Linear Programming:

Applications I
73-220
Lecture 05

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Objectives
● Understand common LP applications in
the major functional areas of business.

● Capable of formulating in mathematical

terms and solving such problems in
spreadsheet (either Solver or
Management Scientist).

2
Agenda
● Review for Last Class
– Graphical solution to two-variable LP models

● Common Applications

● Specific Applications
– Mathematical formulation
– Spreadsheet formulation
– Live show of math and Solver formulations

● Next Class

3
Common Applications
● Operations
– Diet, Production Planning, Blending,
Transportation, Product Mix
● Marketing
– Media Selection, Marketing Research
● Finance
– Portfolio Selection, Financial Planning
● HR
– Workforce assignment

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 Specific Applications:
● Portfolio Selection
An investment company currently has $10 million to
invest. The goal is to maximize expected return earned
over the next year. Their four investment possibilities and
relevant rates of return and limits are summarized below:
Investment Expected Return Maximum
Possibility (%) Allowable ($mil)
Treasury Bonds 8 5
Common Stock 6 7
Money Market 12 2
Municipal Bonds 9 4

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Portfolio Selection (Cont’d)
In addition, the company has specified that at least
30% of the funds must be placed in common stock
and treasury bonds, and no more than 40% in money
market funds and municipal bonds. All of the $10
million currently on hand will be invested. Formulate
a linear programming (LP) model, solve it using Excel
Solver or Management Scientist and determine how
much money to invest in each instrument.

6
 Standard Approaches to
Mathematical Formulation
● What am I trying to decide?
● What are my decision variables (and
units)?
● What is the objective? Is it to be
minimized or maximized?
● What are the constraints? Are they
limitations or requirements? Are they
explicit or implicit?

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Three Components of LP Formulations
● Decision variables with units
– Understand units of your decision variables and
keep it consistent in your objective function as
well as constraints.
● Objective function
– Maximization vs minimization
● Constraints:
– Limited resources
– Managerial requirements
– Nonnegativity
● Model will be discussed in class.

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 Spreadsheet Formulation
● Separate problem data from the spreadsheet
model.
– Carefully organize problem data to facilitate the use
of SUMPRODUCT function in determining objective
function and left-hand side of constraints.
● Three components of the spreadsheet model
corresponding to math formulation.
– Decision variables (originally blank)
– Objective function (link problem data to performance,
an Excel function is required)
– Constraints (Excel formulae containing decision
variables on the left-hand side and only constants on
the right-hand side).

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 Make-or-Buy Problem I
DuPunt Inc. manufactures three types of chemicals. For the
upcoming month, DuPunt has contracted to supply the
following amounts of the three chemicals:
Chemical Contracted Sales (lb)
1 2000
2 3500
3 1800
DuPunt’s production is limited by the availability of
processing time in two chemical reactors. Each chemical must
be processed first in reactor 1 and then in reactor 2. The table
on the next slide provides the hours of processing time
available next month for each reactor and the processing time
required in each reactor per pound of each chemical:
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 Make-or-Buy Problem II
Reactor Processing Times (hrs/lb)
Chemical Reactor
1 2 3 Available
Reactor 1 0.05 0.04 0.01 200 hrs
Reactor 2 0.02 0.06 0.03 150 hrs
Owing to the limited availability of reactor processing time,
DuPunt has insufficient capacity to meet its demand with in-
house production. Consequently, DuPunt must purchase
some chemicals from vendors having excess capacity and
resell them to its own customers. The table on the next slide
provides each chemical’s in-house production cost and
outside purchase cost:

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 Make-or-Buy Problem III
Chemical In-House Outside Purchase
Production Cost Cost
($/lb) ($/lb)
1 2.50 2.80
2 1.75 2.50
3 2.90 3.25
DuPunt’s objective is to fill its customers’ orders with the
cheapest combination of in-house production and outside
purchases. Formulate this as an LP model and solve it by using
Excel Solver.
LP and spreadsheet formulations will be discussed in class.

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Next Class
● Do more questions from Chap. 4. Review
the applications we discussed in class
and become more familiar with double-
subscript formulation.

● More applications will be discussed in

class.
– Staff scheduling
– Blending problem

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