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Optimization Analytics

Assignment - 2

Submitted By: Saurabh Kumar Gautam


Enrolment No: MB17GBA223
A) Consider the effect of losing 100 units of production capacity at Plant A.
Would it affect the total operating cost? If so, by how much? How do you know?

Total cost = 169570.


Constraint related to production capacity of plant A is 1st one.
Shadow price: Unit of change in total cost for one unit of change in right hand side of the
constraint.
Here RHS is 2000, if we change it to 2001. Total cost will decrease by 0.25.
If we change it to 1900, it means tightening the constraints situation will get worsen and it
will increase total cost by 100 *0.25 = 25
Hence total cost = 169595

Would the production and shipping plan change?


Production plan: Total quantity of units that plant A manufacturing is changing from 2000
to 1900, production plan is also subjected to changes.
Shipping plan: It is directly related and depending on the quantity that is produced from
plants.
Quantity of production related to plant A changes, this impacts shipping plan.
B) Consider the effect of a 50-cent increase in the unit transportation cost between
Plant A and Region 2.
How would this increase affect the total operating cost? If so, by how much?

Existing transportation cost from Plant A and Region 2 = 2.10


Revised transportation cost from Plant A and Region 2 = 3.60
Revised objective coefficient for Plant A and Region 2 = 28.10
Allowable range for objective coefficient for Plant A and Region 2 is 28.1 to -0.25, within this
range optimum solution will not change. But objective function value (Total cost) changes.
Revised cost increase = (900*0.50)=450
Therefore final cost is = 170020

Would the production and shipping plan change?


Since the optimal solution remains same, production and shipping will not be changed.
Any changes in optimal solution will lead to changes in production and shipping plan.

C) The demand requirements used in the model correspond to contracts for


which prices and quantities have long been settled and are not negotiable. As you are
preparing a production and shipping plan, the marketing department approaches you
with a potential new contract for 80 units to be shipped to Region 1 at a delivered
price (Gaussian’s revenue) of $27.50 per unit. Would additional revenue cover the
associated manufacturing and transportation costs? How do you know? Be specific
in your reasoning.
Revenue generated by shipping 80 quantity to Region 1 at a delivered price of $27.50 per
unit = 2200 Costs associated with this are below.

“Total shipment to Region 1” constraint will get affected.


Shadow price associated with this is 27.25 (additional cost to incur for increasing right hand
side constraint by unit one). For 80 quantity cost is = 80*27.25 = 2180.
Since the revenue generated is greater than price by $20, hence we will take up the
additional order.
D) The strategic planning department is considering the option of increasing the
capacity of one of its plants by the addition of an extra production line. Two types of
lines are available: A small line has a capacity of 500 units and involves a yearly fixed
cost of $400. A large line has a capacity of 800 units and involves a fixed cost of $550.
Unit manufacturing costs would not change; they would depend on the location as
given in the first table.
Should capacity be increased by the addition of one line?
Surely
If so, which of the two types of lines is more attractive to Gaussian, and in which plant
should it be installed?
Constraints effected by this capacity expansion are
1) Plant A Production Quantity

2) Plant B Production Quantity

3) Plant C Production Quantity.

The Non-binding constraint is “Plant B Production Quantity”, there will not be economic
benefit involved in relaxing Non-binding constraint.
Binding constraints are 1 and 3.
Shadow prices associated with this are 0.25 and 0.75 for Plant A and Plant C respectively,
cost associated with Plant A Production Quantity is less it would be better to install additional
line in plant-C.
The complete formulation is:
(Min) 3000 P1 + 3300 P2 + 3600 P3 + 3600 P4 + 255 I1 + 255 I2 + 255 I3 + 255 I4 +
110 U1 + 110 U2 + 110 U3 + 110 U4 + 90 D1 + 90 D2 + 90 D3 + 90 D4

subject to:

Production Capacity Constraints:


Pi <= 3000 for i = 1,2,3,4

Inventory Balance Constraints:


(Month 1) 300 + P1 = I1 + 2300
(Month 2) I1 + P2 = I2 + 2000
(Month 3) I2 + P3 = I3 + 3100
(Month 4) I3 + P4 = I4 + 3000

Production Balance Constraints:


(Month 1) P1 = 2600 + U1 - D1
(Month 2) P2 = P1 + U2 - D2
(Month 3) P3 = P2 + U3 - D3
(Month 4) P4 = P3 + U4 - D4

Nonegativity: All variables >= 0

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