References

Operations research: Hamdy Taha, Prentice Hall of India

Quantitative Analysis for management: Render and Stair
Anderson Williams Sweeney : Quantitative techniques for management
Operations research :J.K.Sharma
Statistics for management :Levin and Rubin

Linear Programming Problem

Objectives:
 To know Linear programming
 To understand formulation of LPP
 Know different situations of applications of LPP.
 Identify situations of LPP
 Appreciate the technique of LPP.

Introduction
Formulation of LPP
Solution of LPP ; By graphical Method
By Simplex Method
Types of LPP
Duality in LPP
Sensitivity and post optimality analysis

1. A firm produces two products A and B. Each unit of product A requires 3 units of raw material X and
5 units of raw material Y and 4 units of labour time. Each unit of product B requires 4 units of raw
material X and 3 units of raw material Y and 2 units of labour time. The raw materials used are limited.
The firm has 60 units of raw material X, 45 units of raw material Y and 50 units of labour time available.
The unit profit of product A and B is expected to be Rs. 8 and Rs. 10 respectively. Formulate this as
linear programming problem.

2. The agricultural research unit of a fertilizer company has advised t the farmers to provide at least 6000
Kgs of phosphate and 7500 Kgs of nitrogen. It is possible to obtain these nutrients from three mixtures.
A , B and C . The cost of a 50 Kg for these 3 mixtures is Rs. 50, Rs. 60 and Rs. 55. The phosphate
and urea contents in these mixtures are 20 Kg and 30 Kg in mixture A, 25 Kg and 25 Kg in mixture B and
30 Kg and 20 Kg in mixture C respectively. Formulate this as LPP to minimize the total cost.

3. The marketing manager of Hops Brewery has an advertising budget of $100000. He must determine
how much to spend on television spots and magazine ads. Each spot is expected to increase sales by
30000cans,where as each magazine ad will account for 100000 cans in sales. Hops gross profit on sales is
10 cents per can. One television spot costs $2000; each magazine ad requires an expenditure of $5000. To
have a balanced marketing program, the advertising budget must involve no more than $70000 in
magazine ads nor $50000in television spots.
Formulate the linear programming problem.

4. HiDec produces two models of electronic gadgets that use resistors, capacitors and chips. The
following table summarizes the data of the situation
Resource unit resource requirement Maximum availability
Model 1 model 2 units
Resistors 2 3 1200
Capacitors 2 1 1000
Chips 0 4 800
Unit profit $ 3 4

5. The Win Big Gambling Club promotes gambling junkets from a large wide western city to casinos in
Bahamas. The club has budgeted up to $8000 per week for local advertising. The money is to be allocated
among four promotional media. Win Big’s goal to reach the largest possible high potential audience
through the various media. The following table presents the number of potential gamblers reached by
making use of advertisements in each of the four media. It also provides the cost /advertisement placed
and the maximum number of ads that can be purchased per week.

Medium audience reached /ad cost/ad ($) maximum ads/week

TV spot 1 minute 5000 800 12
Daily news paper
Full page 8500 925 5
Radio spot30 seconds
Prime time 2400 290 25
Radio spot 1 minute
Afternoon 2800 380 20

Win Big’s contractual arrangements require that at least five radio spots be placed each week. To ensure a
broad scoped promotional campaign. Management also insists that no more than $1800 be spent on radio
advertisement every week.
Formulate this as LPP to maximise the effective exposures.

Duality
6. The high note sound company manufactures quality compact disks (CD) players and stereo receivers.
Each of these products requires a certain amount of skilled craftsmanship, of which there is a limited
weekly supply. The firm formulates the following LPP in order to determine the best production mix of
CD players and receivers.
Maximise profit= $50 X1+$120 X2
Subject to constraints
2X1+4X2≤ 80 (hours of available electrician’s time)
3X1+X2≤ 60 (hours of audio technician’s time available)
X1≥0 and X2≥0
Solve this problem as LPP using graph. Also write the dual of the problem and interpret

7. The decision is to be taken concerning the number of hours spent by biochemists on certain laboratory
experiments and the number of hours spent by biophysicist on the same series of experiments. A
biochemist costs$23/hour while a biophysicist salary averages $18/hour. Both types of scientists can be
used on three needed laboratory operations: tests 1, tests 2 and tests 3. The experiments and their times
are as follows:

Lab experiment scientists type minimum test

Biophysicists Biochemists time needed per day
Test 1 8 4 120
Test 2 4 6 115
Test 3 9 4 116
Formulate the problem as LPP and solve using simplex method.
What is the dual of the primal problem? Interpret the meaning of dual and its solution

8. An investor has moneymaking activities A 1, A2, A3, and A4. He has only one lakh of rupees to invest.
In order to avoid excessive investment, no more than 50% of the total investment can be placed in activity
A2 and for activity A3. Activity A1 is very conservative, while activity A4 is speculative. To avoid
excessive speculation, at least rupee 1 be invested in activity A1 for every rupee 3 invested in activity A4.
The data on returns on investments are as follows:

Activity Anticipated returns on investments (%)

A1 10
A2 12
A3 14
A4 16

The investor wishes to know how much should he invest in each activity to maximise the total returns on
investments. Formulate this problem as linear programming problem.

9. The board of directors of a company has given an approval for the construction of a new plant. The
plant will require an investment of Rupees 50 lakh. The required funds will come from the sale of
proposed bond issue and loans from two financial institutions. For the company, it will not be possible to
sell more than Rupee 20 lakh in bonds at the proposed rate of 12%. Financial corporation A will loan up
to Rupee 30 lakh at an interest rate of 16% but insists that the amount of the bond debt plus the amount
owned to the financial corporation B will not be more than twice the amount owned to the financial
institution A. Financial corporation B will loan am amount up to the amount loaned by the financial
corporation A but at the interest rate of 18%. Formulate this as a linear programming problem to
determine the amount of funds to be obtained from each source in a manner that minimizes the total
amount of interest charge.

10. A company has two grades of inspectors 1 and 2 , who are to be assigned for a quality control
inspection. It is required that at least 2000 pieces be inspected per 8 hour day. Grade 1 inspector can
check pieces at the rate of 40 per hour with an accuracy of 97%. Grade 2 inspectors checks at the rate of
30 pieces per hour with an accuracy of 95%.
The wage rate of a grade 1 inspector is Rs. 5 per hour while that of a grade 2 inspector is Rs. 4 per hour.
An error made by an inspector costs Rs. 3 to the company. There are only nine grade 1 inspectors and
eleven grade 2 inspectors available in the company. The company wishes to assign work to the available
inspectors so as to minimize the total cost of inspection. Formulate this problem as an LPP model so as to
minimize daily inspection cost.

11. A company engaged in producing tinned food, has 300 trained employees on the rolls, each of whom
can produce one can of food in one week. Due to the developing taste of the public for this kind of food,
the company plans to add to the existing labour force by employing 150 people, in a phased manner over
the next five weeks. The new comers would have to undergo a two week training programme before
being put to work. The training is to be given by existing employees from among the existing ones and it
is known that one of the employee can train three trainees. Assume that there would be no production
form the trainers and the trainees during training period as the training off the job. How ever, the trainees
would remunerated at the rate of Rs. 300 per week, the same rate as for the trainers.
The company has booked the following orders to supply during the next five weeks.

Week 1 2 3 4 5
No. Of cans 280 298 305 360 400
Assume that the production in any week would not be more than the number of cans ordered so that
every delivery of food would be fresh.
Formulate this problem as an LPP to develop a training schedule that minimizes the labour cost over the
five week period.

12. XYZ company produces an automobile spare parts . The contract that has been signed with a large
truck manufacturer calls for the following four month shipping schedule.
Month Number of parts to be shipped.
January 3000
 February 4000
March 5000
April 5000
The company can manufacture 3000 parts per month on a regular time basis and 2000 parts per month on
an overtime basis. Its production costs Rs. 15000 for a part produced in regular time and Rs. 25000 for a
part produced in overtime. Its monthly inventory holding cost is Rs. 500.
Formulate this problem as an LPP model to minimize the overall cost.

13. An advertising company wishes to plan an advertising campaign in three different media: television,
radio, and a magazine. The purpose of the advertising is to reach as many as potential customers as
possible. Following are the results of a market study:
Television
Prime day prime time Radio Magazine
Cost of an advertising unit 40000 75000 30000 15000
Number of potential
customers reached per unit 400000 900000 500000 200000
Number of women
Customers reached per unit 300000 400000 200000 100000

The company does not want to spend more than Rs. 800000 on advertising. It is further required that
i) at least 2 million exposures take plane among women
ii) advertising on television be limited to Rs. 5,00,000
iii) at least three advertising units be bought on prime day and two units during prime time;
and
iv) the number of advertising units on radio and magazine should each be between 5 and 10.

Formulate this problem as an LPP to maximize potential customer reach.

14. A business man is opening a new restaurant and has budgeted Rs. 8,00,000 for advertisement in the
coming month. He is considering four types of advertising :
i) 30 seconds television commercials
ii) 30 seconds radio commercials
iii) Half page advertisement in a news paper
iv) Full page advertisement in a weekly magazine which will appear four times during the
coming month.

The owner wishes to reach families with income both over and under Rs. 50,000. The amount of exposure
to families of each type and the cost of each media is shown below:

Media cost of advertisement Exposure to families with Annual Income

Over Rs.50,000 Under Rs. 50,000

Television 40000 200000 30000

Radio 20000 500000 700000
News paper 15000 300000 150000
Magazine 5000 100000 100000

To have a balanced campaign, the owner has determined the following restrictions
i) no more than four television advertisements
ii) no more than four advertisements in the magazine
iii) no more than 60% of all the advertisements in news paper and magazine
iv) there must be at least 4500000 exposures to families with income under Rs. 50000.

Formulate this as an LP model to determine the number of each type of advertisement to pursue so as to
maximize the total number of exposures.
15. A machine tool company conducts a job training program for machinist. Trained machinists are used
as teachers in the program in the ratio of one for every ten trainees. The training programme lasts for one
month. From the past experience it has been found that out of en trainees hired only seven complete a
programme success fully and rest are released.

Trained machinists are also needed for machining and company requirement for the next three months is
as follows:
January 100 February 150 March 200
In addition, the company requires 250 machinists by April. There are 130 trained machinists available at
the beginning of the year. Pays per month are
Each trainee Rs. 1400
Each trained machinist
(machining and teaching) Rs. 1900
Each trained machinist idle Rs. 1700

Formulate this problem as LP model to minimize the cost of hiring and training schedule and the
company’s requirements.

16. Relax-and-Enjoy Lake Development Corporation is developing a lakeside community at a privately

owned lake. The primary market for the lakeside lots and homes includes all middle-and upper-income
families within approximately 100 miles of the development Relax-and-Enjoy has employed the
advertising firm of Bone, Phillips and Jackson (BP&J) to designs the promotional campaign.

After considering possible advertising media and the market to be covered, BP&J has recommended that
the first month’s advertising be restricted to five media. At the end of the month, BP&J will then
revaluate its strategy based on the month’s results. BP&J has collected data on the number of potential
customers reached, the cost per advertisement, the maximum number of times each medium is available,
and the exposure quality rating for each of the five media. The quality rating is measured in terms of an
exposure quality unit, a measure of the relative value of the one advertisement in each of the media. This
measure, based n BP&J’s experience in the advertising business, takes into account factors such as
audience demographics( age, income, and education of the audience reached), image presented, and
quality of the advertisement. The information collected is presented in Table 4.1.

Relax-and-Enjoy provided BP&J with an advertising budget of $ 30,000 for the first month’s campaign.
In addition, Relax-and-Enjoy imposed the following restriction on how BP&J may allocate these funds.
At lease 10 television commercials must be used, at least 50,000 potential customers must be reached, and
no more than $18,000 may be spent on television advertisements. What advertising media selection plan
should be recommended?

ADVERTISING MEDIA ALTERNATIVES FOR THE RELAX-AND-ENJOY LAKE

DEVELOPMENT CORPORATION

Advertising Media Number of Cost ($) Maximum Exposure

Potential per Times Quality
Customers Advertise Available Units
Reached ment per
Month*
1. Daytime TV (1 min) station 1000 1500 15 65
WKLA
2. Evening TV (30sec), station 2000 3000 10 90
WKLA
3. Daily newspaper (full page) 1500 400 25 40
The Morning Journal
4. Sunday newspaper 2500 1000 4 60
1
magazine ( page colour),
2
The Sunday Press
5. Radio, 8:00 A.M. or 300 100 30 20
5:00P.M. news (30 sec),
station KNOP

17. An organization conducts marketing research to learn about consumer charecteristics, attitudes, and
preferences. Marketing research firms that specialize in providing such information often do the actual
research for client organizations. Typical services offered by a marketing research firm include designing
the study, conducting market surveys, analysing the data collected, and providing summary reports and
recommendations for the client. In the research design phase, targets or quotas may be established for the
number and types of respondents to be surveyed. The marketing research firm’s objective is to conduct
the survey so as to meet the client’s needs at a minimum cost.
Market Surveys Inc.(MSI), specializes in evaluating consumer reaction to a new products,
services, and advertising campaigns. A client firm has requested MSI’s assistance in ascertaining
consumer reaction to a recently marketed household product. During meetings with the client, MSI
agreed to conduct door-t--door personal interviews to obtain responses for households with children and
households without children. In addition, MSI agreed to conduct both day and evening interviews.
Specifically, the client’s contract called for MSI to conduct 1000 interviews under the following quota
guidelines.
1. Interview at least 400 households with children.
2. Interview at least 400 households without children.
3. The total number of households interviewed during the evening must be at least as great as the number
of households interviewed during the day.
4. At least 40% of the interviews for households with children must be conducted during the evening.
5. At least 60% of the interviews for households without children must be conducted during the evening.
Because the interviews for households with children take additional interviewer time and because evening
interviewers are paid more than daytime interviewers, the cost varies with the type of interview. Based on
previous research studies, estimates of the interview costs are as follows:
Interview Cost
Household Day Evening
Children $20 $25
No children %18 $20

What is the household time-of-day interview plan that will satisfy the contract requirements at minimum
total interviewing cost?

18. Welte Mutual Funds, Inc. located in New York City. Welte has just obtained $100,000 by converting
industrial bonds to cash and is now looking for other investment opportunities for thee funds. Based on
Welte’s current investments, the firm’s top investment analyst recommends that all new investments be
made in the oil industry, steel industry or in government bonds. Specifically, the analyst has identified
five investment opportunities and projected their annual rates of returns. the investments and rates of
return are shown in Table 4.3.
Management of Welte has imposed the following investment guidelines.
1. Neither industry (oil or steel) should receive more than $50,000
2. Government bonds should be at least 25% of the steel industry investments.
3. The investment in Pacific Oil, he high-return but high-risk investment, cannot be more than 60% of the
total oil industry investment.

INVESTMENT OPPORTUNITIES FOR WELTE MUTUAL FUNDS

Investment Projected Rate of Return (%)
Atlantic Oil 7.3
Pacific Oil 10.3
Midwest Steel 6.4
Huber Steel 7.5
Government bonds 4.5
What portfolio recommendations- investments and amounts- should be made for the available $100,000?
Given the objective of maximizing projected return subject to budgetary and managerially imposed
constraints, we can answer this question by formulating and solving a linear programming model of the
problem.

19. Hewlitt Corporation has established in early retirement program as part of it’s corporate restructuring.
At the close of the voluntary sign-up period, 68 employees had elected early retirement. As a result of
these early retirements, the company has incurred the following obligations over the next years. Cash
requirements (in thousands of dollars) are due at the beginning of each year.

Year 1 2 3 4 5 6 7 8

Cash Requirement 430 210 222 231 240 195 225 255

The corporate treasurer must determine how much money must be set aside today to meet eight yearly
financial obligations as they come due. The financing plan for the retirement program includes
investments in government bonds as well as saving. The investments in government bonds are limited to
three choices.

Bond Price Rate Years to Maturity

1 $1150 8.875 5
2 1000 5.500 6
3 1350 11.750 7

The government bonds have a par value of $1000, which means that even with different prices each bond
pays $1000 at maturity. The rates are based on the par value. For purpose of planning, the treasurer has
assumed that any funds not invested in bonds will be placed in savings and earn interest at an annual rate
of 4%.

20. The Janders Company markets various business and engineering products. Currently Janders is
preparing to introduce two new calculators. one for the business market called the Financial Manager
and one for the engineering market called the Technician. Each calculator has three components, a base,
an electronic cartridge, and a face plate or tap. The same base is used for both calculators, but the
cartridges and tops are different. All components can be manufactured by the company or purchased from
outside suppliers. The manufacturing costs and purchase prices for the components are summarised in
Table below.
Janders’ forecasters indicate that 3000 Financial Manager calculators and 2000 Technician calculators
will be needed. However, manufacturing capacity is limited. The company has 200 hours of regular
manufacturing time and 50 hours of overtime that can be scheduled for the calculators. Overtime involves
a premium at the additional cost of $9 per hour. Table below shows manufacturing times (in minutes) for
the components.
MANUFACTURING COSTS AND PURCHASE PRICES FOR JANDERS CALCULATOR
COMPONENTS
Cost per Unit
Components Manufacture (Regular Time) Purchase
Base $0.50 $0.60
Financial Manager cartridge 3.75 4.00
Technician cartridge 3.30 3.9.
Financial Manager top 0.60 0.65
Technician top 0.75 0.78

21. B and K grocery store sells two types of soft drinks the brand name A1 cola and the cheaper store
brand B& K cola. The margin for A1 about 5 cents per can and that of B&K is 7 cents per can. On the
average store sells no more than 500 cans of both colas a day. Although A1 is a recognized brand name,
customers tend to buy more B &K because it is reasonably cheaper. It is estimated that at least 100 cans
of A1 are sold daiy and that B&K out sells A1 by a margin of at least 2:1.
How many cans per day of each brand should the store carry to maximize profit?

22. Reddy Mikks produces both interior and exterior paints from two raw materials, M1 and M2. The
following table provides the basic data of the problem:

Tons of raw material per ton of Maximum daily

Exterior paint Interior paint availability(tons)
Raw material M1 6 4 24
Raw material M2 1 2 6
Profit per tone ($1000) 5 4

A market survey indicates that the daily demand for the interior paints can not exceed that if the exterior
paint by more than one ton. Also, the maximum daily demand of interior paint is 2 tons.
Reddy MIKKS want to determine the optimal product mix of interior and exterior paints that maximizes
the total daily profit.

23. The president of Birdeyes Real Estate is studying the possibility of developing the company’s 800
acres. The new development will include single-, double-, and triple family homes.It is estimated that
15% of the acreage will be allocated to streets and the utility easements. Birdeyes estimate the returns
from the different housing units as
Housing unit single double triple
Net return per unit($) 10000 12000 15000

The cost of connecting water services to the area is propor5tionate to the number of units constructed.
How ever, the county charges a minimum of $ 100000 for the project. Additionally the expansion of the
water system beyond the present capacity is limited to 200000 gallons per day during peak periods. The
following data summarize the cost of connecting water service as well as the water consumption
assuming an average size family

Housing unit single double triple recreation

Water service
cost per unit($) 1000 1200 1400 800
Water consumption
per unit (gal/day) 400 600 840 450
Formulate this problem as Linear programming problem.

24. Progress City is studying the feasibility of introducing a mass transit bus system that will elevate the
smog problem by reducing city driving. The study seeks the determination of number of buses that can
handle that transportation needs. After gathering the necessary information, the city engineer noticed that
the minimum number of buses needed fluctuates with time of the ay and that the required number of
buses can be approximated by constant values over successive 4 hour interval. The table below
summarizes the engineer’s findings.
To carry out the required daily maintenance, each bus can operate only 8 successive hours a day.

Time number of buses

12.00- 4.00 AM 4
4.00 -8.00 AM 8
8.00 -12.00 noon 10
12.00- 4.00 PM 7
4.00-8.00 PM 12
8.00-12.00 midnight 4
Formulate the problem as LP model.
Sensitivity Analysis/ post optimality Analysis

Special Cases
Infeasible solution: If at the optimal iteration any of the artificial variable is present
Unbounded solution: if the entering variable is having coefficients zero and negative
Alternate solutions: if the number of zeros in the zj-cj row are more than the number of variables

1. Consider the following linear programming problem,

Maximize z = x1+9x2+x3 (profit function)
Subject to constraints
x1+2x2 +3x3  9 ( Machine hours)
4x1+x2+2x3  15 (labour hours)
X1, X2, X3 non negative

After solving the above problem, the following table is arrived at.

c 1 9 1 0 0
Basis Cb X1 X2 X3 S1 S2 B
X2 9 1/2 1 3/2 1/2 0 9/2
X5 0 2 0 -1 -1 1 6
Zj-Cj 7/2 0 25/2 9/2 0 Z=81/2

Answer the following questions.

i. The availability of machine hours is reduced by 2 hours will the current solution change?
ii. If the product I is to be produced, what change is required in the profit contribution?
iii. What is the percent utilization of three resources?
iv. If a new product proposal is as follows what do you suggest about introducing that product.
Consumption of machine hours=2units
Consumption of labour hours=3 units
Profit contribution=5units/unit.

2. In the process of solving the given LPP the following table is obtained. Answer the following
questions.
Maximize Z= 15x1+ 6 x2+9x3+2x4 profit function
Subject to constraints
2x1+ x2+5x3+6x4 20 resource 1
3x1+ x2+3x3+256x4 24 resource 2
7x1 + x4  70 resource 3
x1, x2,x3,x4 0

C 15 6 9 2 0 0 0 B
B Cb X1 X2 X3 X4 S1 S2 S3
X2 6 0 1 9 -32 3 -2 0 12
 X1 15 1 0 -2 57/3 -1 1 0 4
S3 0 0 0 14 -132 7 -7 1 42
Zj-Cj 0 0 15 91 3 3 0 Z=132

i. What is the percent utilization of the three resources?

ii. If product 3 is to be produced what change do you suggest in the profit contribution of
product 3?
iii. What is the range of profit contribution of product 1 over which the current solution
remains optimal?
iv. If the availability of the resource 2 is increased to 30, how does this change affect the
current solution?

3. HiDec produces two models of electronic gadgets that use resistors, capacitors and chips. The
following table summarizes the data of the situation
Resource unit resource requirement Maximum availability
Model 1 model 2 units
Resistors 2 3 1200
Capacitors 2 1 1000
Chips 0 4 800

Unit profit $ 3 4

In getting the solution to this problem the following simplex table is found.
C 3 4 0 0 0
Basis Cb X1 X2 X3 S1 S2 b
X1 3 1 0 -1/4 ¾ 0 450
X5 0 0 0 -2 2 1 400
X2 4 0 1 ½ -1/2 0 100
Zj-Cj 0 0 5/4 -1/2 0 Z=1750
Determine the status of each resource.
In terms of optimal profit , determine the worth of one resistor, one capacitor and one chip.
If the available number of resistors is increased to 1300 units , find the new optimum solution.
If the available number of chips is reduced to 350 units, determine the optimal solution.

4. Consider the following linear programming problem

Maximize Z= 4X1 +6 X2 +2 X3 Profit function
St. X1 +X2+ X3  12 Man power constraint
X1 +4X2+9 X3  9 Raw material constraint
And X1,X2 ,X30
Following is the optimal solution for the above LPP.
C 4 6 2 0 0
Basis Cb X1 X2 X3 S1 S2 B
X1 4 1 0 -1 4/3 1/3 1
X2 6 0 1 2 -1/3 1/3 2
Zj-Cj 0 0 6 10/3 2/3 Z=16

1) Find the range of the manpower and raw material over which the current solution remains optimal.
2) Find the range of the profit contribution over which the current solution remains optimal.
3) If the product three is to be produced what change in the profit contribution do you suggest?
4) A new product consuming the same set of resources is conceived. It takes the 3 units of manpower
and 2 units of the raw material. Which fetches Rs.5 per unit of the product what do you suggest to
the company?

5. Solve the following problem and answer the following questions:

Maximize Z= -X1+3X2-2X3
Subject to constraints
3X1-X2+2X37
-2X1+4X212
-4X1+3X2+8X310
X1, X2, and X3are non negative

The following able was obtained in the process of getting the optimal solution
-1 3 -2 0 0 0
Basis Cb X1 X2 X3 S1 S2 b
X1 -1 1 0 4/5 2/5 1/10 0 4
X2 3 0 1 2/4 1/5 3/10 0 5
S3 0 0 0 10 1 -1/2 1 11
Zj-Cj 0 0 12/5 1/5 4/5 0 Z=11

i. Is the solution an optimal solution? If yes, why?

ii. Is the solution unique? Why?
iii. What is the percentage utilization of the resources?
iv. If product 3 is to be produced what change do you suggest in the profit contribution of the
product?
v. What is the unit worth of each resource?
vi. What is the range of the availability of resource 1 over which the current solution remains
optimal?
vii. What is the range of the profit contribution of product 2 over which the current solution
remains optimal?
viii. If a new product is proposed that consumes two units of resource 1, 3 units of resource 2
and 2 units of resource 3 and the profit contribution is estimated to be Rs. 5. What is your
suggestion about introducing this new product?

6. MANCO produces three products P1, P2, and P3. The production process uses raw materials R1 and
R2, which are produced on facilities F1, and F2.The following table provides the pertinent data of the
problem.
Usage per unit
Resource units P1 P2 P3 Maximum daily capacity
F1 Minutes 1 2 1 430
F2 minutes 3 0 2 460
R1 lb 1 4 0 420
R2 lb 1 1 1 300
The minimum daily demand for P2 is 70 units and the maximum demand for P3 is 240 units. The unit
profit contribution of P1, P2 and P3 are $ 300, $200 and $ 500 respectively.
MANCO management is discussing means to improve the financial situations of the company. The
following are the most prominent proposals.
i. The per unit profit of P3 can be increased by 20%, but this will reduce the market
demand to 210 units instead of present 240 units.
ii. Raw material R2, appears to be a critical factor in limiting current production. Additional
units can be secured from different supplier whose price per pound is $3 higher than the
present supplier.
iii. The capacities of F1 and F2 can be increased by up to 40 minutes a day, each for an
additional cost of $ 35 per day.
iv. The chief buyer of the product P2 is requesting that its daily supply be increased from
the present 70 units to 100 units.
v. The per unit processing time of P1 on F2 can be reduced from 3 to 2 minutes at an
additional cost of $4 per day.
Discuss the feasibility of these proposals remembering that some of them are not mutually exclusive.

7. Maximize Z=5x1+10x2+8x3 profit function

Subject to 3x1+5x2+2x3≤ 60 Fabrication hours
 4x1+4x2+4x3≤ 72 Finishing hours
2x1+4x2+5x3≤ 100 Packaging hours
x1, x2, x3 ≥0
C * * * * * *
Basic X1 X2 X3 S1 S2 S3 bi
X2 10 1/3 * * 1/3 -1/6 * 8
X3 8 2/3 * * -1/3 5/12 * 10
S3 0 -8/3 * * 1/3 -17/12 * 18
Zj-Cj * * * * * * Z=*

i. Replace the * by appropriate numbers

ii. Is the solution optimal? Why?
iii. Is the solution unique? Why?
iv. What is the percent utilization of the three resources?
v. What is the unit worth of the three resources?
vi. What is the range of availability of the fabrication hours over which the current solution
remains optimal?
vii. What is the range of the profit contribution of product 1 for which the current solution
remains optimal?
viii. What change do you suggest in the profit contribution of product three if it is to be
produced?
ix. If a new product is introduced which consumes 2,3 and 4 units of resources 1,2 and 3
respectively and fetches profit of 6 units per unit then what would you suggest?

8. Max Z = 6X1 + 4X2

Subject to constraints
2X1 + 3X2 ≤ 100 ………… Raw material
4X1+ 2X2 ≤ 120 …………. Time
X1, X2 ≥ 0 ...………. Non-negativity

C 6 4 0 0 b
Basis CB X1 X2 S1 S2
X2 4 0 1 1/2 -1/4 20
X1 6 1 0 -1/4 3/8 20
Zj-Cj 0 0 1/2 5/4 Z=200

Answer the following questions

I. Is the solution optimal?

II. Is the solution unique?
III. If the availability of the raw material is reduced to 90 units , will the current solution be
optimal?
IV. If over time is allowed, because of which the availability is increased to 150 units, will the
current solution be optimal?
V. What is the unit worth of the resources?
VI. If a new product is introduced whose one unit consumed 2 units of raw material and one
unit of the time and gets 5 units as profit should you advice to go for the product?

9. The following linear programming model for analysing the product mix of Maxine’s Hat company
which produces three hat styles:
Maximize Z= 7X1+5X2 +2X3
3X1+5X2 +X3 ≤ 150
7X1+5X2 +2X3≤ 100
7X1+5X2 +2X3≤160
X1¸X2 , X3≥0
The print out below shows the optimal solution to the problem. Consider each of the following statements
independently and state whether true or false. Explain each answer.
Basic x1 x2 x3 sx4 sx5 sx6 Solution
-------------------------------------------------------------------------
x2 0.00 1.00 -0.06 0.31 -0.19 0.00 28.13
x1 1.00 0.00 0.44 -0.19 0.31 0.00 3.12
sx6 0.00 0.00 0.69 -0.44 0.06 1.00 100.62
--------------------------------------------------------------------------
Zj-Cj 0.00 0.00 0.75 0.25 1.25 0.00 162.50

i) If the price of the hat 3 were increased to 2.50 it would be part of the optimal solution.
ii) The capacity of machine C can be reduced to 65 hours without affecting the profits
iii) If machine A had a capacity of 170 hours the production out remain unchanged.

10. After a few iterations in an attempt to solve an LPP given here below:
Maximize Z= 3X1+ 2X2+5X3
Subject to
X1+ 2X2+X3≤430 operation 1
3X1 +2X3≤460 operation 2
X1+ 4X2 ≤420 operation 3
Xi ≥ 0 i= 1,2,3.

The following simplex table emerged:

C * * * * * *
B CB X1 X2 X3 S1 S2 S3 b
X2 * -1/4 1 0 ½ -1/4 0 *
X3 * 3/2 0 1 0 ½ 0 *
S3 * 2 0 0 -2 1 1 *
Zj-Cj

Fill in the blanks

Write the dual of the problem.
Identify the solution to the dual
Find the range of values over which the profit contribution of product 2 could vary without changing the
optimality?
What are the shadow prices of the three operations?
What are the capacity utilization of three operations

11. The product planning manager at Westlake Electronics wants to determine the optimal television
product mix for the next quarter. The production capacities for the firm’s three manufacturing facilities
are
fabrication Assembly
Facility hrs hrs
1 10000 50000
2 15000 60000
3 5000 35000
total 30000 145000

Westlake can produce three different types of TVs: Portable (20 inches), regular(27 inches), and home
theatre(40 inches). the gross profit and production requirements by type of TV are
fabrication assembly
Television gross profit hr/unit hr/unit
Portable $75 3 9
Regular $125 4 12
Home Theatre $200 7 16
 Basic x1 x2 x3 x4 x5 x6 x7
---------------------------------------------------------------------------
1) x4 0.75 0.00 0.00 1.00 0.00 0.00 1.75
2) x5 0.00 0.75 0.00 0.00 1.00 0.00 0.00
3) x6 0.00 0.00 0.75 0.00 0.00 1.00 0.00
4) sx13 0.00 0.00 0.00 0.00 0.00 0.00 -5.00
5) sx14 0.00 0.00 0.00 0.00 0.00 0.00 0.00
6) sx15 0.00 0.00 0.00 0.00 0.00 0.00 0.00
---------------------------------------------------------------------------
z 18.75 18.75 18.75 0.00 0.00 0.00 18.75
---------------------------------------------------------------------------

Basic x8 x9 sx10 sx11 sx12 sx13 sx14

---------------------------------------------------------------------------
1) x4 0.00 0.00 0.25 0.00 0.00 0.00 0.00
2) x5 1.75 0.00 0.00 0.25 0.00 0.00 0.00
3) x6 0.00 1.75 0.00 0.00 0.25 0.00 0.00
4) sx13 0.00 0.00 -3.00 0.00 0.00 1.00 0.00
5) sx14 -5.00 0.00 0.00 -3.00 0.00 0.00 1.00
6) sx15 0.00 -5.00 0.00 0.00 -3.00 0.00 0.00
------------------------------------------------------------------------------
z 18.75 18.75 31.25 31.25 31.25 0.00 0.00

¦ Basic sx15 Solution

¦-----------------------------------
¦ 1) x4 0.00 2500.00
¦ 2) x5 0.00 3750.00
¦ 3) x6 0.00 1250.00
¦ 4) sx13 0.00 20000.00
¦ 5) sx14 0.00 15000.00
¦ 6) sx15 1.00 20000.00
¦-----------------------------------
¦ z 0.00 937499.94

What product mix optimises product mix?

What is the value of the objective function?
What is the value of an additional hour of fabrication time at facility 1?
What should be the impact on the optimal solution of the company if the company were to produce at
least 1500 portable and 500 home theatre TVs?
What should be the impact on the optimal solution if the production capacities for all three plants were
increased by 10%?
The general rule for writing the dual of a primal problem

For every L P problem there exists another problem called as dual. The given problem is called as Primal
problem.

The dual is formed from the primal using the following rules:

Sr. No. Problem Type Constraints Variables

1 Primal Maximise ≤ type ≥type
Dual Minimise ≥ type ≥ type
2 Primal Minimise ≥ type ≥ type
Dual Maximise ≤ type ≥ type
3 Primal Maximise = type ≥ type
Dual Minimise ≤ type Unconstrained
4 Primal Minimise =type ≥ type
Dual maximise ≥ type Unconstrained
5 Primal Maximise = type Unconstrained
Dual Minimise = type Unconstrained
6 Primal Maximise ≤ type Unconstrained
Dual Minimise = type ≥ type
7 Primal Minimise ≥ type Unconstrained
Dual Maximise = type ≥ type

 Dual of a dual is a primal problem

 If either the primal has an unbounded solution dual will have the infeasible solution. And vice a
versa
 If the primal has a finite optimal solution then the dual will also have the finite optimal solution.
The value of the objective function is same for both primal and dual problems.
 The dual variables give a basis for deciding how much to pay for an additional unit of resources.
 The additional amount that should be paid for one unit of a resource is called as the shadow price
or simplex multiplier.
 ASIGNMENT PROBLEM

Objectives
 Know assignment problem
 Know methods of finding solution
 Know variations in the problem
 Understand the significance of these methods
 Obtain the optimal solution to an assignment problem
 Appreciate the use of assignment problem in decision making.

Structure
Introduction
Solution to the assignment problem
Special Cases In Assignment Problems

1. Solve the following assignment problem for minimum cost.

Jobs I II III IV
Men
A 160 130 175 190
B 135 120 130 160
C 140 110 125 170
D 50 50 80 80

2. Using the following cost matrix, determine the optimal job assignment and the cost of assignment.

Machinist Job
1 2 3 4 5
A 10 3 3 2 8
B 9 7 8 2 7
C 7 5 6 2 4
D 3 5 8 2 4
E 9 10 9 6 10

3. A methods engineer bonds to assign 4 new methods to 3 work centers. The assignment of the new
methods will increase the production. The cost incurred is given below. If only one method can be
assigned to a work center. Determine the optimal assignment.

Methods A B C
1 10 7 8
2 8 9 7 4. A firm is contemplating the introduction of 3 products 1,2,3 in
3 7 7 12 its three plants A,B,C. only a single product is decided to be
4 10 10 10 introduced in each of the plants. The unit cost of producing a
product in a plant is given in the following matrix. Product-1
cannot be produced at plant C.
 Plant
Product A B C
1 8 12 -
2 10 6 4
3 7 6 6

Maximization Case In Assignment Problem

5. Four jobs are processed on different machines; one job on one machine. Resulting profits vary with
assignments. They are given here

Machines
Jobs A B C D
Find I 42 35 28 21 the optimum assignment of jobs to machines and the
II 30 25 20 15 corresponding profit
III 30 25 20 15
6. A IV 24 20 16 12 farmer has three farms A,B,C which need respectively
100,300 and 50 units of water (in suitable units).The canal
can supply 150 units and the tube well 200 units while the balance is left at the mercy of rain god. The
following table shows the cost per unit of water in a dry year when the rain totally fail, the third row gives
the cost of failure of the rain. Find how the canal and tube well water should be utilized to minimize the
total cost.

A B C
Canal 3 5 7 150
Tube well 6 4 10 200
Failure of rain 8 10 3 100
100 300 50
7. Three employees of a company are to be assigned to three jobs which can be done by any of them.
Because of the different number of years spent in the organization, John, Jim and Sally get different
wages per hour, $6, $8, and $10, respectively. The amount of time in hours taken by each employee to do
the job is given in table below. Determine the cost of best assignment.
Job John Jim Sally
A 5 3 6
B 4 5 8
C 6 7 1

8. Scott and Associates Inc., is an accounting firm that has three new clients. Project leaders will be
assigned to the three clients. Based on the different backgrounds and experiences of the leaders, the
various leader-client assignments differ in terms of projected completion times. The possible assignments
and the estimated completion times in days are
Client
Project leader 1 2 3
Jackson 10 16 32
Ellis 14 22 40
Smith 22 24 34
9. A job shop has purchased three new machines of different types. There are four available locations in
the shop where a machine could be installed. Some of these locations are more desirable than others for
particular machines because of their proximity to work centers which would have a heavy work flow to
and fro from the machines. The estimated cost per unit time of materials handling involving each of the
machines is given below for the respective locations.

Location 1 2 3 4
Machines
1 13 10 12 11
 2 15 - 13 20
3 5 7 10 6

What is the optimal assignment?

10. A department head has four subordinates and four tasks to be performed. The subordinates differ in efficiency
and the tasks differ in their intrinsic difficulty. His estimates of the time that each man would take to perform each
task I given below
Tasks
Subordinates I II III IV
A 8 26 17 11
B 13 28 4 26
C 38 19 18 15
D 19 26 24 10
How should the tasks be allotted to subordinates so as to maximize the total man-hours.

11. A project work that consists of four major jobs for which an equal number of contractors have
submitted tenders. The tender amount quoted in lakhs of rupees is given in the matrix.
Job
Contractor A B C D
1 10 24 30 15
2 16 22 28 12
3 12 20 32 10
4 9 26 34 16
find the assignment which minimizes the total cost of project, when each contractor has to be assigned
only one job.
12. The Gleaming Company has just developed a new dish washing liquid and is preparing for a national
television promotional campaign. The firm has decided to schedule a series of 1 minute commercials
during the peak homemaker audience viewing hours of 1 pm to 5 P.M. To reach widest audience,
Gleaming wants to schedule one commercial on each network and to have one commercial to appear
during each of the one hour time blocks. The exposure rating for each hour, which represents the number
of viewers per $1000spent, are presented in the following table. Which network should be scheduled each
hour to provide the maximum audience exposure?
Network
Viewing hours A B C Independent
1-2 P.M. 27.1 18.1 11.3 9.5
2-3 P.M. 18.9 15.5 17.1 10.6
3-4 P.M. 19.2 18.5 9.9 7.7
4-5 P.M. 11.5 21.4 16.8 12.8

13. The hospital administrator at St. Charles General Hospital must appoint head nurses to four newly
established departments, Urology, cardiology, orthopedics and obstetrics. In anticipation of this staffing
problem, she had hired four nurses. Believing in the quantitative analysis approach to problem solving the
administrator interviewed each nurse, considering his or her back ground personality and talents and
developed a cost scale ranging from 1 to 100. A 0 for a nurse assigned to cardiology indicates that she is
perfectly suited for the task. A value close to 100 indicate that she is not at all suited for the job. The table
below shows complete set of cost figures that the hospital administrator felt represented all possible
assignment. Which nurse should be assigned to which unit?
Department
Nurse urology cardiology orthopedics obstetrics
1 28 18 15 75
2 32 48 23 38
3 51 36 24 36
4 25 38 55 12
 TRANSPORTATION PROBLEM

Objectives
 Know transportation problem
 Know methods of finding solution (initial and optimal)
 Know variations in the problem
 Understand the significance of these methods
 Obtain the optimal solution to a transportation problem
 Appreciate the use of transportation problem in decision-making.

Structure
Introduction
Relevant terms
Initial basic feasible solution:
Optimal solution: Stepping-stone
The Method Of Multiplier or U-V Method

1. The origins availability, the destination requirements and the unit cost of transportation are given
below: Find the transportation schedule for each situation
a)
D1 D2 D3 D4 D5 D6 bi
O1 2
50
1 3 3 2 5
O2 3
40
2 4 4 3 4
O3
3 5 2 2 4 1 60

O4
5 2 2 1 2 2 31

bJ 30
50 20 40 30 11 181
b)
D1 D2 D3 bi

O1 20 15 32
25
O2 35 22 24
20
O3 30 35 28
30
O4 15 25 10
25
bJ 30
50 20 100

2. Determine an initial basic feasible solution to the following transportation problem using Northwest
corner rule
Matrix minima
Vogel’s approximation method

D1 D2 D3 D4 Supply
S1 21 16 15 3 11
S2 17 18 14 23 13
S3 32 27 18 41 19
Demand 6 10 12 15 43

3. Foster generators, has a plant in clave land, Ohio, Bedford, Indiana and York Peneselvia. Production
capacities over the next 3 month planning period for one particular type of generator is as follows:

Origin Plant 3 month

production capacity
1 Cleveland 5000
2 Bedford 6000
3 York 2500

The firm distributes its generators through 4 regional distribution centres located in Boston, Chicago,
St.Louis, Xelington. The 3-month’s forecast of demand for the distribution centres is as follows:

Distribution Distribution 3 months forecast

centre

1 Boston 6000
2 Chicago 4000
3 St.Louis 2000
4 Xelington 1500

The transportation cost per unit is given in the following table:

Destinati 1 2 3 4 Availability
on
Origin
1 3 2 7 6 5000
2 7 5 2 3 6000
3 2 5 4 5 2500
Forecast 6000 4000 2000 1500 13500

4. The SunRay transport company ships truckloads of grain from 3 silos to 4 mills. The supply (in
truckloads) and the demand (also in truckloads) together with the unit transportation model is as follows:

Silos\Mills 1 2 3 4 Supply
1 10 2 20 11 15
2 12 7 9 20 25
3 4 14 16 18 10
Demand 5 15 15 15

The unit transportation cost Cij, are in hundreds of dollars. The purpose of model is to determine the minimum
cost shipping schedule between the silos and the mills. This is equivalent to determining the quantity Xij
shipped from silo i to mill j (i=1,2,3 and j=1,2,3,4).

5. A product is produced at three plants and shipped to three warehouses. The transportation cost per unit
are shown in the following table
Plant Ware house Plant capacity
W1 W2 W3
P1 20 16 24 300
P2 10 10 8 500
P3 12 18 10 100
Warehouse
 Demand 200 400 300

Formulate it as linear programming model for minimizing transportation cost.

Solve the above problem using any of the transportation method to get the optimal transportation
schedule.

6. Sound electronics, Inc. produces a battery tape recorder at plants located in Martinsville, North
Carolina; Plymouth, New York; and Franklin, Missouri. The unit transportation cost for the shipments
from the three plants to the distribution centres in Chicago, Dallas, and New York are as follows:
To
From Chicago Dallas New York
Martinsville 1.45 1.60 1.40
Plymouth 1.10 2.25 0.60
Franklin 1.20 1.20 1.80
After considering transportation costs, management has decided that under no circumstances will it use
the Plymouth-Dallas route. The plant capacities and distributor orders for the next month are as follows:
Capacity Orders
Plant (units) Distributor (units)
Martinsville 400 Chicago 400
Plymouth 600 Dallas 400
Franklin 300 New York 400
Because of different wage scales at the three plants, the unit production cost varies from plant to plant.
Assuming the costs are $29.50 per unit at Martinsville, $31.20 per unit at Plymouth, and$ 30.35 per unit
at Franklin, find the production distribution plan that minimizes production and transportation costs.

7. The following table shows the necessary information on the availability of supply to each warehouse,
the requirement of each market and unit transportation cost in Rs. from each warehouse to each
destination.
Markets
Warehouses P Q R S SUPPLY
A 6 3 5 4 22
B 5 9 2 7 15
C 5 7 8 6 8
Demand 7 12 17 9 45
The shipping clerk has worked out the following schedule from experience.
12 units from A to Q, 1 unit from A to R, 9 units from A to S , 15 units from B to R , 7 units from C to P
and one unit from C to R.
Check if the clerk has the optimal schedule if no find the optimal schedule.

8. A baking firm can produce a specialty bread in either of its two plants, as follows

Production Production
Plant capacity loaves cost
Cents/loaf
A 2500 23
B 2100 25
Four restaurant chains are willing to purchase this bread, their demands and the prices that they are
willing to pay are as follows

Chain Maximum Price offered

demand loaves Cents/loaf
1 1800 39
2 2300 37
3 550 40
4 1750 36
The cost in cents of shipping the loaf from a plant to a restaurant chain is given in the following table
Plant Chain 1 Chain 2 Chain 3 Chain 4
Plant A 6 8 11 9
Plant B 12 6 8 5
Determine a delivery schedule for the baking firm.

9. A company has three production units A,B,C which supply to the four retail chains W,X,Y,Z . the cost
of manufacturing one unit at the three different units is as follows
A: Rs.20 B: Rs. 25 C: Rs.22 .
The retail chain are willing to pay for ont unit as follows:
W: Rs.45 X: Rs. 55 Y: Rs.53 and Z: Rs.57
The capacity of the manufacturing units is 50,60 and 40 respectively and the demand of the retail chains
is 20,70 , 50 and 10 respectively.
The cost in Rs. Of shipping one unit of commodity from different manufacturing units to various retail
stores is as follows:
Retail units
Unit W X Y Z
A 5 15 7 6
B 8 7 9 1
C 15 8 9 8
Find the optimal schedule that will maximize the total profit.

10. Boralis manufactures backpacks for serious hikers. The demand for its product occurs from March to
June each year. Boralis estimates the demand for the four months to be 100, 200, 180 and 300 units,
respectively. The company uses part time labour to manufacture the backpacks and as such, its production
capacity varies monthly. It is estimated that Boralis can produce 50, 180, 280, and 270 units for March to
June, respectively. Because the production capacity and demand for different months do not match a
current month’s demand may be satisfied in one of the three ways.
1. current month’s production
2. Surplus production of the earlier months.
3. Surplus production of the later months.
In the first case, the production cost per unit is $40. The second case incurs an additional holding cost of
$0.5 per backpack per month. In the third case an additional penalty cost of $2 is incurred per backpack
per month delay. Boralis wishes to determine th optimal production schedule for the four months.
Probability Theory
Objectives:
At the end of this unit, a participant should be able to
 Understand what is probability
 Know various terms used in probability
 Know various approaches in probability
 Know probability theorems
 Apply the rules of probability
 Differentiate between the situations for applying probability
 Know types of probability
 Calculate probability of given event
 Know Bayes’s theorem
 Apply Bayes’s theorem
 Appreciate probability theory and its use in business.

Structure
Relevant terms
Definition of probability
Types if probability
Bayes’ Theorem
Terms and Definitions

1. A set is a collection of elements.

2. The universal set is the set containing everything in a given context. We denote it by S.

3. The complement of set A is the set containing all the elements in the universal set S that are
not members of set A. We denote the complement of A by Ā.

4. A Venn diagram is a schematic drawing of sets that demonstrates the relationships between
different sets. In a Venn diagram, sets are shown as circles or other closed figures, within a
rectangle corresponding to the universal set, S.

5. The intersection of sets A and B, denoted by A∩B, is the set containing all elements that are
members of both A and B.

6. The union of A and B, denoted by AUB, is the set containing all elements that are members of
either A or B or both.

7. Two sets are said to be disjoint, when their intersection is an empty set; i.e. they have no
common elements i.e. A∩B=Φ

8. The term experiment refers to describe an act or process which can be repeated under some
given conditions and leads to one of several possible outcomes.

9. Random experiments are those experiments whose results depend on chance.

10. The results of a random experiment are called outcomes.

11. The sample space is the universal set S pertinent to a given experiment. It is the set of all
possible outcomes of an experiment.

12. If in an experiment all the possible outcomes are known in advance and none of the outcomes
can be predicted with certainty, then such an experiment is called a random experiment and
the outcomes as events or chance events. An event is a subset of the sample space S.
13. An event whose occurrence is inevitable when a certain random experiment is performed is
called a certain or sure event.

14. An event which can never occur when a certain random experiment is performed is called an
impossible event.

15. An event which may or may not occur while performing a certain random experiment is
known as a random event.

16. Two events are said to be mutually exclusive or incompatible when both cannot happen
simultaneously in a single trial or, in other words, the occurrence of any one of them precludes
the occurrence of the other. Symbolically, if A and B are mutually exclusive events, P(AB) =
0.

17. Two or more events are said to be independent when the outcome of one does not affect, and
is not affected by the other.

18. Events are said to be equally likely when one does not occur more often than others.

19. In simple events we consider the probability of the happening or not happening of single
events.

20. In Compound Events, we consider the joint occurrence of two or more events.

21. Events are said to be exhaustive when their totality includes all the possible outcomes of a
random experiment.

22. Two events A and B are said to be complementary events if they are mutually exclusive and
exhaustive.

23. Probability is a quantitative measure of uncertainty – a number that conveys the strength of
our belief in the occurrence of an uncertain event.

24. Classical or a priori probability :

 Basic assumption is that the outcomes of a random experiment are ‘equally likely’.
 An experiment is the process of making an observation or taking a measurement.
 An event is the outcome of the experiment.
 ‘Probability’ or ‘measure of probability’ is the ratio of the number of “favorable” cases to
the total number of equally likely cases – as defined by Laplace.
 It is called a priori probability because we can state the answer in advance or a priori.

25. Relative frequency theory of probability (a posteriori or empirical probability):

 The probability of an event can be defined as the relative frequency with which it occurs in
an indefinitely large number of trials. If an event occurs ‘a’ times out of n, then its relative
frequency is a/n, the value which is approached by a/n when n becomes infinity is called
the limit of the relative frequency. Symbolically, P(A) = Lim a/n
n→∞

 Practically, P(A) = a/n.

26. Subjective probability is defined as the probability assigned by an individual based on

whatever evidence is available. Hence such probabilities are based on the beliefs of the person
making the probability statement.

27. Axiomatic approach to probability :

 In this approach no fixed definition is given, rather we give certain axioms or postulates on
which probability calculations are based.
  The whole field of probability theory for finite sample spaces is based on the following
three axioms :
i. The probability of an event ranges from 0 to 1, i.e. 0  P(A)  1.
If the event A cannot take place, its probability will be zero, i.e.
P(A) = 0 and if an event is sure to occur, or certain, its probability
will be one i.e. P(A) = 1.
ii. The probability of the entire sample space is 1 i.e. P(S) = 1.
iii. If A and B are mutually exclusive (or disjoint) events, then the probability of
occurrence of either A or B denoted by P(AUB) shall be given by P(AUB) = P(A) +
P(B).

P(A) = 1 – P(Ā)

P(AB) = 0 for mutually exclusive events.

The conditional probability of event A given the occurrence of event B is

P(A/B) = P(AB) / P( B) assuming that P(B)  0.

For independent events, P(A/B) = P(A), P(B/A) = P(B) and

P(AB) = P(A)P(B).

The probability of the union of several independent events –

A1, A2, A3, …..An - is given by the following equation :

P(at least one of A1, A2, A3, …..An happen) = P(A1UA2UA3 ….UAn ) =
1–P(Ā1)P(Ā2)P(Ā3)…..P(Ān)
Theorems

Addition Theorem :

For two events A and B,

P (occurrence of either A or B) = P(A or B) = P(A) + P(B) – P(AB)
Where AB is the event that both events A and B occur jointly.
For two mutually exclusive events A and B,
P (occurrence of either A or B) = P(A or B) = P(A) + P(B)

Multiplication Theorem :

For two independent events A and B,

P(occurrence of both A and B simultaneously) = P(A and B) = P(AB) = P(A)P(B)
In case events A and B are not independent,
P(occurrence of both A and B simultaneously) = P(A and B) = P(AB) = P(A)P(B/A) =
P(B)P(A/B)

Bayes Theorem

P (Ai / B) = P(Ai ) P(B/Ai )

∑ P(Ai ) P(B/Ai )
 Problems
1. In a group of 100 persons 650 drink tea, 400 drink coffee, 150 drink both tea and coffee. If a
person is selected at random what is the probability that he drinks
a) tea only b) coffee only c) only coffee or only tea.
2. Out of 5 eligible candidates whose details are given below

Female 1 – 35 yrs , Female - 28 yrs, Male 1 – 30 yrs, male 2 – 43 yrs, Male 3 – 34 yrs
A person is to be selected to represent the group. A person is selected at random. What is the
probability that
a) selected candidate is male
b) selected candidate is female
c) selected candidate is above 40
d) selected candidate is a female or at the most 30

3. An urn contains 4 red and 5 black balls. Second urn contains 5 red and 7 black balls and the third urn
contains 6 red and 6 black balls. An urn is selected at random and a ball is drown. The ball drown is red
in colour. What is the probability that it is selected from first urn?
4. Consider a population of consumers consisting of two types of consumers. The upper class of consumers
comprises 35% of the population and each member has a probability of 0.8 purchasing of brand A of a product.
Each member of he rest of the population has a probability of 0.3 of purchasing brand A of the product. A
consumer is chosen at random and found to be buyer of the brand A. What is the probability that the buyer belongs
to middle and lower class of consumers?

5. GMAC MBA new-matriculates survey provided the following data for 2018 students.
Applied to more than one school
Age group yes no

23 and under 207 201

24-26 299 379
27-30 182 268
31-35 66 193
36 and over 51 169
For a randomly selected MBA student,
a) What is the probability that a person is 24-26 years old or applied to more than one school?
b) Given that the person had applied to more than one school, what is the probability that he is 31
and above?
Is the number of schools applied to independent of age? Explain

6. A consulting firm has submitted a bid for a large research project. The firm’s management initially felt
they had a 50-50 chance of getting the project. However, the agency to which the bid was submitted has
subsequently requested for additional information on the bid. Past experience indicates that on 75% of the
successful bids and 40% of the unsuccessful bids the agency requested additional information.
What is the conditional probability of a request for additional information given that the bid will
be ultimately be successful?
Compute a posterior probability that the bid will be successful given that a request
for additional information has been received.

7. A public-interest group was planning to make a court challenge to auto insurance rates in one of the
three cities: Atlanta, Baltimore, and Cleveland. The probability that it would choose Atlanta was 0.40;
Baltimore, 0.3; and Cleveland, 0.25. The group also new that, it had 60% chance of favorable ruling if it
chose Baltimore, 45% if it chose Atlanta, and 35% if it chose Cleveland. If the group did receive a
favorable ruling, which city did it most likely choose?

8. Despite the fact that it is the rainy season of the year, Jimmy Bob has decided to go to fishing
tomorrow, but only if it is not raining. Based on past weather data, there is 70% chance it will rain during
the rainy season. The 6.00 pm weather report forecasts an 85% chance of rain tomorrow. Should Jimmy
Bob plan on fishing tomorrow?
9. Suppose that 80% of the candidates for the sales position turn out to be successful and that we have a
predictive test which 95% of the past sales successes and only 50% of the past slaes failures have passed.
If we administer the test to 50 individuals and find 40 pass, how many successful sales men can we
expect to have (assuming that we appoint all 40 who pass)?

10. Two predictive tests are available in the situation that is explained in the previous example. The
percentage of past successful and unsuccessful sales men who have passed and failed each of the tests are
given by the tests given below. A sales candidate passes test 1 and fails test 2. What action should be
taken?

Successful salesman unsuccessful salesman

Test 2 Test 2
Test 1 P F Test 1 P F
P 85 10 P 25 25
F 1 4 F 25 25
Binomial and Poisson distribution.
Objectives
At the end of this unit, a participant should be able to

 define random variable

 Make decision using random variable
 Know probability distribution
 Know parameters of distributions.
 Apply concepts in distribution to business situations
 Calculate probabilities of events under certain probability distributions.

1. A salesperson finds that, in the long run, two out of three sales calls are successful. Twelve sales
calls are to be made; What is the probability that 1) no sales are made 2) three sales are made

2. A large shipment of computer chips is known to contain 10% defective chips. If 10 chips are
randomly selected, what is the expected number of defective ones? What is the standard deviation
of the number of defective chips?

3. An MBA graduate is applying for nine jobs, and believes that she has in each of the nine cases a
constant and independent 0.48 probability of getting an offer.What is the probability that she will
have at least three offers?

4. The probability that a worker in a factory has a disease induced by the chemical is 0.6. If a group
of 5 workers is taken. Find the probability that

No worker has the disease

One worker has the disease
More than 2 workers have the disease
At least three have disease
At the most 2 have the disease

5. The mean of binomial distribution is 6 and the standard deviation is 2 , calculate the
probability of success., probability of at lease one success and at the most 2 successes.

6. Given that in a given population 40% of the people have O+ blood group. If 6 persons are chosen
at random what is the probability that
all will have O+ blood group
None of them have O+ blood group
At least 3 have the O+ blood group

7. A car hire firm has two cars which it hires out day by day. The number of demands for a car on
each day is distributed as poisson variate with mean 1.5. Calculate the proportion of days on
which (i) neither car is used (ii) some demand is refused

8. On the average, one in 400 items is defective. If the items are packed in boxes of 100, what is the
probability that any given box of items will contains
No defectives
Less than two defectives
One or more defective
More than three defectives

9. The book 100% American by Daniel Evan Weiss reports over 1000 statistical facts about the
United States and its people. One fact reported is that 60% of the people live in the state where
they have born.
 a) What is the probability that in a random sample of 10 people at least 8 will be living in the
state where they were born?
b) What is the probability that in a random sample of 5 people exactly 1 person will not be
living where she or he was born?
10. Based on past experience, the main printer in a university computer center is operating properly
90% of the time. Suppose inspections are made at 10 randomly selected times.
a) What is the probability that the main printer is operating properly for exactly 9 of the
inspections?
b) What is the probability that the main printer is not operating properly on more than 1
inspection?
c) What is the expected number of inspections in which the main printer is operating
properly?
11. The probability that a patient fails to recover from a particular operation is 0.1. Suppose that eight
patients having this operation are selected at random. Answer the following questions.

What is the probability that at most one patient will not recover? What is the probability that at least 2
but no more than 3 patients will not recover? What is the probability that all patients will not recover?
What is the expected number of patients that will not recover?

12. An insurance company states that 10% of all fire insurance claims are fraudulent. Suppose the
company is correct, and that it receives 120 claims. What's the probability that at least 3 claims are
fraudulent? What's the probability that less than 1 claims are fraudulent?
13. A company estimates that there is an 80% chance of an order arriving on time from a supplier.
Suppose 5 orders are placed this week.
a) What is the probability that at least 4 orders arrive on time?
b) What is the probability that none of the orders arrive on time?
c) How many orders would you expect to arrive on time?
14. A natural gas exploration company averages four strikes (that is, natural gas is found) per 100
holes drilled. If 20 holes are to be drilled, what is the probability that no strikes will be made?
What is the probability that at least one strike will be made?
15. A new type of missile is to be tested. It has been estimated that the probability of a successful
missile launch is 80%. Each launch has been prepared by a different team of technicians, so each
launch can be considered independent of the other. If four launches are made, what is the
probability of zero (0) successful launches?
16. A mail-order business has six telephone lines. Let X denote the number of lines in use at a
specified time. Suppose that the p.m.f of X is given in the following table.
X 0 1 2 3 4 5 6
p(x) .10 .15 .20 0.25 0.20 0.06 0.04
Calculate and sketch the c.d.f. of X and use it to calculate the probabilities of each of
the following events:
a) At most 3 lines are in use b)Fewer than 3 lines are in use
b) At least 3 lines are in use d)Between 2 and 5 lines (inclusive) are in use
e) Between 2 and 4 lines (inclusive) are not in use

17. A chemical supply company has in stock 100lb of a certain chemical, which it sells to customers
in 5-lb lots. Let X denote the number of lots ordered by a randomly chosen customer, where X has
p.m.f
x 1 2 3 4
p(x) 0.2 0.4 0.3 0.1
a) Compute E(X) and V (X).

18. A k-out-of-n system is one that will function if and only if at least k of the n individual
components in the system function. If the individual components function independently of one
another, each with probability 0:9, what is the probability that a 3-out of-5 system functions?
 19. A company that produces a fine crystal knows from experience that 10% of its goblets have
cosmetic aws and must be classified as “seconds".
a) Among six randomly selected goblets, how likely is it that only one is selected?
b) Among six randomly selected goblets, what is the probability that at least two are seconds?

20. A toll bridge charges $1.00 for passenger cars and $2.50 for other vehicles. Suppose that during
daytime hours, 60% of all vehicles are passenger cars. If 25 vehicles cross the bridge during a
particular daytime period, what is the resulting expected toll revenue?

21. Of all customers purchasing automatic garage-door openers, 75% purchases a chain driven model.
Let X=the number among the next 15 purchasers who selected the chain-driven model.
b) Find P(X = 10). c) Find P(8  X  12)

22. Suppose that a manufactured product has 2 defects per unit of product inspected. Using Poisson
distribution, calculate the probabilities of finding a product without any defect, 3 defects, and 4
defects. (Given e-2 = 0.135)

23. A factory produces blades in packets of 10. The probability of a blade to be defective is 0.2 per
cent. Find the number of packets having two defective blades in a consignment of 10,000 packets.

24. In a certain factory manufacturing razor blades, there is a small chance of 1/50 for any blade to be
defective. The blades are placed in packets, each containing 10 blades. Using the Poisson
distribution, calculate the approximate number of packets containing not more than 2 defective
blades in a consignment of 10,000packets.

25. The following table shows the number of customers returning the products in a marketing
territory. The data is for 100 stores:
i. No. of returns : 0 1 2 3 4 5 6
ii. No. of stores : 4 14 23 23 18 9 9
Fit a Poisson distribution.

26. In a town 10 accidents took place in a span of 50 days. Assuming that the number of accidents per
day follows the Poisson distribution, find the probability that there will be three or more accidents
in a day.

27. From a bag containing 3 red and 2 white balls, a man is to draw two balls at random without
replacement. He gains Rs. 20 for each red ball and Rs. 10 for each white one. What is the
expectation of his draw? With what variance?

28. The monthly demand for transistors is known to have the following probability distribution
Demand 1 2 3 4 5 6
Probability.1 .15 .2 .25 .18 .12
Determine the expected demand of the transistors. Also obtain cost ( C ) of producing n transistors is
given by the following relationship C=10000+500 C, determine the expected cost.

29. An industrial salesman wants to know the average number of units he sells per sales call. He
checks his past sales records and comes up with the following probabilities:
Sales (units) 0 1 2 3 4 5
Probability.15 .2 .1 .05 .3 .2
You are expected to help the sales man in his objective.

Normal distribution.
1. General Hospital's patient account division has compiled data on the age of accounts receivables.
The data collected indicate that the age of the accounts follows a normal distribution with mean 28
 days and standard deviation 8 days. What proportion of the accounts are between 20 and 40 days
old? What proportion of the accounts are less than 30 days old? What is the number of days in
which 75% of all accounts are above?
2. The length of time of long-distance telephone calls has mean of 18 minutes and standard deviation
of 4 minutes. Suppose a sample of 50 telephone calls is used to reflect on the population of all
long-distance calls. What is the chance that the average of the 50 calls is between 16 and 17
minutes? What theorem do we need in order to solve (a.)?
3. The time required to complete a final examination in a particular college course is normally
distributed, with mean of 80 minutes and a standard deviation of 10 minutes. Answer the
following questions. What is the probability of completing the exam in one hour or less? What is
the probability a student will complete the exam in a time between 60 and 75 minutes? What is the
inter quartile range for completion times?
4. Assume that the dividends of electric utility stocks as of a given date have a normal distribution
with mean of 8.5 percent and standard deviation of 2.5 percent. Find the probability that the
average dividend of 25 such stocks will exceed 10 percent.
5. What proportion of a normal distribution is within one standard deviation of the mean? (b) What
proportion is more than 1.8 standard deviations from the mean? (c) What proportion is between 1
and 1.5 standard deviations above the mean?
6. A test is normally distributed with a mean of 40 and a standard deviation of 7. (a) What score
would be needed to be in the 85th percentile? (b) What score would be needed to be in the 22nd
percentile?
7. Assume a normal distribution with a mean of 90 and a standard deviation of 7. What limits would
include the middle 65% of the cases.
8. Reclaimed phosphate land in Polk County, Florida, has been found to emit a higher mean
radiation level than other non mining land in the county. Suppose that the radiation level for the
reclaimed land has a distribution with mean 5.0 working levels (WL) and a standard deviation of
0.5 WL. Suppose further that 20 houses built on reclaimed land are randomly selected and the
radiation level is measured in each. What is the probability that the sample mean for the 20 houses
exceeds 4.7 WL? What is the probability that the sample mean is less than 4.8 WL? The reaction
time to a certain psychological experiment is considered to be normally distributed with a mean of
20 seconds and a standard deviation of 4 seconds. What proportion of subjects take between 15
and 30 seconds to react? What proportion of subjects take longer than 30 seconds to react? What
is the reaction time such that only 10% of subjects are faster?
9. Wages for workers in a particular industry average $11.90 per hour with a standard deviation of
40 cents. The wages are considered to be normally distributed. Suppose you are employed in this
industry. What would your wage have to be if 75% of all workers earn more than you? What
proportion of workers receive wages less than $11 per hour? What proportion of workers make
between $12 and $13 per hour?
10. Daily fluctuations of French CAC-40 stock index from March to June in 1997 seem to follow a
normal distribution with mean of 2600 and a standard deviation of 50. Find the probability that the
CAC-40 will be (i) between 2520 and 2670 (ii) below 2730 and not less than 2450?

11. The mean cost for employee alcohol rehabilitation programs involving hospitalization is $10,000
((USA Today, September 12, 1991). Assume that rehabilitation program cost has a normal
distribution with a standard deviation of $2,200. What is the probability that a rehabilitation
program will cost at least $12,000? What is the cost range for the 10% most expensive
rehabilitation programs?
12. The grade point averages of a large population of cadets in MA206 are approximately
normally distributed with a mean of 2.4 and a standard deviation of 0.8.
What fraction of the students will possess a grade point average in excess of 3.0?
If cadets possessing a grade point average equal to or less than 1.9 are dropped from USMA, what
percentage of the cadets will be dropped?
What grade point average would you need to be in the 90th percentile? The 45th percentile?

13. Assume that the price of a share of TWA stock is normally distributed with mean 48 and
standard deviation 6. What is the probability that on a randomly chosen day in the period
 for which our assumptions are made, the price of the stock will be more than $60 per
share? Less than $60 per share? More than $40 per share? Between $40 and $50 per
share?

14. The amount of oil pumped daily at Standard Oil’s facilities in Prudhoe Bay is normally
distributed with mean 800,000 barrels and standard deviation 10,000. In determining the
amount of oil the company must report as its lower limit of daily production, the
company wants to choose an amount such that for 80% of the days, at least the reported
amount x is produced. Determine the value of the lower limit x.

15. Models of the pricing of stock options make the assumption of a normal distribution. An
analyst believes that the price of an IBM stock option is a normally distributed random
variable with mean $8.95 and variance 4. The analyst would like to determine a value
such that there is a 0.90 probability that the price of the option will be greater than that
value. Find the required value.

16. The number of people responding to a mailed information brochure on cruises of the
Royal Viking Line through an agency in San Francisco is approximately normally
distributed. The agency found that 10% of the time, over 1,000 people respond
immediately after a mailing, and 50% of the time, at least 650 people respond right after
the mailing. Find the mean and the standard deviation of the number of people who
respond following a mailing.
17. Wages for workers in a particular industry average $11.90 per hour with a standard deviation of
40 cents. The wages are considered to be normally distributed. Suppose you are employed in this
industry. What would your wage have to be if 75% of all workers earn more than you? What
proportion of workers receive wages less than $11 per hour? What proportion of workers make
between $12 and $13 per hour?
18. The speeds of all cars travelling on a stretch of interstate highway 1-95 are normally distributed
with a mean of 68 miles per hour and a standard deviation of 3 miles. Find the percentage of
travellers who are violating the 65 miles speed limit.
19. The weekly food expenditure for large families ( families at least 2 children) in London is known
to be Normally distributed with mean £155 and a standard deviation of £32.What is the
probability that a randomly selected large family spends less than £110.What is the probability
that a randomly selected large family spends more than £225 on food per week? What is the
probability that a randomly selected large family spends between £ 115 and £210 per week? In a
random sample of 420 large families in London how many families spent in the above cases.

20. The lifetime of a certain kind of battery is a random variable having a normal distribution with a
μ=300 hours and σ 35hours. Find the probability that one of those batteries will have a life time
more than 320 hours. Also find the value above which we can expect to find the best 25% of these
batteries?

21. If the heights of 300 students are normally distributed with mean 68.00 inches and standard
deviation 3.0 inches. Now many students have heights a) greater than 72 inches, b) less than or
equal to 64 inches, c) between 65 and 71 inches inclusive and equal to 68 inches.

Decision Analysis
Objectives
At the end of the session the participant will be able to
Know the various situations of decision making
Know various approaches foe decision making
Use the decision tree
Use Bayes’ theorem for decision making.
Structure
Decision under
Certainty
Risk
Uncertainty
Decision trees

1. The following payoff table shows profit for a decision analysis problem with two decision alternative
and three states of nature.
State of Nature
Decision Alternative S1 S2 S3
d1 250 100 25
d2 100 100 75
If the decision maker knows nothing about the probabilities of the states of nature, what is the
recommended decision using the optimistic, conservative, and minimax regret approaches?

2. Suppose that a decision maker faced with four decision alternatives and four states of nature develops
the following profit payoff table.
State of Nature
Decision Alternative S1 S2 S3 S4
d1 14 9 10 5
d2 11 10 8 7
d3 9 10 10 11
d4 8 10 11 13
a. If the decision maker knows nothing about the probabilities of the
states of nature, what is the recommended decision using the optimistic, conservative, and
minimax regret approaches?
b. Which approach do you prefer? Explain. Is establishing the most appropriate approach
before analysing the problem important for the decision maker? Explain.
c. Assume that the payoff table provides cost rather than profit payoffs. What is the
recommended decision using the optimistic, conservative, and minimax regret approaches?

3. Southland Corporation’s decision to produce a new line of recreational products has resulted in the
need to construct either a small plant or a large plant,. The best selection of plant size depends on how the
marketplace reacts to the new product line. To conduct an analysis, marketing management has decided to
view the possible long-run demand as either low, medium, or high. The following payoff table shows the
projected profit in millions of dollars:
Long-Run Demand
Plant Size Low Medium High
Small 150 200 200
Large 50 200 500
a. What is the decision to be made, and what is the chance event for Southland’s problem?
b. Construct a decision tree.
c. Recommend a decision based on the use of the optimistic, conservative, and minimax
regret approaches.

4. Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job,
Ken has been able to increase his annual salary by a factor of over 100. At the present time, ken is forced
to consider purchasing some more equipment for Brown Oil because of competition. His alternatives are
shown in the following table.
EQUIPMENT FAVORABLE MARKET ($) UNFAVORABLE MARKET ($)

Sub 100 300,000 - 200,000

Oiler J 250,000 - 100,000
Texan 75,000 - 18,000
For example, if Ken purchases a Sub 100 and if there is a favourable market, he will suffer a loss of $
200,000. But Ken has always been a very optimistic decision maker.
(a) What type of decision is Ken facing?
(b) What decision criterion should he use?
(c) What alternative is best?

5. Today’s Electronics specializes in manufacturing modern electronic components. It also builds the
equipment that produces the components. Phyllis Weinberger, who is responsible for advising the
president of Today’s Electronics on electronic manufacturing equipment, has developed the following
table concerning a proposed facility:
PROFIT ($)

STRONG MARKET FAIR MARKET POOR MARKET

Large facility 550,000 110,000 -310,000

Medium-sized facility 300,000 129,000 -100,000
Small facility 200,000 100,000 - 32,000
No facility 0 0 0

(a) Develop an opportunity loss table.

(b) What is the minimax decision?

6. Even though independent gasoline stations have been having a difficult time, Susan Solomon has been
thinking about starting her own independent gasoline station. Susan’s problem is to decide how large her
station should be. The annual returns will depend on both the size of her station and a number of
marketing factors related to the oil industry and demand for gasoline. After a careful analysis. Susan
developed the following table:
SIZE OF FIRST GOOD MARKET FAIR MARKET POOR MARKET
STATION ($) ($) ($)
Small 50,000 20,000 -10,000
Medium 80,000 30,000 -20,000
Large 1,00,000 30,000 - 40,000
Very large 300,000 25,000 -160,000

For example, if Susan constructs a small station and the market is good, she will realize a profit of
$50,000.
(a) Develop a decision table for this decision.
(b) What is the maximax decision?
(c) What is the maximin decision?
(d) What is the equality likely decision?
(e) What is the criterion of realism decision? Use an  value of 0.8.
(f) Develop an opportunity loss table.
(g) What is the minimax decision?
7. Dorothy Stanyard has three major routed to take to work. She can take Tennessee Street the entire, she
can take several back streets to work, or she can use the expressway. The traffic patterns are very
complex, however. Under good conditions, Tennessee Street is the fastest route. When Tennessee is
congested, one of the other routes is usually preferable. Over the past two months, Dorothy has tried each
route several times under different traffic conditions. This information is summarized in minutes of travel
time to work in the following table:
NO TRAFFIC MILD TRAFFIC SEVERE TRAFFIC
CONGESTION CONGESTION CONGESTION
(minutes) (minutes) (minutes)

Tennessee Street 15 30 45
Back roads 20 25 35
Expressway 30 30 30
In the past 60 days, Dorothy encountered severe traffic congestion 10 days and mild traffic congestion 20
days. Assume that the last 60 days are typical of traffic conditions,
(a) Develop a decision table for this decision.
(b) What route should Dorothy take?
(c) Dorothy is about to buy a radio for her car that would tell her the exact traffic conditions
before she started to work each morning. How much time in minutes on the average would
Dorothy save by buying the radio?
8. Teresa Granger is the manager of Chicago Cheese, which produces cheese spreads and other cheese-
related products. E-Z Spread Cheese is a product that has always been popular. The probability of sales,
in cases, is as follows:
DEMAND IN CASES 10 11 12 13 14
PROBABILITY .2 .3 .2 .2 .1
A case of E-Z Spread Cheese sells for $100 and has a cost of $75. Any cheese
that is sold to a local food processor for $50. Teresa never sells cheese that is more
than a week old. How many cases of E-Z Spread Cheese should Teresa produce each week?

9. Harry's Hardware does a brisk business during the year, but during Christmas, Harry's Hardware sells
Christmas trees for a substantial profit. Unfortunately, any trees not sold at the end of the season are
totally worthless. Thus, the number of trees that are stocked for a given season is a very important
decision. The following table reveals the demand for Christmas trees.
DEMAND FOR CHRISTMAS TREES PROBABILITY

50 0.05
75 0.1
100 0.2
125 0.3
150 0.2
175 0.1
200 0.05

Harry sells trees for $15 each, but his cost is only $6.
(a) How many trees should Harry stock at his hardware store?
(b) If the cost increased to $12 per tree and Harry continues to sell trees for $15 each, how many trees
should Harry stock?
(c) Harry is thinking about increasing the price to $18 per tree. Assume that the cost per tree is $6. It
is expected that the probability of selling 50, 75, 100, or 125 trees will be 0.25 each. Harry does
not expect to sell more than 125 trees with this price increase. What do you recommend?

10. After buying a computer system, Sim Thomas must decide whether to purchase (1) a complete
maintenance (or service) policy at a cost of $ 500, which would cover all maintenance costs; (2) a partial
maintenance policy at a cost of $300, which would cover some of the costs of any maintenance; or (3) no
maintenance policy. The consequences, costs, and probabilities are given in the following table:
maintenance not required
required

No Service Agreement $3,000 $0

Partial Service Agreement $1,500 $3000
Complete Service Agreement $ 500 $ 500
Probabilities 0.2 0.8

(a) What do you recommend?

(b) If the probability of needing maintenance is 0.8 (instead of 0.2) and the probability of not
needing maintenance is 0.2, how does this change Sim’s decision?

11. Bob Welch, a famous divorce attorney, is facing a decision with four options (alternatives) and four
scenarios (states of nature). The options relate to furniture in his client’s house. The options range from a
cash settlement for the furniture (Option 1) to aggressively litigating the issue (Option 4), where his client
could get $ 30,000 or suffer a $ 20,000 loss from fees and related costs. He does not know the
probabilities of the states of nature, which include Scenario 1 (favourable judge), Scenario 2 (jury trial),
Scenario 3 (out of court settlement), and Scenario 4 (arbitration). (See the following table.) Help Bob by
determining the maximax and maximin decisions. What is the equally likely decision?
scenario 1 scenario 2 scenario 3 scenario 4

Option 1 $5,000 $ 5,000 $ 5,000 $ 5,000

Option 2 $10,000 $ 5,000 $ 2,000 $0
Option 3 $ 20,000 $ 7,000 $ 1,000 -$5,000
Option 4 $ 30,000 $ 15,000 -$10,000 -$20,000

12. Center City motors Sales has recently incorporated. Its chief asset is franchise to sell automobiles of a
major American manufacturer. CCMS’s general manager is planning the staffing of the leadership’s
garage facilities. From information provided by the manufacturer and from the nearby dealerships, he has
estimated the number of annual mechanic hours that the garage will be likely to need.
Hours 10000 12000 14000 16000
Probability 0.2 0.3 0.4 0.1
The manager plans to pay each mechanics $9.00 per hour and to charge customer $16.00. The mechanics
will work for 40 hour week and get annual 2 week vacation.
Determine how many mechanics Center City should hire?
How much should Center City pay to get perfect information about the number of mechanics it needs?

13. A shopkeeper at a local stadium must decide whether to sell ice cream or coffee at today’s game. The
shopkeeper believes that the profit will depend upon the whether. The pay off table is as follows:
Event action
Sell coffee sell ice cream
Cool weather Rs.40 Rs.20
Warm weather Rs.55 Rs.80
Based upon his past experience at this time of the year, the shopkeeper estimates that the probability of
warm weather as 0.60. Prior to making his decision, the shopkeeper decides to hear forecast of the local
weatherman. In the past, when it has been cool, the weatherman has forecast cool weather80% times.
When it has warm , the weatherman has forecast warm weather 70% times. If today’s forecast is for cool
weather, using Bayesian decision theory and EMV criterion, determine whether the shopkeeper should
sell ice cream or coffee?

14. You are given the following payoffs of three acts A1,A2,A3 and the states of nature S1,S2,S3:
Acts
States of nature A1 A2 A3
S1 25 -10 -125
S2 400 440 400
S3 650 740 750
The probabilities of the three states of nature are 0.1,0.7and 0.2 respectively. Specify the decision under
the three criteria for under uncertainty as well as EMV.

15. Given the following pay off in Rs. Matrix:

State of nature Probability Decision
Don’t expand expand 200 units Expand 400 units
High demand 0.4 2500 3500 5000
Medium demand 0.4 2500 3500 2500
Low demand 0.2 2500 1500 1000
What should be the decision if we use (i) Emv criterion,(ii) The Minimax criterion (iii) The maximin
criterion?

16. At the Campus Set, a clothing store for stylish young moderns manager Judy Sommers is ordering the
seasons bathing suits from Jamaican Swimwear. As in the past years, she is ordering mostly two piece
suits, but she does plan to carry some one piece suits. From the past estimates demand for the latter:
Units demanded 19 20 21 22 23 24
Probability 0.04 0.12 0.30 0.24 0.18 0.12
The one-piece suits will retail for $43; Judy’s cost is $21. Any suit left at the end of the season go on sale
for $19 and are certain to sell at that price. Use managerial analysis to determine the number of one-piece
suits Judy should order.

17. A company operating a chain of drugstores plans to open a new store in one of the two locations. The
a management of the company figures that in the first location, the store will show an annual profit of
$20,000 if it is successful and an annual loss of $2000 if it is not. So far as the second location is
concerned, the store will show an annual profit of $25000 if it is successful and an annual loss of $5000 if
it is not. If the probability of success is ½ for each location, where should the company open a new store
so as to maximize the expected profit.

18. Airport Rent –A-Car is a locally operated business in competition with several major firms. ARC is
planning a new deal for customers who want to rent a car for only one day and return it to the airport. For
$24.95, the company will rent a small economy car to a customer, whose only other expense is to fill the
car with gas at the day’s end. ARC is planning to buy a number of small cars from the manufacturer at a
reduced price of $6,750. The big question is how many to buy. Company executives have decided on the
following estimated probability distribution of the number of cars rented per day :
Number of cars rented 10 11 12 13 14 15
Probability 0.18 0.19 0.21 0.15 0.14 0.13

The company intends to offer the plan 6 days a week (312 days per year) and anticipates that its variable
cost per car per day will be $2.25. After using the cars for 1 year. ARC expects to sell them and
recapture 45 percent of the original cost. Ignoring the time value of money and any non-cash expenses,
determine the optimal number of cars for ARC to buy.

19. For several years, the Madison Rhodes Department Store had featured personalized pencils as a
Christmas special. Madison Rhodes purchased the pencils from its supplier, who provided the embossing
machine. The personalizing was done on the department store premises. Despite the success of the
pencil sales, Madison Rhodes had received comments that the quality of the lead in the pencils was poor,
and the store had found a different supplier. The new supplier, however, would be unable to begin
servicing the department store until after the first of January. Madison Rhodes was forced to purchase its
pencils one final time from its original supplier to meet Christmas demand. It was important, therefore,
that pencils not be overstocked, and yet the manager was adamant about not losing too many customers
because of stockouts. The pencils came packed 15 to the box, 72 boxes to the case. Madison Rhodes
paid $60 per case and sold the pencils for $1.50 per box. Labor costs are 37.5¢ per box sold. Based on
previous years’ sales, management constructed the following schedule :
Expected sales (cases) 15 16 17 18 19 20
Probability 0.05 0.20 0.30 0.25 0.10 0.10

(a) How many cases should Madison Rhodes order?

(b) What’s the expected profit?

20. Emily Scott, head of a small business consulting firm, must decide how many M.B.A.s to hire as full-
time consultants for the next year. (Emily has decided that she will not bother with any part-time
employees.) Emily knows from experience that the probability distribution on the number of consulting
jobs her firm will get each year is as follows:
Consulting jobs 24 27 30 33
Probability 0.3 0.2 0.4 0.1
Emily also knows that each M.B.A. hired will be able to handle exactly three consulting jobs per year.
The salary of each M.B.A. is $60,000. Each consulting job is worth $30,000 to Emily’s firm. Each
consulting job that the firm is awarded but cannot complete costs the firm $10,000 in future business lost.
(a) How many M.B.A.s should Emily hire?
(b) What is the expected value of perfect information to Emily?
21. The Writer’s Workbench operates a chain of word-processing franchises in college towns. For an
hourly fee of $8.00, Writer’s Workbench provides access to a personal computer, word-processing
software, and a printer to students who need to prepare papers for their classes. Paper is provided at no
additional cost. The firm estimates that its hourly variable cost per machine (principally due to paper,
ribbons, electricity, and wear and tear on the computers and printers) is about 85¢. Deborah Rubin is
considering opening a Writer’s Workbench franchise in Ames, Iowa. A preliminary market survey has
resulted in the following probability distribution of the number of machines demanded per hour during
the hours she plans to operate:

Number of machines 22 23 24 25 26 27
Probability 0.12 0.16 0.22 0.27 0.18 0.05

If she wishes to maximize her profit contribution, how many machines should Deborah plan to have?
What is the hourly expected value of perfect information in this situation? Even if Deborah could obtain
a perfectly accurate forecast of the demand for each and every hour, why wouldn’t she be willing to pay
up to the EVPI for that information in this situation?

22. Manfred Baum, merchandise manager for the Grant Shoe Company, is planning production decisions
for the coming year’s summer line of shoes. His chief concern is estimating the sales of a new design of
fashion sandals. These sandals have posed problems in the past for two reasons: (1) the limited selling
season does not provide enough time for the company to produce a second run of a popular item, and (2)
the styles change dramatically from year to year, and unsold sandals become worthless. Manfred has
discussed the newest design with salespeople and has formulated the following estimates of how the item
will sell:
Pairs (thousands) 45 50 55 60 65
Probability 0.25 0.30 0.20 0.15 0.10

Information from the production department reveals that the sandal will cost $15.25 per pair to
manufacture, and marketing has informed Manfred that the wholesale price will be $31.35 a pair. Using
the expected-value decision criterion, calculate the number of pairs that Manfred should recommend the
company produce.

23. An investor is convinced that the price of a share of PDQ stock will rise in the near future. PDQ stock
is currently selling for $57 a share. Upon inspecting the latest quotes on the options market, the investor
finds that she can purchase an option at a cost of $5 per share, allowing her to buy PDQ for $55 per share
within the next 2 months. She can also purchase an option to buy the stock within a 4-month period; this
option, which cost $10 per share, also has an exercise price of $55 per share. She has estimated the
following probability distributions for the stock price on the days the options expire:

Price 50 55 60 65 70 75
Probability at 2 Months 0.05 0.15 0.15 0.25 0.35 0.05
Probability at 4 Months 0 0.05 0.05 0.20 0.30 0.40

The investor plans to exercise her option just prior to its expiration if PDQ stock is selling for more than
$55 and immediately sell the stock at that market price. Of course, if the stock is selling for $55 or less
when the option expires, she will lose the entire purchase cost of the option. The investor is relatively
conservative, with the following utility values for changes in her dollar assets:

Change +1,500 +1,000 +500 0 -500 -1,000

Utility 1.0 0.9 0.8 0.7 0.1 0.0

She is considering one of three alternatives:

(1) To buy a 2-month option on 100 shares.
(2) To buy a 4-month option on 100 shares.
(3) Not to buy at all.
Which of these alternatives will maximize her expected utility?
24. The Motor City Auto Company is planning to introduce a new automobile that features a radically
new pollution-control system. It has two options. The first option is to build a new plant, anticipating
full production in 3 years. The second option is to rebuild a small existing pilot plant for limited
production for the coming model year. If the results of the limited production show promise at the end of
the first year, full-scale production in a newly constructed plant would still be possible 3 years from now.
If it decides to proceed with the pilot plant, and later analysis shows that it is unattractive to go into full
production, the pilot plant can still be operated by itself at a small profit. The expected annual profits for
various alternatives are as follows :

Production Consumer Annual Profit

Facility Acceptance ($ Millions)
New plant High 14
New plant Low -6
Pilot plant High 2
Pilot plant Low 1

Motor City’s marketing research division has estimated that there is a 50 percent probability that
consumer acceptance will be high and 50 percent that it will be low. If the pilot plant is put into
production, with a correspondingly low-keyed advertising program, the researchers feel that the
probabilities are 45 percent for high consumer acceptance and 55 percent for low acceptance. Further,
they have estimated that if the pilot plant is built and consumer acceptance is found to be high, there is a
90 percent probability of high acceptance with full production. If consumer acceptance with the pilot
models is found to be low, however, there is only a 10 percent probability of high eventual acceptance
with full production. Which plant should be built?

25. Evelyn Parkhill is considering three possible ways to invest the $200,000 she has just inherited.

(1) Some of her friends are considering financing a combined laundromat, video-game arcade, and
pizzeria, where the young singles in the area can meet and play while doing their laundry. This
venture is highly risky and could result in either a major loss or a substantial gain within a year.
Evelyn estimates that with probability 0.6, she will lose all of her money. However, with probability
0.4, she will make a $200,000 profit.
(2) She can invest in some new apartments that are being built in town. Within 1 year, this fairly
conservative project will produce a profit of at least $10,000, but it might yield $15,000, $20,000,
$25,000, or possibly even $30,000. Evelyn estimates the probabilities of these five returns at 0.20,
0.30, 0.25, 0.20. and 0.05, respectively.

(3) She can invest in some government securities that have a current yield of 8.25 percent.

(a) Construct a decision tree to help Evelyn decide how to invest her money.
(b) Which investment will maximize her expected 1-year profit?
(c) How high would the yield on the government bonds have to be before she would decide to invest in
them?
(d) How much would she be willing to pay for perfect information about the success of the laundromat?
(e) How much would she be willing to pay for perfect information about the success of the apartments?

26. Farmer McCoy can plant either corn or soybeans. The probabilities that the next harvest prices of
these commodities will go up, stay the same, or go down are .25, .30, and .45, respectively. If the prices
go up, the corn crop will net $30,000 and the soybeans will net $10,000. If the prices remain unchanged,
McCoy will (barely) break even. But if the prices go down, the corn and soybeans crops will sustain
losses of $35,000 and $5000, respectively.
(a) Represent McCoy’s problem as a decision tree.
(b) Which crop should McCoy plant?
The farmer has the additional option of using the land as a grazing range, in which case he is guaranteed a
payoff of $7500. The farmer has also secured additional information from a broker regarding the degree
of stability of future commodity prices. The broker’s assessment of “favourable” and “unfavourable” is
further quantified by the following conditional probabilities:

a1 a2

s1 .15 .85

P aj si = s2 .50 .50

s3 .85 .15

where a1 and a2 represent the “favourable” and “unfavourable” assessment by the broker, and s 1 to
s3 represent the “down/same/up” change in future prices, respectively.
(a) Draw the associated decision tree.
(b) Specify the optimal decision for the problem.

27. AFC is about to launch its new Wings ‘N Things fast food nationally. The research department is
convinced that Wings ‘N Things will be a great success and wants to introduce it immediately without
advertisement in all AFC outlets. The marketing department sees “things” differently and wants to
unleash an intensive advertisement campaign. The advertisement campaign will cost $100,000 and if
successful will produce $950,000 revenue. If the campaign is unsuccessful (there is a 30% chance it
won’t be), the revenue is estimated at only $400,000 with probability .8 if the customers are receptive and
$200,000 with probability .2 if they are not.
(c) Draw the decision tree for the game.
(d) Would you favor playing this game?
28. AFC management has decided to test-market its Wings ‘N Things in selective locations. The outcome
of the test is either “good” (a1) or “bad” (a2). The test yields the following conditional probabilities with
and without the advertisement campaign:

a1 a2 a1 a2

v1 .95 .05 w1 .8 .2

v2 .3 .7 w2 .4 .6

The symbols v1 and v2 represent “success” and “no success,” and w 1 and w2 represent “receptive” and
“not receptive.”
(a) Develop the associated decision tree.
(b) Determine the best course of action for AFC.

29. A manufacturer makes a certain piece of machinery for the government. He is paid $ 1000 if it is
shipped in perfect condition and $750 if it is not shipped in perfect condition. To test a piece of this
machinery before it is shipped costs $10 and if it is found to be defective it costs another $50 to correct
for the imperfection. Is it more profitable for the manufacturer to ship each piece of machinery with
inspection or without inspection, if he knows that 2 per cent of these pieces of machinery are defective
when they come off his assembly line? What if he knows that 6 per cent of these pieces of machinery are
defective?
 Network Analysis
Critical Path Method and Program Evaluation And Review Technique
Objectives
At the end of this unit, a participant should be able to
 Know the network
 Draw a network
 Identify the components of the network
  Know a critical path
 Locate the critical path
 Know the Critical path method (CPM)
 Appreciate the use of network analysis in business and economics. Know Program evaluation and
review technique (PERT)
 Differentiate between CPM and PERT.
 Know crashing
 Appreciate the use of network analysis in business and economics.
Structure
Network
Critical path method
Program evaluation and review technique
Time cost optimization

1. Jackson Community Hospital has a small automated hematology lab. The following procedure is used
in the laboratory operation.
________________________________________________________________________
Description activity time minutes
________________________________________________________________________
Blood sample taken 1-2 4
Lab collects sample 2-3 2
Emergency sample given priority 2-4 1
Initial reports on samples 3-4 5
Inadequate samples rejected 3-6 6
Secondary reports on samples 4-5 15
Reports on emergency samples sent down 5-6 5
All other reports issued 6-7 9
Design the appropriate network. Calculate slack for each event and also the floats for each activity.

2. Consider the following activity sequence for a project:

______________________________________________
Activity Immediately Duration
Preceding Days
______________________________________________
A - 2
B - 3
C - 2
D B 4
E A,B 3
F B 2
G F,C 5
H G 4
I C,F 3
J I,D 2
K J 1
L E 6
_____________________________________________

Construct a network and calculate the activity time estimates.

3. An architect has been awarded a contract to prepare plans for an urban renewal project. The project consists of
the following activities and their estimated times.
Activity Description Immediate predecessors time(days)
A Prepare preliminary sketches - 2
B Outline specifications - 1
C Prepare drawings A 3
D Write specifications A,B 2
E Run off prints C,D 1
F Have Specification B,D 3
G Assemble E,F 1
Indicate the critical path.
Calculate the activity floats.

4. Consider the time estimates in weeks for activities as presented below:

Activity immediate optimistic most likely pessimistic

Predecessor
A - 4 5 12
B - 1 1.5 5
C A 2 3 4
D A 3 4 11
E A 2 3 4
F C 1.5 2 2.5
G D 1.5 3 4.5
H B,E 2.5 3.5 7.5
I H 1.5 2 2.5
J F, G, I 1 2 3
Draw the network.
Calculate the expected duration and its variance.
What is the probability that the project will be completed in 15 weeks?

5. Office Automation Inc. has developed a proposal for introducing a new computerized office system
that will improve word processing and interoffice communication for a particular company. Contained in
the proposal is a list of activities that must be accomplished to complete the new office system project.
Use the following information about the activities.
Immediate Time (weeks) Cost($000s)
Activity predecessor normal crash Normal crash
A - 10 8 30 70
B A 8 6 120 150
C B 10 7 100 160
D A 7 6 40 50
E D 10 8 50 75
F C,E 3 3 60 60
Develop a project network
Develop activity schedule
Find the optimal project cost and the duration associated with it.

6. The basic cost time data for the jobs in a project are as given below:

Job Normal Crash Cost of crashing

Days Cost Days Cost per day
A 3 140 2 210 70
B 6 215 5 275 60
C 2 160 1 240 80
D 4 130 3 180 50
E 2 170 1 250 80
F 7 165 4 285 40
G 4 210 3 290 80
H 3 110 2 160 50
Total 1300 1890
The activity dependencies are as follows
A,B,.C are starting activities. Activity D,E,F can start when A is completed. G can start after B,D is
completed. Activity H can start after C and E are completed. Activities G,F and H are final activities.
Draw the network and indicate the critical path.
If indirect cost per day is Rs.120, what is the optimal project duration?

7. Consider the data of the project

Duration (weeks)
Activity Predecessors a m b
A - 3 5 8
B - 6 7 9
C A 4 5 9
D B 3 5 8
E A 4 6 9
F C,D 5 8 11
G C,D,E 3 6 9
H F 1 2 9
What is the probability of completing the project on or before 30 weeks?

8. A prerequisite for the funding of a government project is the construction of a CPM network.
The data on the time and cost of various activities are as follows

Time in weeks cost in dollars

______________________________________________________
Activity normal crash normal crash
1-2 16 14 1500 2000
1-3 25 20 2000 2500
2-4 10 7 2500 4000
3-4 32 26 1000 1600
3-5 40 35 1750 2250
4-5 16 12 4000 6000
4-6 12 8 3000 4200
5-6 9 6 1500 3000
Determine the critical path , The crash critical path , the minimum project completion time with the least
increase in the costs over the normal cost.

9. A marketing firm is studying the possibility of introducing a new product. In order to facilitate the
product development, the firm wants to build a PERT chart based on the following activities:
________________________________________________________________________
Time (weeks)
_________________________________
Description Activity a m b
________________________________________________________________________
Market survey 1-2 2 3.5 5
Product test I 1-3 3.5 5 6.5
Market Analysis 2-4 4 4.5 7
Product test II 3-5 3 5 6.5
Small market test 4-5 2.5 4 5.5
Promotion campaign 4-6 4.5 5 5.5
FDA approval 5-6 1 3 4
Product test III 6-7 2 3 4
Citywide distribution 4-7 6 7.5 10
Test final analysis 7-8 3 4 4.5
General Distribution 8-9 8 11 16
Determine the critical path. What is the probability that the entire project would be completed by the end
of 30 weeks?
10. The following table gives the activities in a construction project and other relevant information:
________________________________________________________________________
Activity Immediate Time (days) Direct cost (Rs)
predecessors Normal Crash Normal Crash
________________________________________________________________________
A - 4 3 60 90
B - 6 4 150 250
C - 2 1 38 60
D A 5 3 150 250
E C 2 2 100 100
F A 7 5 115 175
G B,D,E 4 2 100 240
Indirect cost varies as follows
Days 15 14 13 12 11 10 9 8 7 6
Cost 600 500 400 250 175 100 75 50 35 25
Draw an arrow diagram for the project.
Determine the project duration which will return the minimum total project cost.

11. The list of activities for erecting a canteen in the factory is given below with other relevant details .
Job A must precede all others while job E ust follow all others: apart from this ,jobs can run concurrently
________________________________________________________________________
Code Job description Normal crash
Duration Cost Duration Crash
Days Rs Days Rs
_____________________________________________________________________
A Lay foundations and build walls 5 3000 4 4000
B Tile roofing 6 1200 2 2000
C Install electricity 4 1000 3 1800
D Install plumbing 5 1200 3 2000
E Connect services to finish 3 1600 3 1600
Draw network and identify critical path. Crash the network fully to find out minimum duration.
If indirect costs are Rs. 300/day , determine the time cost trade off for the project.

12. A project is represented by the network shown below and has the following data
Task: A B C D E F G H I
Optimistic 5 18 26 16 15 6 7 7 3
Pessimistic 10 22 40 20 25 12 12 9 5
Most likely 8 20 33 18 20 9 10 8 4
Determine expected times and their variances.
The probability of an event occurring at the expected completion date if original scheduled time of completing the
project is 41.5 weeks.

3 F 6 I 7
B
E
A H
1 2
D

5
G
C
4

13. Tom Schriber, a director of personnel of Management Resources Inc. is in the process of designing a
program that his customers can use in the job-finding process. Some of the activities include preparing
resume, writing letters, making appointments to see prospective employer, researching companies and
industries, and so on. Some of the activities is shown in the following table
Days Immediate
Activity a m b predecessors
A 8 10 12 -
B 6 7 9 -
C 3 3 4 -
D 10 20 30 A
E 6 7 8 C
F 9 10 11 B,D,E
G 6 7 10 B,D,E
H 14 15 16 F
I 10 11 13 F
J 6 7 8 G,H
K 4 7 8 I,J
L 1 2 4 G,H

Construct the network diagram

Determine the probability that the project will be completed in 70 days.