Imperial College

REVISION TUTE FOUR Name -_____________________

1. ND Ltd produces two products, the Alpha and the Beta. For the next quarter, the following information
is relevant:

Material A: 1,200 kgs are available.

Per unit of Alpha: 2 kgs
Per unit of Beta: 3 kgs

Material B: 1,500 kgs are available.

Per unit of Alpha: 5 kgs
Per unit of Beta: 2 kgs

Labour: 2,000 hours are available.

Per unit of Alpha: 7 hours
Per unit of Beta: 5 hours.

Each unit of Alpha and Beta make a contribution of $8 each.

ND Ltd has already agreed a contract to supply 20 Alphas and 20 Betas with a key customer. This
order, if cancelled, would incur a significant financial penalty.

Formulate the Linear Programming problem.

2. Solve the equations:

(i). 2X + 3Y = 190
(ii). 7X + 4Y = 340

3. A company is using linear programming to decide how many units of each of its two products to make
each week. Weekly production will be x units of Product X and y units of Product Y. At least 50 units of
X must be produced each week, and at least twice as many units of Y as of X must be produced each
week. Each unit of X requires 30 minutes of labour, and each unit of Y requires two hours of labour.
There are 5,000 hours of labour available each week.

Which of the following is the correct set of constraints?

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A. 0.5x + 2y ≤ 5,000
x ≥ 50
y ≤ 2x

B. x + 4y ≤ 5,000
x ≥ 50
y ≥ 2x

C. 0.5x + 2y ≤ 5,000
x ≥ 50
y ≥ 100

D. 0.5x + 2y ≤ 5,000
x ≥ 50
y ≥ 2x

4. An office manager wishes to minimise the cost of telephone calls made. 40% of calls in peak hours
cost $1 each and the remainder of such calls cost $1.50 each. 30% of calls at other times cost 80c
each, 50% of them cost 90c each, and 20% of them cost $1 each. These proportions cannot be varied,
though the total numbers of calls made in peak hours and of calls made at other times can be.

If x equals the number of calls made each day in peak hours, and y equals the number of calls made
at other times, write the manager’s objective function in the given space

_______________________

5. The shadow price of a binding constraint is:

A. The decrease in contribution which occurs when increasing the constraint limit by one unit
B. The premium (over and above the normal price) that the company would be willing to pay to
suppliers for supplying one more unit of the binding constraint
C. The contribution gained from being able to produce one more unit of the most profitable product
D. The cost of acquiring one more unit of the binding constraint from suppliers

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6. Direct labour is currently paid at a rate of $40 per hour. Direct labour is a scarce resource however the
workforce has agreed to work additional hours but the rate is currently in negotiation. Each unit will
require 2 hours of labour.

The shadow price of labour is $12 per hour.

What is the maximum amount per hour that the organisation would pay for the extra hours?

A. $12
B. $40
C. $52
D. $64

7. QT manufactures two products, X and Y. It has created a linear programme problem and formulated
the objective function as follows:

Maximise contribution = 20x + 5y

Where,
X = Number of product X produced
Y = Number of product Y produced

QT has determined that two materials, A and B, form the binding constraints. The constraints have
been represented by the following formulae:

(A) 5x + 2y = 11,000 kgs

(B) 10x + 5y = 25,000 kgs

The solution to the linear programme formulation provided a contribution of $35,000. However, a new
market supplier for material A has been found and, although the supplier is more expensive than
existing suppliers, this may alleviate the material A constraint.

The shadow price for material A is $________

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8. HJK is a light engineering company which produces a range of components, machine tools and
electronic devices for the motor and aircraft industry. It employs about 1,000 people in 12 main
divisions, one of which is the alarm systems division

Alarm systems division

HJK produces two types of alarm system, one for offices and homes (X) and the other for motor vehicles
(Y), on the same equipment. For financial reasons, it is important to minimise the costs of production.
To match the current inventory and demand position, at least 100 alarm systems in total are required
each week, but the quantity of one type must not exceed twice that of the other. The inputs necessary
for the manufacture of one alarm system are given below, together with the availability of resources
each week:

Type Plating Circuitry Assembly

X 3 feet 4 units 20 minutes
Y 2 feet 8 units 8 minutes
Total available each week 420 feet 800 units 34 hours

The management accountant estimates that the unit costs of production are $100 for X and $80 for Y.
Past experience suggests that all alarms can be sold. At present, 75 of each alarm system are produced
each week.

(a) State the objective function and the constraints for the production of alarm systems AND use a
graphical method to find the optimal product mix.

(b) Explain briefly any points of significance for management

9. QLJ is planning to expand its product range by producing two new products: Product X and Product Y.
Product X and Product Y will be produced from different combinations of the same resources. Only
products X and Y use these resources. Details of the estimated selling price and cost per unit for each
product are shown below:

Product X Product Y
$ $
Selling price 229 260
Material A ($8 per kg) 40 16
Material B ($20 per kg) 20 60
Labour ($25 per hour) 75 100
Variable O/H ($16 per machine hour) 32 48

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The total fixed costs of producing X and Y will be $70,000 per month.

The management accountant at QLJ is in the process of producing a linear programming model to
determine the optimal monthly production plan for the two new products. The management accountant
has established that the following resources are available in each month and has produced the following
graph.

Resources available

Material A 10,150 kg
Material B 5,500 kg
Labour 8,400

Linear programming graph for Products X and Y

The objective of QLJ is to earn the maximum total profit possible per month from the production of
products X and Y.

(a) Interpret the graph to determine the optimum monthly production plan and the maximum total profit
per month from products X and Y.
Note: You are required to use simultaneous equations to determine the exact quantities of Product
X and Product Y to be produced.
(6 marks)

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(b) Calculate the minimum change in the selling price of Product X that would cause the optimum
production plan to change to Point B shown on the graph.
(4 marks)

10. PTP produces two products from different combinations of the same resources. Details of the selling
price and costs per unit for each product are shown below:

Product E Product M
$ $
Selling price 175 125
Material A ($12 per kg) 60 24
Material B ($5 per kg) 10 15
Labour ($20 per hour) 40 20
Variable O/H ($7 per machine hour) 14 28

The fixed costs of the company are $50,000 per month.

PTP aims to maximise profits from production and sales. The production plan for June is currently under
consideration.

The following resources are available in June:

Material A 4,800 kg
Material B 3,900 kg
Labour 2,500 hours
Machine hours 5,000 hours

Part A.
(i). Identify the objective function and the constraints to be used in a linear programming model to
determine the optimum production plan for June.
(3 marks)

The solution to the linear programming model shows that the only binding constraints in June are those
for Material A and Material B.

(ii). Produce, using simultaneous equations, the optimum production plan and resulting profit for June.
(You are NOT required to draw or sketch a graph.)
(5 marks)

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Based on the optimal production plan for June, the management accountant at PTP has determined
that the shadow price for Material A is $7 per kg.

Part B
Explain the meaning of the shadow price for Material A.
(2 marks)

11. GF is a company that manufactures clothes for the fashion industry. The fashion industry is fast moving
and consumer demand can change quickly due to the emergence of new trends.

GF manufactures three items of clothing: the S, the T and the B using the same resources but in
different amounts.

Budget information per unit is as follows:

S T B
$ $ $
Selling price 250 40 100
2
Direct material ($20 per m ) 100 10 30
Direct labour ($12 per hour) 36 12 27
Variable O/H ($3 per machine hour) 9 3 6.75

Total fixed costs are $300,000 per month.

Included in the original budget constructed at the start of the year, was the sales demand for the month
of March as shown below:
S T B
Demand in March (Units) 2,000 6,000 4,000

After the original budget had been constructed, items of clothing S, T and B have featured in a fashion
magazine. As a result of this, a new customer (a fashion retailer), has ordered 1,000 units each of S, T
and B for delivery in March. The budgeted demand shown above does not include this order from the
new customer.

In March there will be limited resources available. Resources will be limited to:

Direct materials 14,500 m2

Direct labour 30,000 hours

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There will be no opening inventory of material, work in progress or finished goods in March

(a) Produce a statement that shows the optimal production plan and the resulting profit or loss for
March.
Note: you should assume that the new customer’s order must be supplied in full.
(10 marks)

(b) Explain TWO issues that should be considered before the production plan, that you produced in
part (a), is implemented.
(4 marks)

12. A company produces three products (X, Y and Z) from the same resources (but in different quantities).
Extracts from the original budget for Month 11 are shown below:

X Y Z
$ $ $
Selling price ($ per unit) 24 41 42
Total cost ($ per unit) 20 20 35
Labour hours per unit 0.5 1.5 1.5
Production & sales units 10,000 6,000 10,000

Variable costs are 40% of the total cost of each unit

Fixed costs are absorbed at the rate of 150% of variable costs based on the budgeted production
quantities as shown above.

It has now become known that during Month 11 essential maintenance work will have to be carried out.
This will limit the availability of resources to:

Labour hours 12,500

Machine hours 30,000

(a) Produce, using marginal costing principles, a columnar statement that shows the profit maximising
production plan for Month 11 and the resulting profit or loss.
(9 marks)

(b) Calculate the three shadow prices for labour hours. Your answer must state the range of labour
hours that each shadow price covers.
(5 marks)

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13. THS produces two products from different combinations of the same resources. Details of the products
are shown below:

E R
Selling price $99 $159
Material A ($2 per kg) 3 kgs 2 kgs
Material B ($6 per kg) 4 3
Machining ($7 per hour) 2 hours 3 hours
Skilled labour ($10 per hour) 2 hours 5 hours
Max monthly demand (units) Unlimited 1,500

THS is preparing the production plan for next month. The maximum resource availability for the
month is:

Material A 5,000 kg
Material B 5,400 kg
Machining 3,000 hours
Skilled labour 4,500 hours

Identify, using graphical linear programming, the optimal production plan for products E and R to
maximise THS’s profit in the month.
(13 marks)

14. Company WX manufactures a number of finished products and two components. Three finished
products (P1, P2, and P3) and two components (C1 and C2) are made using the same resources (but
in different quantities). The components are used internally by the company when producing other
products but they are not used in the manufacture of P1, P2 or P3.

Budgeted data for December for P1, P2, P3, C1 and C2 are as follows:

P1 P2 P3 C1 C2
Units demanded 500 400 600 250 150
$/unit $/unit $/unit $/unit $/unit
Selling price 155 125 175 - -
Direct labour ($10/hour) 25 15 30 10 15
Direct material ($50/kg) 10 20 20 5 10
Var prod. O/H ($40/m hour) 10 15 20 10 20
Fixed prod. O/H ($20/ l.hour) 50 30 60 20 30
Gross profit 60 45 45 - -

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Further information for December:

Direct labour: 4,300 hours are available.

Direct material: 420 kgs are available.
Machine hours: no restrictions apply.

Components: C1 and C2 are readily available from external suppliers for $50 and $80 per unit
respectively. The external suppliers are reliable and the quality of the components is similar to that of
those manufactured by the company.

(a) Produce calculations to determine the optimal production plan for P1, P2, P3, C1 and C2 during
December.
Note: it is not possible to produce partly finished units or to hold inventory of any of these products
or components.

15. JRL manufactures two products from different combinations of the same resources. Unit selling prices
and unit cost details for each product are as follows:

Product J L
$/unit $/unit
Selling price 115 120
Direct material A ($10 per kg) 20 10
Direct material B ($6 per kg) 12 24
Skilled labour ($14 per hour) 28 21
Var O/H ($4 per machine hour) 14 18
Fixed overhead* 28 36
Profit 13 11

*Fixed overhead is absorbed using an absorption rate per machine hour. It is an unavoidable central
overhead cost that is not affected by the mix or volume of products produced.

The maximum weekly demand for products J and L is 400 units and 450 units respectively and this is
the normal weekly production volume achieved by JRL. However, for the next four weeks the
achievable production level will be reduced due to a shortage of available resources.

The resources that are expected to be available are as follows:

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Material A 900 kg
Material B 1,750 kg
Skilled labour 1,250 hours
Machine time 2,400 machine hours

(a) Identify, using graphical linear programming, the weekly production schedule for products J and L
that will maximise the profits of JRL during the next four weeks.
(15 marks)

(b) The optimal solution to part (a) shows that the shadow prices of skilled labour and direct material
A are as follows:
Skilled labour $ Nil
Direct material A $11.70

Explain the relevance of these values to the management of JRL.

(6 marks)

(c) Explain, using the graph you have drawn in part (a), how you would calculate by how much the
selling price of Product J could increase before the optimal solution would change.
(4 marks)

16. A company manufactures three products D, E and F which use the same resources (but in different
amounts). In addition to these resources each unit of Product F uses a component which the company
currently purchases from an external supplier for $80. The demand for the products in Month 1 and the
details per unit of the three products are as shown below:

D E F
Demand (units) 2,400 2,200 3,000
$ $ $
Selling price 112 136 153
Component 80
Direct materials ($4 per kg) 12 16 12
Skilled labour ($16 per hour) 16 24 8
Unskilled labour ($12 per hour) 18 12 9
Variable O/H ($3 per mc hour) 12 12 9

The fixed costs of the company are $150,000 per month.

The company has reverse engineered the component and has realised that it could make the
component in-house. The cost of making a component is shown below:

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$
Direct materials ($4 per kg) 12
Skilled labour ($16 per hour) 16
Unskilled labour ($12 per hour) 3
Variable O/H ($3 per mc hour) 6

There would be no incremental fixed costs incurred as a result of making the component in-house.
In Month 1 the maximum availability of skilled labour is 5,400 hours but all other resources are readily
available.
The company bases all short term decisions on profit maximisation.

a) Calculate the optimum production plan for Month 1 and the resulting profit. (Note: The company
would either buy the component or make it in-house; it would not do a mixture of the two options.)
(11 marks)

For legal reasons it will not be possible to produce Product F in Month 2.

Demand for products D and E will be 3,000 units each in Month 2. No inventories can be held.
The availability of resources in Month 2 is as follows:

Direct materials 16,000 kg

Skilled labour 5,400 hours
Unskilled labour 5,000 hours
Machine hours 19,600 hours

(b)
(i) Identify the objective function and the constraints to be used in a linear programming model
to determine the optimum production plan for Month 2.
(4 marks)
(ii) The solution to the linear programming model shows that the only binding constraints in Month
2 are those for skilled labour and unskilled labour.

Produce, using simultaneous equations, the optimum production plan and resulting profit for
Month 2. (You are NOT required to draw or sketch a graph.)
(4 marks)

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17. WRX manufactures three products using different quantities of the same resources. Details of these
products are as follows:

Product W R X
$/unit $/unit $/unit
Market selling price 90 126 150
Direct labour ($7/hour) 14 28 35
Material A ($3/kg) 15 12 21
Material B ($6/kg) 24 36 30
Variable overhead ($4/hour) 8 16 20
Fixed overhead 12 7 12
73 99 118

Profit 17 27 32

The management of WRX has predicted the demand for these products for July as follows:

Product W 500 units

Product R 800 units
Product X 1,600 units

These demand estimates do NOT include an order from a major customer to supply 400 units per
month of each of the three products, at a discount of $10 per unit from the market selling price.
During July the management of WRX anticipate that there will be a shortage of material B, and that
only 17,500 kgs will be available.

It is not possible for WRX to hold inventory of any raw materials, work in progress or finished products.

a) Prepare calculations to show the optimum product mix to maximise WRX’s profit for July, assuming
that the order with the major customer is supplied in full.
(7 marks)

WRX has now realised that the contract with the major customer does not have to be met in full for
any of the three products. The customer will accept whatever WRX is prepared to supply at the
contracted prices but they will charge a financial penalty if WRX does not supply them in full in July.

b) Calculate the lowest value of the financial penalty that the major customer would need to insert in
the contract to ensure that WRX meets its order in full in July.
(8 marks)

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c) Now that you have presented your answers to (a) and (b) above to the management team of WRX,
the production manager has advised that, due to holidays, the number of direct labour hours
available will be reduced to a total of 9,800 hours in July.
A decision has been made that WRX will fulfil its order with the major customer in full in July, and it
has been agreed that a linear programming model will be used to determine the optimum usage of
the resources that will be available after setting aside those required for the major customer’s order.

(i). Identify the objective function and the constraints to be used in the linear programming model to
determine the optimum usage of the remaining resources to maximise the company’s profits for
July
(6 marks)
(ii). The optimal solution has been determined as:

W 500 units
R 0 units
X 880 units

Explain which of the constraints you stated in (c)(i) are binding on the solution. (You are not required
to draw a graph.)
(4 marks)

18. Tablet Co makes two types of tablet computer, the Xeno (X) and the Yong (Y). X currently generates
a contribution of $30 per unit and Y generates a contribution of $40 per unit. There are three main
stages of production: the build stage, the program stage and the test stage. Each of these stages
requires the use of skilled labour which, due to a huge increase in demand for tablet computers over
recent months, is now in short supply. The following information is available for the two products:

Stage Xeno (X) Yong (Y)

Minutes per unit Minutes per unit
Build ($10 per hour) 24 20
Program ($16 per hour) 16 14
Test ($12 per hour) 10 4

Tablet Co is now preparing its detailed production plans for the next quarter. During this period it
expects that the skilled labour available will be 30,000 hours (1,800,000 minutes) for the build stage,
28,000 hours (1,680,000 minutes) for the program stage and 12,000 hours (720,000 minutes) for the
test stage. The maximum demand for X and Y over the three-month period is expected to be 85,000
units and 66,000 units respectively. Fixed costs are $650,000 per month.

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Due to rapid technological change, the company holds no inventory of finished goods.

a) On the graph paper provided, use linear programming to calculate the optimum number of each
product which Tablet Co should make in the next quarter assuming it wishes to maximise
contribution. Calculate the total profit for the quarter.
(14 marks)
b) Calculate the amount of any slack resources arising as a result of the optimum production plan
and explain the implications of these amounts for decision-making within Tablet Co.
(6 marks)

19. CSC Co is a health food company producing and selling three types of high-energy products: cakes,
shakes and cookies, to gyms and health food shops. Shakes are the newest of the three products
and were first launched three months ago. Each of the three products has two special ingredients,
sourced from a remote part the world. The first of these, Singa, is a super-energising rare type of
caffeine. The second, Betta, is derived from an unusual plant believed to have miraculous health
benefits.
CSC Co’s projected manufacture costs and selling prices for the three products are as follows:

Cakes Cookies Shakes

Per unit $ $ $
Selling price 5.40 4.90 6.00
Costs:
Ingredients: Singa ($1·20 per gram) 0.30 0.60 1.20
Ingredients: Betta ($1·50 per gram) 0.75 0.30 1.50
Other ingredients 0.25 0.45 0.90
Labour ($10 per hour) 1.00 1.20 0.80
Variable overheads 0.50 0.60 0.40
Contribution 2.60 1.75 1.20

For each of the three products, the expected demand for the next month is 11,200 cakes, 9,800
cookies and 2,500 shakes.
The total fixed costs for the next month are $3,000.

CSC Co has just found out that the supply of Betta is going to be limited to 12,000 grams next month.
Prior to this, CSC Co had signed a contract with a leading chain of gyms, Encompass Health, to
supply it with 5,000 shakes each month, at a discounted price of $5·80 per shake, starting
immediately. The order for the 5,000 shakes is not included in the expected demand levels above.

a) Assuming that CSC Co keeps to its agreement with Encompass Health, calculate the shortage of
Betta, the resulting optimum production plan and the total profit for next month. (6 marks)

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One month later, the supply of Betta is still limited and CSC Co is considering whether it should
breach its contract with Encompass Health so that it can optimise its profits.

b) Discuss whether CSC Co should breach the agreement with Encompass Health.
Note: No further calculations are required. (4 marks)

Several months later, the demand for both cakes and cookies has increased significantly to 20,000
and 15,000 units per month respectively. However, CSC Co has lost the contract with Encompass
Health and, after suffering from further shortages of supply of Betta, Singa and of its labour force,
CSC Co has decided to stop making shakes at all. CSC Co now needs to use linear programming to
work out the optimum production plan for cakes and cookies for the coming month. The variable ‘x’ is
being used to represent cakes and the variable ‘y’ to represent cookies.

The following constraints have been formulated and a graph representing the new production
problem has been drawn:

Singa: 0·25x + 0·5y ≤ 12,000

Betta: 0·5x + 0·2y ≤ 12,500
Labour: 0·1x + 0·12y ≤ 3,000
x ≤ 20,000
y ≤ 15,000
x, y ≥ 0

c) (i) Explain what the line labelled ‘C = 2·6x + 1·75y’ on the graph is and what the area represented by
the points 0ABCD means.
(4 marks)

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(ii) Explain how the optimum production plan will be found using the line labelled ‘C = 2·6x + 1·75y’
and identify the optimum point from the graph. (2 marks)
(iii) Explain what a slack value is and identify, from the graph, where slack will occur as a result of the
optimum production plan. (4 marks)

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