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1. Furnco manufactures desks and chairs. Each desk uses 4 units of wood, and each chair
uses 3 units of wood. A desk contributes $40 to profit, and a chair contributes $25.
Marketing restrictions require that the number of chairs produced be at least twice the
number of desks produced. There are 20 units of wood available.
Using the graph below, determine a production plan that maximizes Furnco’s profit.
(a) Draw isoprofit lines where the total profit equals 125, 150, 175, and 200.
Here are the points where the isoprofit lines cross the axes:
X1 X2
0 5
z = 125
3.125 0
0 6
z = 150
3.75 0
0 7
z = 175
4.375 0
0 8
z = 200
5 0
6
Chairs
0
0 1 2 3 4 5 6
Desks
1Based on problems 3.3, 3.5, 4.20, and 4.27 (pp. 89-144) in Practical Management Science, by Wayne Winston
and S. Christian Albright. Solutions by David C. Juran.
Shade in the feasible region.
40
30
Corn
20
10
0
0 10 20 30 40 50 60
Wheat
A B C D E F G H I J
1 Bonds Home Loans Auto Loans Personal Loans
objective function:
2 25.0% 25.0% 25.0% 25.0% 14.75% =SUMPRODUCT(B2:E2,B3:E3)
3 Investment Returns 10.0% 16.0% 13.0% 20.0%
4 =SUM(B8:E8)
=E2
5
6 =SUMPRODUCT(B9:E9,B2:E2)
7 Bonds Home Loans Auto Loans Personal Loans
8 Total Funds = 100% 25.0% 25.0% 25.0% 25.0% 100.0% <= 100.0%
9 Personal <= Bonds -100.0% 0.0% 0.0% 100.0% 0.0% <= 0.0%
10 Home <= Auto 0.0% 100.0% -100.0% 0.0% 0.0% <= 0.0%
11 Personal Loans Limit 0.0% 0.0% 0.0% 100.0% 25.0% <= 25.0%
(a) What is the optimal allocation of funds to the various investment types?
Cells E13:E16 in the answer report indicate that we should invest 25% of the funds in each
of the four types.
(b) What is the expected return on investment from the optimal portfolio?
From cell E8 in the answer report, the optimal portfolio will return 14.75% ($73,750).
(c) What would be the improvement in the return on investment if the limit on the total
amount invested in personal loans were increased to 30%?
We look at cell E20 in the Sensitivity Report, and see that the shadow price is 1%. That
means that for every unit of increase in this constraint’s right-hand side, we will realize a
1% improvement in the objective function. If we change the right-hand side of this
constraint from 25% to 30% (a change that is within the allowable increase shown in cell
G20 of the Sensitivity Report), then the objective function will increase by 0.05 * 0.01 =
0.0005. Our portfolio return would go from 0.1475 to 0.1480 (from 14.75% to 14.80%).
(d) If the return on bonds increases from 10% to 13%, what will happen to the optimal
allocation of funds?
Cell G9 in the Sensitivity Report indicates that the bond return would have to increase by
at least 4.5% before the optimal investment mix would change. Since this is only a 3%
increase, the portfolio would not change (although it would become more profitable).
A B C D E F G H
1 Microsoft Excel 9.0 Sensitivity Report
2 Worksheet: [spract-lp5.xls]Sheet1
3 Report Created: 12/3/01 2:54:09 PM
4
5
6 Adjustable Cells
7 Final Reduced Objective Allowable Allowable
8 Cell Name Value Cost Coefficient Increase Decrease
9 $G$9 Crude 1 Gas 1 2088.89 0.00 21 0 3.19744E-14
10 $H$9 Crude 1 Gas 2 2111.11 0.00 11 3.19744E-14 47.025
11 $I$9 Crude 1 Gas 3 800.00 0.00 1 51.125 0
12 $G$10 Crude 2 Gas 1 777.78 0.00 31 1.27898E-14 0
13 $H$10 Crude 2 Gas 2 4222.22 0.00 21 1E+30 1.27898E-14
14 $I$10 Crude 2 Gas 3 0.00 0.00 11 0 1E+30
15 $G$11 Crude 3 Gas 1 133.33 0.00 41 0 2.13163E-14
16 $H$11 Crude 3 Gas 2 3166.67 0.00 31 2.13163E-14 30.9
17 $I$11 Crude 3 Gas 3 200.00 0.00 21 204.5 0
18 $G$17 Advertising Gas 1 $0 ($209) -1 209 1E+30
19 $H$17 Advertising Gas 2 $750 $0 -1 1E+30 104.5
20 $I$17 Advertising Gas 3 $0 ($409) -1 409 1E+30
21
22 Constraints
23 Final Shadow Constraint Allowable Allowable
24 Cell Name Value Price R.H. Side Increase Decrease
25 $B$19 Total produced 13500 0 14000 1E+30 500
26 $B$22 Actual total octane Gas 1 30800 0 0 800 1E+30
27 $C$22 Actual total octane Gas 2 76000 -3.55271E-15 0 800 2800
28 $D$22 Actual total octane Gas 3 11200 0 0 5200 1E+30
29 $B$27 Actual total Sulfur Gas 1 30 3090 0 5 2
30 $C$27 Actual total Sulfur Gas 2 190 3090 0 5 31.66666667
31 $D$27 Actual total Sulfur Gas 3 10 3090 0 5 5
32 $G$19 Total demand Gas 1 3000 20.8 0 500 400
33 $H$19 Total demand Gas 2 9500 -0.1 0 1E+30 7500
34 $I$19 Total demand Gas 3 1000 40.8 0 500 250
35 $J$9 Crude 1 Total purchased 5000 57.25 5000 200 200
36 $J$10 Crude 2 Total purchased 5000 20.9 5000 400 1400
37 $J$11 Crude 3 Total purchased 3500 0 5000 1E+30 1500
(c) How much of the Crude Oil 2 will be used to make Gas 3?
Cell D18 of the Answer Report indicates that none of the Crude Oil 2 will be used to make
Gas 3.
(d) The marketing director insists that Sunco needs to spend $500 advertising Gas 1.
What will this do to the net profit?
The optimal decision is to spend $0.00 advertising Gas 1. Any other decision would be less
profitable (unless something important has been left out of the model).
(e) 500 barrels of Crude Oil 2 are available on the spot market. How much should
Sunco offer per barrel for this commodity?
According to the Sensitivity Report (cell E36), Sunco should offer no more than $20.90 per
barrel.
(f) Assuming that the seller agrees to Sunco’s price, how many barrels of Crude Oil 2
should they buy?
The allowable increase (G36) is 400 barrels. We might want more than 400 more barrels,
but we can’t tell without re-running Solver.
(g) 500 barrels of Crude Oil 3 are available on the spot market. How much should
Sunco offer per barrel for this commodity?
None. (See cell E37 of the Sensitivity Report.)
(h) Assuming that the seller agrees to Sunco’s price, how many barrels of Crude Oil 3
should they buy?
None. In fact, Sunco is not even buying all of the 5,000 barrels of Crude Oil 3 that were
originally available (see D41 in the Answer Report).