix

Given that the Leontief inverse matrix

0.45 0.82 0.32

0.23 0.65 0.90

a) Advice the manufacturing company what level each factory should produce to satisfy the

new demand.

b) Hence calculate the intermediate demand values

CHAPTER 7 Matrices Algebra: Application of Matrices 136

Solution

Let’s start by getting the technical coefficient matrix by first presenting the above data into a

table format.

Figure 1.3

Output

Steel Iron Cooper Final Total

demand output

Steel 200 50 100 150 500

Iron 200 250 300 250 1000

Input

The input of steel, iron, cooper and final demand is supposed to equal to the total output.

x1 + x2 + x3 + d1 =

x

500

200 500 250 1000 250 1500

400 500 300 1000 400 1500

0.40 0.25 0.17

0.80 0.30 0.27

Given that

x = (I - A) d

−1

CHAPTER 7 Matrices Algebra: Application of Matrices 137

−1

as

0.45 0.82 0.32

0.23 0.65 0.90

So we get the final demand add or minus the change in demand where necessary.

The new demand is given by

x = d ± ∆d

50

∆d = 50

100

Hence

150 + 50 200

New demand = 250 + 50 =

300

400 − 100 300

0.45 0.82 0.32

0.23 0.65 0.90

= 432

x 0.45 0.82 0.32 300

0.23 0.65 0.90 300 511

354

x = 432

511

The intermediate demand at this level can be calculated as follows using the technical

CHAPTER 7 Matrices Algebra: Application of Matrices 138

coefficient matrix

0.40 0.25 0.17

0.80 0.30 0.27

354

x = 432

511

0.40 0.25 0.17 432 = 660.72

0.80 0.30 0.27 511 853.47

Practice Problem

1) An agricultural economy has three industries: Dairy, Beef and Crops.

To generate one shilling worth of Dairy requires KES 0.2 worth of dairy, KES 0.4 of beef and 0.3

of crops

To generated one shillings of Beef, we require KES 0.3 of dairy, KES 0.2 beef and 0.6 of crops.

To generate one shilling require KES 0.4 of dairy, KES 0.3 of beef and KES 0.1 of water.

Determine the internal consumption given that output is

400

X = 300

200

First determine the technical coefficient matrix

2) ABC estate has three interrelated industries namely Coffee processing Factory, Tea

processing factory and Sisal bags weaving factory. The total output for coffee is 540 million

shillings, tea is 600 million shillings and Sisal is 900 million shillings. The final demand for coffee,

tea and sisal products is 75, million, 15 million and 130 million respectively. Out of what coffee

processing factory produces 90 million is for its own use, 225 million is used by the sisal bags

and tea processing uses 150 million. Tea processing uses 150 million for its own respectively.

Sisal bag weaving factory sells off 270 million to coffee processing factory and 200 million to tea

processing factory. Recently, the ministry of trade and Regional Cooperation project that coffee

processing tea processing factories, final demand will rise by 25 million and 5 million

respectively while sisal weaving factory will fall by 60 million in the next one year.

CHAPTER 7 Matrices Algebra: Application of Matrices 139

Given the Leontief matrix for the problem is

2.642 3.413 2.697

3.633 2.312 4.459

Advise the ABC estate at what level each division should produce to satisfy the demand

What should be the intermediate demand values at these production levels?

3) In a relationship between steel and electricity 20% of the value of what steel produces is

consumed internally and 15% used to pay for electricity used in production. Also 35% of the

value of what the electricity industry produces is used to pay for steel consumed and 20% of it

pays for the electricity consumed internally.

Write the input- output matrix for steel and electricity

Given the production capacity of steel and electricity is shillings 90 billion and 75 billion

respectively, how much of each is consumed internally.

4) A miniature economy has three industries I1, I2 and I3, which are interdependent. Following

is s a transactions table for the industries. The figures show the value of inputs and output in sh.

Million

I1 I2 I3

b) Determine the technical coefficients matrix.

c) Find the matrix (I – A)

d) Find the total output and the primary input required by each industry if the final demand

is 100, 150 and 200 for I1, I2, I3 respectively

5) A small economy has two strategic industries namely Agriculture and Manufacturing. To

produce KES 1.00 worth of agricultural products requires KES 0.30 of agricultural products and

CHAPTER 7 Matrices Algebra: Application of Matrices 140

KES 0.20 of manufactured products. To produce KES 1.00 worth of manufactured products

requires KEs 0.4 of agriculture produces and KES 0.10 of manufactured products.

If the gross output from the two industries is KES 800 and KES 700 million of agriculture and

manufacturing respectively what is the total internal consumption?

What is the total output required to meet a final consumer demand of KES 350 million and KES

250 million respectively?

CHAPTER 7 Matrices Algebra: Markov Process Model 140

Markov process model is a stochastic model that is time based to make predictions of various

states in the future given the current states.

Markov process can be applied in accounts receivables, marketing in determining the brand

royalty and market share analysis and in insurance policies when calculating life insurance

payouts.

Markov process as stochastic process is used to analyze decision problems in which the

occurrence over specific events depends on the occurrence of the event immediately prior to

the current event. In general the Markov process helps to identify a specific state of the system

being studied and the state transition relationship. The occurrence of an event at a specified

point in time say period (n) and put and the system in a given state say (En).

If the passage of one period or unit of time events occurs during time period n + 1 the system

has improved to state to En + 1 in the next period.

Markov process model is useful in the studying the movement of certain system over repeated

trials, which are often successful time period where the system or outcome of the system in a

given time period cannot be given certainty.

Markov process has a finite number of state none of which is absorbing in nature (state is said

to be absorbing if a customer will never switch to another state)

The states are both connectively exhausted and mutually exclusive that is exhaust the market at

100%

The probability of moving from one state to another depends only on the immediately

preceding state.

Transition probabilities are stationary that is constant for duration of the analysis

The probability has a set of initial probability which may be given or determined.

The transition probability of moving two alternative states in the next period given a state in the

time period must sum to one unit that is 100%

Example 7.20

A Criso Ltd industry manufactures two products X and Y. The marketing manager noted that the

two brands have a very stiff completion in terms of advertising and promotion. The product

manager of product X complained to the marketing manager that brand Y is taking its market

CHAPTER 7 Matrices Algebra: Markov Process Model 142

share. He requested for a research to be done on the two products and the following

information was obtained. Of those loyal to brand X in a given week, 30% remained brand loyal

in the next week whereas the rest switched to brand Y. Of those loyal to brand Y, 40% switched

to brand X while the rest remained loyal. When the research report was submitted brand X and

Y were estimated to hold 65% and 35% 0f the market share respectively.

Determine the transition probabilities matrix for the above problem

Determine the market share in the first and second week?

Determine the long-run market share

Solution

We can present the following information into a tabular form so that we can be able to obtain a

transition probability matrix as shown below.

Figure 1.1

X Y

X 30% 70%

Y 40% 60%

0.3 0.7

0.4 0.6

During the first week the market share will change like shown below

We have to multiply the transition probability matrix with the vector matrix of the research

report

0.3 0.7

[0.65 0.35] = [ 0.335 0.665]

0.4 0.6

This means that 33.5% of the buyers of product X remained loyal whereas the 66.5% switched

to product Y in the first week.

To determine the next transition in the second week we need to use the vector matrix that we

have gotten that is [ 0.335 0.665]

CHAPTER 7 Matrices Algebra: Markov Process Model 143

0.3 0.7

[0.335 0.665] = [ 0.3665 0.6335]

0.4 0.6

This means that in the second week 36.65% of the buyers remained loyal to product X and

63.35% switched to product Y.

The long-run is also called the steady state, equilibrium state, it may be referred to us the

numerous run in the transition probability remain constant or unchanged. That is this is where

no further changes occur to the market share of each company in the analysis

In the long-run it is expected that the vector matrix is

0.3 0.7

[x 1 − x] =[ x 1 − x]

0.4 0.6

0.3 x + 0.4(1 − x) =x

0.7 x + 0.6(1 − x) =1 − x

x

−0.1x + 0.4 = x

1.1x = 0.4

x = 0.363

Then Y is given by 1 − x

Thus 1 − 0.363 =

0.637

X = 0.363

Y = 0.637

When the transition matrix is 100% it is said to be exhausted for instance in the following

example

CHAPTER 7 Matrices Algebra: Markov Process Model 144

x1 x2 x3

A 40% 60% 45%

B 60% 40% 55%

100% 100% 100%

Example 7.21

Three companies A, B and C are in competition and are currently holding 30%, 30% and 40% of

the total market share respectively. Company A retains 60% of its customers and loses 20% to B

and 20% to C. Company B retains 70% of its customers and loses 10% to B and 20% C. Company

retains 60% while it loses 30% to B and 10%

a) Constitute the transition probability matrix

b) Express or interpolate in terms of gains in words

c) What will each company market share be in 1 year time and 2 year time

d) Determine the market share in the long-run

Solution

The transition probability matrix will be as follows

A B C

A 60% 20% 20%

B 10% 70% 20%

C 10% 30% 60%

Thus

A B C

A 0.6 0.2 0.2

B 0.1 0.7 0.2

C 0.1 0.3 0.7

This means that company A retains 60% of the customers and loses 20% to B and 20% to C.

Secondly Company B loses 10% of its customers to company B and 20% of its customers to C

and retains 70% to itself. Finally company C retains 60% of its customers and loses 30% to

company B and 10% to company C

CHAPTER 7 Matrices Algebra: Markov Process Model 145

A B C

A 0.6 0.2 0.2

B 0.1 0.7 0.2

C 0.1 0.3 0.6

[0.3 0.3 0.4] 0.1 0.7 0.2 = [0.25 0.39 0.36]

0.1 0.3 0.6

This means that Company retained 25% of its customers, company B retained 39% and company

C retained 36% in the first year.

In the second year the transition probability will change and we are going to multiply with the

new vector matrix we have gotten in above part as given below

[0.25 0.39 0.36] 0.1 0.7 0.2 = [0.225 0.431 0.344]

0.1 0.3 0.6

In the second year the market share for company A is 22.5% and company B is 43.1% and

company C is 34.4%

The steady state or the long-run and in the long-run the matrix is expressed as given below

In general the steady state is given by

[x y z ][ P ] = [ x y z]

Thus in the given situation the steady state is expressed as follows considering the market share

of A, B and C is x, y and z

[ x y z ] 0.1 0.7 0.2 = [ x y z]

0.1 0.3 0.6

We are supposed to multiply

x

0.2 x + 0.7 y + 0.3 z =

y

0.2 x + 0.2 y + 0.6 z =

z

CHAPTER 7 Matrices Algebra: Markov Process Model 146

x+ y+z = 1

We can still correct the like terms together in the above equations.

0.2 x − 0.3 y + 0.3 z =

0

0.2 x + 0.2 y − 0.4 z =

0

0.2 x − 0.3 y + 0.3 z = 0........................................(ii )

x+ y+z = 1.......................................................(iii )

Take the first two equations that equation (i) and (ii) and eliminate x by multiplying by 2

0.4 x − 0.6 y + 0.6 z =

0..................................(ii )

0.4 x − 0.6 y + 0.6 z =0

− 0.5 y + 0.7 z = 0............................(iv)

Take equation (ii) and (iii) and still eliminate x by multiplying by 0.2

x + y + z 1.......................................................(iii ) × 0.2

0.2 x − 0.3 y + 0.3 z =

0

0.2 x + 0.2 y + 0.2 z =

0.2

−0.2.............................. ( v )

− 0.5 y + 0.1z =

CHAPTER 7 Matrices Algebra: Markov Process Model 147

−0.5 y + 0.7 z =

0

−0.5 y + 0.1z =−0.2

0.6 z = 0.2

z = 0.33

Using any equation between (iv) and (v) we can solve for y, for our case let use equation (v)

−0.2

−0.5 y + 0.033 = −0.2

−0.5 y = −0.2 − 0.033

−0.5 y = −0.233

y = 0.466

x+ y+z = 1

=x ?= y 0.466 =z 0.33

x + 0.466 + 0.33 =

1

x + 0.796 = 1

x = 1 − 0.796

x = 0.204

x = 0.204

y = 0.466

z = 0.33

This means that at the long-run company A is expected to maintain 20.4%, while the rest move

to company B will maintain 46.6% and company C maintain 33%

Example 7.23

The market share of two companies A and B is 30% and 70% in the current time period. The

information obtained in terms of the customer lose and retention is given by the matrix D

0.3 0.7

D=

0.2 0.8

Determine the transition probability matrix in the 1st and 2nd month

What is the steady state of the two companies

CHAPTER 7 Matrices Algebra: Markov Process Model 148

Solution

0.3 0.7

[0.3 0.7] = [ 0.23 0.77 ]

0.2 0.8

Second month

0.3 0.7

[0.23 0.77] = [ 0.223 0.777 ]

0.2 0.8

Steady state

0.3 0.7

[ x 1 − x] = [ x 1 − x]

0.2 0.8

0.3 x + 1 − x ( 0.2 ) =x

0.7 x + 1 − x ( 0.8 ) = 1 − x

x

0.3 x − 0.2 x − x =−0.2

−0.9 x = −0.2

x = 0.22

y = 0.88

Example 7.24

Three companies X, Y, and Z are in stiff competition and the relevant managers have asked for a

market research to determine the market share. The research report indicated that company X

had retained 55% of its customers and lost 25% to company Y and 20% to company Z. Company

Y retained 60% of its customers and 30% switched to X and 10% switched to Z. Company Z

retained 90% and 5% switched to company X and rest to company Y. The companies’ current

states are 40%, 30% and 30% respectively

b) What will be the market share in the third year

c) Determine the market share in the steady state

CHAPTER 7 Matrices Algebra: Markov Process Model 149

Solution

X Y Z

X 55% 25% 20%

Y 30% 60% 10%

Z 5% 5% 90%

Transition probability matrix

X Y Z

X 0.55 0.25 0.20

Y 0.30 0.60 0.10

Z 0.05 0.05 0.90

Market share in third year

First calculate the market share in the first year

[0.4 0.3 0.3] 0.30 0.60 0.10 = [0.325 0.295 0.38]

0.05 0.05 0.90

Market share in the second year

[0.325 0.295 0.38] 0.30 0.60 0.10 = [0.286 0.277 0.437]

0.05 0.05 0.90

[0.286 0.277 0.437] 0.30 0.60 0.10 = [0.262 0.260 0.478]

0.05 0.05 0.90

Steady state

In general the [ x y z ][ P ] = [ x y z]

CHAPTER 7 Matrices Algebra: Markov Process Model 150

[x y z ] 0.30 0.60 0.10 = [ x y z]

0.05 0.05 0.90

x

0.25 x + 0.6 y + 0.05 z =

y

0.2 x + 0.1 y + 0.9 z =

z

1

x+ y+z =

0.25 x − 0.4 y + 0.05 z =0

0.2 x + 0.1 y − 0.1z = 0

0.25 x − 0.4 y + 0.05 z =0.........................(ii )

1..........................................(iii )

x+ y+z =

Take the first two equations that equation (i) and (ii) and eliminate z by subtracting both

equations

0.25 x − 0.4 y + 0.05 z =0..................................(ii )

0.25 x − 0.4 y + 0.05 z = 0

− 0.7 x + 0.7 y = 0..................................(iv)

Take equation (ii) and (iii) and still eliminate z by multiplying by 0.05

CHAPTER 7 Matrices Algebra: Markov Process Model 151

= x + y + z 1..........................................(iii ) × 0.05

0.........................(ii )

0.05 x + 0.05 y + 0.05 z 0.05..........................................(iii ) × 0.05

=

0.2 x − 0.45 y =−0.05.........................................(v)

Solve now equation (iv) and (v) by multiplying by 0.2 and 0.7 respectively

−0.7

= x + 0.7 y 0....................(iv) × 0.2

0.2 x − 0.45 y =−0.05.............(v) × 0.7

Eliminate x

−0.14 x + 0.14 yz =0

0.14 x − 0.315 y =−0.035

−0.175 y = −0.035

y = 0.2

Using any equation between (iv) and (v) we can solve for y, for our case let use equation (v)

−0.05

0.04 − 0.45 y =

−0.05

−0.45 y = −0.05 − 0.04

−0.45 y = −0.09

y = 0.2

x+ y+z = 1

=x 0.2= y 0.2

= z ?

0.2 + 0.2 + z =

1

z + 0.2 = 1

z = 1 − 0.4

z = 0.6

CHAPTER 7 Matrices Algebra: Markov Process Model 152

x = 0.2

y = 0.2

z = 0.6

=X 20%

= Y 20% =Z 60%

Practice Problem

1. A,B and C mobile companies are in competition and currently hold 50%, 30% and 20%

respectively of the total market share. A retains 70% of its customers, losses 20% to B

and 10% to C. B retains 80% of its customer; losses 10% to A and 10% to C. C retains 60%

of its customers; losses 105 to A and 30% to B

b) What will each channel market be in two years time?

c) Calculate each channels market share equilibrium

2. State and briefly describe areas Markov analysis is used in modern business world.

3. Small town has only three banks B1, B2, B3. The three banks have a combined client

base of 21,000 customers. Each customer has only one savings account in any one of the

banks. However customers keep shifting their accounts from one bank to another. The

table below shows the movement of customers account in the 1st month.

To

B1 B2 B3

CHAPTER 7 Matrices Algebra: Markov Process Model 153

At the start of the first month B1 had 6000 accounts, B2 had 12000 accounts and B3 had

3000 accounts.

b) Determine the number of savings accounts in each bank at the beginning of the

2nd month.

c) Determine the distribution of the accounts in the long run.

4. There are three firms ABC, PQR and XYZ sharing a market as 40%, 40% and 20%

respectively on January 1, 2007. Over a year, the following developments took place.

ABC retains 80% of its customers, loses 16% to PQR and 4% to XYZ

PQR retains 84% of its customers, loses 12% to ABC and 4% to XYZ

XYZ retains 76% of its customers, loses 18% to ABC and 6% to PQR

Assuming that the total market size does not change,

a) What share of the market did each firm hold on January 1, 2012?

b) What would be the long-run shares of the firms at equilibrium if the buying

habits do not change?

process with the following transition probabilities:

Formula X Formula Z

Formula X 0.90 0.10

Formula Y 0.05 0.95

b) What are the projected market shares of the two brands?

6. Suppose that in the above problem (5) a new toothpaste brand enters the market such

that the following transition probabilities exist:

Formula X 0.80 0.10 0.10

Formula Y 0.05 0.75 0.20

Formula Z 0.40 0.30 0.30

b) Which brand will suffer most from the introduction of the new brand of

toothpaste?

c) Explain the term ‘Steady State’ (Equilibrium) in Markov process.

CHAPTER 7 Matrices Algebra: Markov Process Model 154

determining the selling pattern of their three soap brands, Simba, Chui and Twiga, gave

the following information: Out of a sample 2400 buyers interviewed, 750 bought Simba

and 900 bought Twiga, the rest bought Chui. Of those who bought Simba 90 will switch

to Chui next month and 120 will switch to Twiga. Of those who bought Chui, 60 will

switch to Simba and 90 will switch to Twiga. 90 of those who bought Twiga will switch to

Simba and 45 will switch to Chui.

b) The market share of each brand in March.

c) The market shares of the brands in the long run

DECISION

CHAPTER 8 ANALYSIS

Learning Objectives

At the end of this section the students should be able to:

Determine the Maxmin Minimax Approach

Determine the Minimax Regret Approach

Determine the Decision making with probabilities

A decision in general may be defined as the selection by the decision maker of an act considered

to be the best according to some pre-designated standard from the several available options.

Decision analysis can be determining optimal strategies when a decision maker is faced with

several alternatives and uncertainty or risks feared pattern of future. Irrespective of the type of

decision making problem they are certain elements which are common to all such problems.

Cause of action- a decision made from among a set of defined alternative causes of action

State of nature – These are consequences or events of any causes of action are dependent upon

certain factors beyond the control of the decision maker. These factors are called status of

nature.

Uncertainty – there is uncertainty regarding which event or outcome will occur. This

uncertainty is indicated in terms of probabilities assigned to events.

Pay off – each combination of course of action and events or outcome is associated with a pay-

off which measures the net benefit to the decision maker that accrues from a given combination

of decision alternatives and events. They also known as conditional profits values or conditional

profit values or conditional economic consequences.

CHAPTER 8 Decision Analysis 156

Example 8.1

A phone manufacture is in the final stages of selecting a computerized assembly plant, for its

company untested model. The company needs to determine the size of the plant that will be

economical to build and maintain. There three sizes large, medium and small. The management

believes that the model overall level of acceptance in the market will be one or two possibilities.

High acceptance ( high sales)

Low acceptance (low sales)

Step I

Determine the various alternatives course of action from which the final decision is to be made

that is

d1.............building large plants

d 2 .............building medium plants Course of action

d 3 .............building small plant

We should note that the selection of the best decision alternative will depend on what

management fore seen to be the best possible management acceptance of the model and

consequently the demand and resources.

Step II

Identify the possible outcomes and the state and the state of nature of events for the decision

problem. The events are beyond the control of the decision makers

S1...............high acceptance

S2 ...............Low acceptance

Step III

Determine the payoffs function which describes the consequences resulting from the

difference. Combination of the acts and events. Suppose the management has estimated the

profits from the sales of the model to be as follows

High Low

acceptance acceptance

S1 S2

Decision

alternative

d1 Large 250 -30

d 2 Medium 200 30

CHAPTER 8 Decision Analysis 157

d 3 Small 150 70

When we consider the payoff to be V then to calculate payoff we multiply the decision

alternative by the acceptance

S1 high

d1 Large

S2 Low

S1 High

d2 Medium

S2 Low

Decision node is

always a S1 High

d3 Small

square/rectangle

S2 Low

State on nature

node

Solution

Decision Alternative S1 S2

D1 Large 200 -20

D2 Medium 150 20

D3 Small 100 60

CHAPTER 8 Decision Analysis 158

S1 High 200

D1 Large

S2 Low -20

S1 High 150

D2 Medium

S2 Low 20

Decision node S1 High 100

(always represented

by a square or D3

rectangle) S2 Low 60

State of nature node

shown by a circle

This method is also called conservative it evaluates each decision in terms of, first determine the

minimum pay offs for each alternative and secondly the alternative which correspond to the

maximum of the minimum pa offs

S1 S2 Min

D1 200 −20 −20

D2 150 20 20

Maximizes the

D3 100 60 60 minimum

Optimizer – Maximize the maximum (if profit) or min (if costs)

The minimax approach is based on the concept of regret opportunity cost or opportunity cost

and calls for selecting the cost of action that minimizes the pay offs

Step 1

Determine the amount of regret associated with each decision alternative

CHAPTER 8 Decision Analysis 159

D1 200 −20 −20 minimum

D2 150 20 20

D3 100 60 60

Step 2

Construct a regret table as below

S1 S2

D1 200 − 200 60 − −20 Subtract the highest value in

D2 200 − 150 60 − 20 each column in our case it is

D3 200 − 100 60 − 60 200 in first column and 60 in

the second column

S1 S2

D1 0 80

D2 150 40

D3 100 0

Step 3

Extract the max regret associated with each decision alternative

S1 S2 Max regret

D1 0 80 80

D2 150 40 50

D3 100 0 100

Step 4

Pick a decision alternative that minimizes the max regret

S1 S2 Max regret

D2 to minimize

D1 0 80 80 the maximum

D2 150 40 50

D3 100 0 100

CHAPTER 8 Decision Analysis 160

When probability estimates for each forms of nature they are referred as expected value

approach and can be used to identify the best decision alternative.

Let n be the number of state of nature

P ( S j ) the probability of state of nature S j

Since only one of the n states of nature occurs the associated probabilities must satisfy the

following two actions;

P ( S j ) ≥ 0 for all states of nature

If you sum up the probabilities

∑ P ( S ) = P ( S ) + P ( S ) + P ( S ) + ... + P ( S ) = 1

j =1

j 1 2 3 n

n

EV ( di ) = ∑ P ( S j )V ( di S j )

j =1

Example 8.2

S1 S2

D1 200 −20

D2 150 20

D3 100 60

Let

P ( S1 ) 0.3

= P ( S2 ) 0.7

CHAPTER 8 Decision Analysis 161

Solution

EV ( d=

1) ( 0.3 × 200 ) + ( 0.7 × −20=) 46

EV ( d2 ) = ( 0.3 × 150 ) + ( 0.7 × 20 ) = 59

EV ( d3 ) = ( 0.3 × 100 ) + ( 0.7 × 60 ) = 72

Example 8.3

Consider the payoff table below (The payoff in millions of shillings and P ( S j ) the probability of

state of nature S j occurring)

Action S1 S2 S3

D1 20 25 -10

D2 30 15 30

D3 40 0 50

P(Sj ) 0.3 0.4 0.3

Recommend the best decision alternative using

a) Optimistic approach

b) Pessimistic approach

c) Bayes (Expected Value ) approach

d) Minimax Regret approach

Solution

Optimistic approach is based on extreme optimistic this extracts the maximum payoffs for each

decision alternative and selects the maximum

CHAPTER 8 Decision Analysis 162

D1 20 25 -10 25 Pick D3 to

maximize max

D2 30 15 30 30

D3 40 0 50 50

D1 20 25 -10 −10 Pick D2 to

maximize

D2 30 15 30 15

minimum

D3 40 0 50 0

n

EV ( di ) = ∑ P ( S j )V ( di S j )

j =1

EV ( d=

1) ( 0.3 × 20 ) + ( 0.4 × 25) + ( 0.3 × −10=) 13

EV ( d2 ) = ( 0.3 × 30 ) + ( 0.4 × 15 ) + ( 0.3 × 30 ) = 24

EV ( d3 )= ( 0.3 × 40 ) + ( 0.4 × 0 ) + ( 0.3 × 50 )= 27

Action S1 S2 S3

D1 20 25 -10

D2 30 15 30

D3 40 0 50

Pick D2 to

Action S1 S2 S3 Regret minimize max

profit

D1 20 25 -10 60

D2 30 15 30 20

D3 40 0 50 25

CHAPTER 8 Decision Analysis 163

Example 8.4

S1 S2

D1 200 450

D2 400 550

D3 650 350

The prior probabilities are given as P(S1) = 0.6 P(S2) = 0.4

A market research report has been offered to the company by a new research firm for which the

following probability information (conditional probabilities) is available.

P(I1/S2) = 0.1 P(I2/S2) = 0.8

Solution

a) Posterior probabilities

Sj P (S j ) P ( I1 /S1 ) P ( I1n S1 ) P ( S1 /J1 )

S1 0.6 × 0.9 = 0.54 0.54 = 0.93

0.58

S2 0.4 × 0.1 = 0.04 0.04 = 0.07

0.58

P ( I1 ) 0.58

Sj P (S j ) P ( I 2 /S1 ) P ( I 2 n S1 ) P ( S1 /J 2 )

S1 0.6 × 0.2 = 0.12 0.12 = 0.27

0.44

S2 0.4 × 0.8 = 0.32 0.32 = 0.73

0.44

P ( I 2 ) =0.44

CHAPTER 8 Decision Analysis 164

We use the posterior= = P ( S2 /J1 ) 0.07

+ ( 450 × 0.07 ) =

D1 ( 200 × 0.93) 217.5

D 2 400 + ( 550 × 0.07 )

( × 0.93) = 410.5

+ ( 350 × 0.07 ) = 629

D3 ( 650 × 0.93)

D3 is the best optimal strategy because it has the highest value of 629

probabilities P ( S1 /J 2 ) 0.27

Again when using the posterior= = P ( S2 /J 2 ) 0.73

+ ( 450 × 0.73) =

382.5

( × 0.27 )

D 2 400 + ( 550 × 0.73)

= 509.5

D3 ( 650 × 0.27 )

+ ( 350 × 0.73) = 431

D2 is the best optimal strategy because it has the highest value of 509.5

CHAPTER 8 Decision Analysis 165

Practice Problem

1. Suppose that a decision maker faced with three decision alternatives and two states of

nature develops the following profit payoff table

S1 S2

D1 1300 1500

D2 1500 1150

D3 1400 1250

2. John bakes and sells queen cakes. The demand per week ranges between 1000 and 1500

cakes. The cakes are in packets of 100. The table below shows the probability

distribution of the cakes.

1000 0.10

1100 0.30

1200 0.20

1300 0.20

1400 0.15

3. Suppose that a decision maker faced with four decision alternatives and four states of

nature develops the following profit payoff table:

States of Nature

S1 S2 S3 S4

Decision Alternatives D1 14 9 10 5

D2 11 10 8 7

D3 9 10 10 11

D4 8 10 11 13

If the decision maker knows nothing about the probabilities of the four states of nature,

what is the recommended decision using the approaches below

a) Laplace

b) Optimistic

c) Conservative

d) Minimax regret

CHAPTER 8 Decision Analysis 166

4. Suppose the decision maker in (I) above obtains information that enables the following

probability estimates to be made:

b) Now assume that the entries in the payoff table are costs; use the expected value

approach to determine the optimal decision

c) What is the value of perfect information (EVPI)?

S1 S2

D1 100 350

D2 300 250

D3 450 450

The prior probabilities are given as P(S1) = 0.35 P(S2) = 0.65

A market research report has been offered to the company by a new research firm for

which the following probability information (conditional probabilities) is available.

P(I1/S2) = 0.15 P(I2/S2) = 0.85

6. John can bake 1000 to 1500 cakes depending on the demand. However, since the

uncertain she has to decide in advance how many cakes to bake for the coming week.

Each cake costs sh. 10 and is sold at KES 15.

a) Construct a payoff table for John.

b) Use the expected monetary value criterion to determine the optimal number of

cakes she should bake for next week.

c) Repeat part (b) above using

i. Maximax criterion

ii. Maximin criterion

iii. Minimax regret criterion

CALCULUS I:

CHAPTER 9 DIFFERENTIATION

Learning Objectives

At the end of this section the students should be able to:

dy

• Recognize the notation f'(x) and for the derivative of an equation

dx

• Find the gradient of curve using graphs and symbolically differentiate.

• Identify a tangent, secant and chord of curve.

• Getting the derivative of a function

• Differentiate power fuctions

The gradient of a curve at any point through a tangent at that point is called differentiation. The

gradient of a curve at any point is the tangent to the curve at that point.

Consider the following the following figure

Figure 9.0

Constant gradient

Change in y (∆y )

Change in x (∆x)

Linear equation

CHAPTER 9 Calculus I: Differentiation 168

The gradient which is also called the slope is constant through out the line whether positive

gradient like the above or a negative gradient. Taking any two points it will always give us the

same gradient. The slope is given by;

Change in y ∆y

=

Change in x ∆x

The above case is only true when dealing with the linear functions

Taking the figure 5.1 line A shows the tangent of the curve y = f ( x) .A tangent is a line the

touches a curve at a point.

Figure 9.1

y = f ( x)

Tangent A

Tangent to curve y = f ( x)

Figure 5.2 Line A is the tangent of the curve y = f ( x) . Line B and C are secant is an

approximation of a tangent and can be use to calculate the slope of a curve.

Line D and E is called a chord which is a line that join two points on a curve.

.

CHAPTER 9 Calculus I: Differentiation 169

Figure9.2

Chord

y = f ( x)

Secant C

C

Tangent A

B Secant B

A

Taking the second scenario of the curve below the gradient varies everywhere along the curve

Figure 9.3

C

Gradient variable

Tangent C

B

Tangent B

Tangent A

Non-linear equation

CHAPTER 9 Calculus I: Differentiation 170

A tangent at a particular point will be used to find the slope at that point the slope of a curve is

variable everywhere there is a tangent we have a different gradient.

Consider the curve ABC in the figure 5.3 let now consider a car moving from point A to C via B.

between A and C the slope is steadily increasing, when the car reaches point B the slope stops

increasing and remains constant.

The derived function is called the derivative of f and is denoted by the symbol f ' which is

read f prime.

The gradient function is called derivative function and denoted by the following notation

dy

read as dee y over dee x.

dx

We should note that dy / ∂x doesn’t mean dy divided by ∂x but it is a single symbol

representing derivative of y in respect to x

Example 9.1

Solution

dy

In this we can use the or use f ( x) = x 2

dx

The graph is draw by taking the range of to be −2 ≤ x ≤ 2

Table 9.4

x2 4 2.25 1 0.25 0 0.25 1 2.25 4

CHAPTER 9 Calculus I: Differentiation 171

Figure 9.5

4

2

y=x

3

∆y =1.5

∆y =−1.5

2

∆x =−0.5 ∆x =0.5

Tangent

1

∆y =−0.5 ∆y =0.5

-1 ∆x =−0.5

∆x =0.5

-2 1 2

When the graph is plotted it appears like the above Figure 5.4 . Using the slope of the tangent

we find the derivative as follows.

−1.5

f '(−1.5) = = −3

0.5

−1.5

f '(−0.5) = = −1

0.5

f '(0) = 0

0.5

f '(0.5)

= = 1

0.5

1.5

f '(1.5)

= = 3

0.5

CHAPTER 9 Calculus I: Differentiation 172

Example 9.2

Consider the following function =

value of y by

Solution

Table 9.6

x2 4 2.25 1 0.25 0 0.25 1 2.25 4

-1 -1 -1 -1 -1 -1 -1 - -1 -1

1

y x2 −1 3

= 1.25 0 -0.75 -1 -0.75 0 1.25 3

CHAPTER 9 Calculus I: Differentiation 173

Figure 9.7

3

y x2 −1

=

Tangent

Tangent at x = 1

at x = 1

-2 ∆y =1 -1 1 ∆y =1 2

∆x =1 ∆x =1

Tangent at x = 0 -1

From the Figure 5.5 the gradient at the tangent x is -1, 0, and 0.5 is given as follows. We obtain

the gradient manually.

−2

When x = −1 we obtain = −2 , similarly when x = 0 the gradient is zero at the tangent

1

1 1

x= the slope is = 1

2 1

Now when using the graph method it is very involving and thus we can use differentiation

which is the process of finding the slope of a curve at part6icular point through a tangent at the

that point.

CHAPTER 9 Calculus I: Differentiation 174

Consider the function of the form f ( x) = x n when we get the derivative of the equation we get

f '( x) = nx n −1

dy

In terms of the y = x n we introduce to obtain a derivative of the same nature with the

dx

dy

above which is as follows = nx n −1

dx

When differentiating x n we multiply the coefficient of x with the power n and simultaneously

subtract 1 from the power n to get n − 1

Figure 9.8

Coefficient of x

Power

y = 1x n

To get the derivative of the equation we multiply the coefficient of;

dy

= 2 × x 2−1

dx

dy

= 2= x1 2 x

dx

We can verify the result we had gotten when using the graph through this symbolic method as

follows

Taking the values of x to -1.5, -1, -0.5, 0, 0.5, 1, 1.5 then with the derivative of 2x

dy

= 2 x = (2 × −1.5) = −3 Given that x = −1.5

dx

dy

= 2 x = (2 × −1) = −2 Given that x = −1

dx

dy

= 2 x = (2 × −0.5) = −1 Given that x = −0.5

dx

CHAPTER 9 Calculus I: Differentiation 175

dy

= 2 x = (2 × 0) = 0 Given that x = 0

dx

dy

=2 x = (2 × 0.5) = 1

dx

x = 0.5

dy

= 2 x = (2 × 1) = 2

dx

x =1

dy

=2 x =(2 × 1.5) =3

dx

x = 1.5

The above results are similar to the result we got when using the graphical method.

Example 9.3

1

(i) y = x (ii) y = 3 (iii) y = x5 (iv) y=4 (v) y = x

x

Solution

1

y = x = y = x2

1

dy 1 −1

= × x2

dx 2

CHAPTER 9 Calculus I: Differentiation 176

1

1 −

= x 2

2

1

= 1

2x 2

1

=

2 x

1

Differentiate y = 3

we can express this function in this as y = x −3

x

dy

= −3 x −3−1

dx

= −3 x −4

3

= − 4

x

dy

When differentiating y = x5 we need to in form of y = x n thus = nx n −1

dx

dy

= 5 x5−1 = 5x 4

dx

And any number raised to power zero is equal to 1 thus

y = 4 x0

dy

= 0 × 4 x 0−1

dx

0 × 4 x −1 =

0

dy

x1−1 1x 0 Since any number raised to power zero is 1

= 1=

dx

Thus x 0 = 1

dy

=1

dx

CHAPTER 9 Calculus I: Differentiation 177

Practice Problem

(i) y = 5 x

1

(ii) y =

x

(iii) y = 1

(iv) y = x10

(v) y = 3 x

1

(vi) y = 3

x

RULES OF DIFFERENTIATION

Learning Objectives

At the end of this section the students should be able to:

• Use constant rule to differentiate a function.

• Use sum rule to differentiate a function.

• Use the difference rule to differentiate a function.

• Use a combination of sum and difference rule to differentiate a

function.

• Use product or multiplication rule to differentiate a function.

• Use quotient or division rule to differentiate a function.

• Use chain rule to differentiate a function.

1 Constant Rule

Given that y = cx n then we differentiate x n first and then multiply with c. The general formula

dy

is = nx n −1

dx

The constant rule states that we differentiate the function and multiply by the constant

Example 9.4

Differentiate

(a) y = 3x3

(b) y = 6x

(c) y = 4 8 x

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 179

Solution

(a) y = 3 x3 Using the constant rule we are supposed to differentiate x 3 then multiply with 3

dy

= 3(3

= x3−1 ) 9 x 2

dx

dy

= 6( x1=

−1

x0 6

) 6=

dx

x and then multiply by 4

dy 18 1 18 −1 1 −7 8

= 4=

x 4 x= x

dx 8 2

1

= 7

2x 8

Practice Problem

(a) y = 6 x 7

(b) y = 15 x

(c) y = 6 x 2

(d) y = 5 6 2x

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 180

In sum rule we differentiate each function separately and add thus given that

y = ax n + bx n + cx n

dy

Thus the in general = nax n −1 + nbx n −1 + ncx n −1

dx

Example 9.5

Differentiate

i) y = 3 x 2 + 2 x + 2

y 4 x3 + 6

ii) =

iii) y = 5 x3 + x 6 + 4 x

Solution

3x 2 Differentiate to 6x

2x Differentiate to 2

2 Differentiate to 0

dy

= 6x + 2

dx

To differentiate =

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 181

6 Differentiate to 0

dy

= 12 x 2

dx

Separately

x 6 Differentiate to 6x 5

4x Differentiate to 4

dy

= 15 x 2 + 6 x5 + 4

dx

Practice Problem

i) y = 4 x5 + x8 + 6

a 7b 2 + b

ii)=

iii) m = 6n 4 + 3n 2 + n 6 + 7

This rule is that we differentiate separately and the subtract in general given

y = ax n − bx n − cx n we can differentiate to:

dy

= nax n −1 − nbx n −1 − ncx n −1

dx

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 182

Example 9.6

y 2x2 − x

a) =

= n6 − n2

b) m

p = 4q 2 − 3 p − 9

Solution

To differentiate=

2x 2 Differentiate to 4x

x Differentiate to 1

dy

= 4x − 1

dx

We differentiate m

n 6 Differentiate to 6n5

n 2 Differentiate to 2n

dy

= 6n 5 − 2n

dx

4q 2 Differentiate to 8q

3 p Differentiate to 3

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 183

Practice Problem

Differentiate

a) y = 5 x5 − 2 x 2 + 4 x

b) s= t 5 − t 2

m 4n 6 − n

c) =

1 5

d) =y 2

−3

2x 3x

rule

A combination of the sum rule and the difference rule that we have computed in the previous

examples

Example 9.7

Differentiate

i) y = 7 x 4 + x3 − 3 x 2 + 4

ii) s =t 7 − 4t 4 + 2t

iii) y = x10 + x8 − x5 − 1

Solution

In this case we differentiate separately and add, subtract where there is positive or negative

sign respectively.

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 184

i) y = 7 x 4 + x3 − 3 x 2 + 4

dy

= 4 × 7 x 4−1 + 3 x3−1 − 2 × 3 x 2−1 + 0 × 4 x1−0

dx

= 28 x3 + 3 x 2 − 6 x + 0

= 28 x3 + 3 x 2 − 6 x

dy

= 7t 7 −1 − 4 × 4t 4−1 + 2t1−1

dx

=7t 6 − 16t 3 + 2

iii) y = x10 + x8 − x5

dy

= 10 x10−1 6 x8−1 5 x5−1

dx

= 10 x 9 + 6 x 7 − 3 x 4

Practice Problem

Differentiate

1. f '( x) = 4 x 6 + 2 x 4 − x 2 + x

2 1

2.. y = 4

2x − 2

+

x x

3. k = l 5 − 2l 3 + l 2 − 4l

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 185

When differentiate in this rule we are dealing with the product of two functions. We

Can also call this multiplication rule

The concept behind this rule is multiplying each function by the by the derivative of

the other function.

Example 9.8

Differentiate the following functions.

1). y = (3 x + 1)(8 x + 4)

2) y

= x (4 x + 3)

3) y =( x + 4)(2 x + 2)

Solution

1) y = (3 x + 1)(8 x + 4)

u 3 x + 1 and=

That is= v 8x + 4

dy dv du

We can now = u + v

dx dx dx

du

Separately so as to obtain= u 3 x + 1 then =3

dx

dv

Again consider the function = v 8 x + 4 and differentiate to =8

dx

dv du

Then we multiply u we have (3 x + 1)8 = 24 x + 8 and the second function is given by v we

dx dx

get (8 x + 4)3 = 24 x + 12 then we must add

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 186

dy dv du

= u +v

dx dx dx

24 x + 8 + 24 x + 12

24 x + 24 x + 8 + 12

= 48 x + 20

2) y

= x (4 x + 3)

v 4 x + 3 and

We have u and v to be u = x and = u = x can be written as

1 du 1 − 1 2 dv

u=x 2

and = x also =4

dx 2 dx

dy dv du

= u +v

dx dx dx

dy 1 1 1

= ( x 2 )4 + (4 x + 6) x − 2

dx 2

1 1 1

= 4x 2

+ 2x 2

+ 3x − 2

1 3

= 6x 2

+

x

3) y =( x + 4)(2 x + 2)

dy dv du

Let=

u x + 4 and =

v 2 x + 2 then using = u + v then=

u x +4

dx dx dx

1 du 1 − 1 2

can be written as=

u x 2

+ 4 and = x v 2 x + 2 and

then given that =

dx 2

dv

=2

dx

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 187

dy dv du

= u +v

dx dx dx

dy 1 1 1

= ( x 2 + 4)2 + (2 x + 2) x − 2

dx 2

1 1 1

= 2x 2

+8+ x 2

+ x− 2

1 1

= 3x 2

+ x− 2

+8

Practice Problem

1) y =( x 2 + 2)(5 x + 4)

2) y

= 4

x (7 x + 4)

3) y =(3 x + 8)( x + 7)

The quotient rule is to differentiate division of two functions. The

denominator multiply with derivative of the numerator, subtract the

numerator multiply with the derivative of the denominator and divide

the result with the denominator squared.

u

Let consider the function of the format y = then the above can be represented

v

du dv

dy v dx − u dx

=

dx v2

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 188

Example 9.9

2− x

(a) y =

4 + x2

2x

(b) y =

1+ x

8x − 5

(c) y =

3x 2 − 4

Solution

2− x

(a) y =

4 + x2

du dv

Differentiate u= 2 − x to = −1 and again differentiate v= 4 + x 2 to = 2x

dx dx

du dv

dy v dx − u dx

then =

dx v2

dy (4 + x 2 )(−1) − (2 − x)2 x

=

dx (4 + x 2 ) 2

−4 − x 2 − 4 x − 4 x 2

=

(4 + x 2 ) 2

−5 x 2 − 4 x − 4

=

(4 + x 2 ) 2

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 189

2x

(b) y =

1+ x

du dv

Differentiate u = 2 x to = 2 and v = 1 + x to = 1 given that

dx dx

du dv

dy v dx − u dx

= So we can differentiate

dx v2

dy (1 + x)2 + (2 x)(1)

=

dx (1 + x) 2

2 + 2x + 2x

=

(1 + x) 2

2 + 4x

=

(1 + x) 2

8x − 5

(c) y =

3x 2 − 4

du dv

v 3 x 2 − 4 we obtain

u 8 x − 5 and=

Take = = 8 and = 6 x respectively thus

dx dx

du dv

dy v dx − u dx

Using the formula =

dx v2

dy (3 x 2 − 4)8 − (8 x − 5)(6 x)

=

dx (3 x 2 − 4) 2

24 x 2 − 32 − 48 x 2 − 30 x

=

(3 x 2 − 4) 2

−24 x 2 − 30 x − 32

=

(3 x 2 − 4) 2

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 190

y ( x + 3) 2 we can expand ( x + 3)( x + 3) = x 2 + 6 x + 9

If for instance we have =

then we can differentiate

dy

= 2 x + 6 = 2( x + 3)

dx

y ( x + 3)8

Consider the following function =

We can expand it ( x + 3)( x + 3)( x + 3)( x + 3)( x + 3)( x + 3)( x + 3)( x + 3) . It is very

involving and laborious thus where chain rule applies.

Again given= y (4 x + 8)5 we cannot say that the derivative is 5(4 x + 8) 4

In chain rule differentiate the function that is outside the bracket and multiply

with derivative of the function inside the bracket.

In general given y is a function of u which is the function of x , we can use the

dy dy du

Formula = ×

dx du dx

Example 9.10

Differentiate

y (4 x + 8)5

1) =

2)

= y (2 x 2 + 4 x)7

10

1

3)=y x − 3

2

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 191

Solution

y (4 x + 8)5

1) =

u 4 x + 8 and

To solve the above equation we must establish = y = u 5 then

dy dy du du

using the general formula = × we can obtain = 4 and

dx du dx dx

dy

= 5u 4 Respectively then we can multiply

du

dy

When we have = 5u 4 we know that =

u 4 x + 8 then we can say that

du

dy

= 5(4 x + 8) 4

du

Thus

dy

=5(4 x + 8) 4 (4) =20(4 x + 8) 4

dx

2) =y (2 x 2 + 4 x)7

In the above function =

du

for the above functions are = 4x + 4

dx

dy

u 6 7(2 x 2 + 4 x)6

and = 7=

du

dy dy du

= ×

dx du dx

CHAPTER 9 Calculus I: Differentiation, Rules of differentiation 192

dy

=7(2 x 2 + 4 x)6 (4 x + 4)

dx

=(28 x + 28)(2 x 2 + 4 x)6

10

1

3)=y x − 3

2

1

In the above function=

u x − 3 and y = u10 thus the derivative are

2

9

du 1 dy 1

= and= 10

=u 9 10 x − 3 thus in general we use the

dx 2 du 2

dy dy du

following formula = ×

dx du dx

and we obtain

9 9

dy 1 1 1

= 10 x − 3 = 5 x − 3

dx 2 2 2

Practice Problem

y (5 x + 8)8

(a) =

(b) =y (6 x 2 + 3 x)10

7

1

(c) =y x − 8

4

Maximization and Minimization of Function

Learning Objectives

• Use of first derivative to find the stationary points of a function.

• Use the second derivative to determine whether the stationary point is

maxima and minima.

• Find the maximum and minimum points of a function.

• Use stationary points to sketch graphs of fuctions.

Stationary Points

This section is concerned with the application in which will are interested with the stationary

points. When we have a non-linear equation which have take the shape of U and inverted U at

the symmetry of the parabola we have the turning points. The turning points which are also

called the stationary point are either maxima or minima.

It is maxima when the shape is inverted U and minima when it is U shaped.

Figure 9.9

Turning point

(maxima)

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 194

Figure 9.10

Turning point

(minima)

Example 9.11

y =x 2 − 10 x + 9

Differentiate

Solution

dy

= 2 x − 10

dx

dy

=0

dx

2 x − 10 =

0

2 x = 10

x=5

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 195

We can calculate the value of y by substituting x =5 to the equation y =x 2 − 10 x + 9

52 10 ( 5 ) + 9

y =−

y = 25 − 50 + 9

y = −16

To know whether the points are minima or maxima we get the second derivative indicated as

d 2y

or f "( x )

dx 2

d 2y

=2

dx 2

When the second derivative is positive then the stationary points are at minima

To obtain the points at which it cut the x axis we solve the equation as quadratic

y =x 2 − 10 x + 9

−b ± b 2 − 4ac

x=

2a

10 ± 102 − 4 (1)( 9 )

=

2

10 ± 100 − 36

=

2

10 ± 64

=

2

10 ± 8

=

2

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 196

10 + 8 18

x

= = = 9

2 2

10 − 8 2

x= = = 1

2 2

=x 1=

or x 9

Sketching the when using the value of the x we have obtained after solving the quadratic

equation as where the graph will cut the x-axis

Figure 9.11

y =x 2 − 10 x + 9

9

5

1 9

(5, -21) minima

-16

1

To obtain the symmetry of the parabola we (1 + 9 ) =

5

2

To whether the minima remember to differentiate the second time in our case we had obtained

d2y

=2

dx 2

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 197

Example 9.12

y=− x2 + 6x + 7

Differentiate

Solution

dy

=−2 x + 6

dx

dy

=0

dx

−2 x + 6 =0

−2 x =

−6

x=3

Substitute x to obtain y

y=− x2 + 6x + 7

x=3

− ( 32 ) + 6 ( 3) + 7

y=

y =−9 + 18 + 7

y = 16

To determine whether they are maxima or minima we get the second order derivative

d 2y

=- 2

dx 2

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 198

When the second derivative is negative we say it is maxima for our case the second derivative is

negative 2 thus the stationary points are maxima

We can determine the points at which the curve cut the x –axis by solving as quadratic equation.

− x2 + 6 x + 7 =0

−b ± b 2 − 4ac

x=

2a

−6 ± 62 − 4 ( −1)( 7 )

=

2 ( −1)

−6 ± 36 − −28

=

−2

−6 ± 64

=

−2

−6 ± 8

=

−2

−6 + 8 2

x= = = −1

−2 −2

−6 − 8 −14

=x = = 7

−2 −2

−1

x= or 7

x=

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 199

Figure 9.12

16

y=− x2 + 6x + 7

-1 3

7

Application of differentiation

In most case the application of differentiation to business is inform of the differentiating total

revenue (TR) to get marginal revenue (MR)

dTR

= MR

dq

On the other hand the application is used to different ate total cost (TR) to get the marginal cost

(MC) which is shown below.

dTC

= MC

dq

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 200

Example 9.13

Company A sells its output to company B for KES 200 per unit. The Cost of the sales per week in

company A are given by the function TC =2Q2 + 40Q − 80 where Q is the value of the weekly

sales.

Company B uses the output of company A to manufacture a product whose demand is

dependent on the sale price. The revenue per week of company B is given= as R 1000Q − 16Q2

and the cost per week of company B excluding the cost of the products bought from company A

are given C =2Q2 − 120Q − 400

Company A can restrict the weekly supply of its product to company B but cannot raise the price

above KES 200. The two companies are considering whether to merge together into a single

company.

Determine:

At what weekly sales will company A maximizes it profit.

What will be the profit or loss in company B if company A were to supply a profit maximizing

quantity of its product weekly?

If the two companies were to merge into one what would be the profit maximizing output per

week and what would be the weekly profit.

Solution

TRA = PQ

TC A =2Q2 + 40Q − 80

π=

A TRA − TC A

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 201

= 160Q − 2Q2 + 80

dπ A

= 160 − 4Q

dQ

Then

dπ A

=0

dQ

160 − 4Q =

0

−4Q =

−160

Q = 40

d 2π A

= −4

dQ2

Company A profit function is maximum because the second derivative is negative 4 at the level

of output of 40 units.

TRB = PQ

=

=

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 202

The total cost will be added the revenue of company A which is a cost to company B

π=

B TRB − TC B

Q = 40

= 6800

dπ B

= 880 − 36Q

dx

d 2π B

= −36

dx 2

The second derivative is negative thus the profit KES 6800 is maximum

When the two companies merge we add both the total cost

TC A + TC B

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 203

The total revenue to be used is that of company B because total revenue for company A is a cost

to company B

dπ A+B

= 1040 − 40Q

dQ

dπ A+B

=0

dQ

1040 − 40Q =

0

1040 = 40Q

Q = 26

d 2π A+B

= −40

dQ2

π A+B = 14000

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 204

Example 9.14

Where q is the number of calculators produced per week in ten thousands of units. The

revenue made in selling the calculators is given by the equation:

Find the:

a) The initial set up cost before production begins.

b) An equation for estimating the weekly profit and level of output that maximize the

profit.

c) The maximum the profit at this level.

Solution

C

= 0.2q 3 – 6q 2 − 220q + 500 ( KES 00 , 000 )

q=0

3 2

=

= KES 50,000,000

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 205

Profit

= TR − TC

– 6q 2 - 220q + 500 )

π =

Level of output

π =

−0.2 q 3 + 5.75 q 2 +220q − 286

dπ

−0.6q 2 + 11.5q + 220

=

dq

dπ

=0

dq

dπ

−0.6q 2 + 11.5q + 220

=

dq

d 2π

−1.2q + 11.5

=

dq 2

0

−b ± b 2 − 4ac

q=

2a

Hence

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 206

=

2 ( −0.6 )

−11.5 ± 660.25

=

−1.2

−11.5 ± 25.7

=

−1.2

= = = −11.83

−1.2 −1.2

= = = 31

−1.2 −1.2

−11.83

q= or 31

q=

= 25.696

25.696 =

−25.7

d 2π

Thus the quantity of 31 units will give a maximum profit because the is -25.7

dq 2

π =

−0.2 q 3 + 5.75 q 2 +220q − 286

q = 31

π =

π =

−5958.2 + 5525.75 + 6820 − 286

π = 610,155, 000

CHAPTER 9 Calculus I: Differentiation, maximization and minimization of functions 207

Practice Problem

1. A Company estimates that the total cost of producing x units of its popular product

Alpha is given by the equation: C =+2000 200x – 10x 2 + 2x 3 . The marketing

department further estimates that the revenue made in selling x units is given by:

R = 800x – 2x 2 .

Determine the number of that should be produced to maximize the total profit.

2. A manufacturer expects that the total cost (in Kenya shillings) of producing x units of his

product will be given

C=

Required

a) Define the terms average cost and marginal cost

b) Derive both the average cost and marginal cost functions for the above

c) How many units would he have to produce in order to minimize his total costs?

d) Explain your findings in c) above

e) What is the cost of producing the 7000th unit of the product?

Partial Differentiation

Consider the function that relates the dependent variable y and three different independent

variables. The process of determining the rate of change with the three variables is called

partial differential. The procedure involves differentiating y with respect to x1 when keeping x2

and x3 constant.

Example 9.15

y = x 5 + 3xz + z 2 + 100

Solution

∂y

= 5 x 4 + 3z

∂x

∂y

=0

∂x

5 x 4 + 3z =0

∂y

= 3x + 2z

∂z

∂y

=0

∂z

3x + 2z = 0

CHAPTER 9 Calculus I: Partial Differentiation 209

∂2 y ∂2 y

20

= x3 3

∂x 2 ∂x∂z

∂2 y ∂2 y

2= 3

∂x 2 ∂z∂x

So that to find the Hessian determinant that has got a positive we use the following

∂2 y ∂2y

∂x 2 ∂x∂z

2

∂y ∂2y

∂z∂x ∂z 2

H= 2 × 2 − ×

∂x ∂z ∂z∂x ∂x∂z

Example 9.16

Given the TR = 5Q + A − Q2 + AQ − A2 where Q represent the total output and A advertising

expenditure. Determining the level of output at which the TR will be maximized.

Solution

TR = 5Q + A − Q2 + AQ − A2

∂TR

=5 − 2Q + A =0

∂Q

∂TR

=1 + Q − 2 A =0

∂A

TR = 5Q + A − Q2 + AQ − A2

5 − 2Q + A = 0 ⇒ 5 = 2Q − A

1 + Q − 2 A =0 ⇒ 1 =−Q + 2 A

CHAPTER 9 Calculus I: Partial Differentiation 210

5 2Q − A

=

1 =−Q + 2 A

3Q = 7

7

Q= = 2.33

3

11

A = 3.67

=

3

∂ 2TR ∂ 2TR

=

−2 1

=

∂Q2 ∂Q∂A

∂ 2TR ∂ 2TR

=

−2 1

=

∂A2 ∂A∂Q

H = 2 × 2 − ×

∂Q ∂A ∂Q∂A ∂A∂Q

H= ( −2 × −2 ) − (1 × 1) = 3

Example 9.17

A company produces two goods A and B and the prices are given below

P=

1 50 − x

P=

2 95 − 3y

CHAPTER 9 Calculus I: Partial Differentiation 211

Solution

TR1 + TR2 =

=PQ

TR1= x ( 50 − x ) + y ( 95 − 3y ) ⇒ 50 x − x 2 + 95y − y 2

π= TR − TC

= 50 x − x 2 + 95y − 3y 2 − ( x 2 + 3xy + y 2 )

= 50 x − x 2 + 95y − 3y 2 − x 2 − 3xy − y 2

= 50 x − x 2 − x 2 + 95y − 3y 2 − y 2 − 3xy

= 50 x − 2 x 2 + 95y − 4 y 2 − 3xy

π = 50 x − 2 x 2 + 95y − 4 y 2 − 3xy

∂π

= 50 − 4 x − 3y = 0

∂x

∂π

= 95 − 8y − 3x = 0

∂y

−4 x − 3y =

−54

−8y − 3x =−95

x=5

y = 10

∂ 2π ∂ 2π

=

−4 −3

=

∂x 2 ∂x∂y

∂π ∂ 2π

−8

= −3

=

∂y 2 ∂y∂z

CHAPTER 9 Calculus I: Partial Differentiation 212

∂ 2π ∂ 2π ∂ 2π ∂ 2π

H = 2 × 2 - ×

∂x ∂y ∂x∂y ∂y∂z

( −4 × −8 ) − ( −3 × −3) =23

It is maximum because the Hessian determinant is positive 23

The price can be calculated as follows

We can find the price by multiply with the value of x and y to P1 and P2

P=

1 50 − x

x=5

P1 = 50 − 5 = 45

P=

2 95 − 3y

y = 10

P=

2 95 − 30

P2 = 65

The profit can be calculated as follows

π = 50 x − 2 x 2 + 95y − 4 y 2 − 3xy

π = 50 ( 5) − 2 ( 52 ) + 95 (10 ) − 4 (102 ) − 3 ( 5)(10 )

= 600

Practice Problem

Where D is the number of directory sold, a is the number of advert pages

How many directories containing how many advert pages should be sold in order to

maximize profit.

2. An non-profit making organization has started a small project whereby the aim is to

provide employment to as many people as possible without loss or profit. The weekly

total earnings of x workers can be estimated using the following equation

2

E =98 + 16 x + x 2

3

The revenue generated by the x workers

= C 100 x − 4 x 2 .

Required

CHAPTER 9 Calculus I: Partial Differentiation 213

a) Determine how many workers will generate the maximum possible revenue

b) Determine the maximum no of workers the organization will employ with making

a loss

3. A company has determined through regression analysis that its sales are in two different

medium. This is given by the following relationship

Determine the company’s optimal level of sales.

4. The total profit per acre on a wheat farm, had been found to be related to the

expenditure per acre for labor and sol conditions as given by the following function

Where x represents the expenditure per acre spent on labor and y represent the

expenditure per acre spent on soil improvement.

Determine the value of x and y that maximize profits

5. A company deals with two types of ladies wear with demand functions;

P=

x 25 − 4 x for product x

P=

y 10 − 6y for product y

Total cost function

TC =20 + 3x 2 =2y 2 =2 xy

d) Compute the production level and profits to maximize profit level x when y is not

being produced

Constrained Optimization

Managers face many constrains in their decision making for example marketing manager is

required to maximize sales subject to an advertising budget, a production manager is required

to maximize output subject a minimum use of labor, machines and other inputs. This are

constrained optimization problems to solve this problem we can use Lagrange multipliers. It

handles non linear constrains and problems that involve more than two variables with ease.

We have two types of function in Lagrange multiplier

Objective functions that is what you opt to achieve f ( x , y )

Constrains

Subject to ∅ ( x , y ) =

m

When dealing with Langrage multiplier we need to define the Lagrange function that is take the

objective function and constrained in a single function and rearrange the function and multiply

by the Lagrange which is usually scalar λ (lambda) so in general

Objective function

f ( x,y )

Subject to a constant

∅( x,y ) =

m

g ( x , y , λ )= f ( x , y ) + λ M − Q ( x , y )

∂g

=0

∂x

∂g

=0

∂y

∂g

∂λ

CHAPTER 9 Calculus I: Constrained Optimization 215

Example 9.18

x 2 − 3xy + 12 x

Subject to

2 x + 3y =6

Solution

f ( x , y ) =x 2 − 3xy + 12 x

Q ( x , y ) = 2 x + 3y = 6

g ( x , y , λ ) =x 2 − 3xy + 12 x + λ 6 − ( 2 x + 3y )

= x 2 − 3xy + 12 x + 6λ − 2 xλ − 3yλ

∂g

= 2 x − 3y − 12 − 2λ = 0..................................................... ( i )

∂x

∂g

= −3x − 3λ = 0................................................................. ( ii )

∂y

∂g

=6 − 2 x − 3y =0.............................................................. ( iii )

∂λ

2 x − −3y − 12 − 2λ =0................................................................ ( i )

0............................................................................... ( ii )

−3x − 3λ =

6 − 2 x − 3y =0............................................................................ ( iii )

Take the first two equations

CHAPTER 9 Calculus I: Constrained Optimization 216

2 x − 3y − 2λ 12................................................................ ( i ) × 3

−3x − 3λ 0...................................................................... ( ii ) × 2

36................................................................ ( i )

6 x − 9 y − 6λ =

0...................................................................... ( ii )

−6 x − 6λ =

36..................................................................... ( iv )

−9y − 12λ =

−3x − 3λ 0............................................................................... ( ii ) × 2

2 x + 3y 6.................................................................................. ( iii ) × 3

0............................................................................... ( ii )

−6 x − 6λ =

18.................................................................................. ( iii )

6 x + 9y =

18..................................................................................... ( v )

9 y − 6λ =

36..................................................................... ( iv )

−9y − 12λ =

18............................................................................ ( v )

9 y − 6λ =

−18λ = 54

λ = −3

36..................................................................... ( iv )

−9y − 12λ =

λ = −3

−9y − 12 ( 3) =

36

−9y + 36 =

36

−9y = 0

y=0

x = −3

CHAPTER 9 Calculus I: Constrained Optimization 217

Practice Problem

where x denotes the number of frames and y the number of wheels. Assuming that the firm

doesn’t want any spare frames or wheels left over at the end of the production run , find

the maximum profit.

2. The total profit per acre on a wheat farm has been found to be related to the

expenditure per acre for labor and soil conditioners given the following function:

Where x represents the expenditure per acre spent on labor and y represents the

expenditure per acre spent on soil improvement

Determine the value of x and y that maximizes profit hence maximum profit

3. A producer of two goods A and B has a total cost given as where x and y denotes the

quantity of goods respectively. If P1 and P2 denotes the corresponding prices then the

demand equation are ;

Required

Determine the optimal profits if the companies total cost are fixed at KES 100

4. A company produces and sells two products A and B in related markets. The total

revenue made in selling x units of A and y units of B is given by:

The total cost is given by C = x + y.

CHAPTER 10 CALCULUS II:

INTEGRATION

Learning Objectives

At the end of this section the students should be able to:

Integrate function

Recognize the notation for indefinite integration

Find total cost given the marginal cost

Find the total revenue given marginal revenue

Integration can be regarded as the opposite process of differentiation hence called the anti

differentiation. However for the definite integral the result is single number or numeric result.

∫ (2x + 20 x )dx

4

is x

Example 10.1

Evaluate

∫ (2x + 20 x )dx

4

Solution

∫ (2x + 20 x )dx

4

CHAPTER 10 Calculus II: Integration 219

2 x 1+1 20 x 4 +1

∫ 1 + 1 + 4 + 1 + c dx

=x 2 + 4 x 5 + c

The best that can be done is integrate and add a c which is constant of integration.

There are times when information is known about a particular situation that enables the

constant of integration to be calculated.

The rule for integration is a simple function of x, kx n is to increase the power of x by 1 and

divided the whole function by n + 1

kx n +1

That is ∫ ( kx n )dx ⇒ +c

n +1

Example 10.2

Evaluate

∫ ( 3x − 4 x )dx

2

∫ (8x − 3x 2 + 6 x − 10 )dx

3

2

Solution

∫ ( 3x − 4 x )dx

2

3 x 2 +1 4 x 1 +1

− +c

2+1 1+1

=x 3 + 2 x 2 + c

CHAPTER 10 Calculus II: Integration 220

∫ (8x − 3x 2 + 6 x − 10 )dx

3

8 x 3 +1 3 x 2 +1 6 x 1 +1

− + − 10 x 0 +1 + c

3+1 2+1 1+1

2 x 4 + x 3 + 3x 2 + 10 x + c

2

14 x 1+1 12 x 2+1

+ +c

2 3

7x2 + 4 x 3 + c

Definite Integral

In general when dealing with definite integral we just integrate just like the other normal

integration but his time with definite values.

a

The symbol for definite integral ∫ ( )dx where a is a definite and b is a lower value.

b

Example 10.3

Evaluate

4

∫ ( 3x + x )dx

2

a)

0

∫ (5x + 3 x 2 + 5 x )dx

4

b)

−2

Solution

∫ ( 3x + x )dx

2

0

CHAPTER 10 Calculus II: Integration 221

4

3 x 2+1 x1+1

∫0 3 + 2 + c dx

4

x2

∫x +

3

+c

0

2

3 42 3 02

4 + + c − 0 + + c

2 2

[64 + 8 + c ] − [0 + 0 + c ]

[72 + c ] − [0 + c ]

72 + c − c

= 72

∫ (5x + 3 x 2 + 5 x )dx

4

−2

CHAPTER 10 Calculus II: Integration 222

6

5 x 4+1 3 x 2+1 5 x1+1

∫−2 5 + 3 + 2 + c dx

6

5 5x2

∫−2

3

x + x + + c dx

2

6 5 ( 62 ) 5 ( −22 )

∫

5 3 5 3

6 + 6 + + c − −2 + −2 + + c

−2

2 2

= 8082 − −30

= 8052

When you require a numeric insert say the total revenue between two activity levels the

expression is termed as a definite integral. In the indefinite integration the result is a function of

x or any variable that is given say a, b, c, d ... .

a

The symbol for definite integral ∫ ( )dx where a is a definite and b is a lower value

b

Example 10.4

The total revenue obtained from selling x hundred items in a particular day is given by R which is

a function of variable x. The marginal revenue MR

= 20 − 4 x

Determine the total revenue function

Find the number of items sold in one day that will maximize the total revenue and evaluate TR

at that point.

CHAPTER 10 Calculus II: Integration 223

Solution

MR

= ∫ (20 − 4 x ) dx

= 20 x − 2 x 2 + c

c=0

TR 20 x − 2 x 2

=

dTR

= 20 − 4 x = 0

dx

20 − 4 x = 0

4 x = 20

x=5

dTR

= 20 − 4 x = 0

dx

20 − 4 x =0

4 x = 20

x=5

d 2TR

= −4

dx 2

TR 20 ( 5) − 2 ( 52 )

=

TR 100 − 50

=

= 50

Example 10.5

Your firm has recently stated to give economic advice to your client acting as a consultant you

have estimated the demand function to be AR = 200 − 8 x where AR is the average cost and x is

the output. AR is selling per unit. Investigation of the client cost profile the marginal cost is

given by MC =x 2 − 28 x + 211

Further investigation has shown that the firm’s cost when not producing output are 10

a) Determine the TC

b) Determine the TR

CHAPTER 10 Calculus II: Integration 224

Solution

AR x ( 200 − 8 x )

=

a).

TR 200 x − 8 x 2

=

MC =x 2 − 28 x + 211

b).

∫(x − 28 x + 211)

2

TC =

x 2+1 28 x 1+1

= − + 211x + c

2+1 1+1

1 3

x − 14 x 2 + 211x + c

3

c = 10

1 3

x − 14 x 2 + 211x + 10

3

c)Profit function

CHAPTER 10 Calculus II: Integration 225

1

200 x − 8 x 2 − x 3 − 14 x 2 + 211x + 10

3

1

200 x − 8 x 2 − x 3 + 14 x 2 − 211x − 10

3

1

200 x − 211x − −8 x 2 + 14 x 2 − x 3 − 10

3

1

−11x + 6 x 2 − x 3 − 10

3

dπ

= −11 + 12 x − x 2 = 0

dx

x =1 or 11

d 2π

= 12 − 2 x

dx 2

x = 11

12 − 2 (11) =

−10

12 − 2 (1) =

10

Practice Problem

1. The marginal revenue (MR) of a product is KES 30 and we know that total revenue is zero

when is zero, total cost equal KES 250,000

a) Find the total revenue

b) Find the total cost

c) Find the profit function

2. Evaluate;

a.

∫ (1 − 2 x + 10 x

2

b. − 12 x 4 )dx

CHAPTER 10 Calculus II: Integration 226

5

c. ∫ (200 x − 10 x

2

+ 21x 3 + 100)dx

0

3. If he marginal cost of making x pairs of gloves is shillings, find the total cost of

increasing production from 400 to 500 pairs.

that fixed cost are 8 when production is zero. Find the output to give maximum profit.

AR = 20 − 5Q − Q2

4 14Q − 5Q2 + Q3

TC =+

b) Find the firms maximizing output and unit price.

MR

= 300 − 6Q

MC= 50 + 4Q

The fixed costs are set to 500 when the firm is not producing.

a) Find the profit function of the firm

b) Find the quantity of output that maximizes the firm’s profit hence the maximum

profit

7. Company XYZ employed a cost accountant who developed two functions to describe the

operation of the firm. He found the marginal revenue to be MR = 25 − 5x − 2 x 2 and the

marginal cost function to be MC = 15 − 2 x − x 2 where x is the level of output. Determine

the profit maximizing output of this firm and the total profit at that point.

8. The marginal revenue (MR) of a product is KES30 and we know that total revenue is zero

when x (number of units sold) is zero. The marginal cost (MC) is KES 22.50 and we are

given that when x is zero, total costs equal KES 250,000

a) Find the total revenue function

b) Find the total cost function

c) Find the profit function

CHAPTER 10 Calculus II: Integration 227

9. A company manufactures large scale items. It has been shown that the marginal cost , is

thousands of shillings where is the number of units of output per

annum. It has also been shown that the marginal revenue is thousands

of shillings.

b) Establish the total revenue function

c) Establish the break-even situation of the company

d) Determine the number of units of output that would maximize

CHAPTER 11 NON – LINEAR

EQUATIONS

Learning Objectives

At the end of this section the students should be able to:

−b ± b 2 − 4ac

Solve a quadratic equation using the quadratic formula x =

2a

Solve a quadratic equation by factorizing method

Sketch the graph of a quadratic equation on a graph

Determine the equilibrium price given quadratic demand equation and supply

function

Quadratic functions

In a quadratic the highest power of the independent variable is 2. Quadratic is solved by finding

the values of x that satisfy it solution or roots. The shape of the quadratic equation is called a

parabola.

This is where the curve crosses the x-axis and has two solutions

−ax 2 + bx + c =0

2

ax + bx + c =0

CHAPTER 11 Non-Linear equations 229

The curve turn round just as it touches the x-axis, it has one solution.

One

solution

The curve turns round before it ha a chance to cross the x – axis, it has no solution

Discriminant

The expressions b − 4ac which appear under the square root sign of the quadratic formula

2

determine the character of the solution and is called the discriminant. Specifically when the

value of b2 − 4ac is greater than zero then we have two solution, If the discriminant is equal to

zero we have one solution and if it is less than zero we have no solution.

b2 − 4ac =

0 one solution

b2 − 4ac < 0 no solution

CHAPTER 11 Non-Linear equations 230

Factor method

Completing the square method

Quadratic formula

Graphical method

In this level we are going to solve the quadratic equation by only two methods that is the facto

method and quadratic method

Example 11.1

Solve the following quadratic equations factor method

x 2 + 13x + 42 =

0

6 x 2 − 5x − 6 =0

Solution

x 2 + 6 x + 7 x + 42

Take the number that is before x2 called the coefficient of x2 and multiply with the constant

which the number without the variable x and x2

What we obtain is called the product

Product =1 × 42 =42

Identify two numbers when multiplied we get 42 and when we add them together we obtain 13

i.e. the coefficient before x is called the sum

We need to factor as follows.

CHAPTER 11 Non-Linear equations 231

x 2 + 6 x + 7 x + 42

x 2 + 6 x + 7 x + 42

x ( x + 6) + 7( x + 6)

( x + 7 )( x + 6 )( x + 6 )

Since these two are the

same only consider one

( x + 7 )( x + 6 ) =

0

( x + 7) =

0

x +7= 0

x = −7

( x + 6) =

0

x +6= 0

x = −6

x=

−6 or −7

6 x 2 − 5x − 6 =0

CHAPTER 11 Non-Linear equations 232

Product = 6 × −6 = 36

Sum = −5

Numbers= 4, −9

6x2 + 4 x − 9x − 6 =0

2 x ( 3x + 2 ) − 3 ( 3x + 2 ) =

0

(2 x − 3)( 3x + 2 )( 3x + 2 ) =

0

(2 x − 3)( 3x + 2 ) = 0

2x − 3 =0

2x = 3

x = 1.5

3x + 2 =0

3x = −2

1

x= −

2

1

=x 1.5 or −

2

Practice Problem

Use factor method to solve the following quadratic functions

a) x 2 + 17 x + 70 =

0

b) 1 − x 2 =

0

c) 2 x 2 − 4 x + 16 =

0

d) 7 x 2 + 21x − 42 =

0

1 2

e) x + 6 x + 27 =

0

3

CHAPTER 11 Non-Linear equations 233

Example 11.2

Solve the following quadratic equation using the quadratic formula

2x2 + 9x + 5 =0

x 2 − 10 x + 9 =0

Solution

−b ± b2 − 4ac

x=

2a

ax 2 + bx + c =0

2x2 + 9x + 5 =0

When

a 2,=

= b 9 and=

c 5

x 2 − 10 x + 9 =0

CHAPTER 11 Non-Linear equations 233

x 2 − 10 x + 9 =0

−b ± b 2 − 4ac

x=

2a

− − 10 ± ( −10 ) − 4 (1)( 4 )

2

x=

2 (1)

10 ± 100 − 36

x=

2

10 ± 64

x=

2

10 ± 8

x=

2

10 + 8 18 10 − 8 2

=x = or =x =

2 2 2 2

x = 9 or 1

Practice Problem

a) 3 x 2 − 15 x + 6 =0

b) 2 x 2 − 19 x − 10 =

0

c) x 2 − 3 x + 10 = 2 x + 4

d) 4 x 2 + 12 x + 9 =0

e) x 2 + x + 1 =0

CHAPTER 11 Non-Linear equations 235

Example 11.3

A company invests in a particular project and it is estimated that after x months of running the

cumulative profit (000’s of shillings) from the project is given by the equation

y= 31.2 x − 3x 2 − 60 where x represents the time in months. The project can run for 9 months at

the most.

Required

d) Use the graph to estimate the best time to end the project (time of maximum profits)

Solution

To determine how to draw the curve there are three steps to remember

Step 1

Determine the basic shape that is whether it has U shaped if a > 0 , inverted U shape if a < 0

Step 2

Determine the y-intercept by identifying the constant that has no variable or substitute x = 0

Step 3

CHAPTER 11 Non-Linear equations 236

31.2 x − 3x 2 − 60 =

0

−b ± b2 − 4ac

x=

2a

−31.5 ± 31.52 − 4 ( −3)( −60 )

x=

2 ( −3)

−31.5 ± 992.25 − 720

x=

−6

−31.5 ± 272.25 −31.5 ± 16.5

=x ⇒

−6 −6

=x = 2.5

⇒

−6 −6

−31.5 − 16.5 −48

=x = 8

⇒

−6 −6

x = 2.5 or 8

ii).The initial cost of the project will be given by the y-intercept on the graph or the cost when

the project is at time zero

y= 31.2 x − 3x 2 − 60

x=0

y= 31.2 ( 0 ) − 3 ( 02 ) − 60

y = −60,000

This imply the initial cost is KES 60,000

Step 2 – The y-intercept is -60

Step 3- we have already solved for x that is x = 2.5 or 8

CHAPTER 11 Non-Linear equations 237

Maximu

m profit

21.1125

Profits

y= 31.2 x − 3 x 2 − 60

-60

The symmetry of the parabola will give the best time to end the project

1

(2.5 + 8 ) =

5.25 months when the project making maximum profit

2

Example 11.4

Given that the supply and demand functions

P=

Calculate the equilibrium price

Plot the curves on a graph paper

Solution

At equilibrium the supply is equal to the demand

CHAPTER 11 Non-Linear equations 238

Q2 + 14Q + 22 =

−Q2 − 10Q + 150

Q2 + Q2 + 14Q + 10Q + 22 − 150 =

0

2Q2 + 24Q − 128 =

0

−b ± b2 − 4ac

x=

2a

2

2Q + 24Q − 128 = 0

−24 ± 242 − 4 ( 2 )( −128 )

x=

2 (2)

−24 ± 576 + 1024

x=

4

−24 ± 1600

x=

4

−24 ± 40

x=

4

−24 + 40 16

x

= = = 4

4 4

x =4

−24 − 40 −64

x= = = −16

4 4

x = −16

=x 4 or − 16

To plot the graph we need to plot the to check the point of intersection of the two curves.

The equilibrium quantity is 4 units hence we can calculate the price by either using the demand

function or supply function which gives the same answer.

CHAPTER 11 Non-Linear equations 239

Q=4

− ( 42 ) − 10 ( 4 ) + 150

P=

P=

−16 − 40 + 150

P = 94

150

−QD2 − 10QD + 150

P=

(4, 94)

22

-16 4

Practice Problem

P = 2Q2 + 10Q + 10

−Q2 − 15Q + 52

P=

Determine the equilibrium price and quantity; hence sketch the graph on a graph paper

CHAPTER 11 Non-Linear equations 240

2. The total cost and revenue functions of producing q units of a certain product are given by

TC = 2q + 10

TR = – 2 q2 + 14q

Draw the graph of the profit function and determine the breakeven quantity q and also the

quantity that yields the maximum quantity.

π = aQ2 + bQ + c

It is known that if π =9, 34, and 19 then Q = 1, 2, and 3 respectively. Solve for the values of a, b,

and c. Hence determine the breakeven point.

4. Use Ms Excel to tabulate values of the profit function π = – 0.01q3 + 5q2 + q – 1000 for q = 0,

2, 4, 6, …, 30 and hence plot this function using Ms Excel . Use your graph to determine the

breakeven points and the maximum profit.

5.The demand and supply functions of two interdependent products are given by

Qd1 = 40 − 5 P1 − P2

Qd 2 = 50 − 2 P1 − 4 P2

Qs1 = 4 P1 − 3

Qs2 = 3P2 − 7

6. Where, Qd and Qs denote the respectively quantity demanded and supplied for each product.

Determine the equilibrium price and quantity for each product.

Qd1 = 15 − P1 + 2 P2 + P3

Qd 2 = 9 + P1 − P2 − P3

Qd 3 = 8 + 2 P1 − P2 − 4 P3

Qs1 = P1 − 7

Q s2 = 4 P2 − 4

Qs3 = 2 P3 − 5

Determine the market equilibrium price and quantity for each product.

CHAPTER 12 REVENUE, COST

AND PROFIT

Learning Objectives

At the end of this section the students should be able to:

Sketch the graph of total revenue, total cost, and average cost and

profit functions

Total revenue is the amount received by the company for the sale of its commodities or goods

or services.

Total revenue (TR) is given by price (P) by the number of units (Q)

TR = PQ

Example 12.1

It is given that where TR is the total revenue and Q is quantity of

commodity. On the graph paper plot the graph of TR against Q

CHAPTER 12 Revenue, cost and profit 242

Solution

Step 1- the is inverted U because the coefficient of Q2 is less than 1 thus it is -2

Step 2 – y-intercept is zero

Step 3 – Solving for the value of Q

TR 100Q − 2Q2

=

100Q − 2Q2 =

0

Q (100 − 2Q ) =

0

Q=0

100 − 2Q =

0

−2Q =

−100

Q = 50

Maximum

profit

1250

TR 100Q − 2Q2

=

25 50

Maximum Profit

CHAPTER 12 Revenue, cost and profit 243

TR 100Q − 2Q2

=

Q = 25

=TR 100 ( 25) − 2 ( 252 )

TR 2500 − 1250

=

TR = 1250

Total cost is any item that can be traced in the production or the facilitation on earning

revenue. Total cost involves two variables that are the fixed cost and the variable cost.

Total cost is given by adding the fixed cost and variable cost per unit

= FC + VC ( Q )

TC

The total cost function is a linear function such that when draw on a graph it appear a straight

line.

Variable

cost

Total Fixed

cost cost

Quantity

When we divide the total cost by the quantity then we get the average cost

TC

AC =

Q

CHAPTER 12 Revenue, cost and profit 244

= FC + VC ( Q )

TC

FC + VC ( Q )

AC =

Q

FC VC ( Q )

AC

= +

Q Q

FC

AC

= + VC

Q

P TR − TC

=

Example 12.2

Given that the fixed costs are KES 1000 and the variable cost are KES per unit express total cost

and average cost as functions of Q

Solution

TC = VC ( Q )

= FC

= 1000 + 4 ( Q )

= 1000 + 4Q

CHAPTER 12 Revenue, cost and profit 245

Example 12.3

If the fixed costs are KES 4 and variable cost per unit is KES 1 and the demand function is

P 10 − 2Q

=

Required

a) Obtain the profit function

b) Find the break even point

c) Find the Maximum profit

d) Sketch the graph

Solution

= FC + VC ( Q )

TC

= 4+Q

TR = PQ

= Q (10 − 2Q )

= 10Q − 2Q2

π= TR − TC

= 10Q − 2Q2 − ( 4 + Q )

= 10Q − 2Q2 − 4 − Q

−2Q2 + 9Q − 4

=

ii).At Break even point (BEP) profit is equal to zero or the Total Revenue is equal to Total cost

P = 0 or TC = TR

−2Q2 + 9Q − 4

P=

−2Q2 + 9Q − 4 =0

−2Q2 + 9Q − 4 = 0

Product = −2 × −4 = 8

Sum = 9

Numbers = 1,8

CHAPTER 12 Revenue, cost and profit 246

−2Q2 + Q + 8Q − 4 =0

−Q ( 2Q − 1) + 4 ( 2Q − 1) =

0

( −Q + 4 )(2Q − 1) =0

Q = 4 or 1

Maximum

profit

6.125

π=

−2Q2 + 9Q − 4

1 4

Break even

points

π =−2Q2 + 9Q − 4 =0

Q=4

π =−2 ( 42 ) + 9 ( 4 ) − 4 =0

π =−2 ( 42 ) + 9 ( 4 ) − 4 =0

−10.125 =20.25 − 4

π = 6.125

CHAPTER 12 Revenue, cost and profit 247

Practice Problem

1. A manufacturing plant has KES 8,400 in fixed costs and it uses KES1.25 to produce a single

unit of its products. The selling price has been set at KES 2.0 per unit by the laws of demand and

supply.

Required:

a) How many units must be produced in order for the operation to break even?

b) Draw a graph of both Cost and Revenue functions marking clearly the break even

point, the profit and loss regions

2. A photographer is willing to supply 280x – 500 cheap passport photographs per year at a price

of x dollars each. The public will buy 1000 – 120x such photographs at x dollars.

Required:

a) What is the equilibrium price and equilibrium demand?

b) Plot the two functions on a graph and show the equilibrium point?

3. The yearly demand for a certain style of gloves is x = 20,000 – 2000p, where p denotes the

price per pair (in dollars). The total cost of producing x pairs of gloves is

Required:

a) Formulate the Revenue and Cost functions in terms of price, p

b) Plot on the same graph the two functions and mark clearly the loss and profit regions.

Let p be on the x axis

4. Determine the price range that will earn the manufacturer profits i.e. establish break even

point by solving quadratic equations for this problem.

CHAPTER 12 Revenue, cost and profit 248

5. 20 units of a product cost KES. 200,000 and 50 units cost KES 272,000. Determine

6. For each of the following determine the linear cost equation, revenue and profit

equation and the breakeven point

.

Unit variable cost = KES 3200, fixed cost = KES 72,000 and unit price = KES 4,900

Unit variable cost = KES 7,200, fixed cost = KES 160,000 and unit price = KES 8,000

Unit variable cost = KES 8,000, fixed cost = KES 640,000 and unit price = KES 11,200

Unit variable cost = KES 4,000, fixed cost = KES 720,000 and unit price = KES 6,400

7. For each of the following P denotes the unit price and x the number of units produced

and sold of a product

Cost function

= C 200 X + 160000

−2 x + 2400

Cost function

= C 400 x + 180000

−2 x + 2700

Cost function C =

−300 x =

540000

Required

a) Determine the revenue function for each

b) How many units of the product should sold in order to break even

c) Sketch these graphs using excel hence estimate the number of units produced for

the firm to maximize profit

CHAPTER 12 Revenue, cost and profit 249

8. A chocolate manufacturer has fixed cost of KES 26,000 per week. The variable cost to

produce one chocolate is KES 25. If the chocolate is then sold for KES 38 per bar,

determine how many bars must be produce and sold each week to;

a) Break even

CHAPTER 13 DECISION TREES

Learning Objectives

At the end of this section the students should be able to:

Compute the expected value

Use the roll back method to make the best decision

represent problems in which a series of decision has to be made under conditions of

uncertainty. Any one of the decision may be dependent on the outcome of preceding decisions

or the outcomes of a trial.

Decision tree is constructed from left to right.

The branches represent the possible alternative decisions which could be made and the various

possible outcomes which might arise.

The square or rectangle nodes from the decision branches are drawn represent the points the

decision maker selects his decision.

The round or circle nodes represent the points at which the outcome of the decision arises.

CHAPTER 13 Decision trees 251

Example 13.1

The District Agricultural Officer of a certain District has advised farmers to apply pesticides

costing KES 2000 per acre to better their crop on the weather; this pesticide might have no

effect on their crops per acre, 10% increase in yield, or a 15% increase in yield. The probability

of each effect is shown below.

Increased Yield

Weather 0% 10% 0.5%

Dry 0.1 0.4 0.5

Normal 0.2 0.6 0.2

Wet 0.3 0.5 0.2

Based on the experience and without pesticide application, the farmer can expect the following

probabilities, yields and crops prices for the different weather conditions.

Increased Yield

Weather Probability 50kg bags per Selling price per

acre bag -KES

Dry 0.3 48 700

Normal 0.6 55 620

Wet 0.1 60 580

Use a decision tree to decide whether or not the farmers should supply the pesticide.

CHAPTER 13 Decision trees 252

Solution

The farmer has only one decision to make whether to use the pesticide or not. Thus the decision

tree for this problem has only one choice

0% 0.1 31600

C

Dry 0.3

0% 0.2 32100

B D

Pesticide

Wet 0.1

0% 0.3 32800

15% 0.2

38020

Non pesticide 0% 0.3 33600

If the pesticide is not applied we arrive at choice node F with the following payoffs

Normal ⇒ 55 bags × 620 = Kshs 34,100

Wet ⇒ 60 bags × 580 = Kshs 34,800

CHAPTER 13 Decision trees 253

When the pesticide is used, we must perform a similar calculation in which the yield per acre is

applied by the appropriate factor to account for the increase in yield. For example if there is dry

weather and the pesticide increase yield by 10% then the yield per acre is

Finally to obtain the payoff in dry weather when the pesticides increase yield by 10% we must

subtract the pesticides cost per acre KES 2000 from the return per acre.

We now assign numbers to the nodes using Bayes theorem and working right to left of the tree.

To chance nodes C, D, E and F we assign expected values of the values are 35654, 35,167,

35,584 and 34,020 respectively.

To chance node B we assign expected value of the numbers assigned to nodes, C, D and E

35299

Finally we assign to choice node A the maximum of the numbers assigned to nodes B and F

which is KES 35,299. Thus the farmer maximum expected gain is 35299 per acre. He should

apply the pesticides.

Example 13.2

ANU has hired a new campus Y. They can either test the market or abandon project. The details

are set out below.

Test cost KES 5 million; likely outcome are:

Favorable 0.7

Unfavorable 0.3

If favorable they could either abandon or continue with the project. The demand is anticipated

to be:

Low P = 0.25 loss KES 10 million

Medium P = 0.6 profit KES 15 million

High P = 0.15 profit KES 45 million

If the test market indicates failure the project would be abandoned. Abandonment at any stage

results in loss of KES 3 million from rent that would have been paid.

Draw a decision tree diagram with probabilities cost and revenues incorporated appropriately

Evaluate the decision tree and recommend the action company should take

CHAPTER 13 Decision trees 254

Solution

D2 3m

Low -10m

Failure

0.25

A

Medium

Favorable Continue B 15m

Test 0.5

D1 D3

High 45m

0.15

3m

Abandon

3m

Abandon

Evaluation

( 0.25 × −10

= ) ( 0.6 × 15) + ( 0.15 × 45

= ) 13.25 million

10.175 million

Comparison at D1 is

CHAPTER 13 Decision trees 255

ANU should test the market at cost of KES 5 million and go ahead with the favorable program if

these are favorable indicator.

Practice Problem

1. The management of AZT Company Ltd. are planning for the future needs of the

company. They are faced with three decisions either to expand the present factory, or

try to cope with demand in the present location without expanding or move to a new

location with larger facilities. If they choose to expand the factory, it will cost them KES

800,000 and moving to the larger location will cost KES 1.6 million. The following

information is available to help them make the decision.

Demand Probability

High 0.5

Medium 0.3

Low 0.2

State of demand

Location high medium low

Same 2.4 1.6 0.8

Expand 4.8 2.8 1.6

New 5.6 3.2 0.8

Use a decision tree to determine the best decision the management could arrive at.

their holiday as good at a beach hotel. The probability of hot around the beach is 0.6.

The probability of regarding a holiday as good given that the weather is hot is 0.9. If a

holidaymaker chosen at random considers the holiday to good, what is the probability

the weather is hot?

A firm has developed a new product. The firm can either test the market or abandon the

project. Testing the market would cost KES. 6 million and the test would either be

CHAPTER 13 Decision trees 256

success or failure. The probability of a success outcome is 0.7 and failure is 0.3. If the test

shows failure the company will abandon the project. Abandoning the project at any

stage would cause the company sell the patent at KES. 3.6 million. If test is successful,

the company can either abandon the project or market the product. If they market the

product with successful test results the anticipated profit is;

Demand Profit

Low – KES. 12 million

Medium KES. 18 million

High KES. 54 million

Draw a decision tree for the above and use the expected monetary value criterion to

advise the management on the best decision.

3. The Beta Company is proposing to introduce to the market a remote controlled toy car.

There are three different possible models A, B and C they models they manufacture.

However, they have the capacity of manufacturing only one of them. The probable

acceptance of any of the three models is given below.

Model acceptance Probability Model A Model B Model C

Excellent 0.4 120 100 60

Moderate 0.5 80 60 50

Poor 0.1 -30 -20 10

a) the maximax, maximin or minimax regret criteria are used.

b) The expected monetary value criterion is used.

to market a new toothpaste. He is also considering a consumer-testing programme that

will cost KES. 75,000 before marketing the product. If they market without the

consumer-testing programme, the probability of success is 0.5. The consumer –testing

programme can produce a favourable result with probability 0.40. Given a favourable

test result, the probability of product success is 0.80 but is only 0.30 if the test result is

unfavourable. If the product is marketed after the testing programme an additional cost

of KES. 50,000 for distribution will be incurred. If the product is marketed without the

testing programme, KES. 100,000 will be spent on distribution. The projected profits are

KES 1,500,000 and an unsuccessful launch would result in a loss of KES 800,000. No

profits or losses if the product is not marketed.

CHAPTER 13 Decision trees 257

CHAPTER 14 MATHEMATICS OF

FINANCE

Learning Objectives

At the end of this section the students should be able to:

Use compound method to find interest

Use the payback period to determine the worthwhile of a project

Use the Net present value method to determine the worth while of the

project

Simple Interest

Given that A want to invest his KES10, 000 in bank, for five years and the bank offers a simple

interest at rate of 10%. Calculate the interest that the money earns after the end of the period.

I = P r t

CHAPTER 14 Mathematics for finance 259

Solution

P× r× t

I=

100

r = 10%

t = 5years

P = 10,000

10,000 × 10 × 5

I= = 5000

100

FV= P + Pr t

= P (1 + rt )

= P (1 + rt )

FV

10

= 10,000 1 + × 5

100

= 10,000 (1.5)

= 15000

Compound Interest

For example to invest KES 10, 000 in three years at compounded interest of 10% p.a

Solution

CHAPTER 14 Mathematics for finance 260

10

Year 1 ⇒

= FV 10,000 1 + (1,1) 11000

⇒ 10,000=

100

10

Year 2 ⇒

= FV 11,000 1 + (1,1) 12100

⇒ 11,000 =

100

10

Year 3 ⇒

= FV 12100 1 + ⇒ 12,100 (=

1,1) 13310

100

To avoid doing that given that one may compound for several years we use the following

formula

FV PV (1 + r )

n

=

FV = Future value

PV = Present value

r = interest rate in %

3

10

FV = 10,000 1 + 13310

=

100

Example 14.1

What is the value of sum of KES 50,000 invested at rate of 5% compounded interest for interest

for 10 years.

CHAPTER 14 Mathematics for finance 261

Solution

FV PV (1 + r )

n

=

10

5

50,000 1 +

100

50,000 (1.05)

10

= 81,445

Investments Analysis

management. Investment analysis is needed in order to make optimal use of available

resources. To evaluate an investments proposal the study of the following component is

necessary.

The initial cash outflow

The returns (net cash inflow)

Economic life of the assets

Minimum return desired such investment

The most widely used method of evaluating an investment appraisal can be grouped into two

categories

Traditional method

Payback period method

Average rate of return

Discounted cash flow methods

Net present value

Internal rate of return method (IRR)

Discounted payback period

CHAPTER 14 Mathematics for finance 262

Payback period is the number of years required to recover the cash invested in a project if the

annual cash inflows are the same. The payback period can be computed by dividing the cash

invested by annual cash inflow

Example 14.2

A project requires KES 60,000 and yield inflows of KES 12000 p.a for 7 years. What is the

payback period?

Solution

Cash outlay

Pay back period =

Average net cash inflow per year

60,000

= = 5 years

12,000

Example 14.3

CHAPTER 14 Mathematics for finance 263

Y1 10,000

Y2 15,000

Y3 20,000

Y4 15,000

Y5 12,000

Y6 15,000

Y7 20,000

Calculate the payback period for the project if the initial out flow is KES 60,000 , KES, 40,000

Solution

Add the year 1, 2, 3 and 4 until you get 60,000

60,000

When the initial cash flow is 40, 000 and year until you get 40,000

10,000 + 15,000 =

25,000

Up to second year we can recover 25, 000 the remainder which is gotten from the difference of

the initial out flow

Divide the difference with the next cash flow in this case it is 20,000

15,000 3

= 0.75 equivalent to

20,000 4

CHAPTER 14 Mathematics for finance 264

This method takes into account the time value of money. It correctly shows that cash flows

arising at different time periods differ in value and are comparable only when they are

equivalent present and are calculated as .

1

PV = FV n

1+r

Example 14.4

Solution

1

PV = FV n

1+r

10,000

= = 6209.2

(1 + 0.1)

5

Example 14.5

A businessman has two projects, A and B but can only invest in one. He has approached you for

advice and given you the cash flows for each projects as below.

CHAPTER 14 Mathematics for finance 265

Initial cost 212.5 250

Year 1 expenses 25 0

Year 1 income 25 0

Year 2 expenses 25 0

Year 2 income 275 302.5

a) Calculate the Net present value (NPV) of each project using a discount rate of 7% p.a.

b) Compute the internal rate of return for each project

c) Which of the two projects would you recommend

Solution

275 − 25 25 − 25

NPVA = + = 212.5

1.072 1.07

302.5 − 25

NPV

= B 250 212.5

−=

1.07

264.5 − 250 =

14.2 million

275 − 25 25 − 25

NPV=

A + − 212.5

= 0

(1 + A ) 1 + A

2

250

= = 212.5

(1 + A )

2

(1 + A )

2

1.1765

=

1+ A =

1.085

IRRA = 8.5%

CHAPTER 14 Mathematics for finance 266

IRRB = iA

302.5

NPVB

= = 250

(1 + A )

2

(1 + A )

2

1.21

=

1+ A =

1.1

IRRB = 10%

Project B is the best suitable project than project A. Since it has a higher NPV and IRR

Example 14.6

A new machine is expected to last for six years and to produce annual (year end) saving of KES

10,000. What is the maximum sum worth paying for machine now assuming compound interest

at 10% per annum?

Solution

To calculate the NPV of annuity (equal cash flows) check from the table of annuity factor for 6

years

This is how we check from the table which is always given

Year 1

1−

(1 + r )

1

n

1

PVIFrt ∑

= =

i =1 ( 1 + r )

1

r

10%

CHAPTER 14 Mathematics for finance 267

From the real annuity table this how you trace the value

Present Value of Annuity Factors

n/r 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 .9901 .9804 .9709 .9615 .9524 .9434 .9346 .9259 .9174 .9091

2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355

3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869

4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699

5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908

6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553

PFVA = 4.3553

Example 14.7

A company is considering the launch of a product, for which an investment in equipment of KES

150,000 would be required. The project life would be limited to five years by the expected life of

the product. It is expected that the equipment could be sold for KES10,000 in year 6. Market has

indicated being low. Cash inflows are forecast as follows;

Year Kshs.'000' Kshs.'000'

1 60 50

2 62 50

3 65 50

4 70 50

5 70 50

If the new product is now, an existing product, which could otherwise be retained for a further

five years, would be discounted immediately. If retained cash inflows of KES 12,000 p.a. would

CHAPTER 14 Mathematics for finance 268

be expressed for the existing product. The company’s discount rate is 15% p.a. (Assume that all

cash flows occur at year ends).

a) Calculate the expected Net Present value of the new product

b) Advise the company on whether to launch the new product, or to retain the existing

product

Solution

Capital investment

150,000

Year 6 10,000 × 0.432 =4320

145,680

Check from the Present value table

Year 1

(1 + r )

−n

PVIFrt= =

(1 + r )

n

15%

up to year 5

Present Value Factor for a Single Future Amount up to year 5

(Interest rate = r, Number of periods = n)

n/r 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%

1 .9434 .9346 .9259 .9174 .9091 .9009 .8929 .8850 .8772 .8696

2 .8900 .8734 .8573 .8417 .8264 .8116 .7972 .7831 .7695 .7561

3 .8396 .8163 .7938 .7722 .7513 .7312 .7118 .6931 .6750 .6575

4 .7921 .7629 .7350 .7084 .6830 .6587 .6355 .6133 .5921 .5718

5 .7473 .7130 .6806 .6499 .6209 .5935 .5674 .5428 .5194 .4972

CHAPTER 14 Mathematics for finance 269

Year 2 62,000 × 0.756 = 46,872

Year 3 65,000 × 0.658 = 42,770

Year 4 70,000 × 0.572 = 40,040

Year 5 70,000 × 0.497 = 34,790

216,672

Year 1

1−

(1 + r )

1

n

1

PVIFrt ∑

= =

i =1 ( 1 + r )

1

r

15%

Present Value of Annuity Factors

1 .9434 .9346 .9259 .9174 .9091 .9009 .8929 .8850 .8772 .8696

2 1.8334 1.8080 1.7833 1.7591 1.7355 1.7125 1.6901 1.6681 1.6467 1.6257

3 2.6730 2.6243 2.5771 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216 2.2832

4 3.4651 3.3872 3.3121 3.2397 3.1699 3.1024 3.0373 2.9745 2.9137 2.8550

5 4.2124 4.1002 3.9927 3.8897 3.7908 3.6959 3.6048 3.5172 3.4331 3.3522

PFVA = 3.353

CHAPTER 14 Mathematics for finance 270

56,285

PV of existing product = 12,000 × 3.353 = 40,236 based on expected value there is potential

value of

56,285 − 40,236 = 16,049 From accepting the new product

Practice Problem

1. An investor projects that she will require KES. 3.0 million in 4 years’ time from now to

repay a debt. She decides to deposit KES P now into an account that pays 10% interest

p.a. compounded annually. She withdraws the money plus the accrued interest after 4

years. Determine how much she deposits into the account so that the accumulated

amount to equal the debt.

18% p.a. compounded monthly.

b) Find the nominal interest rat p.a. compounded quarterly that corresponds to an

effective rate 10.38% p.a.

2. Find the future value of KES 200,000 in three year’s time compounded monthly at a

rate of 18% p.a.

3. A lady decides to save KES 10,000 per year and deposits the money each year into an

account that pays interest at a rate of 10% p.a. Calculate the accumulated value after 10

years.

CHAPTER 14 Mathematics for finance 271

4. An investment requires an initial capital outlay of KES 12 million and will produce a

return of KES 25 million at the end of 5 years. Use the internal rate of return and

determine if the investment is worthwhile given that the cost of capital is 12% p.a.

5. Find the simple interest on KES 5000 invest for 3 years 2 months at 10% p.a.

Calculate the accrued amount for KES 4,500 borrowed for 90 days at 15% p.a. simple

interest.

6. A promissory note with a maturity value of KES120, 000 and a simple interest rate of

12% p.a. is sold 3 months prior to its due date. What is the present value on the day it is

sold?

7. Determine the simple discount on a promissory note of maturity KES. 300,000 due in

eight months at a discount rate of 15% p.a. What is the discounted value of the note?

What is the equivalent simple interest rate?

8. A bank’s simple discount rate is 18% p.a. If you sign a promissory note to pay KES

400,000 in six months, how much would you receive from the bank now? What is the

equivalent simple interest rate?

9. Jack borrows a sum of money from a bank and has to pay back KES.100, 000 in 9 months

time from now. The agreed interest rate is 12%p.a. How much does he receive now?

How much does he owe the bank 4 months from now? If he reschedules to repay the

debt at the end of the year, how much will he have to pay?

10. KES 20,000 is invested for 3 years at an interest rate of 14% p.a. compounded semi-

annually. Determine the accrued amount.

11. What is the present value if the compounded amount is KES 1,000,000 at 18% p.a. for 5

years and interest is calculated on quarterly basis?

12. An obligation of KES 50,000 fall due in one and a half years time. What amount will be

needed to the debt if it paid in six months?

13. Calculate the amount accrued on KES 300,000 invested at 12% p.a. for 3 years

compounded daily.

CHAPTER 14 Mathematics for finance 272

14. What is the present value of a maturity value of KES. 500,000 at 16% p.a. compounded

quarterly and invested for two and half years?

15. Suppose KES. 120,000 is invested now and gives a return of KES 136,000 in one year’s

time, calculate the internal rate of return.

16. KES 1,000,000 is invested now and gives a return of KES 800,000 in the first year and

further KES 560,000 in the second year. Determine the internal rate of return.

17. A project requires an initial investment of KES 12,000,000. It has a guaranteed return of

KES. 8 million at the end of year 1 and a return of KES. 2 million each at the end of years

2, 3, 4. Estimate the IRR. Would you recommend that someone invest in the project if

the prevailing market rate is 8% compounded annually?

18. A firm decides to invest in new machinery, which is expected to produce additional

revenue of KES. 8million at the end of each for ten years. At the end of this period the

firm plans to sell the equipment for KES. 5 million. What is the maximum amount the

firm should pay now if it not to suffer a net loss in the investment at discount rate of

6%?

19. A principal of KEs. 560,000 is invested at 9% p.a. compounded monthly for 5 years.

Determine the future value and interest after 5 years.

20. Mr. X opens a savings account for his daughter. Each month he deposits KES 4,000 into

this account. Calculate the future value of the amount after 3 years if interest is

computed at 12% p.a. compounded monthly.

21. Find the present value of an annuity with a yearly payment of KES 100,000 at an interest

rate of 9% p.a. after 10 years.

22. You have been given the opportunity to invest in any one of three projects A, B, or C.

Projects A, B, and C require an initial cash outlay of sh. 1.6 million, sh. 2.4 million and sh.

8 million respectively. The guaranteed return after 3 years is sh. 2.0 million, sh. 2.96

million and sh. 9.36 million for A, B, and C respectively. If the market rate is 5% p.a.

compounded annually, explain which one of these projects you would invest in.

23. The county of Narok has decided to engage your services as a financial consultant. The

Governor require to know which proposed investment would represent the best use if

CHAPTER 14 Mathematics for finance 273

the allocation from the National Government of KES 4,900,000 for three strategic passed

projects by the county assembly.

24. The dilemma arises because each of the three projects have an economic life of three

years and can yield a total cash inflow of KES 6,000,000. However estimates show that

the pattern of inflows, for each project differs as below.

Project 1 Project 2 Project 3

2010 1,000 2,000 3,000

2011 2,000 2,000 2,000

2012 3,000 2,000 1,000

The county has checked on a hurdle rate of 10% p.a. as the minimum discounting rate for

its projects and it is anticipating that the cash inflows will occur evenly over any given

year. The PV interest factors at 10% are as follows:

Using payback period and NPV techniques, advice the Governor on which project is most

viable.

CHAPTER 15 LINEAR PROGRAMMING

Learning Objectives

At the end of this section the students should be able to:

Sketch the feasible region defined by simultaneous linear inequalities

Formulate a LP problem

Solve a LP problem

Introduction

There are many activities in organization which involve the allocation of resources. These

resources include labor, raw materials, machinery and money. The allocation of these resources

is sometimes called programming. Linear programming is suitable method for modeling an

allocation problem if the objective and constraints on the resources can be expressed as linear

relationships of the variables

Many practical problems involve maximizing and minimizing a function to constraints. For

example we may want to maximize a profit function subject to certain limitation.

There are many activities in organizations which involves the collection of resources machinery,

money, man, material.

The allocation of these resources is sometimes called programming. Problem arises because the

resources are usually limited or scarce supply. Linear programming is a mathematical

techniques concerned with allocation of scarce resources.

The objective is to determine the most efficient method of allocating these resources to

valuable so that some measures of performance is optimized.

Linear programming can be used to solve problem that satisfies the following.

Problem must be capable of being stated in numerical terms.

All factors involved in the problem must have linear relationships

The problem must per5mit choice of choices between alternative causes of action

There must be one or more restrictions on the factors involved for example a fertilizer must

contain a minimum of 155 potassium, 15% phosphate and 30% nitrogen.

CHAPTER 15 Linear programming 275

Formulate a linear programme mathematically

This involves identification of the objectives and constraints. These are then written down as

linear relationship in terms of variables

Identify the feasible combination of valuables

This is a combination which optimizes the objective. If only to variable s involved a graphical

solution is possible if however we have more than to variables than simplex method is used

Once the optimum solution is identified it must be evaluated

This will include a sensitivity analysis

The basic procedure is the same for all linear programs

Steps involved are.

1. Identify the valuable in the problem for which the value can be chosen with the limits of

the constraints

2. Identify the objectives

3. Write down the objective in terms of variables.

4. Identify the constraints.

5. Write down the constraints in the terms of variables.

Example 15.1

A launcher make two blend of animals feeds that is daily meal and Maize jam by mixing three

inputs coded x, y and z and the weekly cost and availability of the input are as below.

x 25,000

y 50,000

z 75,000

% of each inputs

x y z

Daily meal 25 55 20

Maize jam 40 20 40

There is a requirement that the launcher must produce 50,000 kg of each blend.

Given that the cost of making each unit of dairy meal and maize jam is KES 100, KES 120

CHAPTER 15 Linear programming 276

respectively.

Formulate the above problem as linear programming problem if the objective function of the

launcher is to make blend of the least possible cost.

Solution

Let the maize jam be q

Constrains

The launcher must produce at least 50,000 of p and q inputs

p ≥ 50000

q ≥ 50000

The value of x, y and z is given as

x = 25000

y = 50000

z = 75000

We can form the following equation

0.25 p + 0.4q = 25000

0.55 p + 0.2q = 50000

0.2 p + 0.4q = 75000

Example 15.2

Linear program

Minimize cost C 100 p + 120q

=

Subject to:

CHAPTER 15 Linear programming 277

Example 15.3

A family bakery produces two types of cakes Black forest and banana bread. The bakery can sell

all that it bakes but production is limited by the supply of major ingredients and by the amount

of oven capacity available.

The production of one cake black forest requires 0.04 hours of oven time while as the

production of banana bread requires 0.08 hours of oven time.

0.02 kilogram of special ingredients is required for one black forest cake and 0.08 kg is required

for one banana bread cake.

Each day the bakery has 21 oven hours available and 160 kilograms of the special ingredients

The contribution is KES 200 for the black forest cake and KES 300 for the banana bread cake.

How much of each should be baked if the bakery wishes to maximize the daily production.

Solution

Let the black forest cake be x

Let the banana bread cake be y

Constraints

0.04 x + 0.08 y ≤ 24

0.02 x + 0.08 y ≤ 160

Linear program

Maximizing profit

Subject to:

CHAPTER 15 Linear programming 278

Example 15.4

A firm produces two types cooking fat supper and premier. The raw material to make super cost

KES 20 per kilogram and to make premier cost KES 30 per kilogram.

The raw materials pass through three machines processors. The time taken in each processor is

as given below in minutes.

Supper 4 8 5

Premier 6 10 8

The three processor are available for a maximum of twelve hours a day. The contribution is KES

45, 50 for supper and premier respectively.

Required

Define the decision valuables and the constraints for the above problem.

Formulate the problem as a linear programming model given the objective of the firm is to

maximize profit.

Solve the above problem graphically and hence indicate the optimal solution and the optimal

objective value.

Solution

Let the supper be x

Let the premier be y

Objective function

=π 45 x + 50 y

The time constraints are,

Machine processor 1

Machine processor 2

Machine processor 3

The equation of constraints are given as below

CHAPTER 15 Linear programming 279

Linear program

Objective:= π 45 x + 50 y

Subject to:

To draw the linear program on graph we need to get specific points which we are going to use

We calculate the points as follows

4x + 6 y =

720 with the value of x = 0 then we can get the value of y as follows

4x + 6 y =720

x=0

6 y = 720

y = 120

Again we can equate y = 0

4x + 6 y =

720

4 x = 720

x = 180

So when plotting the line we use the two points. We can do likewise to the other two equation

to obtain the following

CHAPTER 15 Linear programming 280

A(0, 72)

B(90, 0)

C (0, 0)

Use the points to substitute the objective function to see what will give the highest value since

our objective is to maximize profit and we need the highest profit values

B = 45(90) + 50(0) = 4050

C =0

90 kg of supper fat

0kg of premier fat

CHAPTER 15 Linear programming 281

Example 15.5

Using the linear program in example 1 we can solve the problem graphically as follows.

Minimize cost = C 100 p + 120q

Subject to:

Solution

Solving the linear program graphically it will appear like the figure below.

CHAPTER 15 Linear programming 282

The objective function is to minimize cost

C 100 p + 120q

=

Thus

Objective function- it is the maximizing profit and revenue or minimizing function of costs

Constraints – Are the resources that are limited but necessary to maximize or minimize an

objective function.

The basic procedure is the same for formulation of all linear programmes:

CHAPTER 15 Linear programming 283

Step 1

Identify the variables in the problem for which the values can be chosen, within the limits of the

constraints

Step 2

Identify the objective and the constraints on the allocation

Step 3

Write down the objective in terms of the variables

Step 4

Write down the constraints in terms in terms of the variables

Example 15.6

University administration is planning a team building trip for its staff. Two types of buses are

available. Type A can carry people and 1000 kg of baggage and costs KES 20,000. Type B carry 50

people and 750 kg of baggage and costs KES 24,000. A total of 800 people are going on trip, and

they have 18,000 of baggage.

Form a linear program for above information

How many of each type bus should be chartered to minimize the cost of the trip.

Solution

To solve the above linear programming we say that;

Let the number of type A of bus be x

Let the number of type B of bus be y

40 x + 50y ≥ 800

Subject to

1000 x + 750y ≥ 18000

Remember we don’t need the negative part thus we always introduce the non-negativity

function

CHAPTER 15 Linear programming 284

To plot the points we need to get two points in every line that is find the value of y when x is

zero and x when y is zero and use the points to plot the graph

40 x + 50y ≥ 800

x y

0 16

40 0

For the second line then get the value of x when y is equal to zero and similarly get the value of

y when x is equated to zero

x y

0 24

18 0

24 B

Feasible

15 A Region

C

4 18 40

40 x + 50y ≥ 800

1000 x + 750y ≥ 18000

CHAPTER 15 Linear programming 285

The boundary and interior of ABC is called the feasible region, feasible production set,

production possibility set or opportunity set

The solution lies on the vertexes where the lines are cut each other but must within the feasible

region

20,000 x + 24,000y

20,000 (15) + 24,000 ( 4 ) =

396,000

20,000 ( 0 ) + 24,000 ( 24 ) =

800,000

20,000 ( 40 ) + 24,000 ( 0 ) =

960,000

We should take the least because we are trying to minimize cost that is hire 15 buses of type A

and 4 buses of type B

Example 15.7

A gem dealer buys rough – cut amethysts and beryls of uniform size, which she finishes for sale

retail jewelers. Each amethyst requires one hour on a grinder, one hour on a sander and two

hours on a polisher and yields a net profit of KES 7500. Each beryl requires two hours on a

grinder, five hours on a sander and two hours on a polisher and yields a profit of KES 10,000.

The grinder, sander and polisher are available for a maximum of 40 hours a week.

Formulate the above as a linear programming problem

By use of suitable scale solve the linear programming problem by graphical method and

establish the optimal mix

The gem dealer wants to introduce a new gem and wants to know which machine has idle

capacity. Evaluate the resource utilization

Solution

Let y be the number of beryl

CHAPTER 15 Linear programming 286

Amethysts Beryls

Grinder 1 2 40 Hours

Sander 1` 5 40 hours

Polisher 2 2 40 Hours

Profits per unit Shs 7500 shs10,000

Maximize = 7500x+10000y

Subject to:

Grinder: x +2y ≤ 40....................................................... ( i )

Sander: x + 5y ≤ 40....................................................... ( ii )

Polisher: 2x + 2y ≤ 40.................................................... ( iii )

for x ≥0 and y ≥ 0

x y

0 20

40 0

Sander: x + 5y ≤ 40....................................................... ( ii )

x y

0 8

40 0

x y

0 20

20 0

CHAPTER 15 Linear programming 287

x + 5y ≤ 40

Feasible Region

2x + 2y ≤ 40 x + 2 y ≤ 40

From the above we find that the solution is 15 Amethyst and 5 Beryls

Example 15.7

K ltd produces two products x and y. X has a contribution of KES 3 per unit and y has a

contribution of KES per unit. The manufacturer wishes to establish the weekly production plan

which maximizes contribution.

(hours) (hours) (hours)

X 4 4 1

Y 2 6 1

Total available 100 180 40

CHAPTER 15 Linear programming 288

Because of trade agreements, sales of x are limited to weekly maximum of 20 units and to

honor an agreement with an old established customer at least 1o units of y must be sold per

week.

Formulate a linear programming model that could be used to determine the production

quantities of each product so as to maximize profit

Solution

Objective function; 3x + 4 y

Subject to constraints

ii) Labour hours constraints 4 x + 6y ≤ 180

iii) Material constraints x + y ≤ 40

iv) x sales constraints x ≤ 20

v) y sales constraints y ≥ 10

v) Non negativity x ≥ 0: y ≥ 0

Practice Problem

1. A firm makes two products Alpha and Beta both which require two raw materials RM1

and RM2. Each of the product, Alpha requires 2kg of RM1 and 3.5 kg of RM2. Each

kilogram of product beta requires 3kg of RM1 and 1.5 kg of RM2. Each week 100kg of

RM1 and 120kg of RM2 are available. There is an unlimited supply of labor and machine

time the firm can sell all its production. The unit profit on Alpha and beta is KES 50 and

KES 80 respectively

a) Set up a profit maximizing linear programming model for the problem

c) Find the optimum solution for the profit maximizing model graphically

2. A manufacturer who produces two products A and B has formulated the following linear

programming problem.

CHAPTER 15 Linear programming 289

Subject to:

x + 2y ≤ 50

3x + 2y ≤ 180

x ≥ 10

y ≤ 20

x ≥ 0, y ≥ 0.

Solve the problem graphically stating the optimal solution and profit.

3. A Company manufactures two types of toys T1 and T2. Each toy is processed through

three machines A, B and C. Each T1 toy requires 4 hours of machine A, 2 hours of

machine B and 1 hour of machine C. A unit of T2 requires 2 hours on machine A, 2 hours

on machine B and 3 hours of machine C. EachT1 toy contributes KES 50 to profit and

each unit of T2 contributes KES 30 to profit. There are a maximum of 80 hours available

for machine A, a maximum of 50 hours available on machine B and 40 hours available on

machine C.

Formulate and solve the linear programming problem using the graphical method.

4. A mail order firm has to transport 900 parcels using a lorry, which can carry 150 parcels

at a time, and a van that can carry 80 parcels at a time. The cost each trip of a lorry is

KES. 500 and KES. 400 for the van. The total transportation cost must not exceed KES.

4,400 and the lorry make fewer trips than the van. Each lorry trip makes a profit of KES.

200 and a van trip KES. 100. Write down the relevant inequalities and determine the

best combination of trips for the lorry and the van that would yield maximum profit.

5. A shop stocks two types of detergents A and B. The shop can sell at least 3 times as many

units of A as of B but there room to store 32 units of both. Each unit of A sold yields a

profit of sh. 20 and each unit of B sh. 50. Write down the linear inequalities involved. By

graphing the inequalities, determine the number of units of each type required making

maximum profit.

CHAPTER 15 Linear programming 290

6. A Company produces two products A and B. Each unit of product A gives a profit

contribution of KES 60 and each unit of product B yields a profit of KES 50. Each unit of

product A requires 3 hours of polishing and 2 hours of plating. Each unit of product B

requires 4 hours of polishing and one hour of plating. There are 120 hours of polishing

available per week and 40 hours of plating available per week. Formulate and solve the

linear programming problem.

Because of lack of raw materials not more than 400 tons of the photocopy paper can be

produced in a week and not more than 300 tons of duplicating papers per week. There are

160 production hours per week. Each ton of photocopy paper requires 12 minutes of

production time and each ton of the duplicating paper requires 24 minutes. The profit

contribution of the photocopy paper is KES. 500 per ton and that of the duplicating paper is

KES. 200 per ton. Formulate and solve the linear programming problem.

(viii) x ≥ 2; y ≥ 1; x + y ≤ 7; y – x > 0

9. A Company produces two products X and Y. The plant capacity constrains the output of

X to a maximum of 50 units per day and that of Y to a maximum of 70 units per day. It

takes 4.8 minutes to manufacture a unit of X and 8 minutes to manufacture a unit of Y.

Each day has a maximum of 8 hours of production time. The profit per unit of X is KES. 80

and KES. 100 per unit of Y. Formulate and solve the linear programming problem.

10. S K ltd has received a special order from the ministry of special programme for high

quality protein biscuits for famine relief. S ltd must minimize costs and ensure that the

mix meets the minimum nutritional requirement set by the ministry of public health.

The LPO requires 1, 000 kgs of biscuit mix which is made of four ingredients, R, S,T, U

CHAPTER 15 Linear programming 291

that cost KES 8, KES 2, KES 3, and KES 1 per kilogram respectively. According to national

nutritional guidelines by the ministry of public health the batch must contain a minimum

of 400kgs of protein, 250 kgs of fat, 300 kgs of carbohydrates and 50 kgs of sugar.

R 50% 30% 15% 5% 0%

S 10% 15% 50% 15% 10%

T 5% 5% 30% 30% 5%

U 5% 5% 5% 30% 60%

b) Formulate the linear programming problem in the standard manner

12. ANU is about to buy some publishing machines to enable it print it newly designed

distance learning packs and a choice of Type X or Type Y machine. The university has

budgeted KES 160,000 for the purchase of the machines. Type X machine costs KES 5, 00

each, Type Y machine costs KES. KES 10, 000 each require 10 hours of maintenance a

week and can produce 2,000 distance learning packs per week.

13. Use the graphical method to solve linear programming problems formulated below.

(i) Minimize: Cost, C = 30x + 20y (ii) maximize: Profit, P = 60x + 20y

2x + 4y ≥ 10 4x + y ≤ 5

4x + 2y ≥ 10 and y ≥ 4, x ≥0 3x + 2y ≤ 7

x + y ≤ 3 and x, y ≥ 0

14. Each machine, X or Y needs 50 square meters of floor area. The available 1,000 square

meters of floor area and 400 hours of maintenance time each week. There is

overwhelming response to the distance learning mode and all distance learning packs

produced can be sold. The university management wishes to minimize output.

a) List objective function and constraints

b) Graph the constraints shading the feasible region

c) State the optimal mix of publishing machine to but with reasons

CHAPTER 15 Linear programming 292

alpha and beta. The properties of the two ingredients are.

A 20% 30% 40% 10% KES 120

B 40% 10% 45% 45% KES 80

It has been decided that the fertilizer will be sold in bags containing minimum of 50kg

It must contain at least 15% nitrogen

It must contain at least 8% phosphate

It must contain at least 25% bone meal

The manufacturer wishes to meet the above requirement at the minimum cost possible-

16

INTRODUCTION TO

CHAPTER QUANTITATIVE TECHNIQUES

Learning Objectives

At the end of this section the students should be able to:

Understand the Stages in Quantitative study

Differentiate the different models

Quantitative techniques is the approach of modern science on complex problems arising in the

management of four Ms (man, machinery, money, in the large organization and also

government ministries and department.

It’s policy is to help management determine its policy and action scientifically.

This is the stage where one should appreciate that there is a problem in existence. One should

go ahead to understand the problem and explain it well.

2) Model building

A model building is any representation of reality and may be in graphical physical or

mathematical terms. It tries to show the working of the real world by means of simulators,

mathematical symbol, equations formula graphs.

A model can be classified into:

a) Normative model

Are concerned with finding the best optimum of ideal solution to a problem.

b) Descriptive model

This model describe the behavior of a system without attempting to find the best

solution to any problem. Example is simulation.

CHAPTER 16 Introduction to quantitative techniques 294

3) Data collection

Correct the relevant data in order to solve problem. Data collected is from revenue cost

production, quantity the uncertainty risk involved.

4) Problem solving

This involves the manipulation of the acquired data using standard mathematical means and

using recognized quantitative techniques where a large amount of data is used use of computer

is necessity.

This involves analysis a problem to whether it can work in real life situation. Accuracy of the

data used and assumption made must be properly analyzed.

After careful interpretation of the result of the result of the study and modification where

appropriate then the resulting solution can be implemented.

After implementation the performance of the model should be carefully monitored that it

actual does work and fulfill its objectives.

The review process should be done regularly and every stage of implementation.

All organization are subject to change and hence no solution and remain optimal for ever

It is therefore necessary for organization to continua review the model that is used and existing

solution to see if adjustment is required.

Example of Model

Mathematical Model

This are frequently used in management and particular in quantitative.

Iconic Model

This is visual model of the real object they represent. They may be larger or smaller the reality

Analagol Model

Use one self of physical movement or properties present another set

Simulation Model

Represent the behavior of a real system for example learning how to drive you use a table.

Heulistic Model

Use a set of intuitive rules which management hope will produce a worker able solution to a

better solution methods currently be used e.g. in programming where you set boundaries

17

LINEAR PROGRAMMING:

CHAPTER SIMPLEX METHOD

Learning Objectives

At the end of this section the students should be able to:

Identify surplus variable

Identify the feasible solution and region

Identify shadow prices

Simplex alogarithim is the most efficient method of solving linear programming. It is mostly

used where a linear program has more than two variables. The alogarithim use in built matrix

procedure as used in solving system of simultaneous equation. It is such method that seeks the

optimal solution using a matrix method.

Definition of Terms

Slack variable

Prior to solving linear problem using the simplex method the constraints variable must be

standardized .for the constraints of the form ≤ (less than) a value added to ensure equality. The

variable are called slack variable and they have a zero contribution towards the profit in

objective function.

Surplus variable

These are constraints of the form ≥ (greater than) a value is subtracted to ensure equality are

called surplus variable

Standardization

CHAPTER 16 Linear programming simplex method 296

The above subtraction and addition is called standardization. Standardization process should

not lead to the violation of non negativity requirement for all the variables.

Feasible Region

A an area that satisfies all the problem’s constraints that the area with the possible solutions

Feasible Solution

A point in the feasible or wanted region that satisfies all of the problem’s constraints.

Example 17.1

A steel structure produces two types of metal namely M 1 and M 2 subject constraints on three

raw materials a, b and c

The objective of the firm is to select a product mix which will maximize profit.

Linear program for the problem is

Produce x units of product M 1 per week and y units of M 2 per week

Maximize = p 2 x + y ( sh / week )

Subject to :

A : 3 x ≤ 27 kg

B : 2 y ≤ 30kg

C : x + y ≤ 20kg

x ≥ 0, y ≥ 0

Using the simplex method determine the product mix and maximum value of the weekly profit.

Solution

Standardize the linear program

Maximize = P 2x + y

Subject to:

A : 3 x + S1 ≤ 27

B : 2 y + S 2 ≤ 30

C : x + y + S 3 ≤ 20

CHAPTER 16 Linear programming simplex method 297

Arrange the coefficient in the left hand side of the constraints equation in matrix format

Put the right-hand side of the constraints in separate column on the right of the variable

Label the row with the names of the variable which are basic that is the slack variable or the

surplus variable

Add the objective functions as an additional row to the table.

Find the lowest negative value in the objective function ( in our case it is -2 in the tableau 1.

Divide the right-hand side values (b column) by the corresponding number in the pivot column.

Choose the smallest positive ratio (in our case above) . The corresponding row is called pivotal

row. The intersection of pivotal row and pivotal column is the pivotal elements (in case 3)

Divide all the elements in the pivotal row by pivotal elements and replace the pivotal row by this

new row. Also replace the variable by the label from the pivotal column.

Tableau 3

Basic

Variables x y S1 S2 S3 b

R1 S1 1 0 1 0 0 9

3

R2 S2 0 2 0 1 0 30

R3 S3 1 1 0 0 1 20

R4 Z -2 -1 0 0 0 0

Using the arithmetic operation on the row reduce all the elements in pivot column to zero

This arithmetic operation must use only the pivot row as the bases.

CHAPTER 16 Linear programming simplex method 298

Tableau 4

Basic

Variables x y S1 S2 S3 b

R1 S1 1 0 1 0 0 9

3

R2 S2 0 2 0 1 0 30 R=

5 R3 − R1

R3

S3 0 1 −1 0 1 20

3

R4

Z -2 -1 0 0 0 0

Tableau 6

Basic

Variables x y S1 S2 S3 b

R1 x 1 0 1 0 0 9

3

R2 2

S2 0 0 1 -2 8

R5 3

y 0 1 −1 0 0 11

3

R=

7 R5 + R6

R6 2

Z 0 -1 0 0 18

3

CHAPTER 16 Linear programming simplex method 299

Tableau 7

Basic

Variables x y S1 S2 S3 b

R1 x 1 0 1 0 0 9

3

R2 2

S2 0 0 1 -2 8

R5 3

y 0 1 −1 0 0 11

3

R7 1

Z 0 0 0 1 29

3

Shadow prices

x=9

y = 11

Also where y = 11 represent M 2 units per week.

The maximum profit we must produce 9 units of M 1 and 11 units of M 2

The slack value S 2 which is equal to 8 means that at the end we shall have left 8kg of material B

This means that 1 any extra kilogram of material A will add the profit by KES 1 and any extra

3 3

kilogram of raw material C will add the profit by KES 1

Example 17.2

Maximum profit p = 8 x + 5 y + 10 z

CHAPTER 16 Linear programming simplex method 300

Subject to:

Y- Represent number of product B

Z- Represent number of product C

Solution

CHAPTER 16 Linear programming simplex method 301

Basic

Variables x y z S1 S2 S3 S4 b

R1 S1 2 3 1 1 0 0 0 400

R2 S2 1 0 1 0 1 0 0 150 R=

6 R1 − R3

R3 S3 1 0 1 0 0 1 0 50 R= R2 − R3

2 4 7

R4 S4 0 1 0 0 0 0 1 50

R10= R5 + 10 R3

R5 Z -8 -5 -10 0 0 0 0 0

We can obtain R= 6 R1 − R3 as follows.

R1 2 3 1 1 0 0 0 400

R3 1 0 1 0 0 1 0 50

2 4

R6 11 3 0 1 0 −1 0 350

2 4

R=

7 R2 − R3

R3 1 0 1 0 0 1 0 50

2 4

R2 1 0 1 0 1 0 0 150

R7 1 0 0 0 1 −1 0 100

2 4

R10= R5 + 10 R3

CHAPTER 16 Linear programming simplex method 302

R5 -8 -5 -10 0 0 0 0 0

10R3 5 0 10 0 0 0 21 500

2

R10 -3 -5 0 0 0 21 0 500

2

After performing the above with R3 changing to R8 and R4 changes to R9 form the table below.

We need to perform a similar operation that were done in Tableau 1 to the above Tableau 2

In the above where there is zero there are no operations to be made in the pivot column.

Tableau 2

Basic

Variables x y z S1 S2 S3 S4 b

R6 S1 11 3 0 1 0 −1 0 350

2 4

R7 S2 1 0 0 0 1 −1 0 100 = R6 − 3R9

R11

2 4

R8 S3 1 0 1 0 0 1 0 50

2 4

R9 S4 0 1 0 0 0 0 1 50

R=

15 R10 + 5 R9

R10 Z -3 -5 0 0 0 21 0 500

2

= R6 − 3R9

R11

CHAPTER 16 Linear programming simplex method 303

R6 11 3 0 1 0 −1 0 350

2 4

3R9 0 3 0 0 0 0 3 150

R11 11 0 0 1 0 −1 -3 200

2 4

R=

15 R10 + 5 R9

R10 -3 -5 0 0 0 21 0 500

2

5R9 0 5 0 0 0 0 5 250

R15 -3 0 0 0 0 21 5 750

2

We can now put together the above column two R11 and R15 into the tableau 4 below.

Tableau 3

Basic

Variables x y z S1 S2 S3 S4 b

R11 S1 11 0 0 1 0 −1 -3 200

2 4

R12 S2 1 0 0 0 1 −1 0 100

2 4

R13 z 1 0 1 0 0 1 0 50

2 4

R14 y 0 1 0 0 0 0 1 50

R15 Z -3 0 0 0 0 21 5 750

2

We still have a negative in R15 and for the equation reach optimum we need to eliminate all

the negative since we have -3

CHAPTER 16 Linear programming simplex method 304

2

R13 z (1 0 1 0 0 1 0 50) ÷ 1

2 4 2

R18 x 1 0 1 0 0 1 0 100

2 2

When we replace R13 with R18 we are going to use that as our base to reduce the other

elements in the pivotal column to zero that is row R11 , R12 , and R15 . In R14 the element is

already zero so it is going to be transferred just the way it is.

Basic

Variables x y z S1 S2 S3 S4 b

R11 S1 11 0 0 1 0 −1 -3 200

2 4

R12 S2 1 0 0 0 1 −1 0 100 R= R11 − 1 1 R18

2 4 16 2

R18 x 1 0 1 0 0 1 0 100 R= R12 − 1 R

2 2 17 2 18

R14 y 0 1 0 0 0 0 1 50

R=

20 R15 + 3R18

R15 Z -3 0 0 0 0 21 5 750

2

First, R11 Will be replaced with R16 by subtracting 1 1 R18 from R11 as follows.

2

CHAPTER 16 Linear programming simplex method 305

R= R11 − 1 1 R18

16 2

R11 11 0 0 1 0 −1 -3 200

2 4

1 1 R18 11 0 3 0 0 3 0 150

2 2 4 4

R16 0 0 −3 1 -1 −3 3 50

4 4

2

R12 1 0 0 0 1 −1 0 100

2 4

1 R 1 0 1 0 0 1 0 50

2 18 2 4 4

R17 0 0 −1 0 1 −1 0 50

4 2

Final operation is changing R15 to R20 by adding R15 to 3R18 as given below.

R=

20 R15 + 3R18

R15 -3 0 0 0 0 21 5 750

2

3R18 3 0 3 0 0 3 0 300

2 2

R20 0 0 3 0 0 4 5 1050

2

We can now take R16 , R17 and R20 put them together to create a new tableau 4 as given below

Tableau 4

Basic

Variables x y z S1 S2 S3 S4 b

R16 S1 0 0 −3 1 -1 −3 3 50

4 4

R17 S2 0 0 −1 0 1 −1 0 50

4 2

R18 x 1 0 1 0 0 1 0 100

2 2

CHAPTER 16 Linear programming simplex method 306

R19 y 0 1 0 0 0 0 1 50

R20 Z 0 0 3 0 0 4 5 1050

2

Interpretation

y = 50 units are required to produce product B

Example 17.3

Slack variables

S1 = 50 It means that 50 machine hours are unused at optimum

S 2 = 50 It means that 50 components are unused at optimum

Shadow Prices

For every extra kilo of alloy available 4 extra contributions would be gained.

Extra units of |B that was allowed to be produced overall contribution would increase by 5

1. Practice Problem

1. Duba Paints Company is specializing in the production of industrial varnish. The selling

prices and the associated unit variable costs for high gloss varnish and matt varnish are

shown in the table below.

(KES) per Gallon (KES.) per Gallon

Matt 130 90

High Gloss 160 100

Each gallon of matt varnish requires 6 minutes of skilled labor and each gallon of high

gloss requires 12 minutes of skilled labor. In a given day there are 400 man haws of

CHAPTER 16 Linear programming simplex method 307

skilled labor available. Also there are 100 ounces of an important blending chemical

available each day, where each gallon of matt varnish needs 0.05 ounces of blending

chemical and each gallon of high gloss varnish needs 0.02 ounces of the chemical. The

processing capacity at the plant is limited to 3000 gallons of varnish per day.

The company is committed to supplying a leading retailer with 5000 gallons of matt

varnish and 2500 gallons of high gloss varnish each working week (consisting of five

days). In addition, there is an agreement with the unions that at least 2000 gallons are

produced each day. Dura Coat management would like to determine the daily

production volume of each of the two varnishes that will maximize total contribution.

a) Develop a linear model of the production problem facing Dura Coat paint.

b) Using a graphical approach determine the optimum daily production plan and the

consequent contribution.

2. A farm co-operative has 600 acre available to plant corn and soybeans. Each acre of corn

requires 9 gallons of fertilizer and hour of labor to harvest. Each acre of soybeans

require 3 gallons of fertilizer and I hour to harvest. The farm has available at most 40,500

gallons of fertilizer and at most 5250 of labor for harvesting. If the profits per acre are

KES 60 thousand for corn and KES 40 thousand for soybeans:

b) Use simplex method to determine; how many acres of each crop should the farm

plant in order to maximize profits and the maximum profit.

c) What will happen it 1000 gallons of fertilizer are added to the system.

3. Ken Ltd produce three kinds of malted drink. One of these they sell as a health drink

because it has less sugar; one they sell to hospitals as an invalid food as it has added

vitamins; the third one is a standard product.

The main ingredients, with their costs and normal weekly availabilities, are given in the

table below, as are the estimated maximum weekly demands for the three products.

Estimated

Skimmed Maximum Sale price

Malt Milk Demand per Per kg

Sugar extract powder Week kg dollar

CHAPTER 16 Linear programming simplex method 308

Health drink 0.15 0.25 0.55 1800 1.20

Invalid drink 0.15 0.30 0.25 1200 1.50

raw material

Availability per 1000 1250 2200

Week of raw

Materials, kg

There is an unlimited supply of vitamin additives. Other variables costs are 10p per kg for

the standard drink, 9p per kg for the health drink and 12p per kg for the invalid drink.

a) Formulate the linear programming model for this problem with the objective of

maximizing total contribution per week.

b) The final simplex table for the solution to this problem is given below:

m h i S1 S2 S3 S4 S5 S6 b

S1 0 0 0 1 -1 0 0 0.1 0.15 110

h 0 1 0 0 0 0 0 1 0 1800

i 0 0 1 0 0 0 0 0 1 1200

p 0 0 0 0 1.617 0 0 0.251 0.56 3144.33

Where m, h, i refer to the standard, health and invalid drinks respectively. S1, S2, S3 refer to

the constraints on sugar, malt and skimmed milk, respectively S4, S5, S6 refer to the

constraints on the maximum demand for the standard, health and invalid drinks

respectively.

Determine:

(a) the optimum product mix;

(b) the maximum value of the weekly contribution;

(c) The spare capacity on the constraints.

CHAPTER 16 Linear programming simplex method 309

revolutionary weaning Feed with the trademark “Kuku Mfalme” by mixing four

ingredients. The four ingredients, in, Combination, form three compounds that is

critical for the effectiveness of the feed. One kilogram of The feed must contain at

least 6 units of kemone, 5 units of kemtwo, and 4 units of kemthree. Kemone requires 9

units of ingredient one, 5 units of ingredient two, 4 units of ingredient three and 7 Units

of ingredient four. Kemtwo requires 10 units ingredient one, 3 units of ingredient two, 8

units of Ingredient three and 2 units of ingredient four. Kemthree requires 4 units

of ingredient one, 6 units of Ingredient two, 3 units of ingredient three and 7 units

of ingredient four. Ingredient one costs 8 shillings, ingredient two costs 4 shillings,

ingredient 3 costs 5 shillings and Ingredient four costs 4 shillings.

Required:

a) What is the objective?

b) Formulate the above problem as a linear programming model.

c) Using Solver in excel solve the problem.

d) Interpret the reduced cost associated with ingredient four.

e) How many units of the compounds Kemone, Kemtwo and Kemthree are in

five kilograms (standard packaging) of the optimal blend?

f) If the cost per kilogram of ingredient one increases from 8 shillings to 9

shillings, compute the cost of the five-kilogram package.

g) The minimum cost per kilogram of the blend needs to be reduced to 4.50

shillings. List the compounds whose requirements can be relaxed to realize

this goal.

h) An academic journal on animal nutrition has indicated that the requirements

for Kemone can relaxed to 5 units on the condition that the requirements for

Kemtwo are boosted to 7 units and that for Kemthree rose to 5.3 units. Is this

advisable? Explain.

5. A feed manufacturer produces three types of feeds; X1, X2 and X3. Production of each

type requires The use of three types of resources. Resource requirements (in

kilograms) and availability together With the profit contribution margins are shown

in the table below.

TYPE OF FEED

RESOURCES X1 X2 X3 AVAILABLE (KG)

1 7 8 7 6,500

2 2 3 3 1,800

3 6 4 5 5,000

PROFIT 7 9 9

MARGIN

CHAPTER 16 Linear programming simplex method 310

Required;

a) Formulate this manufacturing situation as a linear programming problem.

b) Using Solver in excel solve the problem.

c) Highlight the implication of the reduced cost for X3.

d) You have been informed that the availability of resource 2 can be raised to

2000kg and that the profit margin for X2 can go up to 10 shillings per unit.

Compute the new Z value.

e) The marketing department has established that there is a market for a new

product, which will require 5kg of resource 1, 4kg of resource 2 and 5kg of

resource 3. The new product has a contribution margin of 8 shillings per unit.

Advice management on the viability of the new product.

DUAL PROGRAM/ MINIMIZING SIMPLEX METHOD

Learning Objectives

At the end of this Section the students should be able to:

Use simplex method to solve a minimizing linear programming problem

Interpret the final tableau of minimizing problem

Example 17.4

Maximum profit p = 3 x + 2 y + 4 z

Subject to:

5 x + y + z ≤ 300

2 x + 3 y + 5 z ≤ 600

x, y , z ≥ 0

Dual

Solution

Minimizing cost,

= C 300a + 600b

Subject to:

CHAPTER 16 Linear programming simplex method 312

5a + 2b ≥ 3

a + 3b ≥ 2

a + 5b ≥ 4

a ≥ 0, b ≥ 0

18

NETWORK ANALYSIS AND

CHAPTER PROJECT SCHEDULING

Learning Objectives

Illustrate through a network flow diagram;

Define and identify the critical path;

Understand how find the critical path using the forward pass and

backward pass;

Estimate the standard deviation of the project duration;

Use probability in estimation of completion of project in network;

Know what is meant by float and how it is calculated

Network analysis is a technique for planning of a project nature for example road construction,

building construction design and implementation program.

The analysis of a project falls into three categories:

The brake down of the project into set individual jobs (activities) and then arranging them in a

logical sequence.

Estimation of the duration of each activity and the identification of the jobs which control a

completion the project.

The estimation of the resource requirement of each activity the rescheduling of the activities to

meet a resource objective the reallocation of money or other resources to improve the

schedule.

Activity

This is a task or job of work that use time and or resources.

We use arrow to represent activity

Event

It is a point in time and indicates the start or the finish of an activity or activities.

A Dummy activity

This activity that doesn’t consume time or resources. It is used to show logical sequence of

CHAPTER 18 Network Analyses and Project Scheduling 314

Network

A combination of activities, dummy activities and events in logical sequence according to the

rules for drawing network

Critical path

It is a path in a network that takes the most time

There should be a starting event and ending events

Network should proceed from left to right

Networks are not drawn to scale that is the length of arrow doesn’t represent time used

Events should be progressively numbered from left to right

Two activities should share both starting and ending events

Starting event

Event number

Activity Time

Activity

Earliest starting latest

time starting time

Danglers are not allowed in networks

Example 18.1

A bridge construction project consist of the following activities precedence relationship and

time

(weeks)

A - 2

B A 3

C A 5

D B,C 2

E B,D 4

F C 3

G E,F 1

CHAPTER 18 Network Analyses and Project Scheduling 315

Required

a) Draw a network diagram

b) Identity the critical path

c) Determine the project completion time

Solution

a)

4

7 7 3

5 F

C

5 2 6 4 7 1 8

1 2 2 7 7 D 9 9 E 13 13 G 14 14

0 0 A 2 2

3

B

3

5 7

b) Critical path

A-C-D-E-F

14 days

CHAPTER 18 Network Analyses and Project Scheduling 316

Example 18.2

(weeks)

A - 4

B - 6

C A 7

D B 3

E C 4

F D 8

G E,F 3

Solution

2 7 4

C 4

4 4 6 11 13 E

A 6 3 7

1

0 0 17 17 G 20 20

6 8

B 3 3 5 F

6 6 D 9 9

CHAPTER 18 Network Analyses and Project Scheduling 317

Example 18.3

Premier company is an engineering firm which has contracted to produce a bunch of machines

to be used by Beta shoes company.

Details are given below

predecessor (days)

A - 9

B - 8

C - 11

D A, B 12

E B, C 10

F B, C 15

G D, E 22

H F, G 8

Required

a) Illustrate the project by an arrow diagram

b) Identify the critical path

c) How many days will the project take?

Solution

a)

3

9 9

12

9

D

A

1 8 2 5 22 6 8 7

0 0 B 8 9 21 21 G 43 43 H 51 51

11 10 15

C E F

4

11 11

CHAPTER 18 Network Analyses and Project Scheduling 318

b) Critical path

A-D-G-H or C-E-G-H

c) 51 days

A standard normal table is one that has a mean of 0 and a standard deviation of 1. All the

normal table that you will come across are set up to handle random variables with µ = 0 and σ =

1.

χ −µ

Z= Where

σ

Suppose we have µ = 100 and σ =15 and we are to calculate the probability of a random

variable X is less than 130, P(X < 130)

This means that the point X is 2.0 standard deviation to the right of the mean. We can look at

the table of normal curve areas attached at the appendices

But for our practice let use the following given table

CHAPTER 18 Network Analyses and Project Scheduling 319

Standard Normal Distribution: Table Values Represent AREA to the LEFT of the Z score.

Z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09

0.0 .50000 .50399 .50798 .51197 .51595 .51994 .52392 .52790 .53188 .53586

0.1 .53983 .54380 .54776 .55172 .55567 .55962 .56356 .56749 .57142 .57535

0.2 .57926 .58317 .58706 .59095 .59483 .59871 .60257 .60642 .61026 .61409

0.3 .61791 .62172 .62552 .62930 .63307 .63683 .64058 .64431 .64803 .65173

0.4 .65542 .65910 .66276 .66640 .67003 .67364 .67724 .68082 .68439 .68793

0.5 .69146 .69497 .69847 .70194 .70540 .70884 .71226 .71566 .71904 .72240

0.6 .72575 .72907 .73237 .73565 .73891 .74215 .74537 .74857 .75175 .75490

0.7 .75804 .76115 .76424 .76730 .77035 .77337 .77637 .77935 .78230 .78524

0.8 .78814 .79103 .79389 .79673 .79955 .80234 .80511 .80785 .81057 .81327

0.9 .81594 .81859 .82121 .82381 .82639 .82894 .83147 .83398 .83646 .83891

1.0 .84134 .84375 .84614 .84849 .85083 .85314 .85543 .85769 .85993 .86214

1.1 .86433 .86650 .86864 .87076 .87286 .87493 .87698 .87900 .88100 .88298

1.2 .88493 .88686 .88877 .89065 .89251 .89435 .89617 .89796 .89973 .90147

1.3 .90320 .90490 .90658 .90824 .90988 .91149 .91309 .91466 .91621 .91774

1.4 .91924 .92073 .92220 .92364 .92507 .92647 .92785 .92922 .93056 .93189

1.5 .93319 .93448 .93574 .93699 .93822 .93943 .94062 .94179 .94295 .94408

1.6 .94520 .94630 .94738 .94845 .94950 .95053 .95154 .95254 .95352 .95449

1.7 .95543 .95637 .95728 .95818 .95907 .95994 .96080 .96164 .96246 .96327

1.8 .96407 .96485 .96562 .96638 .96712 .96784 .96856 .96926 .96995 .97062

1.9 .97128 .97193 .97257 .97320 .97381 .97441 .97500 .97558 .97615 .97670

2.0 .97725 .97778 .97831 .97882 .97932 .97982 .98030 .98077 .98124 .98169

0.97725 which 97.73%

This that if this was to represent a group student sitting for quantitative techniques exam the

probability of a student randomly selected is sitting for the quantitative exam is less than 130 is

97.73%

We see that the probability could also be derived from the middle of the graph by

CHAPTER 18 Network Analyses and Project Scheduling 320

Shaded area of

interest

χ −µ

-3 -2 -1 0 1 2 3 Z=

σ

Another example is that a construction company can build a bridge in 100 days and the

standard deviation is 20 days. Recently the company signed a contract to build a bridge in 125

days. What is the probability that the company will not violate their construction contract?

χ −µ

Z=

σ

From the table Z = 1.25 can be located at 0.89435 by first looking up 1.2 left-hand column of

the table provided below and then moving to 0.05 column so as find the value of Z = 1.25

CHAPTER 18 Network Analyses and Project Scheduling 321

Standard Normal Distribution: Table Values Represent AREA to the LEFT of the Z score

Z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09

0.0 .50000 .50399 .50798 .51197 .51595 .51994 .52392 .52790 .53188 .53586

0.1 .53983 .54380 .54776 .55172 .55567 .55962 .56356 .56749 .57142 .57535

0.2 .57926 .58317 .58706 .59095 .59483 .59871 .60257 .60642 .61026 .61409

0.3 .61791 .62172 .62552 .62930 .63307 .63683 .64058 .64431 .64803 .65173

0.4 .65542 .65910 .66276 .66640 .67003 .67364 .67724 .68082 .68439 .68793

0.5 .69146 .69497 .69847 .70194 .70540 .70884 .71226 .71566 .71904 .72240

0.6 .72575 .72907 .73237 .73565 .73891 .74215 .74537 .74857 .75175 .75490

0.7 .75804 .76115 .76424 .76730 .77035 .77337 .77637 .77935 .78230 .78524

0.8 .78814 .79103 .79389 .79673 .79955 .80234 .80511 .80785 .81057 .81327

0.9 .81594 .81859 .82121 .82381 .82639 .82894 .83147 .83398 .83646 .83891

1.0 .84134 .84375 .84614 .84849 .85083 .85314 .85543 .85769 .85993 .86214

1.1 .86433 .86650 .86864 .87076 .87286 .87493 .87698 .87900 .88100 .88298

1.2 .88493 .88686 .88877 .89065 .89251 .89435 .89617 .89796 .89973 .90147

0.89435 which 89.43%

Shaded area of

interest

We are also told further that if the company is able to finish within 75 days it will be awarded by

the ministry of roads and works a bonus of KES 100,000, what is the probability that they will

receive the bonus?

CHAPTER 18 Network Analyses and Project Scheduling 322

χ −µ

Z=

σ

Sometime you may be given tables that do not have the negative which should be calculated as

follows

= 10. 57%

Alternatively this book provide the negative area of Z as given below

To look up for the Z = - 1.25 by first locating the column of – 1.2 and then moving to the 0.05

column and write down the figure.

Standard Normal Distribution: Table Values Represent AREA to the LEFT of the Z score

Z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09

-1.2 .11507 .11314 .11123 .10935 .10749 .10565 .10383 .10204 .10027 .09853

-1.1 .13567 .13350 .13136 .12924 .12714 .12507 .12302 .12100 .11900 .11702

-1.0 .15866 .15625 .15386 .15151 .14917 .14686 .14457 .14231 .14007 .13786

-0.9 .18406 .18141 .17879 .17619 .17361 .17106 .16853 .16602 .16354 .16109

-0.8 .21186 .20897 .20611 .20327 .20045 .19766 .19489 .19215 .18943 .18673

-0.7 .24196 .23885 .23576 .23270 .22965 .22663 .22363 .22065 .21770 .21476

-0.6 .27425 .27093 .26763 .26435 .26109 .25785 .25463 .25143 .24825 .24510

-0.5 .30854 .30503 .30153 .29806 .29460 .29116 .28774 .28434 .28096 .27760

-0.4 .34458 .34090 .33724 .33360 .32997 .32636 .32276 .31918 .31561 .31207

-0.3 .38209 .37828 .37448 .37070 .36693 .36317 .35942 .35569 .35197 .34827

-0.2 .42074 .41683 .41294 .40905 .40517 .40129 .39743 .39358 .38974 .38591

-0.1 .46017 .45620 .45224 .44828 .44433 .44038 .43644 .43251 .42858 .42465

-0.0 .50000 .49601 .49202 .48803 .48405 .48006 .47608 .47210 .46812 .46414

gives 10.57%

CHAPTER 18 Network Analyses and Project Scheduling 323

Shaded area of

interest

75 100 X = days

Finally, what if the bridge is constructed in within 110 days what will be the probability

χ −µ

Z=

σ

Standard Normal Distribution: Table Values Represent AREA to the LEFT of the Z score

Z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09

0.0 .50000 .50399 .50798 .51197 .51595 .51994 .52392 .52790 .53188 .53586

0.1 .53983 .54380 .54776 .55172 .55567 .55962 .56356 .56749 .57142 .57535

0.2 .57926 .58317 .58706 .59095 .59483 .59871 .60257 .60642 .61026 .61409

0.3 .61791 .62172 .62552 .62930 .63307 .63683 .64058 .64431 .64803 .65173

0.4 .65542 .65910 .66276 .66640 .67003 .67364 .67724 .68082 .68439 .68793

0.5 .69146 .69497 .69847 .70194 .70540 .70884 .71226 .71566 .71904 .72240

The probability is

0.69146

CHAPTER 18 Network Analyses and Project Scheduling 324

We need to subtract the probability of finishing within 125 days and that of finishing within 110

days.

0.89435 – 0.69146

= 0.20289

Thus the probability between 110 and 125 days is 20.29%

It can be represented as follows

Shaded area of

interest

Example 18.4

A Highway contract have been given a contract to recarpet Mai Mahiu road the project manager

has identified eight essential activities in this network. He has also listed the activity as below.

Activity Activity Optimistic Most likely Pessimistic

A - 2 3 4

B - 5 5.5 9

C - 6 7 8

D A 4 8.5 10

E C 1 3.5 9

F B, E 1 3 5

G C 8 9 16

H F, G 1 3 5

Required

a) Calculate the expected time

b) Illustrate the project by an arrow diagram

CHAPTER 18 Network Analyses and Project Scheduling 325

c) What is the probability that the project will take less than 30 weeks

Solution

a + 4m + b

When calculating the expected time we use the formulae where;

6

a = Optimistic

b = Pessimistic

m = Mostly likely

2 + 4(3) + 4 18

A

= = = 3

6 6

5 + 4(5.5) + 9 36

B

= = = 6

6 6

6 + 4(7) + 8 42

C

= = = 7

6 6

4 + 4(8.5) + 10 48

D

= = = 8

6 6

1 + 4(3.5) + 9 24

E

= = = 4

6 6

1 + 4(3) + 5 18

F

= = = 3

6 6

8 + 4(9) + 16 60

G

= = = 10

6 6

1 + 4(3) + 5 18

H

= = = 3

6 6

Activity Time

A - 3

B - 6

C - 7

D A 8

E C 4

F B, E 3

G C 10

H F, G 3

CHAPTER 18 Network Analyses and Project Scheduling 326

2

3 12 8

3 D

A

4 3 5 3 6

1 6 11 14 17 17

F H 20 20

0 0 B

7 4 10

C E G

3

7 7

When calculating the probability that the project will take less than 30 days weeks, we use the

2

b−a

Following formulae δ =

2

6

Thus δ 2 = δ C2 + δ G2 + δ H2

2 2

8−6 2 4

δ =

= 2

=

C

6 6 36

2 2

16 − 8 8 64

δ G2

= = =

6 6 36

2 2

5 − 1 4 16

δ

= 2

=

H =

6 6 36

4 64 16 84

δ2 = + + = = 2.3

36 36 36 36

δ 2 = 2.3

δ = 2.3

= 1.52

CHAPTER 18 Network Analyses and Project Scheduling 327

Using the Chebychev’s theorem which shows the probability as given below by the chart

68%

95%

100%

−δ δ

Using the above we can be able to check the probability of 1.52 as follows

A 20 30 B

1

The total distance point A to B is equal to 1 since we are dealing with the probability and the

probabilities are equal to one.

That is we use the Z sore principle which is given by the formulae given below

χ −µ

Z= Where

σ

CHAPTER 18 Network Analyses and Project Scheduling 328

Example 18.5

Given the following information, Draw the Network diagram and identify critical path. What is

the probability that project will take 30 days to complete

predecessor a m b

A - 2 3 4

B A 1 2 3

C A 4 5 12

D A 3 4 5

E B 1 3 5

F C 1 2 3

G D 1 8 9

H E, F 2 4 6

I H 2 4 12

J G 3 4 5

K I, J 5 7 8

Solution

a + 4m + b

Using the formulae we have to calculate the expected time as given below

6

a = Optimistic

b = Pessimistic

m = Mostly likely

CHAPTER 18 Network Analyses and Project Scheduling 329

2 + 4(3) + 4 18

A

= = = 3

6 6

1 + 4(2) + 3 12

B

= = = 2

6 6

4 + 4(5) + 12 36

C

= = = 6

6 6

3 + 4(4) + 5 24

D

= = = 4

6 6

1 + 4(3) + 5 18

E

= = = 3

6 6

1 + 4(2) + 3 12

F

= = = 2

6 6

1 + 4(8) + 9 42

G

= = = 7

6 6

2 + 4(4) + 6 24

H

= = = 4

6 6

2 + 4(4) + 12 30

I

= = = 5

6 6

3 + 4(4) + 5 24

J

= = = 4

6 6

5 + 4(5) + 8 42

K

= = = 7

6 6

predecessor Time

A - 3

B A 2

C A 6

D A 4

E B 3

F C 2

G D 7

H E, F 4

I H 5

J G 4

K I, J 7

Using the above table we can now use network diagram to represent the above information,

CHAPTER 18 Network Analyses and Project Scheduling 330

3

5 6

3

E 10

2 B 6 4 8

5 9 7

24 24

2 5 9 H 12 12 I 17 17 K

0 3 4 F

1 6

0 0 A 9 7

3 3 C

4 J

4

D

5 7 7

7 7 G 14 17

When calculating the probability that the project will take 30 day we must first calculate using

2

b−a

the following formulae δ 2 =

6

We must identify the critical path which is

Example 18.6

a m b expected

in shillings

A - 3 4 5 1000

B - 4 7 10 1400

C - 4 5 6 3000

D A 5 6 7 1200

E B 2 2.5 6 900

F C 10 10.5 14 2500

G D, E 3 4 5 800

H G, F 1 2 9 300

A certain project had the following information given by the project manager as given in the

table above.

CHAPTER 18 Network Analyses and Project Scheduling 331

The project indirect costs are KES 1300. The contract specifies a penalty of KES 1000 if the

project is not finished by the end of 15 days.

Required

Draw the network and state overall expected project completion time.

Calculate the cost of the project.

State the critical activities.

What is the probability could be completed without incurring any penalty.

Solution

a + 4m + b

We have to calculate the expected time using the formulae as follows.

6

3 + 4(4) + 5 24

A

= = = 4

6 6

4 + 4(7) + 10 42

B

= = = 7

6 6

4 + 4(5) + 10 30

C

= = = 6

6 6

5 + 4(6) + 7 36

D

= = = 6

6 6

2 + 4(2.5) + 6 18

E

= = = 3

6 6

10 + (10.3) + 14 66

F

= = = 11

6 6

3 + 4(4) + 5 24

G

= = = 4

6 6

1 + 4(2) + 9 18

H

= = = 3

6 6

A - 4 1000

B - 7 1400

C - 5 3000

D A 6 1200

E B 3 900

F C 11 2500

G D, E 4 800

CHAPTER 18 Network Analyses and Project Scheduling 332

H G, F 3 300

2

4 6 6

4 D

A 5 4 6 3 7

3 10 12 G 16 16 H 19 19

1 7 3 E

0 0 B 7 9

11

5

F

C

4

5 5

Add all the expected cost

11100

1300 ×19 =

24700

4000

Probability that the project will be completed without incurring any penalty is calculated as

follows

δ 2 = δ C2 + δ F2 + δ H2

CHAPTER 18 Network Analyses and Project Scheduling 333

2

b−a

δ =

2

6

2

6−4

=δ C2 = 0.11

6

2

7−5

=δ =

2

F 0.44

6

2

9 −1

=δ H2 = 1.78

6

δ 2 = 0.11 + 0.44 + 1.78

δ= 0.11 + 0.44 + 1.78

δ = 2.33

= 1.53

Using the principle that we developed previously of the Z score we can calculate the probability

as follows

χ −µ

Z= Where

σ

15 − 19 4

Z= = −

1.53 1.53

= −2.62

=0.0045

CHAPTER 18 Network Analyses and Project Scheduling 334

15 19 days

0.5

The total cost of the project depends on the cost of individual activities plus any additional

valuables of fixed cost. Since all activities must be completed whether they are critical or not

Note that the total; cost of the activities is simply the sum of individual values may be possible

to reduce the duration of a specific activity by employing additional resources.

The implication of this is the cost of that activity will increase. However if the activity is critical a

saving in its duration (time) may result in overall saving in time on the cost and consequently

reduction in the project cost.

The shortest possible time in which an activity can be completed is called crash time

Example 18.7

XYZ Company is involved in the following projects

Activity Predecessor Normal Crash Normal Crash Cost

Time Time Cost (KES) (KES)

(days) (days)

A - 8 4 15,000 18,000

B - 10 8 17,000 22,000

C - 6 5 12,000 14,000

D A, B 8 5 26,000 32,000

E B, C 9 6 28,000 33,000

F C 14 11 29,000 36,000

G D, E 14 10 27,000 37,000

H F, G 6 4 11,000 13,000

In addition to cost of each activity there is site cost KES 1500 per day

b) What is the associated minimum additional cost

CHAPTER 18 Network Analyses and Project Scheduling 335

Solution

4

4 9

(8) 10 11 5

4 A D (8)

0 0 B 8 8 E 14 14 G 24 24 H 28 28

10 10 19 19 39 39

5 33 33

C (6) 11

F

2

5 8

8 10

We first calculate the normal cost by adding all the normal cost of every individual activity as

follows.

Normal cost = 15,000 + 17,000 + 12,000 + 26,000 + 28,000 + 29,000 + 27,000 + 11,000

= 165,000

= 165,000+58,500= 223,500

Calculating the crash time we are going to use the duration in the network diagram

= 205500

Variable Cost= 28 × 1500 = 42,000

=205,500 + 42,000 = 247, 500

The additional cost will be given by getting the difference between the crash time and the

normal cost,

CHAPTER 18 Network Analyses and Project Scheduling 336

=24,000

Look at the non critical events that is A, C, D, and F and see whether there is possibility of using

the normal time and still finishing the project 28 days (crash time)

Float time

Tail Head

6 6 7

4 7 K 9 14

Earliest Tail Latest Head time

Time

Total float

Total float is the amount of time path activities could be delayed without affecting the overall

project duration. It is given by:

Total Float = Latest Head Time – Earliest Tail Time – Activity Duration

14 – 4 – 6 = 4

CHAPTER 18 Network Analyses and Project Scheduling 337

Free float

Free float time is the amount of time activity can be delayed without affecting the

commencement of a subsequent activity at its earliest start time but may affect float of a

previous activity

Free time = Earliest Head Time – Earliest Tail Time – Activity Duration

9–7–6=1

This means that there will be a deficit of on day before the project finishes.

Independent Float

Independent Float is the amount time activity can be delayed when all preceding activities are

completed as late as possible and all succeeding activities are completed as early as possible.

Independent Float = Earliest Head time – Latest Tail Time – Activity duration

9 – 7 – 6 = -4

Example 18.8

A manufacturer wishes to investigate the cause of engine failure in last 3 DC 10 plane crash.

Below are the activities their interrelation and their respective track of time.

Predecessor days

A - 3

B A 20

C A 15

D A 10

E B, C, D 15

F E 10

G B, F 5

H F 3

I G, H 12

Draw the network diagram determine

J I 2

project completion time

Calculate the float in each activity

CHAPTER 18 Network Analyses and Project Scheduling 338

Solution

9

3 46 48

13 18

10

3 H

D

1 3 2 15 5 15 6 10 7 5 10 12 11 2 12

0 0 A 3 3 C 18 18 E 33 33 F 43 43 G 48 48 I 60 60 J 62 62

20

B

4

23 18

CHAPTER 18 Network Analyses and Project Scheduling 339

1.

Practice Problem

1. A certain project had the following had information

time cost Time reduction of

one week

A - 2 4000 1 4000

B A 1 0 1 0

C B 4 2000 2 1250

D B 6 4500 2 1750

E D 3 7000 1 2500

F C, E 3 2000 1 2000

G F 4 6000 1 1250

H D 2 0 2 0

I D 3 2500 2 2000

J H, I 8 6000 4 1000

K G, J 2 4500 1 2500

L K 2 2000 1 1000

Variable overhead cost of KES 3000 per week for the project duration

a) Determine the normal overall completion time and total cost of the project

b) Determine the minimum time in which the project can be completed and

associated minimum cost

office system that will improve accounting processes together with the interface

communication for auditing firms with branches all over Kenya. As shown below

Time Time Cost (KES) Cost

(weeks) (weeks) (KES)

A - 10 8 30,000 70,000

B A 7 6 120,000 150,000

C B 10 7 100,000 160,000

D A 7 6 40,000 50,000

E D 10 8 50,000 75,000

F C,E 3 3 60,000 60,000

CHAPTER 18 Network Analyses and Project Scheduling 340

a) Draw a network and identify the shortest possible time that can take

b) Identify the critical activities

c) If the company has KES 400,000 how much should they borrow if they want

complete the project in 25 weeks

3. Dema Builders Ltd has been awarded a tender to construct a bridge. The bridge

construction project consist of the following activities

Likely

A - 2 3 4

B A 1 2 3

C A 4 5 12

D A 3 4 11

E B 1 3 5

F C 1 2 3

G D 1 8 9

H E,F 2 4 6

I H 2 4 12

J G 3 4 5

K I,J 2 7 9

b) Identify the critical activities.

c) What is the probability that the project will take more than 30 days to complete.

meetings for its members. The staffs of the institute’s Head office begin to prepare the

programme for the year after the previous financial year. The programme includes

details of the speakers and their talks as well as the list of current members. The

activities necessary in the preparation of its programme are given below, together with

the immediate preceding activities.

b) Determine the overall time required to produce and distribute this programme if

no crashing is done.

c) What would be the effect on the overall duration of the project if the time taken

for activity C had been underestimated and it took 30 days to finish it?

d) What is the shortest possible time which the programme can be produced and

distributed?

CHAPTER 18 Network Analyses and Project Scheduling 341

time (day) time cost (KES)

(day)

A - 5 5 -

B A 20 10 10,000

C - 15 10 15,000

D - 15 5 20,000

E D 30 25 5,000

F B,C,E 10 5 10,000

G F 10 5 5,000

H G 15 10 7,500

I E 5 2 5,000

J H,I 5 2 5,000

preceding likely Cost in KES at

activity expected

duration

A - 3 4 5 100,000

B - 4 7 10 140,000

C - 4 5 6 200,000

D A 5 6 7 120,000

E B 2 2.5 6 90,000

F C 10 10.5 14 250,000

G D,E 3 4 5 80,000

H G,F 1 5 9 30,000

The project indirect costs are KEs 30,000 per day. The contract with the customers

specifies a penalty of KES 10,000 per day if the project is not finished at the end of 15

days.

b) Identify the critical path

c) Determine the overall expected project completion time and its associated cost.

d) Determine the probability that the project could be completed without incurring

any penalty charge.

a) Crash time/cost

b) Non-critical activities.

c) A dummy

CHAPTER 18 Network Analyses and Project Scheduling 342

7. The following activities have been identified by Hydra Company Limited as the one

required in launching a new product.

Activities

A - 8

B - 4

C A 4

D A 2

E C, D 3

F B 2

G - 1

H E, F 2

I H, G 3

J I 4

K J 3

L K 4

b) How long will the product take before it is launched?

The time taken to complete tasks A, B, D, K and L is somewhat uncertain and so the following

optimistic and pessimistic estimates have also been made to supplement the most likely figure

given above. The additional estimates are:

A 5 13

B 2 6

D 1 4

K 2 6

L 2 8

b) What is the probability of this time exceeding 35 weeks?

CHAPTER 19 TRANSPORTATION

MODEL

Learning Objectives

• Identify and recognize a transportation problem;

• Set up the starting transportation table;

• Make the starting feasible allocations;

• Improve the starting/initial allocation by calculating the shadow

costs;

• Know when to include dummy destination;

Transportation problem is concerned with allocation of items between suppliers (origin) and

consumers (destination) so that the total cost allocation is minimized. This kind of problem can

be solved using linear programming or a special transportation algorithm.

For as to solve a problem using transportation algorithm a number of conditions must be made.

a) The cost per item for each combination of origin and destination must be specified

b) The supply of items at each origin must be known.

c) The requirement of item at each destination must be known.

d) The total supply must be equal to the total demand

Stage I

Arrange the data in table form and find any feasible allocation. Note that a feasible allocation is

one which all demand at the destination is satisfied and all supply at the origins is allocated.

Stage II

Test the allocation to see whether it is the optimal allocation

Stage III

If the allocation is not optimal reallocation in order to move to a better lower cost solution.

Stage IV

Test again for optimality and repeat this process until an optimum allocation is found.

Finding an Allocation

There are two method of finding initial allocation which the book will focus on:

a) Minimum cost method

CHAPTER 19 Transportation model 344

b) Vogel method

Example 19.1

Three deports A, B, and C can supply 900, 400 and 800 bags of sugar respectively. Three

supermarkets at 1, 2 and 3 require 300, 500 and 600 bags respectively. What is the minimum

cost of allocating the bags of sugar from the depots to the supermarket if the unit

transportation cost are shown in the table below.

Table 1

Sugar Transportation cost in Total

KES to supermarkets available

Deports 1 2 3

A 100 200 50 900

B 20 100 80 400

C 10 200 70 800

Total 300 500 600

Required

a) Allocate as much as possible to the cell with the minimum unit cost

b) Adjust the remaining availability and requirement

c) Choose the next smallest cost and allocate as much as possible to this cell until supply

and demand are all zero

Note

If more than one cell has smallest value of unit cost choose one at random, we must introduce a

dummy since the supply is more than the demand

Table 2

Sugar Transportation cost in Total

shs to supermarkets available

Deports 1 2 3

A 100 200 50 900

B 20 100 80 400 A total of 2100

C 10 200 70 800

Total 300 500 600

Required

A total of 1400

CHAPTER 19 Transportation model 345

The table above will be added one column for the dummy supermarket that is to be created in

order the supply will be equal to the demand.

Table 3

Sugar Transportation cost in shs to Total

supermarkets available

Deports 1 2 3 4

A 100 200 50 0 900

B 20 100 80 0 400 Supply is 2100

C 10 200 70 0 800

Total 300 500 600 700

Required

Demand is 2100

Table 4

Sugar Transportation cost in shs to Total

supermarkets available

Deports 1 2 3 4

A 100 200 50 0 900

B 20 100 80 0 400

C 10 200 70 0 7001 800 100

Total 300 500 600 700

Required 0

In column 4 the cost are all zero and we can allocate at random by choosing one of the three

zeros

When allocating for example if we choose cell C4 we check what is the demand which is (700

bags) and supply which is (800 bags) subtract what we need and leave the rest for another

allocation.

If the allocation is exhausted that is it is have given us a zero after the allocation we no longer

need the cells in that column or row and we close them by putting a cross as given in the Table 5

CHAPTER 19 Transportation model 346

Table 5

Sugar Transportation cost in shs to Total

supermarkets available

Deports 1 2 3 4

A 100 200 50 0 900

B 20 100 80 0 400

C 10 200 70 0 7001 800 100

Total 300 500 600 700

Required 0

Now we move to the next smallest cost which is C1 (10) which requires 300 bags while our

deport can only supply 100 bags we allocate the 100 bags, the remain 200 bags to allocate later

as given in the table 6

Table 6

Sugar Transportation cost in shs to Total

supermarkets available

Deports 1 2 3 4

A 100 200 50 0 900

B 20 100 80 0 400

C 10 1002 200 70 0 7001 800 100 0

Total 300 500 600 700

Required 200 0

We can see that in row C the supply has been exhausted and it is now a zero, this means that

we don’t need the rest of the remaining cells in that row and we must cross them as in the table

7 given below.

CHAPTER 19 Transportation model 347

Table 7

Sugar Transportation cost in shs to Total

supermarkets available

Deports 1 2 3 4

A 100 200 50 0 900

B 20 100 80 0 400

C 10 1002 200 70 0 7001 800 100 0

Total 300 500 600 700

Required 200 0

We again check the smallest cost which is in row B (20) and we see that supermarket 1 require

200 bags and there is 400 bags which deport B is able to supply so we deduct what we require

that is 200 bags as in the table 8

Table 8

Sugar Transportation cost in shs to Total

supermarkets available

Deports 1 2 3 4

A 100 200 50 0 900

B 20 2003 100 80 0 400 200

C 10 1002 200 70 0 7001 800 100 0

Total 300 500 600 700

Required 200 0

0

The supermarket 1 demand has been exhausted and the total required is zero now and we need

to cross the remaining one cell in the column as shown in table 9

CHAPTER 19 Transportation model 348

Table 9

Sugar Transportation cost in shs to Total

supermarkets available

Deports 1 2 3 4

A 100 200 50 0 900

B 20 2003 100 80 0 400 200

C 10 1002 200 70 0 7001 800 100 0

Total 300 500 600 700

Required 200 0

0

Repeating the same procedure we check the smallest cost again on the remain cells which is in

row A (50), in that figure we see what is required is 600 bags by supermarket 3 and deport A is

able to supply 900 bags, thus we deduct what we need which is 600 bags as shown in the table

10

Table 10

Sugar Transportation cost in shs to Total

supermarkets available

Deports 1 2 3 4

A 100 200 50 6004 0 900 300

B 20 2003 100 80 0 400 200

C 10 1002 200 70 0 7001 800 100 0

Total 300 500 600 700

Required 200 0 0

0

The column of the supermarket 3 have been exhausted and now the required bags are zero thus

we need to cross the remaining one cell as in the table 11

CHAPTER 19 Transportation model 349

Table 11

Sugar Transportation cost in shs to Total

supermarkets available

Deports 1 2 3 4

A 100 200 50 6004 0 900 300

B 20 2003 100 80 0 400 200

C 10 1002 200 70 0 7001 800 100 0

Total 300 500 600 700

Required 200 0 0

0

Finally we can allocate the two remaining cell A2 and B2, using the same principle we check the

smallest cost between these two which is B2 (100) that means that supermarket 2 requires 500

bags and deport B is willing and able to supply 200 bags at cost of KES 100, so we take the 200

bags available and get the remaining 300 bags to deport A which is able to supply 300 bags at a

cost of KES 200.

Table 12 shows both allocations starting with the smallest cost which is (100)

Table 12

Sugar Transportation cost in shs to Total

supermarkets available

Deports 1 2 3 4

A 100 200 3006 50 6004 0 900 300

B 20 2003 100 2005 80 0 400 200

C 10 1002 200 70 0 7001 800 100 0

Total 300 500 600 700

Required 200 300 0 0

0 0

The minimum cost that the supermarket can incur is summarized below

From deport A allocate 300 bags to supermarket 2 300 × 200 = 60,000

From deport A allocate 600 bags to supermarket 3 600 × 50 = 30,000

From deport B allocate 200 bags to supermarket 1 200 × 20 = 4,000

From deport B allocate 200 bags to supermarket 2 200 × 100 = 20,000

From deport C allocate 100 bags to supermarket 1 100 × 10 = 1,000

700 bags will remain in deport C 700 × 0 = 0

115,000

CHAPTER 19 Transportation model 350

Alternative allocation

We can use the same minimum cost method to allocate by now we can select at random the

smallest cost to be A4 and start from there.

Following all the steps we have done in the above we can come up with the final table as shown

in table 13

Table 13

Sugar Transportation cost in shs to Total

supermarkets available

Deports 1 2 3 4

A 100 200 50 2003 0 7001 900 200

B 20 100 4005 80 0 400 0

C 10 3002 200 1006 70 4004 0 800 500 100 0

Total 300 500 600 700

Required 0 100 400 0

101,000

CHAPTER 19 Transportation model 351

Vogel method

This method uses penalty cost for each row and column the penalty costs is the difference

between cheapest available route (lowest cost) and the next cheapest.

When you calculate the difference between the lowest two costs in each row and column, pick

the highest penalty and allocate as much as possible to the cell with the smallest cost.

Using the example 1 we can illustrate Vogel method, first we introduce one row of penalty and

another column of penalty and get the difference between the two lowest costs and write them

down in the penalty column and row as in the table 14

Example 19.2

Table 14

Sugar Transportation cost in shs to Total Penalties

supermarkets available

Deports 1 2 3 4 P1

A 100 200 50 0 900 50

B 20 100 80 0 400 20

C 10 200 70 0 800 10

Total 300 500 600 700

Required

P1 10 100 20 0

Penalties

When we are allocating using this method we concentrate on the penalties and pick the column

and row the highest value on either, for our case in the table 14, pick 100 as the highest figure.

Using that 100 check the column and allocate to the lowest value and note that our interest is

the values on the Deport A, B and C in that column.

CHAPTER 19 Transportation model 352

The lowest value is 100 and that is where our allocation where supermarket 2 require 500 bags

and deport B is able to supply 400 bags , we deduct what the deport is supplying and we are

left with a demand of 100 bags which will be supplied later as shown in the table 15

Table 15

Sugar Transportation cost in shs to Total Penalties

supermarkets available

Deports 1 2 3 4 P1

A 100 200 50 0 900 50

B 20 100 4001 80 0 400 0 20

C 10 200 70 0 800 10

Total 300 500 600 700

Required

P1 10 1001 20 0

Penalties

The supply in row B is exhausted and all the cells in that row except where there is allocation

are to be crossed as in table 16

Table 16

Sugar Transportation cost in shs to Total Penalties

supermarkets available

Deports 1 2 3 4 P1

A 100 200 50 0 900 50

B 20 100 4001 80 0 400 0 20

C 10 200 70 0 800 10

Total 300 500 600 700

Required 100

P1 10 1001 20 0

Penalties

CHAPTER 19 Transportation model 353

Repeat the same process of getting the penalties (P2) from the remaining cost without

considering the crossed cells as in table 17

Table 17

Sugar Transportation cost in shs to Total Penalties

supermarkets available

Deports 1 2 3 4 P1 P2

A 100 200 50 0 900 50 50

B 20 100 4001 80 0 400 0 20

C 10 200 70 0 800 10 10

Total 300 500 600 700

Required 100

P1 10 1001 20 0

P2 90 20 0

Penalties

Identify the highest penalty for our case in the table 17 is (90) and allocate to the lowest cost

value which is (10) as in the table 18

Table 18

Sugar Transportation cost in shs to Total Penalties

supermarkets available

Deports 1 2 3 4 P1 P2

A 100 200 50 0 900 50 50

B 20 100 4001 80 0 400 0 20

C 10 3002 200 70 0 800 500 10 10

Total 300 500 600 700

Required 0 100

P1 10 1001 20 0

P2 902 20 0

Penalties

CHAPTER 19 Transportation model 354

Since the column with allocation have been exhausted we have to cross the remaining cell A1 as

in the table 19

Table 19

Sugar Transportation cost in shs to Total Penalties

supermarkets available

Deports 1 2 3 4 P1 P2

A 100 200 50 0 900 50 50

B 20 100 4001 80 0 400 0 20

C 10 3002 200 70 0 800 500 10 10

Total 300 500 600 700

Required 0 100

P1 10 1001 20 0

P2 902 20 0

Penalties

Repeat the same process of generating the penalties (P3) by getting the difference of between

the two least values in each row and column as in table 20

Table 20

Sugar Transportation cost in shs to Total Penalties

supermarkets available

Deports 1 2 3 4 P1 P2 P3

A 100 200 50 0 900 50 50 50

B 20 100 4001 80 0 400 0 20

C 10 3002 200 70 0 800 500 10 10 70

Total 300 500 600 700

Required 0 100

P1 10 1001 20 0

P2 902 20 0

Penalties

P3 0 20 0

CHAPTER 19 Transportation model 355

From the penalties we pick the highest penalty for our case we have (70) and allocate that as

penalty (703) which is in the column of penalties and allocate to the lowest cost value which is

zero as in table 21

Table 21

Sugar Transportation cost in shs to Total Penalties

supermarkets available

Deports 1 2 3 4 P1 P2 P3

A 100 200 50 0 900 50 50 50

B 20 100 4001 80 0 400 0 20

C 10 3002 200 70 0 800 500 10 10 703

Total 300 500 600 700

Required 0 100

P1 10 1001 20 0

P2 902 20 0

Penalties

P3 0 20 0

We need to allocate 700 bags but the deport C is able to supply 500 bags allocate what is

available and leave the remaining for another allocation as in table 22

Table 22

Sugar Transportation cost in shs to Total Penalties

supermarkets available

Deports 1 2 3 4 P1 P2 P3

A 100 200 50 0 900 50 50 50

B 20 100 4001 80 0 400 0 20

C 10 3002 200 70 0 5003 800 500 10 10 703

Total 300 500 600 700

Required 0 100 200

P1 10 1001 20 0

P2 902 20 0

Penalties

P3 0 20 0

CHAPTER 19 Transportation model 356

In Deport C we have exhausted the supply and we have to cross the remaining cells since there

are no longer available as in table 23

Table 23

Sugar Transportation cost in shs to Total Penalties

supermarkets available

Deports 1 2 3 4 P1 P2 P3

A 100 200 50 0 900 50 50 50

B 20 100 4001 80 0 400 0 20

C 10 3002 200 70 0 5003 800 500 10 10 703

Total 300 500 600 700

Required 0 100 200

P1 10 1001 20 0

P2 902 20 0

Penalties

P3 0 20 0

The rest remaining cells can be allocated without allot of mechanics since we can assume they

are penalties and allocate from the highest penalty of 200, 50, and then last figure is zero as in

table 24.

Table 24

Sugar Transportation cost in shs to Total Penalties

supermarkets available

Deports 1 2 3 4 P1 P2 P3

A 100 200 1004 50 6005 02006 900 800 600 50 50 50

B 20 100 4001 80 0 400 0 20

C 10 3002 200 70 0 5003 800 500 10 10 703

Total 300 500 600 700

Required 0 100 200

0 0

P1 10 1001 20 0

P2 902 20 0

Penalties

P3 0 20 0

CHAPTER 19 Transportation model 357

The above table 24 is fully allocated and the following are the summary of the allocation.

From deport A allocate 600 bags to supermarket 3 600× 50 = 30,000

From deport A , 200 bags are remaining 200 × 0 = 0

From deport B allocate 400 bags to supermarket 2 400 × 100 = 40,000

From deport C allocate 300 bags to supermarket 1 300× 10 = 3,000

From deport C allocate 500 bags to supermarket 4 500× 0 = 0

93,000

Stepping stone is a technique that is used in trying to find an optimal solution for s problem

which is not optimal. This technique has two unique parts; the first involves testing the current

solution to determine if improvement is possible and the second involves making changes to the

current solution in order to make it optimal.

Modified distribution module, in both if the allocation is not optimal a stepping stone procedure

is used to move to the next basic allocation.

In our case let start by assigning component v1 , v2 , v3 and v4 to supermarket 1, 2 , 3 and

respectively and assign u1 , u2 and u3 respectively.

Table 25

Sugar Transportation cost in KES to Total

supermarkets available

v1 v2 v3 v4

Deports 1 2 3 4

u1 A 100 200 1004 50 6005 02006 900

u2 B 20 100 4001 80 0 400

u3 C 10 30 v 02 200 70 0 5003 800

4

Required

CHAPTER 19 Transportation model 358

Test whether the allocation is basic we use m + n − 1 m + n − 1 where m is the number of columns

and n the number of rows which is supposed to give the number of allocation.

For our example 4 + 3 − 1 =6 and our allocation were six which means it is basic.

If the allocation is not basic then allocate zero to any of the allocated cell.

After allocating the component the cells we are going to calculate in our case are

A2 , A3 , A4 , B2 , C1 , and C4 they give the following simultaneous equations.

A2 = u1 + v2 = 200

A3 = u1 + v3 = 50

A4 = u1 + v4 = 0

B2 = u2 + v2 = 100

C1 = u3 + v1 = 10

C4 = u3 + v4 = 0

By convention the first deport (U) is assigned the value of zero that u1 is equal to zero. Thus

given that u1 = 0 then we can calculate v2 as:

u1 = 0

A2 = u1 + v2 = 200

0 + v2 = 200

v2 = 200

A3 = u1 + v3 = 50

u1 = 0

0 + v3 =

50

v3 = 50

A4 = u1 + v4 = 0

u1 = 0

0 + v4 =

0

v4 = 0

CHAPTER 19 Transportation model 359

B2 = u2 + v2 = 100

u2 = 200

200 + v2 =

100

v2 100 − 200

=

v2 = −100

C4 = u3 + v4 = 0

v4 = 0

u3 = 0

C1 = u3 + v1 = 10

u3 = 0

0 + v1 =

10

v1 = 10

Using the values below we can be able to calculate the shadow cost of an occupying cells and

can be calculated using the following values.

v1 = 10

u1 = 0

v2 = 200

and u2 = −100

v3 = 50

u3 = 0

v4 = 0

Shadow cost

A1 = u1 + v1 = ?

B1 = u2 + v1 = ?

B3 = u2 + v3 = ?

B4 = u3 + v4 = ?

C2 = u3 + v2 = ?

C3 = u3 + v3 = ?

After substituting the shadow cost using the value given above we obtain.

CHAPTER 19 Transportation model 360

A1 =0 + 10 =10

−100 + 10 =

B1 = −90

−100 + 50 =

B3 = −50

B4 =−100 + 0 =−100

0 200 =

C2 =+ 200

C3 =0 + 50 =50

We are supposed to get the difference between the actual and the shadow cost.

Table 26

Actual cost Shadow Difference

cost

A1 100 10 +90

B1 20 -90 +110

B3 80 -50 +130

B4 0 -100 +100

C2 200 200 0

C3 70 50 +20

It is a basic allocation since all the values are positive and any unit you take in given cell A1 will

increase by +90 and allocation is optimum.

From deport A allocate 600 bags to supermarket 3 600 × 50 = 30,000

From deport A, 200 bags are remaining 200 × 0 = 0

From deport B allocate 400 bags to supermarket 2 400 × 100 = 40,000

From deport C allocate 300 bags to supermarket 1 300 × 10 = 3,000

From deport C allocate 500 bags to supermarket 4 500 × 0 = 0

93,000

Example 19.3

A firm of office equipment suppliers has three deports located in various in various terms. It

receives orders for a total of 600 laptops from 4 customers in total in the three deports there

are 600 laptops available and management wishes to minimize delivery by dispatching the

laptops from the appropriate deports for each customers.

Details of availability requirement and transport cost per laptop are given below.

CHAPTER 19 Transportation model 361

Table 27

A B C D Total

available

X 130 110 200 200 80

Y 170 140 130 130 240

Z 180 180 120 120 280

Total 120 120 160 200

required

Required

Make a feasible allocation of deliveries.

Check the solution to see if it represents the minimum cost possible and hence calculate the

minimum cost.

Solution

Now we are already familiar with making allocation using either the minimum cost method or

the Vogel method. In our case we are going to use the Vogel method because it gives the

minimum cost possible.

We are going to use the final table bearing in mind that you already know to follow the steps to

make the allocation as in table 28.

Table 28

A B C D Total Penalties

available

P1 P2 P3

X 130 110 200 200 80 0 0

801

Y 170 140 130 130 240 120 0

1202 1203 10 10 10

Z 180 180 120 120 280 200 80

405 404 1206 30 30 30

Total 120 120 160 200

required 40 0 40 0

0 0

P1 401 30 30 10

Penalties

P2 10 402 30 10

P3 10 0 303 10

CHAPTER 19 Transportation model 362

We test whether the allocation is basic using the formulae m + n − 1 where 4 + 3 − 1 =6 and the

number of the allocation that we have made are six thus our problem is basic. Now let test for

optimality and introduce our row component ui and column component v j .

In our case let start by assigning component v1 , v2 , v3 and v4 to supermarket 1, 2 , 3 and

respectively and assign u1 , u2 and u3 respectively.

Table 29

A B C D Total

available

v1 v2 v3 v4

u1 X 130 110 200 200 80

801

u2 Y 170 140 130 130 240

1202 1203

u3 Z 180 180 120 120 280

405 404 1206

Total 120 120 160 200

required

After allocating the component the cells lets calculate following simultaneous equations.

X A = u1 + v1 = 130

YB = u2 + v2 = 140

YC = u2 + v3 = 120

Z A = u3 + v1 = 180

Z C = u3 + v3 = 150

Z D = u3 + v4 = 120

X A = u1 + v1 = 130

u=0

0 + v1 =

130

v1 = 130

CHAPTER 19 Transportation model 363

Z A = u3 + v1 = 180

v1 = 130

u3 + 130 = 180 − 130

u3 = 50

With u3 = 50 we can be able to calculate v3 and v4 using the following two equation

Z C = u3 + v3 = 150

u3 = 50

50 + v3 = 150 − 50

v3 = 100

Z D = u3 + v4 = 120

u3 = 50

50 + v4 =

120

v4 = 70

YC = u2 + v3 = 120

v3 = 100

u2 + 100 =

120

u2 = 20

Y2 = u2 + v2 = 140

u2 = 20

20 + v2 =

140

v2 = 120

Using the values that we have solved for let us now calculate the shadow cost of the un

occupied cells given the values of ;

CHAPTER 19 Transportation model 364

v1 = 130

u1 = 0

v2 = 120

u2 = 20 and

v3 = 100

u3 = 50

v4 = 70

X B = u1 + v2 = 120

X C = u1 + v3 = 100

X D = u1 + v4 = 70

YA = u2 + v1 = 150

YD = u2 + v4 = 90

Z B = u3 + v2 = 170

Get the difference between the actual cost and the shadow cost

Table 30

Actual cost Shadow Difference

cost

XB 110 120 -10

XC 150 100 +50

XD 200 70 +130

YA 170 150 +20

YD 130 90 +40

ZB 180 170 +10

This means that the total cost could be reduced by KES 10 for every unit and that can be

transferred to X B .

Since there is a cost reduction that can be made then the above solution is not optimal.

To make the solution optimal we follow the following steps

If there is more than one empty cell negative shadow costs choose the cell with the largest

negative value.

Find the stepping circuit for this empty cell.

The table 31 on the next page shows the stepping circuit

CHAPTER 19 Transportation model 365

Table 31

A B C D Total

available

v1 v2 v3 v4

u1 X 80

801 +

u2 Y 1202 1203+ 240

required

Note that when moving the stepping circuit always move horizontally and vertically but not

diagonal. When there more than two values on the rows or column use only two points

according to which cell is your focus to avoid two same signs that is why we are advised to use

even cell not odd.

Using our largest negative which is -40 now any cell that is negative subtract the highest value

that is (-40) and add (+40) to every cell where there is a positive sign.

Again note that the move should not interfere with the allocation.

Table 32

A B C D Total

available

v1 v2 v3 v4

u1 X 80

40 801 +40

u2 Y 40 1202 1203+40 240

required

CHAPTER 19 Transportation model 366

The new allocation will appear as the one on table 33 and it will not interfere with the previous

allocation

Table 33

A B C D Total

available

v1 v2 v3 v4

u1 X 80

40 40

u2 Y 80 160 240

u3 Z 80 200 280

required

X A = u1 + v1 = 130..............................(i )

X B = u1 + v2 = 110.............................(ii )

YB = u2 + v2 = 140..............................(iii )

YC = u2 + v3 = 120...............................(iv)

Z A = u3 + v1 = 180...............................(v)

Z D = u3 + v4 = 120...............................(vi )

X A = u1 + v1 = 130.........................(i )

u1 = 0

0 + v1 =

130

v1 = 130

Using the same u1 = 0 we can be able to solve v2 using the second equation X B = u1 + v2 = 110

CHAPTER 19 Transportation model 367

X B = u1 + v2 = 110...............................(ii )

u1 = 0

0 + v2 =

110

v2 = 110

Let take v2 = 110 , we can get the value of u2 using the third equation YB = u2 + v2 = 140

YB = u2 + v2 = 140..............................(iii )

v2 = 110

u2 + 110 = 140 − 110

u2 = 30

YC = u2 + v3 = 120............................(iv)

u2 = 30

30 + v3 = 120 − 30

v3 = 90

Previously in our first equation we had solve for the value v1 = 130 lets solve for u3 using

Z A = u3 + v1 = 180

Z A = u3 + v1 = 180..............................(v)

v1 = 130

u3 + 130 = 180 − 130

u3 = 50

Finally with the value of u3 = 50 we can use the sixth equation to calculate the value of v4 using

Z D = u3 + v4 = 120

Z D = u3 + v4 = 120...................................(vi )

u3 = 50

50 + v4 = 120 − 50

v4 = 70

The summary of the values that we have solve are given below

CHAPTER 19 Transportation model 368

v1 = 130

u1 = 0

v2 = 110

u2 = 30 and

v3 = 90

u3 = 50

v4 = 70

We use the values to solve the shadow cost of the unoccupied cells:

X C = u1 + v3 = 90

X D = u1 + v4 = 70

YA = u2 + v1 = 160

YD = u2 + v4 = 100

Z B = u3 + v2 = 160

Z C = u3 + v3 = 140

Get the difference between the actual cost and the shadow cost

Table 34

Actual Cost Shadow cost Difference

XC 150 90 +60

XD 200 70 +130

YA 170 160 +10

YD 130 100 +30

ZB 180 160 +20

ZC 150 140 +10

X A = 130 × 80 = 10400

YB = 140 ×120 = 16800

YC = 120 ×120 = 14400

Z A = 180 × 40 = 7200

Z C = 150 × 40 = 6000

Z D =120 × 200 = 24000

78, 800

CHAPTER 19 Transportation model 369

X A = 130 × 40 = 5200

X B = 110 × 40 = 4400

YB = 140 × 80 = 11200

YC = 120 ×160 = 19200

Z A = 180 × 80 = 14400

Z D =120 × 200 = 24000

78, 400

The difference is (78,800-78,400) = 400

This means for every item moved to X B we will save KES 10 and have 400 that means we need

40 units times 10 gives 400.

Degeracy

A solution is degerate when there are fewer than m + n − 1 allocation in the final table that is if

not basic it is degerate.

It can be overcome by allocating a very small amount essential zero to an independent cell

Example 19.4

Three warehouses XYZ can supply 600, 300 and 400 items to three retailers I, 2 and 3. The

retailer requires 400, 500 and 100 items respectively. Calculate the optimum allocation and

hence optimum transportation cost using the table below.

Table 35

From To Retailers

warehouse 1 2 3

X 60 40 90

Y 50 30 20

Z 20 30 60

CHAPTER 19 Transportation model 370

Solution

Include a row for the demand that is what is required by the retailers and a column for the

supply that is what is available in the warehouse.

Table 36

From To Retailers Total

warehouse available

1 2 3

X 60 40 90 600

Y 50 30 20 300

Z 20 30 60 400

Total 400 500 100

required

Table 37

From To Retailers Total

warehouse available

1 2 3

X 60 40 90 600

Y 50 30 20 300 A total of 1300

Z 20 30 60 400

Total 400 500 100

required

A total of 1000

There is a difference between the total required and the total available, a difference of 300

items thus we need to create a dummy retailer number 4 so as to make the demand and supply

equal. Lets introduce a new column for a forth retailer.

CHAPTER 19 Transportation model 371

Table 38

From To Retailers Total

warehouse available

1 2 3 4

X 60 40 90 0 600

Y 50 30 20 0 300

Z 20 30 60 0 400

Total 400 500 100 300

required

We can now start the allocation by using Vogel method where we will introduce the penalties

row and columns

Table 39

From To Retailers Total Penalties

warehous available

e 1 2 3 4

X 60 40 90 0 600

Y 50 30 20 0 300

Z 20 30 60 0 400

Total 400 500 100 300

required

Penalties

By getting the difference between the two least numbers we get our penalty one that is

between the rows and column and the peck the highest as given below.

CHAPTER 19 Transportation model 372

Table 40

From To Retailers Total Penalties

warehouse available

P1

1 2 3 4

X 60 40 90 0 600 40

Y 50 30 20 0 300 200 20

1001

Z 20 30 60 0 400 20

Total 400 500 100 300

required 0

P1 30 0 401 0

Penalties

Let’s move to the next penalty disregarding the already column we have allocated and make the

second allocation using the highest penalty

Table 41

From To Retailers Total Penalties

warehouse available

P1 P1

1 2 3 4

3002

Y 50 30 20 0 300 200 20 20

1001

Z 20 30 60 0 400 20 20

Total 400 500 100 300

required 0 0

P1 30 0 401 0

P1 30 0 0

Penalties

Using the third penalty to make our forth allocation as given below by table 42

CHAPTER 19 Transportation model 373

Table 42

From To Retailers Total Penalties

warehouse available

P1 P2 P3

1 2 3 4

3002

Y 50 30 20 0 300 200 20 20 20

1001

Z 20 30 60 0 400 0 20 20 10

4003

Total 400 500 100 300

required 0 0 0

P1 30 0 401 0

P2 30 0 0

Penalties

P3 303 0

Make the final two allocations starting with the highest (40) and followed by (30)

Table 43

From To Retailers Total Penalties

warehouse available

P1 P2 P3

1 2 3 4

3004 3002

Y 50 30 20 0 300 200 20 20 20

2005 1001

Z 20 30 60 0 400 0 20 20 10

4003

Total 400 500 100 300

required 0 0 0

P1 30 0 401 0

P2 30 0 0

Penalties

P3 303 0

CHAPTER 19 Transportation model 374

When you examine the final table 43 to see whether the problem is basic m + n − 1 that is

4+3-1 = 6 but the allocation that we have just made are 5 and thus mean the solution is optimal.

Practice Problem

1. Naive supermarkets have four super markets in different towns at present the four

super markets are supplied from two go downs X and Y each with a capacity of 80, 000

tons per day. It is planned to expand the supermarket so that they will require 54, 000,

50, 000, 60, 000, and 70,000 per day respectively from the go down system.

To meet this and future demand Naive of planning to third go down capable of supplying

120, 000 tons per day. Two locations are being considered the transport costs in

KES/tons from each go down to each super market are given below.

downs (i) (ii) (iii) (iv)

X 7000 8500 5500 12000

Y 11000 9000 7500 11000

1 11500 11500 7000 9000

2 18500 9500 8000 7500

Required

Evaluate the two transportation model and decide which is the better location of new go

down. Assume all other cost are the same

a. Degeneracy

b. Non-unique optimal solution, in transportation problems

3. A company has been given a tender to supply maize to four drought zones. The distance

between each grains depot and each drought zone is given below.

deport (i) (ii) (iii) (iv)

A 168 172 175 183

B 156 160 158 163

C 138 140 135 145

D 147 142 140 145

CHAPTER 19 Transportation model 375

Required

a. How the maize should be distributed to the zones in order to minimize the total

distance traveled. Use Hungarian algorithm.

b. Calculate the minimum distance to be covered.

4. There are four areas that urgently need emergency food aid due to the effect of draught.

Government has food storage in the following towns. The amount available, the amount

needed per station together with the associated transportation costs are in the table

below.

From go area Total

down Turkana Kitui Kwale Marsabit available

Eldoret 180 110 150 200 200 000

Nakuru 170 140 120 130 600 000

Kitale 180 180 150 120 700 000

Total required 300 000 300 000 400 000 500 000

b) Calculate the associated total transportation cost

5. Write brief notes on the meaning of the following words as used in Transportation

Problem

a) Basic Feasible Solution

b) Optimal Solution

c) Non-Degenerate Basic Feasible Solution

6. Find the initial feasible solution of the following transportation problem by Vogel’s

Approximation Method.

Test for optimality and advice the management.

i ii iii Availability

A 16 19 12 14

B 22 13 19 16

C 14 28 8 12

Requirement 10 15 17

CHAPTER 19 Transportation model 376

7. Two warehouses supply four stores. The transportation costs from the warehouses to

the stores, the availabilities at the warehouse and requirements at the stores are given

in the table below.

warehouse item

G H I J Available

1 4 3 5 6 100

2 8 2 4 7 200

Required 50 100 75 75

b) Calculate the minimum cost of transfer

8. Expel Transporters has four large stores in different towns: Kisumu, Eldoret, Nakuru, and

Nairobi. At present the four are supplied from the warehouse A and B, each with a

capacity of 40 tons per day.

It is planned to expand the stores so that they will 27, 25, 30 and 35 tons per day

respectively from the warehouse system. To meet this future increases, it is planned to

build a third warehouse, capable to supplying 60 tons per day. Two locations are being

considered. The transport costs in thousands of shillings per tons from each warehouse

to each store are given below

Distance in kilometers

From Customers

Warehouse

A 70 85 55 120

B 110 90 75 110

New 2 135 95 80 75

CHAPTER 19 Transportation model 377

Evaluate the two transportation model and decide which is the better location the new

warehouse assuming all other costs are the same

CHAPTER 20 ASSIGNMENT MODEL

Objectives

At the end of this chapter the student should be able to do the following:

• Know and understand when to use the assignment model

• Know how to set up the initial assignment model table

• Be able move to the next improved table.

• Know how to recognize the optimum solution

• Deal with origin and destination

• To maximize and minimize a given a problem

Introduction

The assignment model is a special case of the transportation model in which the number of

origin must equal the number of the destination that is the table is a square that is the number

of rows and columns must be equal.

At the destination the demand is equal to one at the origin that is the supply is equal to one.

The commonly used such structure to solve such problem is specially designed solution called

Hungarian Algorithm

Hungarian Algorithm

This is a method that provides us with an efficient means of finding optimal solution without

having to make a direct comparison of every option.

The algorithm has three stages which are:

Stage I

Set out the problem in table format.

For each row in the table find the smallest row element and subtract it from every element in

the row.

Repeat the same for column.

CHAPTER 20 Assignment model 379

Stage II

For a feasible solution there must be exactly one assignment to every row and every column.

Find rows with only one zero in it and make an assignment to this zero. If no such row exists

begin with any zero.

Close out all the zeros in the same column.

Repeat number (i) and (ii) until no further progress can be made.

Stage III

If the solution in stage II is not feasible go on to stage III and follow the following steps;

Draw the minimum number of straight line through the rows and columns so that all zeros in

the table are covered and make sure that there are no diagonals.

Find the smallest element without a line through it.

Subtract this number from every element without a line through it.

Add the chosen number to every element with two lines through it.

Leave alone all the elements with one line through them.

This procedure has created at least one new zero return to the stage II and repeat the

procedure until the optimum solution is reached.

Example 20.1

A ferries manufacturer has four distribution ports and four order to deliver to separate country.

Each port has one ship available which is large enough to carry one of these ferries. The distance

between each port and each country are given below.

Tableau 1

(in miles)

u v w x

Ports

ii) 560 600 580 630

Iii) 380 420 350 450

iv) 470 450 400 450

Required

How should be the orders be assigned to ports in order to minimize the total distance travelled.

CHAPTER 20 Assignment model 380

Solution

Identify the smallest element in each row to set up the initial as tableau 2

Tableau 2

(in miles)

Smallest element

u v w x In each row

ii) 560 600 580 630 560

Iii) 380 420 350 450 350

iv) 470 450 400 450 400

Subtract the smallest row element from the entire element in each corresponding row as given

in the tableau 3

Tableau 3

(in miles)

u v w x

i) 0 40 70 150

ii) 0 40 20 70

Iii) 30 70 0 100

iv) 70 50 0 50

CHAPTER 20 Assignment model 381

Tableau 4

(in miles)

u v w x

i) 0 40 70 150

ii) 0 40 20 70

Iii) 30 70 0 100

iv) 70 50 0 50

0 40 0 50

Smallest element in each column

Subtract the smallest element from the entire element in each corresponding column as given

below by the tableau 5

Tableau 5

(in miles)

u v w x

i) 0 0 70 100

ii) 0 0 20 20

Iii) 30 30 0 50

iv) 70 10 0 0

Assign to any of the row or column with one zero and to that zero that is column (x) as shown

below use square to show the assignment

CHAPTER 20 Assignment model 382

Tableau 6

(in miles)

u v w x

i) 0 0 70 100

ii) 0 0 20 20

Iii) 30 30 0 50

iv) 70 10 0 0

Move to the next row or column with one zero if there is none move to the column of your

choice if it has more than one assign one and close the others in that column as shown by the

tableau 7

Tableau 7

(in miles)

u v w x

i) 0 0 70 100

ii) 0 0 20 20

Iii) 30 30 0 50

iv) 70 10 0 0

Lets move to the next column (v) and assign to one zero and close the other zero as shown in

the tableau 8

Tableau 8

(in miles)

u v w x

i) 0 0 70 100

ii) 0 0 20 20

Iii) 30 30 0 50

iv) 70 10 0 0

CHAPTER 20 Assignment model 383

Finally we can assign the last column (u) which have two zeros, thus we need to assign to one

zero and close the other zero as given below

Tableau 9

(in miles)

u v w x

i) 0 0 70 100

ii) 0 0 20 20

Iii) 30 30 0 50

iv) 70 10 0 0

Looking at the tableau 9 we can that every row and every column has one assignment that

means that the solution is feasible and we can assign as follows

Pick the corresponding amount of mile which are in the first table tableau 2 to everywhere

there is assignment.

Assign port (i) to country (u) = 680

Assign port ii) to country (v) = 600

Assign port iii) to country (w) = 350

Assign port iv) to country (x) = 450

2080 miles

Alternative assignment

We need to assign column (u) need to assign to cell ii)u as the alternative assignment as shown

below by tableau 10

CHAPTER 20 Assignment model 384

Tableau 10

(in miles)

u v w x

i) 0 0 70 100

ii) 0 0 20 20

Iii) 30 30 0 50

iv) 70 10 0 0

Assign the column (v) that is cell i)v as alternative assignment as shown below in the tableau 11

Tableau 11

(in miles)

u v w x

i) 0 0 70 100

ii) 0 0 20 20

Iii) 30 30 0 50

iv) 70 10 0 0

We have assigned every row and every column and the solution is feasible and we can make the

following assignments.

Assign port ii) to country (v) = 720

Assign port iii) to country (w) = 350

Assign port iv) to country (u) = 450

2080 miles

CHAPTER 20 Assignment model 385

Example 20.2

A company has six sales region and six sales ladies from pat experience it is known that sales

lady perform differently in different region. The company sales director has established sales for

each region. She has approached you for advice in who should take which region.

Tableau 12

lady Valley Kenya

A 68 72 75 83 75 69

B 56 60 58 63 61 59

C 35 38 40 45 25 27

D 40 42 47 45 53 36

E 62 70 68 66 69 70

F 65 63 69 70 72 68

Required

How should the sale director assign the sales ladies to the region to maximize total sales?

Solution

The problem which involves maximization require we multiply the whole table by negative as

given below by Tableau 13

Tableau 13

lady Valley Kenya

A -68 -72 -75 -83 -75 -69

B -56 -60 -58 -63 -61 -59

C -35 -38 -40 -45 -25 -27

D -40 -42 -47 -45 -53 -36

E -62 -70 -68 -66 -69 -70

F -65 -63 -69 -70 -72 -68

CHAPTER 20 Assignment model 386

After multiplying every element by negative lets identify the smallest element in each row as

given by the tableau 14

Tableau 14

Smallest element

lady Valley Kenya

In each row

A -68 -72 -75 -83 -75 -69 -83

B -56 -60 -58 -63 -61 -59 -63

C -35 -38 -40 -45 -25 -27 -45

D -40 -42 -47 -45 -53 -36 -53

E -62 -70 -68 -66 -69 -70 -70

F -65 -63 -69 -70 -72 -68 -72

Subtract the smallest element from the corresponding rows as given in the tableau 15

Tableau 15

lady Valley Kenya

A 15 11 8 0 8 14

B 7 3 5 0 2 4

C 10 7 5 0 20 18

D 13 11 6 8 0 17

E 12 0 2 4 1 0

F 7 9 3 2 0 4

Identify the smallest element in each column as given below by the tableau 16

CHAPTER 20 Assignment model 387

Tableau 16

lady Valley Kenya

A 15 11 8 0 8 14

B 7 3 5 0 2 4

C 10 7 5 0 20 18

D 13 11 6 8 0 17

E 12 0 2 4 1 0

F 7 9 3 2 0 4

7 0 2 0 0 0

Smallest element in each column

Subtract the identified smallest element in each corresponding column to obtain the table

below as given by the table 17

Tableau 17

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 11 6 0 8 14

B 0 3 3 0 2 4

C 3 7 3 0 20 18

D 6 11 4 8 0 17

E 5 0 0 4 1 0

F 0 9 1 2 0 4

From the above tableau 17 we can try to assign starting with the column with one zero and see

whether we can attain a feasible region. The tableau 18 below shows the assigned elements.

CHAPTER 20 Assignment model 388

Tableau 18

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 11 6 0 8 14

B 0 3 3 0 2 4

C 3 7 3 0 20 18

D 6 11 4 8 0 17

E 5 0 0 4 1 0

F 0 9 1 2 0 4

In the above Tableau 18 we need to draw line passing through rows and columns that have

zeros and draw as minimal lines as possible as in the tableau 19

Tableau 19

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 11 6 0 8 14

B 0 3 3 0 2 4

C 3 7 3 0 20 18

D 6 11 4 8 0 17

E 5 0 0 4 1 0

F 0 9 1 2 0 4

Identify the smallest uncovered element which is 1; add 1 to every element covered by two

lines

That is where two are intersecting each other.

CHAPTER 20 Assignment model 389

Tableau 20

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 11 6 0 8 14

B 0 3 3 0 2 4

C 3 7 3 0 20 18

D 6 11 4 8 0 17

E 5+1 0 0 4+1 1+1 0

F 0 9 1 2 0 4

Subtract 1 to every element that is not covered and the other elements which lies in the line are

supposed to remain untouched as given by the tableau 21

Tableau 21

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 11-1 6-1 0 8 14-1

B 0 3-1 3-1 0 2 4-1

C 3 7-1 3-1 0 20 18-1

D 6 11-1 4-1 8 0 17-1

E 6 0 0 5 2 0

F 0 9-1 1-1 2 0 4-1

Remember that the elements that lie on the lines where there is no intersection are supposed

to remain untouched and the table on the next page shows the final table after performing the

three operations.

We try to assign and see whether we get an assignment on each row and each column as given

below by the tableau 22, starting with the row or column that has one zero.

CHAPTER 20 Assignment model 390

Tableau 22

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 10 5 0 8 13

B 0 2 2 0 2 3

C 3 6 2 0 20 17

D 6 10 3 8 0 16

E 6 0 0 5 2 0

F 0 8 0 2 0 3

From the above allocation we can see that when we try to assign zeros in the rows and columns

the solution is no feasible because one row and one column are un assigned and thus we need

to repeat the process of drawing the lines as shown in the tableau 23

Tableau 23

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 10 5 0 8 13

B 0 2 2 0 2 3

C 3 6 2 0 20 17

D 6 10 3 8 0 16

E 6 0 0 5 2 0

F 0 8 0 2 0 3

By drawing the minimum lines possible identify the smallest element which is uncovered that is

2

Repeating the above procedure add 2 to every element in the intersections of the lines as

shown in the tableau 24

CHAPTER 20 Assignment model 391

Tableau 24

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 10 5 0 8 13

B 0 2 2 0 2 3

C 3 6 2 0 20 17

D 6 10 3 8 0 16

E 6+2 0 0 5+2 2+2 0

F 0+2 8 0 2+2 0+2 3

Subtract 2 to every element that is not covered to obtain a table as the one given below in the

tableau 25

Tableau 25

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 10-2 5-2 0 8 13-2

B 0 2-2 2-2 0 2 3-2

C 3 6-2 2-2 0 20 17-2

D 6 10-2 3-2 8 0 16-2

E 8 0 0 7 4 0

F 2 8 0 4 2 3

Now after performing the three operations of adding 2, subtracting 2 and leaving untouched the

element in the lines, we can try to assign where there are zeros and see whether the solution is

feasible. Let examine the tableau 26

CHAPTER 20 Assignment model 392

Start assigning the row or column with one zero and repeat the procedure until every row and

column are assigned.

Tableau 26

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 8 3 0 8 11

B 0 0 0 0 2 1

C 3 4 0 0 20 15

D 6 8 1 8 0 14

E 8 0 0 7 4 0

F 2 8 0 4 2 3

The above solution is not feasible and we need to redraw the lines again and make sure that the

lines are as minimal as possible that are covering all the zeros that are in the tableau 26. The

tableau 27 below shows the number of lines.

Tableau 27

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 8 3 0 8 11

B 0 0 0 0 2 1

C 3 4 0 0 20 15

D 6 8 1 8 0 14

E 8 0 0 7 4 0

F 2 8 0 4 2 3

Identify the smallest uncovered element which is 2 and add 2 to where our lines are intersecting

As in the tableau 28 below

CHAPTER 20 Assignment model 393

Tableau 28

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8 8 3 0 8 11

B 0 0 0+2 0+2 2+2 1

C 3 4 0 0 20 15

D 6 8 1 8 0 14

E 8 0 0+2 7+2 4+2 0

F 2 8 0 4 2 3

Subtract 2 from the uncovered elements and elements that are covered except those that are in

the intersection will remain untouched see tableau 29

Tableau 29

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 8-2 8-2 3 0 8 11-2

B 0 0 2 2 4 1

C 3-2 4-2 0 0 20 15-2

D 6-2 8-2 1 8 0 14-2

E 8 0 2 9 6 0

F 2-2 8-2 0 4 2 3-2

A summary for the operation is as in the tableau 30 and let try to assign and see whether the

solution is feasible

CHAPTER 20 Assignment model 394

Tableau 30

Sales Nyanza Rift Nairobi Eastern Mt. Costal

lady Valley Kenya

A 6 6 3 0 8 9

B 0 0 2 2 4 1

C 1 2 0 0 20 13

D 6 6 1 8 0 12

E 8 0 2 9 6 0

F 0 6 0 4 2 1

The solution is feasible since when you look at every column and row it is assigned and we need

to allocate as follows

Assign B to Rift Valley region 60

Assign C to Nairobi region 40

Assign D to Mt Kenya region 53

Assign E to Coast region 70

Assign F to Nyanza region 65

371

Example 20.3

A wood working firm employs six joiners, each joiner has different ability and skills and takes a

different amount of time to do each job at present. There are five joiners to be allocated the

time as given below.

Tableau 31

Joiner1 25 16 15 14 13

Joiner2 25 17 18 23 15

Joiner3 30 15 20 19 14

Joiner4 27 20 22 25 12

Joiner5 29 19 17 32 10

Joiner6 34 19 24 32 15

CHAPTER 20 Assignment model 395

Required

The joiner has to be assigned one job. How this should be done in order to minimize the total

man time needed to finish all the jobs.

S

Solution

We must establish a dummy job and get the smallest element on each row as given below by

tableau 32

Tableau 32

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 25 16 15 14 13 0

Joiner2 25 17 18 23 15 0

Joiner3 30 15 20 19 14 0

Joiner4 27 20 22 25 12 0

Joiner5 29 19 17 32 10 0

Joiner6 34 19 24 32 15 0

The smallest values in each row are zero and that will not change our table very much .

We get the smallest value in each column by just picking from the column and write them below

the table as shown by tableau 33

Tableau 33

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 25 16 15 14 13 0

Joiner2 25 17 18 23 15 0

Joiner3 30 15 20 19 14 0

Joiner4 27 20 22 25 12 0

Joiner5 29 19 17 32 10 0

Joiner6 34 19 24 32 15 0

25 15 15 14 10 0

CHAPTER 20 Assignment model 396

Get the differences from each element in the column by subtracting the difference with the

element corresponding with the columns as in tableau 34

Tableau 34

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 0 1 0 0 3 0

Joiner2 0 2 3 9 5 0

Joiner3 5 0 5 5 4 0

Joiner4 2 5 7 11 2 0

Joiner5 4 4 2 18 0 0

Joiner6 9 4 9 18 5 0

We can try to assign and see whether we can get a feasible solution as given in the tableau 35

Tableau 35

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 0 1 0 0 3 0

Joiner2 0 2 3 9 5 0

Joiner3 5 0 5 5 4 0

Joiner4 2 5 7 11 2 0

Joiner5 4 4 2 18 0 0

Joiner6 9 4 9 18 5 0

The solution above is not feasible because one row and column has not been assigned and we

need to introduce lines as given by tableau 36

CHAPTER 20 Assignment model 397

Tableau 36

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 0 1 0 0 3 0

Joiner2 0 2 3 9 5 0

Joiner3 5 0 5 5 4 0

Joiner4 2 5 7 11 2 0

Joiner5 4 4 2 18 0 0

Joiner6 9 4 9 18 5 0

This has been accomplished by drawing 5 lines making sure that all the zeros are covered as

given in the tableau 36 above

Identify the smallest value which is not covered which in our case is 2, add 2 to where the lines

are intersecting and subtract 2 to the elements which are not covered and let the other

elements which are covered remain the way they are except the operation we have done in the

intersection. See a summary in tableau 37

Tableau 37

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 0 1 0 0 3 2

Joiner2 0 2 3 9 5 2

Joiner3 5 0 5 5 4 2

Joiner4 0 3 5 9 0 0

Joiner5 4 4 2 18 0 2

Joiner6 7 2 7 16 3 0

Let try assign and see whether we can achieve a feasible solution as given by the tableau 38

CHAPTER 20 Assignment model 398

Tableau 38

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 0 1 0 0 3 2

Joiner2 0 2 3 9 5 2

Joiner3 5 0 5 5 4 2

Joiner4 0 3 5 9 0 0

Joiner5 4 4 2 18 0 2

Joiner6 7 2 7 16 3 0

The solution is not feasible and we need to repeat the same procedure of drawing as minimal as

possible number of lines as given in the tableau 39 below

Tableau 39

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 0 1 0 0 3 2

Joiner2 0 2 3 9 5 2

Joiner3 5 0 5 5 4 2

Joiner4 0 3 5 9 0 0

Joiner5 4 4 2 18 0 2

Joiner6 7 2 7 16 3 0

By identifying the smallest element value in our case we have 3 as the smallest element value

from the uncovered elements.

Lets add 3 to where the lines are intersecting, subtract 3 to the elements that are uncovered

and the rest that lie along the lines remain untouched. See tableau 40

CHAPTER 20 Assignment model 399

Tableau 40

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 3 4 0 0 3 5

Joiner2 0 2 1 6 2 2

Joiner3 5 0 2 2 1 2

Joiner4 3 6 5 9 0 3

Joiner5 7 7 2 18 0 5

Joiner6 7 2 4 13 0 0

Let’s try to assign and see whether we can get a feasible solution as shown in the tableau 41

Tableau 41

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 3 4 0 0 3 5

Joiner2 0 2 1 6 2 2

Joiner3 5 0 2 2 1 2

Joiner4 3 6 5 9 0 3

Joiner5 7 7 2 18 0 5

Joiner6 7 2 4 13 0 0

The allocation is not feasible and we required again repeating the same process until we can

achieve an optimal solution and we begin by drawing lines as minimal as possible as given by

the tableau 42

CHAPTER 20 Assignment model 400

Tableau 42

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 3 4 0 0 3 5

Joiner2 0 2 1 6 2 2

Joiner3 5 0 2 2 1 2

Joiner4 3 6 5 9 0 3

Joiner5 7 7 2 18 0 5

Joiner6 7 2 4 13 0 0

Identify the smallest element value that is not covered that is 1, add 1 to where the lines are

intersecting and subtract 1 to the elements that are not covered and leave the rest that are

lying along the lines untouched.

See the tableau 43

Tableau43

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 4 5 0 0 4 5

Joiner2 0 2 0 5 2 1

Joiner3 5 0 1 1 1 1

Joiner4 3 6 4 8 0 2

Joiner5 7 7 1 17 0 4

Joiner6 8 3 4 13 1 0

Assign the to see whether the solution is feasible and remember to assign only one zero at

every column and row and when there are more than one zero in the column close the rest

remaining zeros to avoiding assign more than time in each column.

See tableau 44

CHAPTER 20 Assignment model 401

Tableau 44

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 4 5 0 0 4 5

Joiner2 0 2 0 5 2 1

Joiner3 5 0 1 1 1 1

Joiner4 3 6 4 8 0 2

Joiner5 7 7 1 17 0 4

Joiner6 8 3 4 13 1 0

Again our allocation is no feasible and we need to identify the number of lines that covers our

zeros as shown in the tableau 45 below

Tableau 44

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 4 5 0 0 4 5

Joiner2 0 2 0 5 2 1

Joiner3 5 0 1 1 1 1

Joiner4 3 6 4 8 0 2

Joiner5 7 7 1 17 0 4

Joiner6 8 3 4 13 1 0

The smallest element value is 1 and where there is intersection we need to add 1 and subtract 1

where there are elements that are no covered and leave the rest an touched as we are familiar

with these procedure as summary is given below.

See tableau 45

CHAPTER 20 Assignment model 402

Tableau 45

Job 1 Job 2 Job 3 Job 4 Job 5 Job 6

Joiner1 4 6 0 0 5 6

Joiner2 0 3 0 5 3 2

Joiner3 4 0 0 0 1 1

Joiner4 2 6 3 7 0 2

Joiner5 6 7 0 16 0 4

Joiner6 7 3 3 12 1 0

The solution above in tableau 45 is a feasible one because every row and column have been

assigned and thus we need make the assignment to joiners to see which job they are going to

take.

Assign to joiner 1 25

Assign to joiner 2 15

Assign to joiner 3 17

Assign to joiner 4 14

Assign to joiner 5 12

Assign to joiner 6 0

83

Practice Problem

1. A company has four distribution depots and four orders to be delivered to separate

customers. Each depot has one lorry available which is large enough to carry one of

these orders. The distance between each depot and each customer is given below.

CHAPTER 20 Assignment model 403

Distance in kilometers

Depot Customers

A 68 72 75 83

B 56 60 58 63

C 38 40 35 45

D 47 42 40 45

a) How should be the order assigned to the depot in order to minimize the total

distance traveled, use Hungarian algorithm.

b) Calculate the minimum distance to be covered.

construction companies have quoted for the jobs. The quoted costs in millions of

shillings are in table below

Firms Sub-stations

A B C D

DTL 5 6 8 10

KDL 18 14 12 16

EXL 10 13 14 12

ZAP 13 10 10 16

MINT 14 11 11 10

b) Determine the minimum cost of constructing the sub-stations

c) State the construction firm that won’t be assigned any job

CHAPTER 20 Assignment model 404

3. Duport Ltd has 6 sales region and 6 sales representatives. From past experience it is

known that the sales representatives perform differently in the different areas. The

company’s. Sales Director has estimated from each sales person in each area. These are

given in the table below.

Representatives I II III IV V VI

A 680 720 750 830 750 690

B 580 600 580 630 610 590

C 350 380 400 450 250 270

D 400 420 470 450 530 360

E 620 700 680 670 690 700

F 650 630 690 690 720 680

How should the Sales Director assign the salesmen to the areas to maximize total sales?

5. The wood working firm, Crestwood Ltd, employs six joiners. Each man has different

abilities and skills and takes a different amount of time to do each job. At present,

there are five jobs to be allocated. The times are given below:

Man 1 25 16 15 14 13

Man 2 25 17 18 23 15

Man 3 30 15 20 19 14

Man 4 27 20 22 25 12

Man 5 29 19 17 32 10

a) The jobs have to be assigned one job to one man. How should this be done in

order to minimize the total man-time needed to finish all of the jobs?

CHAPTER 20 Assignment model 401

6. ANU Computer Information System (CIS) has five expert programmers. The CIS needs

five application programs to be developed. The head of the computer information

system, after studying the programs to be developed, estimates the computer time in

minutes by the experts for the application programs as follows.

Programmers

D 50 50 80 80 150

E 55 35 70 80 105

How would you assign the programs to the programmers in order to attain minimum

total computer time?

21

INVENTORY PLANNING &

CHAPTER CONTROL

Objectives

At the end of this chapter the student should be able to do the following:

world

Use the economic order quantity(EOQ) to determine how much to

order

Understand the basic stock model

Introduction

One of the consequences of changes in the economic climate is that manufacturing companies

have hard to review their policies to wants the holding and control of stocks that is both raw

materials and finished goods.

When a company that is holding stock of goods capital is tied up in the goods. This unusable

capital represents a cost to the company in the form of lost interest or investment

opportunities.

In addition the stock held will incur cost inform of storage chart personnel employed to manage

it, insurance etc.

A stock model is therefore necessary for any for any organization to help the decision makers to

determine how much to order and in production how much to produce.

The objective of the decision as to minimize the total cost associated with the holding of the

stock.

CHAPTER 21 Inventory planning and control 407

Figure 1

Order size

Re-order

Stock level

level

Lead time

Stock out

In any stock system the stock level will vary over time in cyclical patterns. The pattern of the

demand will dictate how the stock level drop at same point an order will be passed to replenish

the stock after an erupt of time known as the lead time the order will arrive and stock level will

instantly increase and now stock circle will begin.

Assumptions of EOQ

Economic order quantity (EOQ) being one of the oldest and the most commonly known

inventory techniques is still in use to today because it is easy to use but however it has several

assumptions.

1) The demand for the item is constant or approximately constant if the rate of usage is

constant.

2) The lead time also known and is constant

3) Receipt of inventory is instantaneous.

4) Cost per unit is constant throughout the year

5) The only variable cost is the cost placing an order that is ordering cost.

6) Orders are placed so that there are no shortages that are no stock outs permitted

CHAPTER 21 Inventory planning and control 408

Figure 2

Order size

Re-order

Stock level

level

Time

Lead time

D

If D items are required per year and they are ordered in batches of (q) then orders will

q

needed each year.

Annual cost of ordering = Cost of placing order × number of orders placed

The cost of placing order is given by Co

Thus the annual cost of ordering will be expressed as follows

= Co × D

Annual cost of ordering

q

This cost is based on the average amount held in stock over a single stock cycle. In simple

situation the stock level varies linearly from (q) to zero and therefore the average stock is

expressed as follows.

q+0 q

Average stock

= =

2 2

Hence the annual cost of hold the stock = Cost of holding unit for a year × Average stock held

CHAPTER 21 Inventory planning and control 409

= Ch × q

Annual cost of holding the stock

2

The total cost is given by adding all the costs and the costs that we have are the annual cost

ordering and annual cost of holding the stock.

Total cost = annual cost of ordering + annual cost of holding the stock

= Co × D

Given that annual cost of ordering

q

and

= Ch × q

annual cost of holding the stock

2

We can express the total cost as follows

TC = Co × D + Ch × q

q 2

CoD Chq

TC

= +

q 2

Example 21.1

Let’s take D = annual demand

O = order quantity

Co = cost of ordering for one order

Ch = cost of holding one item per year

q

Hence Average stock =

2

Chq

Annual cost of holding stock =

2

D

Number of order per year =

q

CoD

Annual ordering cost =

q

CHAPTER 21 Inventory planning and control 410

CoD Chq

Total cost =

TC +

q 2

The order quantity at minimum can bbe obtained by getting the derivative of the total cost in

respect to the stock (q)

CoD Chq

=TC +

q 2

dTC 1

= CoDq −1 + Chq

dq 2

1

= CoDq −1−1 + Chq1−1

2

1

= CoDq −2 + Chq 0

2

CoD Ch

= +

q2 2

dTC

When TC takes its minimum value when = 0 or when the second derivative is negative that

dq

d 2TC

is less than zero => 0

dq 2

Let us equate our derivative to its minimum that is zero.

CoD Ch

+ = 0

q2 2

And using the above we can the value of (q) or in other words making (q) the subject of the

above equation.

CoD Ch

=

q2 2

2

Cross multiply q by Cho and 2 by CoD

2CoD = q 2Ch

CHAPTER 21 Inventory planning and control 411

2CoD

= q2

Ch

2CoD

= q2

Ch

2.Co.D

q=

Ch

This optimum order quantity is known as the economic order quantity (EOQ). If this quantity is

ordered at regularly intervals through the year then the total cost of holding stocks will take its

minimum value.

2.Co.D

EOQ or (qo ) =

Ch

Example 21.2

A supermarket sells 500, 000 bars of soap annually the demand is spread evenly over the year.

The purchase for each bar is KES 40 .It cost the proprietor KES 20, 000 to place an order .the

supplier lead time is 12 working days.

The holding cost is to be 20% per year of the average stock value.

a) How many bars should be ordered at time if he wishes to minimize his total stocking

cost.

b) Determining how often the order should be placed and re-order level.

c) Assume that the shop is open for 300 days a year and a week is 6 days.

Solution

Let D = 500, 000

Co = 20, 000

= 20

Ch × 40

= 8

100

CHAPTER 21 Inventory planning and control 412

2CoD

EOQ =

Ch

2 × 20, 000 × 50, 000

=

8

= 2,500, 000, 000

= 50, 000

Taking D = 500,000 and since we have already gotten our q = 50, 000 we can get how often he

can order in a given year.

D 500, 000

= = 10 Times

q 50, 000

Within a year he should order 10 times and the shop operates for 300 days a year and thus we

can calculate the duration that the shops before it orders.

300

= 30 Days

10

Company’s which produce a number of different lines may organize their production on batch

bases rather than questions one e.g. coke may decide to make coke in the morning, sprite in the

middle morning and Fanta in the afternoon.

When the batch production is used the company has to decide how large a batch to make at

time and how often to make a batch of particular product the problem is similar to the

economic order quantity.

The ordering of a fixed quantity from an outside supplier is replaced by the [production of a

fixed amount the ordering cost is therefore replaced by the set up costs (Cs).

D q

TC Cs

= + Ch

q 2

CHAPTER 21 Inventory planning and control 413

2.Cs.D

EBQ or (qo ) =

Ch

Example 21.3

XYZ produces several brands of soft drinks these soft drinks are made on a batch production

bases at rate of 50, 000 bottle per day the demand for the most popular soft drink coke is 30,

000, 000 per year spread evenly offer the year.

Whenever a batch of coke is to be made a set up cost of KES 1, 000, 000 are incurred the

company estimate that the annual cost of holding this soft drink is KES 7.50 per bottle.

Assuming that the information given concern 300ml bottle only

How many bottles should they produce in batch if they wish to minimize the total annual cost of

production and holding?

How often should there be a production to run and how long will it last.

Assume the year has 300 days

Solution

Considering the following given information D = 30, 000, 000

Cs = 1, 000, 000

Ch = 7.50

2.Cs.D

EBQ or (qo ) =

Ch

=

7.5

= 2,828, 428

D q

TC Cs

= + Ch

q 2

CHAPTER 21 Inventory planning and control 414

1, 000, 000 × 30, 000, 000 7.5 × 2,828, 428

= +

2,828, 428 2

= = 11 Times

q 2,828, 428

q

How long will it last =

Daily demand

2,828, 428

= = 56.7

50, 000

In the situation examined so far it has assumed that the stock count is not permitted. There may

be occasion in which it is cheaper to go out of stock than to carry the size of stock needed to

avoid stock count.

Suppose a machine produces a batch of component some of which pass directly to slower

machine for immediate use the rest on stock until needed by second machine.

Instead of arriving all together and stock holding jumping firm (0 – q) the stock increase steady

during the time for which the first machines is producing and then decreases as the second

machine uses up the stock let the rate of production be P and usage be D P ≥ D

If the production cycle last for a year then the total quantity produced during a cycle is given by

Pt

q = Pt

Batch produced

q

t=

P

D (P - D)q

TC = Cs + Ch

q 2P

CHAPTER 21 Inventory planning and control 415

When we differentiate the above equation at its minimum we will get the following equation

D (P - D)q

TC = Cs + Ch

q 2P

−2CsDq + Ch

=

dq 2P

dTC

=0

dq

2CsD (P - D)

− 2 + Ch

= 0

=

q 2P

(P - D) 2CsD

= Ch

=

2P q2

2CsD. P

q=

Ch (P - D)

Example 21.4

A machine manufactures spare parts at the rate of 20, 000 per month. A second machine uses

those spare parts at the rate 50, 000 per month and remainder put into stock.

It cost KES100, 000 to set up the machine the company establish their stock hold costs 20% per

annum of the average stock value each parts costs KES 250 to make.

Required

What batch size should be produced on the first machine and what frequency.

Calculate the total variable cost of production

If the set up cost could be reduced to KES 25, 000 how mould changes affects answer (i) and (ii)

Solution

Taking Cs = 100, 000

CHAPTER 21 Inventory planning and control 416

Ch = 250 × 20% = 50

=

50

=

750, 000

= 17,889

Frequency

17,889 1

= 3 months

60, 000 2

D (P - D)q

TC = Cs + Ch

q 2P

60, 000 50(240, 000 − 60, 0000

100, 000 × +

17,889 2 × 240, 000

335, 402 + 18.75

= 335, 420.75

CHAPTER 21 Inventory planning and control 417

2CoD Ch + Cb

q=

Ch Cb

Example 21.5

Supper electronic ltd an independently tailor of electronic and audio equipment One of their

most popular iPod the demand is for 2000 a year spreading evenly over the year. These items

cost the company KES 25, 000 to buy directly from the manufacturer the cost of placing an

order is KES 125, 000 and the cost of holding the iPods in stock is charge at 15% per year of the

average stock value.

The manager is considering the stocks held of these items in order to help improve customer

cash flow.

He has established that the cost of administering an out of stock ordering system together with

a charge for many lost sales and loss of good will amount KES 2000 per iPod per year.

a) Determine the value of total variable cost of stock the iPod if stock out are not

permitted.

b) How much could be saved if a system of planned shortages was introduced

Solution

Given that

CHAPTER 21 Inventory planning and control 418

D = 2000

Co = 125, 000

Ch = 15 ×125, 000 =

3750

100

2CoD

EOQ = q =

Ch

=

3750

= 365.1

D q

TC = Co + Ch

q 2

2000 365.1

= 125, 000 × + 3750 ×

365.1 2

= 684743.9 + 684562.5

= 1,369,306.4

2CoD Ch+Cb

q =

Ch Cb

q =

3750 2000

= 133,333.333 × 2.875

= 383,332

CHAPTER 21 Inventory planning and control 419

= 619

22

D q − s CbS

TC =

Co + Ch +

Ch Cb 2q

2CoD Ch

S is given by:

Ch Ch + Cb

2 2

D q - s CbS

TC = Co + Ch +

Ch Cb 2q

2CoD Ch

S is given by

Ch Ch + Cb

= 294.88

3750 3750 + 200

therefore

2 2

125, 000 × 2000

TC = + 3750

619 2 × 619 2 × 619

= 862, 447.50

= 1,369,306.4 − 862, 442.50 = 506,858.90

CHAPTER 21 Inventory planning and control 420

Practice Problem

1. Telfix Ltd is a mobile phone company. The demand for the phone is

12,500 per annum. Telfix buy the phones for KES 900 each. The ordering

costs are KES 15,000 per order and the stock costs are KES 30 per phone

per annum.

a) Calculate the optimum order quantity.

b) Currently the company is ordering in batches of 300 phones.

How much will they save each year if they change to the order

quantity found in part (a)

equipment. One of their most popular iPod the demand is for 4000 a

year spreading evenly over the year. These items cost the company KES

50, 000 to buy directly from the manufacturer the cost of placing an

order is KES 250, 000 and the cost of holding the iPods in stock is charge

at 15% per year of the average stock value. The manager is considering

the stocks held of these items in order to help improve customer cash

flow.

He has established that the cost of administering an out of stock

ordering system together with a charge for many lost sales and loss of

good will amount KES 4000 per iPod per year.

stock out are not permitted.

b) How much could be saved if a system of planned shortages was

introduced.

3. Megafix Ltd retails Kodax camera in Kenya. On its line is Kodax 10.0

special. The demand for the camera is 6 per week. Megafix buys the

camera for KES 20,000 each. The ordering costs are KES 1.2 million per

order and the stockholding costs are KES 1000 per camera of average

stock per year plus 15% per annum of the average stock value. Assume

50 weeks per year.

a) What is the optimum order quantity

b) Currently Megafix Ltd is ordering in batches of 500 cameras.

How much money will they save each year if they change to

order quantity found in (a) above.

APPENDICES 421

Z

Cumulative probabilities for NEGATIVE z-values are shown in the following table:

z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09

-3.4 0.0003 0.0003 0.0003 0.0003 0.0003 0.0003 0.0003 0.0003 0.0003 0.0002

-3.3 0.0005 0.0005 0.0005 0.0004 0.0004 0.0004 0.0004 0.0004 0.0004 0.0003

-3.2 0.0007 0.0007 0.0006 0.0006 0.0006 0.0006 0.0006 0.0005 0.0005 0.0005

-3.1 0.0010 0.0009 0.0009 0.0009 0.0008 0.0008 0.0008 0.0008 0.0007 0.0007

-3.0 0.0013 0.0013 0.0013 0.0012 0.0012 0.0011 0.0011 0.0011 0.0010 0.0010

-2.9 0.0019 0.0018 0.0018 0.0017 0.0016 0.0016 0.0015 0.0015 0.0014 0.0014

-2.8 0.0026 0.0025 0.0024 0.0023 0.0023 0.0022 0.0021 0.0021 0.0020 0.0019

-2.7 0.0035 0.0034 0.0033 0.0032 0.0031 0.0030 0.0029 0.0028 0.0027 0.0026

-2.6 0.0047 0.0045 0.0044 0.0043 0.0041 0.0040 0.0039 0.0038 0.0037 0.0036

-2.5 0.0062 0.0060 0.0059 0.0057 0.0055 0.0054 0.0052 0.0051 0.0049 0.0048

-2.4 0.0082 0.0080 0.0078 0.0075 0.0073 0.0071 0.0069 0.0068 0.0066 0.0064

-2.3 0.0107 0.0104 0.0102 0.0099 0.0096 0.0094 0.0091 0.0089 0.0087 0.0084

-2.2 0.0139 0.0136 0.0132 0.0129 0.0125 0.0122 0.0119 0.0116 0.0113 0.0110

-2.1 0.0179 0.0174 0.0170 0.0166 0.0162 0.0158 0.0154 0.0150 0.0146 0.0143

-2.0 0.0228 0.0222 0.0217 0.0212 0.0207 0.0202 0.0197 0.0192 0.0188 0.0183

-1.9 0.0287 0.0281 0.0274 0.0268 0.0262 0.0256 0.0250 0.0244 0.0239 0.0233

-1.8 0.0359 0.0351 0.0344 0.0336 0.0329 0.0322 0.0314 0.0307 0.0301 0.0294

-1.7 0.0446 0.0436 0.0427 0.0418 0.0409 0.0401 0.0392 0.0384 0.0375 0.0367

-1.6 0.0548 0.0537 0.0526 0.0516 0.0505 0.0495 0.0485 0.0475 0.0465 0.0455

-1.5 0.0668 0.0655 0.0643 0.0630 0.0618 0.0606 0.0594 0.0582 0.0571 0.0559

-1.4 0.0808 0.0793 0.0778 0.0764 0.0749 0.0735 0.0721 0.0708 0.0694 0.0681

-1.3 0.0968 0.0951 0.0934 0.0918 0.0901 0.0885 0.0869 0.0853 0.0838 0.0823

-1.2 0.1151 0.1131 0.1112 0.1093 0.1075 0.1056 0.1038 0.1020 0.1003 0.0985

-1.1 0.1357 0.1335 0.1314 0.1292 0.1271 0.1251 0.1230 0.1210 0.1190 0.1170

-1.0 0.1587 0.1562 0.1539 0.1515 0.1492 0.1469 0.1446 0.1423 0.1401 0.1379

-0.9 0.1841 0.1814 0.1788 0.1762 0.1736 0.1711 0.1685 0.1660 0.1635 0.1611

-0.8 0.2119 0.2090 0.2061 0.2033 0.2005 0.1977 0.1949 0.1922 0.1894 0.1867

-0.7 0.2420 0.2389 0.2358 0.2327 0.2296 0.2266 0.2236 0.2206 0.2177 0.2148

-0.6 0.2743 0.2709 0.2676 0.2643 0.2611 0.2578 0.2546 0.2514 0.2483 0.2451

-0.5 0.3085 0.3050 0.3015 0.2981 0.2946 0.2912 0.2877 0.2843 0.2810 0.2776

-0.4 0.3446 0.3409 0.3372 0.3336 0.3300 0.3264 0.3228 0.3192 0.3156 0.3121

-0.3 0.3821 0.3783 0.3745 0.3707 0.3669 0.3632 0.3594 0.3557 0.3520 0.3483

-0.2 0.4207 0.4168 0.4129 0.4090 0.4052 0.4013 0.3974 0.3936 0.3897 0.3859

-0.1 0.4602 0.4562 0.4522 0.4483 0.4443 0.4404 0.4364 0.4325 0.4286 0.4247

0.0 0.5000 0.4960 0.4920 0.4880 0.4840 0.4801 0.4761 0.4721 0.4681 0.4641

APPENDICES 422

Standard Normal Cumulative Probability Table

Cumulative probabilities for POSITIVE z-values are shown in the following

table: Z

z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09

0.0 0.5000 0.5040 0.5080 0.5120 0.5160 0.5199 0.5239 0.5279 0. 5319 0.5359

0.1 0.5398 0.5438 0.5478 0.5517 0.5557 0.5596 0.5636 0.5675 0.5714 0.5753

0.2 0.5793 0.5832 0.5871 0.5910 0.5948 0.5987 0.6026 0.6064 0.6103 0.6141

0.3 0.6179 0.6217 0.6255 0.6293 0.6331 0.6368 0.6406 0.6443 0.6480 0.6517

0.4 0.6554 0.6591 0.6628 0.6664 0.6700 0.6736 0.6772 0.6808 0.6844 0.6879

0.5 0.6915 0.6950 0.6985 0.7019 0.7054 0.7088 0.7123 0.7157 0.7190 0.7224

0.6 0.7257 0.7291 0.7324 0.7357 0.7389 0.7422 0.7454 0.7486 0.7517 0.7549

0.7 0.7580 0.7611 0.7642 0.7673 0.7704 0.7734 0.7764 0.7794 0.7823 0.7852

0.8 0.7881 0.7910 0.7939 0.7967 0.7995 0.8023 0.8051 0.8078 0.8106 0.8133

0.9 0.8159 0.8186 0.8212 0.8238 0.8264 0.8289 0.8315 0.8340 0.8365 0.8389

1.0 0.8413 0.8438 0.8461 0.8485 0.8508 0.8531 0.8554 0.8577 0.8599 0.8621

1.1 0.8643 0.8665 0.8686 0.8708 0.8729 0.8749 0.8770 0.8790 0.8810 0.8830

1.2 0.8849 0.8869 0.8888 0.8907 0.8925 0.8944 0.8962 0.8980 0.8997 0.9015

1.3 0.9032 0.9049 0.9066 0.9082 0.9099 0.9115 0.9131 0.9147 0.9162 0.9177

1.4 0.9192 0.9207 0.9222 0.9236 0.9251 0.9265 0.9279 0.9292 0.9306 0.9319

1.5 0.9332 0.9345 0.9357 0.9370 0.9382 0.9394 0.9406 0.9418 0.9429 0.9441

1.6 0.9452 0.9463 0.9474 0.9484 0.9495 0.9505 0.9515 0.9525 0.9535 0.9545

1.7 0.9554 0.9564 0.9573 0.9582 0.9591 0.9599 0.9608 0.9616 0.9625 0.9633

1.8 0.9641 0.9649 0.9656 0.9664 0.9671 0.9678 0.9686 0.9693 0.9699 0.9706

1.9 0.9713 0.9719 0.9726 0.9732 0.9738 0.9744 0.9750 0.9756 0.9761 0.9767

2.0 0.9772 0.9778 0.9783 0.9788 0.9793 0.9798 0.9803 0.9808 0.9812 0.9817

2.1 0.9821 0.9826 0.9830 0.9834 0.9838 0.9842 0.9846 0.9850 0.9854 0.9857

2.2 0.9861 0.9864 0.9868 0.9871 0.9875 0.9878 0.9881 0.9884 0.9887 0.9890

2.3 0.9893 0.9896 0.9898 0.9901 0.9904 0.9906 0.9909 0.9911 0.9913 0.9916

2.4 0.9918 0.9920 0.9922 0.9925 0.9927 0.9929 0.9931 0.9932 0.9934 0.9936

2.5 0.9938 0.9940 0.9941 0.9943 0.9945 0.9946 0.9948 0.9949 0.9951 0.9952

2.6 0.9953 0.9955 0.9956 0.9957 0.9959 0.9960 0.9961 0.9962 0.9963 0.9964

2.7 0.9965 0.9966 0.9967 0.9968 0.9969 0.9970 0.9971 0.9972 0.9973 0.9974

2.8 0.9974 0.9975 0.9976 0.9977 0.9977 0.9978 0.9979 0.9979 0.9980 0.9981

2.9 0.9981 0.9982 0.9982 0.9983 0.9984 0.9984 0.9985 0.9985 0.9986 0.9986

3.0 0.9987 0.9987 0.9987 0.9988 0.9988 0.9989 0.9989 0.9989 0.9990 0.9990

3.1 0.9990 0.9991 0.9991 0.9991 0.9992 0.9992 0.9992 0.9992 0.9993 0.9993

3.2 0.9993 0.9993 0.9994 0.9994 0.9994 0.9994 0.9994 0.9995 0.9995 0.9995

3.3 0.9995 0.9995 0.9995 0.9996 0.9996 0.9996 0.9996 0.9996 0.9996 0.9997

3.4 0.9997 0.9997 0.9997 0.9997 0.9997 0.9997 0.9997 0.9997 0.9997 0.9998

APPENDICES 423

Standard Normal Distribution: Table Values Represent AREA to the LEFT of the Z score.

Z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09

-3.9 .00005 .00005 .00004 .00004 .00004 .00004 .00004 .00004 .00003 .00003

-3.8 .00007 .00007 .00007 .00006 .00006 .00006 .00006 .00005 .00005 .00005

-3.7 .00011 .00010 .00010 .00010 .00009 .00009 .00008 .00008 .00008 .00008

-3.6 .00016 .00015 .00015 .00014 .00014 .00013 .00013 .00012 .00012 .00011

-3.5 .00023 .00022 .00022 .00021 .00020 .00019 .00019 .00018 .00017 .00017

-3.4 .00034 .00032 .00031 .00030 .00029 .00028 .00027 .00026 .00025 .00024

-3.3 .00048 .00047 .00045 .00043 .00042 .00040 .00039 .00038 .00036 .00035

-3.2 .00069 .00066 .00064 .00062 .00060 .00058 .00056 .00054 .00052 .00050

-3.1 .00097 .00094 .00090 .00087 .00084 .00082 .00079 .00076 .00074 .00071

-3.0 .00135 .00131 .00126 .00122 .00118 .00114 .00111 .00107 .00104 .00100

-2.9 .00187 .00181 .00175 .00169 .00164 .00159 .00154 .00149 .00144 .00139

-2.8 .00256 .00248 .00240 .00233 .00226 .00219 .00212 .00205 .00199 .00193

-2.7 .00347 .00336 .00326 .00317 .00307 .00298 .00289 .00280 .00272 .00264

-2.6 .00466 .00453 .00440 .00427 .00415 .00402 .00391 .00379 .00368 .00357

-2.5 .00621 .00604 .00587 .00570 .00554 .00539 .00523 .00508 .00494 .00480

-2.4 .00820 .00798 .00776 .00755 .00734 .00714 .00695 .00676 .00657 .00639

-2.3 .01072 .01044 .01017 .00990 .00964 .00939 .00914 .00889 .00866 .00842

-2.2 .01390 .01355 .01321 .01287 .01255 .01222 .01191 .01160 .01130 .01101

-2.1 .01786 .01743 .01700 .01659 .01618 .01578 .01539 .01500 .01463 .01426

-2.0 .02275 .02222 .02169 .02118 .02068 .02018 .01970 .01923 .01876 .01831

-1.9 .02872 .02807 .02743 .02680 .02619 .02559 .02500 .02442 .02385 .02330

-1.8 .03593 .03515 .03438 .03362 .03288 .03216 .03144 .03074 .03005 .02938

-1.7 .04457 .04363 .04272 .04182 .04093 .04006 .03920 .03836 .03754 .03673

-1.6 .05480 .05370 .05262 .05155 .05050 .04947 .04846 .04746 .04648 .04551

-1.5 .06681 .06552 .06426 .06301 .06178 .06057 .05938 .05821 .05705 .05592

-1.4 .08076 .07927 .07780 .07636 .07493 .07353 .07215 .07078 .06944 .06811

-1.3 .09680 .09510 .09342 .09176 .09012 .08851 .08691 .08534 .08379 .08226

-1.2 .11507 .11314 .11123 .10935 .10749 .10565 .10383 .10204 .10027 .09853

-1.1 .13567 .13350 .13136 .12924 .12714 .12507 .12302 .12100 .11900 .11702

-1.0 .15866 .15625 .15386 .15151 .14917 .14686 .14457 .14231 .14007 .13786

-0.9 .18406 .18141 .17879 .17619 .17361 .17106 .16853 .16602 .16354 .16109

-0.8 .21186 .20897 .20611 .20327 .20045 .19766 .19489 .19215 .18943 .18673

-0.7 .24196 .23885 .23576 .23270 .22965 .22663 .22363 .22065 .21770 .21476

-0.6 .27425 .27093 .26763 .26435 .26109 .25785 .25463 .25143 .24825 .24510

-0.5 .30854 .30503 .30153 .29806 .29460 .29116 .28774 .28434 .28096 .27760

-0.4 .34458 .34090 .33724 .33360 .32997 .32636 .32276 .31918 .31561 .31207

-0.3 .38209 .37828 .37448 .37070 .36693 .36317 .35942 .35569 .35197 .34827

-0.2 .42074 .41683 .41294 .40905 .40517 .40129 .39743 .39358 .38974 .38591

-0.1 .46017 .45620 .45224 .44828 .44433 .44038 .43644 .43251 .42858 .42465

-0.0 .50000 .49601 .49202 .48803 .48405 .48006 .47608 .47210 .46812 .46414

APPENDICES 424

Standard Normal Distribution: Table Values Represent AREA to the LEFT of the Z score.

Z .00 .01 .02 .03 .04 .05 .06 .07 .08 .09

0.0 .50000 .50399 .50798 .51197 .51595 .51994 .52392 .52790 .53188 .53586

0.1 .53983 .54380 .54776 .55172 .55567 .55962 .56356 .56749 .57142 .57535

0.2 .57926 .58317 .58706 .59095 .59483 .59871 .60257 .60642 .61026 .61409

0.3 .61791 .62172 .62552 .62930 .63307 .63683 .64058 .64431 .64803 .65173

0.4 .65542 .65910 .66276 .66640 .67003 .67364 .67724 .68082 .68439 .68793

0.5 .69146 .69497 .69847 .70194 .70540 .70884 .71226 .71566 .71904 .72240

0.6 .72575 .72907 .73237 .73565 .73891 .74215 .74537 .74857 .75175 .75490

0.7 .75804 .76115 .76424 .76730 .77035 .77337 .77637 .77935 .78230 .78524

0.8 .78814 .79103 .79389 .79673 .79955 .80234 .80511 .80785 .81057 .81327

0.9 .81594 .81859 .82121 .82381 .82639 .82894 .83147 .83398 .83646 .83891

1.0 .84134 .84375 .84614 .84849 .85083 .85314 .85543 .85769 .85993 .86214

1.1 .86433 .86650 .86864 .87076 .87286 .87493 .87698 .87900 .88100 .88298

1.2 .88493 .88686 .88877 .89065 .89251 .89435 .89617 .89796 .89973 .90147

1.3 .90320 .90490 .90658 .90824 .90988 .91149 .91309 .91466 .91621 .91774

1.4 .91924 .92073 .92220 .92364 .92507 .92647 .92785 .92922 .93056 .93189

1.5 .93319 .93448 .93574 .93699 .93822 .93943 .94062 .94179 .94295 .94408

1.6 .94520 .94630 .94738 .94845 .94950 .95053 .95154 .95254 .95352 .95449

1.7 .95543 .95637 .95728 .95818 .95907 .95994 .96080 .96164 .96246 .96327

1.8 .96407 .96485 .96562 .96638 .96712 .96784 .96856 .96926 .96995 .97062

1.9 .97128 .97193 .97257 .97320 .97381 .97441 .97500 .97558 .97615 .97670

2.0 .97725 .97778 .97831 .97882 .97932 .97982 .98030 .98077 .98124 .98169

2.1 .98214 .98257 .98300 .98341 .98382 .98422 .98461 .98500 .98537 .98574

2.2 .98610 .98645 .98679 .98713 .98745 .98778 .98809 .98840 .98870 .98899

2.3 .98928 .98956 .98983 .99010 .99036 .99061 .99086 .99111 .99134 .99158

2.4 .99180 .99202 .99224 .99245 .99266 .99286 .99305 .99324 .99343 .99361

2.5 .99379 .99396 .99413 .99430 .99446 .99461 .99477 .99492 .99506 .99520

2.6 .99534 .99547 .99560 .99573 .99585 .99598 .99609 .99621 .99632 .99643

2.7 .99653 .99664 .99674 .99683 .99693 .99702 .99711 .99720 .99728 .99736

2.8 .99744 .99752 .99760 .99767 .99774 .99781 .99788 .99795 .99801 .99807

2.9 .99813 .99819 .99825 .99831 .99836 .99841 .99846 .99851 .99856 .99861

3.0 .99865 .99869 .99874 .99878 .99882 .99886 .99889 .99893 .99896 .99900

3.1 .99903 .99906 .99910 .99913 .99916 .99918 .99921 .99924 .99926 .99929

3.2 .99931 .99934 .99936 .99938 .99940 .99942 .99944 .99946 .99948 .99950

3.3 .99952 .99953 .99955 .99957 .99958 .99960 .99961 .99962 .99964 .99965

3.4 .99966 .99968 .99969 .99970 .99971 .99972 .99973 .99974 .99975 .99976

3.5 .99977 .99978 .99978 .99979 .99980 .99981 .99981 .99982 .99983 .99983

3.6 .99984 .99985 .99985 .99986 .99986 .99987 .99987 .99988 .99988 .99989

3.7 .99989 .99990 .99990 .99990 .99991 .99991 .99992 .99992 .99992 .99992

3.8 .99993 .99993 .99993 .99994 .99994 .99994 .99994 .99995 .99995 .99995

3.9 .99995 .99995 .99996 .99996 .99996 .99996 .99996 .99996 .99997 .99997

APPENDICES 425

Time Value of Money

Present Value of Annuity Factors

n/r 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 .9901 .9804 .9709 .9615 .9524 .9434 .9346 .9259 .9174 .9091

2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355

3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869

4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699

5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908

6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553

7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684

8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349

9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590

10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446

11 10.3676 9.7868 9.2526 8.7605 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951

12 11.2551 10.5753 9.9540 9.3851 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137

13 12.1337 11.3484 10.6350 9.9856 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034

14 13.0037 12.1062 11.2961 10.5631 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667

15 13.8651 12.8493 11.9379 11.1184 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061

16 14.7179 13.5777 12.5611 11.6523 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237

17 15.5623 14.2919 13.1661 12.1657 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216

18 16.3983 14.9920 13.7535 12.6593 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014

19 17.2260 15.6785 14.3238 13.1339 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649

20 18.0456 16.3514 14.8775 13.5903 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136

21 18.8570 17.0112 15.4150 14.0292 12.8212 11.7641 10.8355 10.0168 9.2922 8.6487

22 19.6604 17.6580 15.9369 14.4511 13.1630 12.0416 11.0612 10.2007 9.4424 8.7715

23 20.4558 18.2922 16.4436 14.8568 13.4886 12.3034 11.2722 10.3711 9.5802 8.8832

24 21.2434 18.9139 16.9355 15.2470 13.7986 12.5504 11.4693 10.5288 9.7066 8.9847

25 22.0232 19.5235 17.4131 15.6221 14.0939 12.7834 11.6536 10.6748 9.8226 8.0770

26 22.7952 20.1210 17.8768 15.9828 14.3752 13.0032 11.8258 10.8100 9.9290 9.1609

27 23.5596 20.7069 18.3270 16.3296 14.6430 13.2105 11.9867 10.9352 10.0266 9.2372

28 24.3164 21.2813 18.7641 16.6631 14.8981 13.4062 12.1371 11.0511 10.1161 9.3066

29 25.0658 21.8444 19.1885 16.9837 15.1411 13.5907 12.2777 11.1584 10.1983 9.3696

30 25.8077 22.3965 19.6004 17.2920 15.3725 13.7648 12.4090 11.2578 10.2737 9.4269

31 26.5423 22.9377 20.0004 17.5885 15.5928 13.9291 12.5318 11.3498 10.3428 9.4790

32 27.2696 23.4683 20.3888 17.8736 15.8027 14.0840 12.6466 11.4350 10.4062 9.5264

33 27.9897 23.9886 20.7658 18.1476 16.0025 14.2302 12.7538 11.5139 10.4644 9.5694

34 28.7027 24.4986 21.1318 18.4112 16.1929 14.3681 12.8540 11.5869 10.5178 9.6086

35 29.4086 24.9986 21.4872 18.6646 16.3742 14.4982 12.9477 11.6546 10.5668 9.6442

36 30.1075 25.4888 21.8323 18.9083 16.5469 14.6210 13.0352 11.7172 10.6118 9.6765

37 30.7995 25.9695 22.1672 19.1426 16.7113 14.7368 13.1170 11.7752 10.6530 9.7059

38 31.4847 26.4406 22.4925 19.3679 16.8679 14.8460 13.1935 11.8289 10.6908 9.7327

39 32.1630 26.9026 22.8082 19.5845 17.0170 14.9491 13.2649 11.8786 10.7255 9.7570

40 32.8347 27.3555 23.1148 19.7928 17.1591 15.0463 13.3317 11.9246 10.7574 9.7791

41 33.4997 27.7995 23.4124 19.9931 17.2944 15.1380 13.3941 11.9672 10.7866 9.7991

42 34.1581 28.2348 23.7014 20.1856 17.4232 15.2245 13.4524 12.0067 10.8134 9.8174

43 34.8100 28.6616 23.9819 20.3708 17.5459 15.3062 13.5070 12.0432 10.8380 9.8340

44 35.4555 29.0800 24.2543 20.5488 17.6628 15.3832 13.5579 12.0771 10.8605 9.8491

45 36.0945 29.4902 24.5187 20.7200 17.7741 15.4558 13.6055 12.1084 10.8812 9.8628

46 36.7272 29.8923 24.7754 20.8847 17.8801 15.5244 13.6500 12.1374 10.9002 9.8753

47 37.3537 30.2866 25.0247 21.0429 17.9810 15.5890 13.6916 12.1643 10.9176 9.8&66

48 37.9740 30.6731 25.2667 21.1951 18.0772 15.6500 13.7305 12.1891 10.9336 9.8969

49 38.5881 31.0521 25.5017 21.3415 18.1687 15.7076 13.7668 12.2122 10.9482 9.9063

50 39.1961 31.4236 25.7298 21.4822 18.2559 15.7619 13.8007 12.2335 10.9617 9.9148

APPENDICES 426

Time Value of Money

Present Value of Annuity Factors

n/r 11% 12% 13% 14% 15% 16% 17% 18% 19%

1 .9009 .8929 .8850 .8772 .8696 .8621 .8547 .8475 .8403

2 1.7125 1.6901 1.6681 1.6467 1.6257 1.6052 1.5852 1.5656 1.5465

3 2.4437 2.4018 2.3612 2.3216 2.2832 2.2459 2.2096 2.1743 2.1399

4 3.1024 3.0373 2.9745 2.9137 2.8550 2.7982 2.7432 2.6901 2.6386

5 3.6959 3.6048 3.5172 3.4331 3.3522 3.2743 3.1993 3.1272 3.0576

6 4.2305 4.1114 3.9976 3.8887 3.7845 3.6847 3.5892 3.4976 3.4098

7 4.7122 4.5638 4.4226 4.2883 4.1604 4.0386 3.9224 3.8115 3.7057

8 5.1461 4.9676 4.7988 4.6389 4.4873 4.3436 4.2072 4.0776 3.9544

9 5.5370 5.3283 5.1317 4.9464 4.7716 4.6065 4.4506 4.3030 4.1633

10 5.8892 5.6502 5.4262 5.2161 5.0188 4.8332 4.6586 4.4941 4.3389

11 6.2065 5.9377 5.6869 5.4527 5.2337 5.0286 4.8364 4.6560 4.4865

12 6.4924 6.1944 5.9176 5.6603 5.4206 5.1971 4.9884 4.7932 4.6105

13 6.7499 6.4235 6.1218 5.8424 5.5831 5.3423 5.1183 4.9095 4.7147

14 6.9819 6.6282 6.3025 6.0021 5.7245 5.4675 5.2293 5.0081 4.8023

15 7.1909 6.8109 6.4624 6.1422 5.8474 5.5755 5.3242 5.0916 4.8759

16 7.3792 6.9740 6.6039 6.2651 5.9542 5.6685 5.4053 5.1624 4.9377

17 7.5488 7.1196 6.7291 6.3729 6.0472 5.7487 5.4746 5.2223 4.9897

18 7.7016 7.2497 6.8399 6.4674 6.1280 5.8178 5.5339 5.2732 5.0333

19 7.8393 7.3658 6.9380 6.5504 6.1982 5.8775 5.5845 5.3162 5.0700

20 7.9633 7.4694 7.0248 6.6231 6.2593 5.9288 5.6278 5.3527 5.1009

21 8.0751 7.5620 7.1016 6.6870 6.3125 5.9731 5.6648 5.3837 5.1268

22 8.1757 7.6446 7.1695 6.7429 6.3587 6.0113 5.6964 5.4099 5.1486

23 8.2664 7.7184 7.2297 6.7921 6.3988 6.0442 5.7234 5.4321 5.1668

24 8.3481 7.7843 7.2829 6.8351 6.4338 6.0726 5.7465 5.4509 5.1822

25 8.4217 7.8431 7.3300 6.8729 6.4641 6.0971 5.7662 5.4669 5.1951

26 8.4881 7.8957 7.3717 6.9061 6.4906 6.1182 5.7831 5.4804 5.2060

27 8.5478 7.9426 7.4086 6.9352 6.5135 6.1364 5.7975 5.4919 5.2151

28 8.6016 7.9844 7.4412 6.9607 6.5335 6.1520 5.8099 5.5016 5.2228

29 8.6501 8.0218 7.4701 6.9830 6.5509 6.1656 5.8204 5.5098 5.2292

30 8.6938 8.0552 7.4957 7.0027 6.5660 6.1772 5.8294 5.5168 5.2347

31 8.7331 8.0850 7.5183 7.0199 6.5791 6.1872 5.8371 5.5227 5.2392

32 8.7686 8.1116 7.5383 7.0350 6.5905 6.1959 5.8437 5.5277 5.2430

33 8.8005 8.1354 7.5560 7.0482 6.6005 6.2034 5.8493 5.5320 5.2462

34 8.8293 8.1566 7.5717 7.0599 6.6091 6.2098 5.8541 5.5356 5.2489

35 8.8552 8.1755 7.5856 7.0700 6.6166 6.2153 5.8582 5.5386 5.2512

36 8.8786 8.1924 7.5979 7.0790 6.6231 6.2201 5.8617 5.5412 5.2531

37 8.8996 8.2075 7.6087 7.0868 6.6288 6.2242 5.8647 5.5434 5.2547

38 8.9186 8.2210 7.6183 7.0937 6.6338 6.2278 5.8673 5.5452 5.2561

39 8.9357 8.2330 7.6268 7.0997 6.6380 6.2309 5.8695 5.5468 5.2572

40 8.9511 8.2438 7.6344 7.1050 6.6418 6.2335 5.8713 5.5482 5.2582

41 8.9649 8.2534 7.6410 7.1097 6.6450 6.2358 5.8729 5.5493 5.2590

42 8.9774 8.2619 7.6469 7.1138 6.6478 6.2377 5.8743 5.5502 5.2596

43 8.9886 8.2696 7.6522 7.1173 6.6503 6.2394 5.8755 5.5510 5.2602

44 8.9988 8.2764 7.6568 7.1205 6.6524 6.2409 5.8765 5.5517 5.2607

45 9.0079 8.2825 7.6609 7.1232 6.6543 6.2421 5.8773 5.5523 5.2611

46 9.0161 8.2880 7.6645 7.1256 6.6559 6.2432 5.8781 5.5528 5.2614

47 9.0235 8.2928 7.6677 7.1277 6.6573 6.2442 5.8787 5.5532 5.2617

48 9.0302 8.2972 7.6705 7.1296 6.6585 6.2450 5.8792 5.5536 5.2619

49 9.0362 8.3010 7.6730 7.1312 6.6596 6.2457 5.8797 5.5539 5.2621

50 9.0417 8.3045 7.6752 7.1327 6.6605 6.2463 5.8801 5.5541 5.2623

APPENDICES 427

Present Value Factor for a Single Future Amount

(Interest rate = r, Number of periods = n)

n/r 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

1 .9901 .9804 .9709 .9615 .9524 .9434 .9346 .9259 .9174 .9091

2 .9803 .9612 .9426 .9246 .9070 .8900 .8734 .8573 .8417 .8264

3 .9707 .9423 .9151 .8890 .8638 .8396 .8163 .7938 .7722 .7513

4 .9610 .9238 .8885 .8548 .8227 .7921 .7629 .7350 .7084 .6830

5 .9515 .9057 .8626 .8219 .7835 .7473 .7130 .6806 .6499 .6209

6 .9420 .8880 .8375 .7903 .7462 .7050 .6663 .6302 .5963 .5645

7 .9327 .8706 .8131 .7599 .7107 .6651 .6228 .5835 .5470 .5132

8 .9235 .8535 .7894 .7307 .6768 .6274 .5820 .5403 .5019 .4665

9 .9143 .8368 .7664 .7026 .6446 .5919 .5439 .5002 .4604 .4241

10 .9053 .8203 .7441 .6756 .6139 .5584 .5083 .4632 .4224 .3855

11 .8963 .8043 .7224 .6496 .5847 .5268 .4751 .4289 .3875 .3505

12 .8874 .7885 .7014 .6246 .5568 .4970 .4440 .3971 .3555 .3186

13 .8787 .7730 .6810 .6006 .5303 .4688 .4150 .3677 .3262 .2897

14 .8700 .7579 .6611 .5775 .5051 .4423 .3878 .3405 .2992 .2633

15 .8613 .7430 .6419 .5553 .4810 .4173 .3624 .3152 .2745 .2394

16 .8528 .7284 .6232 .5339 .4581 .3936 .3387 .2919 .2519 .2176

17 .8444 .7142 .6050 .5134 .4363 .3714 .3166 .2703 .2311 .1978

18 .8360 .7002 .5874 .4936 .4155 .3503 .2959 .2502 .2120 .1799

19 .8277 .6864 .5703 .4746 .3957 .3305 .2765 .2317 .1945 .1635

20 .8195 .6730 .5537 .4564 .3769 .3118 .2584 .2145 .1784 .1486

21 .8114 .6598 .5375 .4388 .3589 .2942 .2415 .1987 .1637 .1351

22 .8034 .6468 .5219 .4220 .3419 .2775 .2257 .1839 .1502 .1228

23 .7954 .6342 .5067 .4057 .3256 .2618 .2109 .1703 .1378 .1117

24 .7876 .6217 .4919 .3901 .3101 .2470 .1971 .1577 .1264 .1015

25 .7798 .6095 .4776 .3751 .2953 .2330 .1842 .1460 .1160 .0923

26 .7720 .5976 .4637 .3607 .2812 .2198 .1722 .1352 .1064 .0839

27 .7644 .5859 .4502 .3468 .2678 .2074 .1609 .1252 .0976 .0763

28 .7568 .5744 .4371 .3335 .2551 .1956 .1504 .1159 .0895 .0693

29 .7493 .5631 .4243 .3207 .2429 .1846 .1406 .1073 .0822 .0630

30 .7419 .5521 .4120 .3083 .2314 .1741 .1314 .0994 .0754 .0573

31 .7346 .5412 .4000 .2965 .2204 .1643 .1228 .0920 .0691 .0521

32 .7273 .5306 .3883 .2851 .2099 .1550 .1147 .0852 .0634 .0474

33 .7201 .5202 .3770 .2741 .1999 .1462 .1072 .0789 .0582 .0431

34 .7130 .5100 .3660 .2636 .1904 .1379 .1002 .0730 .0534 .0391

35 .7059 .5000 .3554 .2534 .1813 .1301 .0937 .0676 .0490 .0356

36 .6989 .4902 .3450 .2437 .1727 .1227 .0875 .0626 .0449 .0323

37 .6920 .4806 .3350 .2343 .1644 .1158 .0818 .0580 .0412 .0294

38 .6858 .4712 .3252 .2253 .1566 .1092 .0765 .0537 .0378 .0267

39 .6784 .4619 .3158 .2166 .1491 .1031 .0715 .0497 .0347 .0243

40 .6717 .4529 .3066 .2083 .1420 .0972 .0668 .0460 .0318 .0221

41 .6650 .4440 .2976 .2003 .1353 .0917 .0624 .0426 .0292 .0201

42 .6584 .4353 .2890 .1926 .1288 .0865 .0583 .0395 .0268 .0183

43 .6520 .4268 .2805 .1852 .1227 .0816 .0545 .0365 .0246 .0166

44 .6454 .4184 .2724 .1780 .1169 .0770 .0509 .0338 .0226 .0151

45 .6391 .4102 .2644 .1712 .1113 .0727 .0476 .0313 .0207 .0137

46 .6327 .4022 .2567 .1646 .1060 .0685 .0445 .0290 .0190 .0125

47 .6265 .3943 .2493 .1583 .1009 .0647 .0416 .0269 .0174 .0113

48 .6203 .3865 .2420 .1522 .0961 .0610 .0389 .0249 .0160 .0103

49 .6141 .3790 .2350 .1463 .0916 .0575 .0363 .0230 .0147 .0094

50 .6080 .3715 .2281 .1407 .0872 .0543 .0339 .0213 .0134 .0085

APPENDICES 428

Present Value Factor for a Single Future Amount

(Interest rate = r, Number of periods = n)

n/r 11% 12% 13% 14% 15% 16% 17% 18% 19%

1 .9009 .8929 .8850 .8772 .8696 .8621 .8547 .8475 .8403

2 .8116 .7972 .7831 .7695 .7561 .7432 .7305 .7182 .7062

3 .7312 .7118 .6931 .6750 .6575 .6407 .6244 .6086 .5934

4 .6587 .6355 .6133 .5921 .5718 .5523 .5337 .5158 .4987

5 .5935 .5674 .5428 .5194 .4972 .4761 .4561 .4371 .4190

6 .5346 .5066 .4803 .4556 .4323 .4104 .3898 .3704 .3521

7 .4817 .4523 .4251 .3996 .3759 .3538 .3332 .3139 .2959

8 .4339 .4039 .3762 .3506 .3269 .3050 .2848 .2660 .2487

9 .3909 .3606 .3329 .3075 .2843 .2630 .2434 .2255 .2090

10 .3522 .3220 .2946 .2697 .2472 .2267 .2080 .1911 .1756

11 .3173 .2875 .2607 .2366 .2149 .1954 .1778 .1619 .1476

12 .2858 .2567 .2307 .2076 .1869 .1685 .1520 .1372 .1240

13 .2575 .2292 .2042 .1821 .1625 .1452 .1299 .1163 .1042

14 .2320 .2046 .1807 .1597 .1413 .1252 .1110 .0985 .0876

15 .2090 .1827 .1599 .1401 .1229 .1079 .0949 .0835 .0736

16 .1883 .1631 .1415 .1229 .1069 .0930 .0811 .0708 .0618

17 .1696 .1456 .1252 .1078 .0929 .0802 .0693 .0600 .0520

18 .1528 .1300 .1108 .0946 .0808 .0691 .0592 .0508 .0437

19 .1377 .1161 .0981 .0829 .0703 .0596 .0506 .0431 .0367

20 .1240 .1037 .0868 .0728 .0611 .0514 .0433 .0365 .0308

21 .1117 .0926 .0768 .0638 .0531 .0443 .0370 .0309 .0259

22 .1007 .0826 .0680 .0560 .0462 .0382 .0316 .0262 .0218

23 .0907 .0738 .0601 .0491 .0402 .0329 .0270 .0222 .0183

24 .0817 .0659 .0532 .0431 .0349 .0284 .0231 .0188 .0154

25 .0736 .0588 .0471 .0378 .0304 .0245 .0197 .0160 .0129

26 .0663 .0525 .0417 .0331 .0264 .0211 .0169 .0135 .0109

27 .0597 .0469 .0369 .0291 .0230 .0182 .0144 .0115 .0091

28 .0538 .0419 .0326 .0255 .0200 .0157 .0123 .0097 .0077

29 .0485 .0374 .0289 .0224 .0174 .0135 .0105 .0082 .0064

30 .0437 .0334 .0256 .0196 .0151 .0116 .0090 .0070 .0054

31 .0394 .0298 .0226 .0172 .0131 .0100 .0077 .0059 .0046

32 .0355 .0266 .0200 .0151 .0114 .0087 .0066 .0050 .0038

33 .0319 .0238 .0177 .0132 .0099 .0075 .0056 .0042 .0032

34 .0288 .0212 .0157 .0116 .0086 .0064 .0048 .0036 .0027

35 .0259 .0189 .0139 .0102 .0075 .0055 .0041 .0030 .0023

36 .0234 .0169 .0123 .0089 .0065 .0048 .0035 .0026 .0019

37 .0210 .0151 .0109 .0078 .0057 .0041 .0030 .0022 .0016

38 .0190 .0135 .0096 .0069 .0049 .0036 .0026 .0019 .0013

39 .0171 .0120 .0085 .0060 .0043 .0031 .0022 .0016 .0011

40 .0154 .0107 .0075 .0053 .0037 .0026 .0019 .0013 .0010

41 .0139 .0096 .0067 .0046 .0032 .0023 .0016 .0011 .0008

42 .0125 .0086 .0059 .0041 .0028 .0020 .0014 .0010 .0007

43 .0112 .0076 .0052 .0036 .0025 .0017 .0012 .0008 .0006

44 .0101 .0068 .0046 .0031 .0021 .0015 .0010 .0007 .0005

45 .0091 .0061 .0041 .0028 .0019 .0013 .0009 .0006 .0004

46 .0082 .0054 .0036 .0024 .0016 .0011 .0007 .0005 .0003

47 .0074 .0059 .0032 .0021 .0014 .0009 .0006 .0004 .0003

48 .0067 .0043 .0028 .0019 .0012 .0008 .0005 .0004 .0002

49 .0060 .0039 .0025 .0016 .0011 .0007 .0005 .0003 .0002

50 .0054 .0035 .0022 .0014 .0009 .0006 .0004 .0003 .0002

Discount Factor =1 / (1 + r)n Where r = Discount rate and n = length of time

INDEX 429

Accounts receivables, 140 intersection, 7 Determinant, 96

Activity Time, 314 Commutative law for Union, Difference rule, 181

Differentiation, 168

Activity, 313 7

Discounted cash flow

Additional cost, 336 Complement set, 3 methods, 261

Adjoint matrix, 115 Completing the square Discounted payback period,

Adjugate matrix, 114 method, 230 261

Analagol Model, 294 Compliment, 3 Discriminant, 229

Annual cost of ordering, 408 Compound inequalities, 64 Disjoined sets, 5

Annual demand, 409 Compound Interest, 260 Distributive law for

intersection, 7

Annuity, 266 Conditional economic

Distributive law for union, 7

Anti – derivative, 218 consequences, 155 Division Rule, 187

Arc, 25 Conditional profits values, Division, 19

Assets, 261 155 Dual Program, 311

Assignment model, 378 Conservative, 158 Dummy activity, 313

Associative law for Constant Rule, 179 Earliest starting time, 314

intersection, 7 Constant, 25 Economic Batch Quantity,

Constrained Optimization, 412

Associative law for union, 7

215 Economic life, 261

Assumptions of Markov, 140 Element, 1

Constraints, 275, 284

Average cost, 243 Coordinates, 20 Elimination method38

Average rate of return, 261 Cost of holding, 409 Elimination, 38

Basic Variables, 297-299 Cost of ordering, 408 Empty set, 3

Basic, 358 Cost of ordering, 409 Equilibrium price, 55

Crash cost, 335 Equilibrium quantity, 55

Batch size, 412

Critical path, 314 Equilibrium state, 143

Bayes approach, 161 Equilibrium, 55

Curve, 25

Bayes, 161 Event number, 314

Data collection, 294

Binomial Theorem, 76 De Morgan Laws, 7 Event, 313

Brand royalty, 140 Decision analysis, 155 Expected Time, 325

Break even point, 245 Decision making problem, Expected value approach,

Break even point, 250 155 160

Decision node, 157 Expected value, 160

Cartesian plane, 20, 21

Decision tree, 157 External demand, 121

Cause of action, 155 Factor method, 230

Decision, 155

Chain rule, 190 Factorial, 81

Definite Integral, 220

Characteristics of Markov, Degeracy, 379 Feasible production set, 285

140 Delta, 21 Feasible region, 280, 287,

Chebychev’s theorem, 327 Demand analysis, 46 296

Chord, 168 Demand Function, 47 Feasible Solution, 296

Demand Functions, 46 Final demand, 121

Co-efficient, 59, 60

Demand, 46 Finite number, 140

Cofactors, 100 Fixed cost, 243

Denominator, 187

Coincident line, 36 Dependent variable, 46 Float time, 336

Combination Sum rule, 183 Derivative, 170 Free time, 337

Combinations, 83

INDEX 430

process, 45 Marginal revenue, 199, 223,- Optimizer, 158

Gradient of a curve, 168 227 Optimum order quantity, 409

Gradient, 19, 21, 168 Market share, 140 Order quantity, 409

Graph, 31 Marketing, 140 Order size, 407

Graphical method, 230 Markov model, 140 Origin, 20

Hessian determinant is Markov Process model, 140 Parabola, 228

negative, 212 Mathematical Model, 294 Partial differential, 209

Hessian determinant is Matrix notation, 126 Pascal's triangle, 75

positive, 212 Matrix, 84 Pay off, 155

Hessian determinant, 209 Max regret, 159 Payback period method, 261,

Heuristic Model, 294 Maxima, 193 262

Horizontal axis, 20 Maxmin Minimax Approach, Permutation, 81

Horizontal gradient, 29 158 Pessimistic approach, 161

Hungarian Algorithm, 378 Minima, 193 Points of intersection, 33

Iconic Model, 294 Minimax approach, 158 Points, 20

Identity matrix, 96 Minimax Regret Approach, Positive co-efficient, 59

Implementation of final 158 Positive gradient, 26

solution, 294 Minimizing Simplex Method, Positive integer, 76

Independent Float, 337 311 Posterior probabilities, 163

Independent variable, 46 Minimum cost method, 343 Preceding Activity, 325

Inequalities, 63 Minimum return, 261 Preceding state, 140

Initial cash outflow, 261 Model building, 293 Present Value, 267

Input-output, 121 Multiplication of matrices, 90 Principle diagonal, 84

Insurance policies, 140 Multiplication rule, 185 Principle of Inclusion-

Integration, 218 Multiplication, 19 Exclusion, 6

Intermediate output, 121 Natural numbers, 2, 16 Principle, 85

Internal consumption, 125 Negative coefficient, 60 Problem Recognition, 293

Internal rate of return Negative gradient, 28 Problem solving, 294

method, 261, 265 Negative integer, 2, 16 Product rule, 185

Interpretation of the Negative integer, 77 Production possibility set,

solution, 294 Net cash inflow, 261 285

Intersection of sets, 3 Net present value, 261 Quadratic formula, 230

Inventory Planning & Net Present Value, 264 Quantitative techniques, 293

Control, 406 Network analysis, 313 Quotient Rule, 187

Investment, 261 Network, 313 Range, 31

Investments Analysis, 261 New demand, 138 Rational numbers, 2, 16

Lagrange multipliers, 215 Non-singular matrix, 97 Real numbers, 2, 16

Lambda, 215 Normal cost, 335 Reciprocal, 96

Laplace, 158 Normative model, 293 Regret opportunity cost, 158

Latest starting time, 314 Notation, 4 Regret table, 159

Lead time, 407 Number line, 16 Re-order level, 407

Leontief inverse, Numerator, 187 Returns, 261

126,129,132,137 Numeric, 218 Review and Maintenance,

Leontief Model, 126 Objectives function, 275, 284 294

Linear program, 276 Opportunity cost, 158 Scalar multiplication, 88

Linear Programming, 274 Opportunity set, 285 Secant, 168

Long-run, 143 Optimal strategy, 163

INDEX 431

196 122

Second derivative is positive, Technology matrix, 122

196 Total cost, 199

Second derivative, 195 Total Cost, 409

Segment, 21 Total Float, 336

Sentivity analysis, 274 Total internal consumption,

Set up costs, 412 125

Set, 1 Total normal cost, 335

Shadow cost, 359 Total revenue, 199, 241

Simple inequalities, 64 Traditional method, 261

Simple Interest, 258 Transition probabilities, 140,

Simplex algorithm, 295 141

Simplex method, 295 Transition probability matrix,

Simulation Model, 294 144

Simultaneous equation, 35 Transportation problem, 343

Singular, 97, 98 Transpose, 89

Sketch, 31 Transposing, 115

Slack variable, 295 Turning points, 193

Slope of line, 25, 168 Umbers1

Slope, 21, 168 Uncertainty, 155

Standard equation, 146 Union of set, 3

Standard form, 25 Universal set, 3

Standard Normal Variable cost, 243

Distribution, 319, 321,322 Variable Cost, 335

Standardization, 295 Venn diagram, 4

Starting event, 314 Vertical axis, 20

State of nature, 155 Vogel method, 344, 351

State on nature node, 157 x-axis, 20

State transition relationship, x-intercepts, 32

140 y- axis, 20

Stationary Points, 193 y-intercept, 25,32

Steady state, 143 Zero gradient, 29

Steepness, 21 Z score, 319

Stepping circuit, 364

Stochastic process, 140

Stock level, 407

Stock out, 407

Straight line, 23

Subset, 4

Substitution method, 39

Substitution, 39

Sum Rule, 180

Supply analysis, 46

Supply Function, 49

Supply, 46

Surplus variable, 295

Tangent, 168

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