INDIAN INSTITUTE OF MANAGEMENT INDORE

Post Graduate Programme in Management

Term: II Batch: PGP 2021-23

Subject: IQDM

END TERM Date: Wednesday, 29 December 2021

Total Marks: 100 Duration: 1 hour 40 minutes

Instructions:
1. This is a closed book, closed notes examination. No printed or written material must
be used for reference. No online material and no softcopies of readings must be used
for reference.
2. You may use up to 4 blank sheets, stapled together, for rough work. No loose sheets
will be allowed. These stapled blank sheets must be shown to the proctor/invigilator
in front of the camera or in the classroom, at the beginning of the exam.
3. Nothing written on the rough sheet(s) will be considered for evaluation. Only
whatever is entered in the appropriate places in the answer-sheet on the Mercer Mettl
platform will be considered.
4. On-screen-calculator will be made available during the exam. Offline calculators,
mobile phones and other electronic devices are not allowed.
5. Your laptop/ desktop and internet must be used only for answering this question paper
and not for performing any computation or for drawing graphs or for using any
software or for browsing anything. You are not allowed to use Microsoft Excel Solver
or Open Office or Google sheet or any other spreadsheet or any other software, and
are not allowed to use your internet browser for anything else except for answering
this question paper.
6. Switching from the exam screen to any other app, tab or window is not permitted.
7. All questions are Work-it-out questions requiring detailed answers.
8. For each question, the maximum marks that can be earned are mentioned in
parentheses, at the end of the respective question. There is no negative marking.
9. Type your answers in the space provided alongside each question.
10. Type out all necessary steps/ computation/ justification/ explanation for each answer.
Answers without necessary steps/ computation/ justification/ explanation will not
fetch any marks.
11. If you type more than one answer for any question and one of them is wrong, no
marks will be given.
12. Please type your answers as precisely as possible. Credit (marks) will be given for
correctness, completeness as well as brevity.

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 13. You may type out your answers without subscripts and superscripts. For example, X1
and X1 mean the same. You may also ignore uppercase names. For example, you may
type Machine 1 or machine 1 instead of MACHINE 1.

14. This question paper has 3 sections and a total of 19 questions. All sections and all
questions are compulsory.

Section#1 (42 marks)

PIKU LLC produces three products monthly, P1, P2 and P3. Each of the three
products are processed through three machines with time constraints and then
stored, to be sold at the end of the month. The problem has been formulated as
an LP with the quantities (in kg) of products P1, P2 and P3 produced every month
as decision variables X1, X2 and X3, respectively, so as to maximize the total
monthly contribution. Note that monthly production quantities (in kg) are allowed
to have non-integer values.
Maximize Z = 32X1 + 35X2 + 45X3 (Total monthly contribution in $)

Subject to the constraints

2X1 + 3X2 + 2X3 <= 1800 + R (MACHINE 1 time availability, in hrs)
4X1 + 3X2 + X3 <= 1600 + R (MACHINE 2 time availability, in hrs)
3X1 + 2X2 + 4X3 <= 1500 + R (MACHINE 3 time availability, in hrs)
X1 + X2 + X3 <= 600 (STORAGE availability, in square feet)
X1, X2 and X3 >= 0 (non-negative variables)

Where R = the last 3 digits of your roll-number.

Examples: For 2021PGP004, R will equal 004

For 2018IPM102, R will equal 102
For 2021FPM03, R will equal 003

Note:
The last 3 digits taken by you will be matched with your roll number. Any number
other than the last 3 digits of your roll number taken in place of R will not be
considered for evaluation and will be awarded zero marks.

The formulated LP was solved on Excel Solver and the following sensitivity output
is available to you. Please note that some numbers in the output are missing (and
replaced with “??”) intentionally.

Variable Cells
Final Reduced Objective Allowable Allowable
Cell Name Value Cost Coefficient Increase Decrease

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 $B$7 X1 ?? -8 32 8 1E+30
$C$7 X2 ?? 0 35 10 12.5
$D$7 X3 ?? 0 45 25 10

Constraints
Final Shadow Constraint Allowable Allowable
Cell Name Value Price R.H. Side Increase Decrease
$E$9 Machine 1 ?? 0 1800+ R ?? ??
$E$10 Machine 2 ?? 0 1600 + R ?? ??
$E$11 Machine 3 1500+R ?? 1500+R ?? ??
$E$12 Storage Space 600 25 600 ?? ??

Based on the above information, answer the following questions. Note that each
question is independent of the other questions asked below.

1. The reduced costs of variables X1 and X2 are -8 and 0, respectively. What can
you say about the optimal values of X1 and X2? (2 marks)
X1=0,
X2>=0

2. What is the optimum product-mix? And what is the total monthly contribution?
Type out all steps/ explanation. (3 marks)
X1 = 0
X2 = 450 - 0.5 R
X3 = 150 + 0.5 R
Total Contribution = $ 22500+ 5 R

3. What is the amount of MACHINE 1 hours that are used at optimal? And what is
the amount of MACHINE 2 hours that are used at optimal? (2 marks)
RESOURCE USED
1650-
Machine 1 (hours)
0.5R
Machine 2 (hours) 1500-R

4. Suppose 10 additional hours of MACHINE 2 are available at $8 per hour. Will you
buy any of these additional hours? If yes, how many additional hours? If not, why
not? Justify your answer. (3 marks)
No,
because the shadow price is 0

5. Suppose additional hours of MACHINE 3 are available at $15 per hour. Will you
buy any of these additional hours? If yes, how many additional hours? If not, why
not? Justify your answer. (3 marks)

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No,
Because the shadow price is 5 (which is less than 15)

6. If 50 hours of MACHINE 3 are lost due to power failure, what would be the
resultant total monthly contribution? Justify your answer. (3 marks)

Total contribution decreases by 5*50=250.

Final contribution = $ 22,500+ 5R-250=22,250 +5R

7. By what minimum amount should the price of product P1 be increased so as to

be profitable? Justify your answer. (2 marks)
Reduced cost suggests
price must be increased by 8 or more

8. Ms. Santa, Business Development Manager at PIKU, is of the opinion that to

increase the company's competitiveness in the market, it is necessary to reduce
the contribution margin on Product P3 by 20%. If that is implemented, what will be
the new product-mix? And what is the resultant total monthly contribution? Justify
your answer. (3 marks)
Product mix unchanged.
Because allowable decrease of Product 3’s coefficient in the objective function is
more than 20% of the coefficient.
Final contribution = $ 22,500+ 5R-(150 + 0.5 R)*9=21,150 +0.5 R

9. Ms. Banta, Operations Manager at PIKU, has received a proposal for additional
storage capacity being available in a nearby warehouse at $15 per square feet.
Should you accept the proposal? If not, why not? If yes, how many units (square
feet) and what will be the resultant total monthly contribution? Justify your
answer. (3 marks)
Yes, as shadow price (which is 25) is higher than 15.
Allowable increase = 20+0.4R.
Final contribution = $ 22,500+ 5R+(20+0.4R)*10 = 22,700 + 9R

10. Mr. Abantu, an intern at PIKU, has submitted that in the next month PIKU has
the possibility of adding 150 hours of MACHINE 3 at a cost of $3 per hour and at the
same time it might lose 30 square feet of storage space due to planned sanitization
drive in the storage space area. What would be the resultant total monthly
contribution? Justify your answer. (4 marks)

Contribution would increase by 2*150 - 25*30

= -450. i.e., decrease by 450.
Final contribution = $ 22,050+ 5R

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11. Mr. Eeglu, VP-Supply Chain at PIKU, is of the view that the company should
drop Product P2 from the production plan next month due to excessive inventory
build-up in the supply chain. What will be the new optimal product-mix and the
resultant profit, if PIKU indeed drops product P2 from consideration? Justify your
answer. (4 marks)

Decrease in Contribution =12.5*(450-0.5k).

only P3 will be produced,
quantity =375+0.25k

12. What is the Dual LP of the given LP? Explain the variables, objective function
and constraints. (4 marks)
Min (1800+R) u1+ (1600+R) u2 + (1500+R) u3 + 600 u4
s.t.
2 u1 + 4 u2 + 3 u3 + u4 >= 32 (1)
3 u1 + 3 u2 + 2 u3 + u4 >= 35 (2)
2 u1 + 1 u2 + 4 u3 + u4 >= 45 (3)
u1, u2, u3, u4 >=0

13. What is the optimal solution of the Dual LP? That is, what are the values of the
dual decision variables and the value of the dual objective function, at optimal?
Explain. (3 marks)
U1= 0, u2=0, u3=5, u4= 25,
opt obj val= $ 22,500+ 5R

14. What are the shadow prices of the Dual constraints? Type exactly which
shadow price is for which constraint. Explain. (3 marks)
X1, x2 and x3 are shadow prices of (1), (2) and (3) written above.

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 Section#2 (25 marks)

15. ALLBAGS Company Pvt. Ltd. plans to manufacture one or more of three
types of backpacks B1, B2, and B3, so as to maximize total contribution. The
same type of raw material RM is used for making all these types of backpacks.
ALLBAGS has procured 2000 kg of RM for making these backpacks. B1 and B2
require the same amount of RM per backpack. Each backpack of B2 type
requires half the amount of RM as that required by a unit of B3. If only B1 and
B2 type backpacks are made, then the amount of RM available is sufficient for
making 3000 backpacks, with no RM remaining. Furthermore, any backpack of
B3 type can be made if and only if either no backpack of B1 type is made or at
least 100 backpacks of B2 type are made. If both B1 and B2 type backpacks are
made, an additional fixed cost of Rs. 2000 is incurred. Furthermore, if 100 or
more B2 type backpacks are made, then no more than 750 B1 backpacks can be
made. The contributions are Rs. 200, Rs. 175 and Rs. 230 per backpack of type
B1, B2 and B3, respectively.

Formulate as an ILP/ MILP. Clearly define all variables you use and clearly type
out the objective function and all constraints. DO NOT SOLVE IT. (20 marks)

Decision Variables:

Let x1, x2, x3 be the number of backpacks of types B1, B2 and B3, respectively.

Define the following binary variables:

Let yi = 1 if xi > 0, yi = 0, otherwise, for i = 1, 2, 3.

Let y12 = 1 if both y1 = 1 and y2 = 1, y12 = 0 otherwise.

Let u2 = 1 if x2 >= 100, u2 = 0 otherwise.

\

Let u1 = 1 if x1 <= 750, u1 = 0 otherwise.

Objective: Max z = 200x1 + 175x2 + 230x3 – 2000y12

Subject to the constraints:

2/3 x1 + 2/3 x2 + 4/3 x3 <= 2000

Yi = 1 if and only if xi > 0:

Xi <= Myi, M may be anything >= 3000 for x1 and x2, and >= 1500 for x3

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 Yi <= xi

Y12 = 1 if and only if y1 = 1 and y2 = 1 :

Y12 <= (y1 + y2)/2

Y12 >= y1 + y2 – 1

u2 = 1 if and only if x2 >= 100:

x2 >= 100u2
x2 <= Mu2

u1 = 1 if and only if x1 <= 750:

x1 <= 750u1 + M(1-u1)

x1 >= 751(1-u1)

If x2 >= 100, then x1 <= 750:

U1 >= u2

X1, x2, x3 >= 0, int; yi, y12, ui : bin

16. Suppose , , …., are binary variables to indicate if a physician visits an

institute on day of a week or not. That is, , if the physician
visits the institute on day of the week, , otherwise.
Write the following conditions using linear constraints. The physician must visit the
institute on at least 2 days of the week and must not visit on consecutive days. DO
NOT SOLVE. (5 marks)

Y1+y2+y3+y4+y5+y6+y7 >= 2
Y1+y2<=1, y2+y3 <=1, y3+y4<=1, y4+y5<=1, y5+y6<=1, y6+y7<=1, y7+y1<=1
Or yi + y_(i+1) <= 1, i = 1, 2, …, 6

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Section#3 (33 marks)

Modern Homes is a home builder located in a suburb of Atlanta. The company must
decide whether to leave its model homes unfurnished, furnish them with minimal
accessories, or completely furnish them using custom decoration. The following
table gives the expected profit (in $) for Modern Homes based on how Modern
furnishes its model homes and overall economic outlook.

Economic outlook
Furnishing
Weak Moderate Strong Very Strong
Unfurnished 1600 1100 2100 3100

Minimal 4100 600 3600 6100

Accessories

Custom 7100 1600 2600 k

Decoration

Modern believes that the states of nature “Weak” and “Very Strong” are equally
likely to occur, and the states “Moderate” and “Strong” are equally likely to occur,
where

P(Weak) = smaller of the probabilities p and 1  p, where

p = (200 + R)/2000, where R = the last 3 digits of your roll-number.

Examples: For 2021PGP004, R will equal 004

For 2018IPM102, R will equal 102
For 2021FPM03, R will equal 003

Note:
The last 3 digits taken by you will be matched with your roll number. Any number
other than the last 3 digits of your roll number taken for the computation of p
will not be considered for evaluation and will be awarded zero marks.

Answer the following questions for Modern. It is not necessary to draw decision
trees on Mercer Mettl, but all computations must be typed. You may or may not
draw decision trees in your rough work, but remember that your rough work will
not be evaluated and the answer you type in your answer-sheet on Mercer Mettl
must be self-contained.

17. Suppose k = 9600. What are the expected values of each of the decision
alternatives? What is the best decision alternative for Modern, based on expected

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values? What is the EMV? What is the expected value of perfect information? Show
your computations and justify your answer. (10 marks)

Compute the values P(Weak), P(Moderate), P(Strong), P(Very Strong) correctly,

and multiply by corresponding payoffs from the above table to find

EV(Unfurnished) =
EV(Minimal Accessories) =
EV(Custom Decoration) =
Best Decision Alternative: Custom Decoration
EMV = EV corresponding to Custom Decoration

18. For what all values of k is “Custom Decorated” the best decision alternative,
and for what all values of k is “Minimal Accessories” the best decision alternative.
Show your computations and justify your answer. (8 marks)
EV(Unfurnished) = 1500p + 2100(1-2p)
EV(Minimal Accessories) = 2000p + 2100(1-2p)
EV(Custom Decoration) = (k – 7100)p + 2100(1-2p)

“Minimal Accessories” is always better than “Unfurnished”.

“Custom Decoration” is the best alternative if and only if
EV(Custom Decoration) > EV(Minimal Accessories) if and only if
(k – 7100) > 2000, or
K > 9100.
(or k >= 9100)
“Minimal Accessories” is the best alternative for all k < 9100.
For k = 9100, “Custom Decoration” and “Minimal Accessories” are, both, best.
19. Suppose k = 9600 and a research firm can make 100% accurate forecast of
“bullish sentiment” and “bearish sentiment”. When they forecast “bullish
sentiment”, the economic outlook is either strong or very strong. Furthermore,
when they forecast “bearish sentiment” economic outlook is either weak or
moderate. How much should Modern Homes be willing to pay for this forecast? If
the forecast is “bearish sentiment”, which of the three furnishing options should

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be chosen by Modern Homes? Show your computations and justify your answer. (15
marks)

P(Bullish sentiment) = P(Strong) + P(Very strong) = 0.5

P(Bearish sentiment) = P(Weak) + P(Moderate) = 0.5

P(Weak|Bearish) = 2p
P(Moderate|Bearish) = 1 – 2p

P(Very strong|Bullish) = 2p
P(Strong|Bullish) = 1 – 2p

If Bearish,
EV(Unfurnished) = -1600*2p + 1100(1-2p)
EV(Minimal Accessories) = -4100*2p + 600(1-2p)
EV(Unfurnished) = -7100*2p + 1600(1-2p)

If Bearish, Unfurnished is the best option as EV(Unfurnished) is the maximum.

If Bullish, for Roll No. <= 022, Minimal Accessories is the best option, and
for Roll No. >= 023, Custom Decoration is the best.

EV with perfect information = 0.5*EV(bearish) + 0.5*EV(bullish)

EVPI = EV with perfect information – original EMV

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