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This study unit is the second of three that concern quantitative methods, a major topic that has
been assigned a relative weight of 15% of Part 1. Examination candidates should expect
approximately 17 questions on various aspects of quantitative methods. The subject is tested at level
B, which means questions will have considerable rigor.
Below is a reprint of the IMA’s Learning Outcome Statements that are applicable to Study Unit 7.
After studying the outlines and answering the multiple-choice questions, you will have the skills
necessary to address the topics covered in the following statements:
Part 1 – Section D.2. Linear programming
The candidate should be able to:
demonstrate an understanding of the objectives of linear programming
●
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2 SU 7: Linear Programming
c. Conditions that restrict the optimal value of the objective function are constraints.
1) A shadow price is the amount by which the value of the optimal solution of the
objective function in a linear programming problem will change if a one-unit
change is made in a binding constraint.
a)A nonbinding constraint is one that has excess capacity; i.e., the optimal
solution does not use all of the given resource. The shadow price for a
nonbinding constraint is zero because a one-unit change will not affect
the optimal solution when excess capacity exists.
b) The calculation of shadow prices is a simple example of sensitivity
analysis, which is any procedure to test the responsiveness of the
solution indicated by a model to changes in variables, alternative
decisions, or errors.
d. The unknowns used to construct the objective function and the constraints are the
decision variables. The values of the variables are limited by the constraints.
e. Values that are fixed for purposes of solving the model (but are not fixed forever) are
cost/profit coefficients for the objective function, technical coefficients for the
constraints, and the constants on the right-hand side of the constraints.
f. When the number of constraint equations equals the number of variables, a unique
solution exists. When the number of variables exceeds the number of constraint
equations, the number of possible solutions is usually infinite.
1)The values of the variables are the outputs from the linear programming
process.
2) The constraint equations usually reflect the types of input or types of resources
being allocated, e.g., available machine hours or raw materials.
3) The objective of linear programming is to choose the best solution from a
potentially infinite number of possibilities.
2. Management accountants should recognize situations in which linear programming may be
applicable. When an application is attempted, qualified operations research experts should
assist in providing guidance in formulating and solving the problem. Linear programming is
a powerful planning tool for management that usually requires computer software.
3. Several methods are available to solve linear programming problems.
a. The graphical method, although the easiest technique, is limited to problems with two
variables.
b. The algebraic method is a trial-and-error technique. Pairs of constraints are solved
algebraically to find their intersection. The values of the decision variables are then
substituted into the objective function and compared to find the best combination.
1) The basic rule is that the optimal solution will be at the intersection of two or
more constraint equations.
2) Thus, all intersections can be computed and each solution evaluated in the
objective function to determine which solution is optimal.
c. The simplex method is the technique most commonly used to solve linear
programming problems. It is an algorithm to move from one corner solution to a
better corner solution. When a better solution cannot be found, the optimal solution
has been reached.
1) The simplex method relies on an area of mathematics called matrix algebra.
The equations that form the constraints are arranged in a matrix of coefficients
and manipulated as a group with matrix algebra.
2) Almost all practical applications of linear programming require the use of
computers. Most computer facilities have a linear programming package that
uses the simplex algorithm to find the optimal solution.
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SU 7: Linear Programming 3
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4 SU 7: Linear Programming
Machining Polishing
Small (X) 2 hours 3 hours
Large (Y) 4 hours 3 hours
The available time for processing the two models is 100 hours a week in the
Machining Department and 90 hours a week in the Polishing Department. The
contribution margin expected is $5 for X and $7 for Y.
1) The objective function is the formula for the maximum total contribution margin.
Because each X produces a $5 CM and each Y produces a $7 CM, the total
CM will be 5X + 7Y. This is what Wineroot wants to maximize.
2) A constraint equation can be set up for the Machining Department, which has a
total of 100 hours available each week. Each X requires 2 hours of time from
that department, and each Y requires 4 hours. Accordingly, the total Machining
Department time taken by production is 2X + 4Y, which must be equal to or less
than the 100 hours available.
2X + 4Y < 100
3) The constraint equation for the Polishing Department is found in a similar
manner. The Polishing Department has a total of 90 hours available each
week. Each unit of X or Y requires 3 hours. Thus, the constraint for this
department is that 3X + 3Y must be equal to or less than 90.
3X + 3Y < 90
4) Both constraints are inequality expressions of the form less than or equal. To
transform them to an equality form, a positive variable called the slack variable
must be added to the left-hand side of each constraint.
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SU 7: Linear Programming 5
2X + 4Y < 100
2X + 4Y + S1 = 100
3X + 3Y < 90
3X + 3Y + S2 = 90
a) In general, each slack variable makes zero contribution to the value of the
solution.
b) Before the tableau is reconstructed, the linear programming problem may
be restated as follows:
Maximize 5X + 7Y + 0S1 + 0S2 subject to
2X + 4Y +1S1 + 0S2 = 100
3X + 3Y +1S2 + 1S2 = 90
If: X, Y, S1, S2 > 0
d. The initial simplex tableau (in its most common format) can be constructed from the
Wineroot Company’s LP problem. Rows run horizontally and columns run vertically.
#$
& ' ( (
* %
*
a) Using these coefficients, the constraint rows (resource coefficient rows) are
2 4 1 0 100
3 3 0 1 90
b) The resource coefficient rows in the tableau must equal the constraints.
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6 SU 7: Linear Programming
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SU 7: Linear Programming 7
10) The current (but not the optimal) solution to this simplex problem is obtained by
multiplying the CB column times the RHS column and adding the products.
a)
The result is found in the far right column (RHS) in the Zj row, which here is
zero.
b) The current solution does not always equal zero, although it does in this
case because CB = 0.
e. The following is the graphical solution to the foregoing problem:
4
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0123
1
2
,-.
&'/"
1) Given the objective function (OF) 5X + 7Y, the extreme points of the feasible
region yield the following values:
At point OF
(0, 0) 0
(0, 25) (0 × 5) + (25 × 7) = 175
(30, 0) (30 × 5) + (0 × 7) = 150
(10, 20) (10 × 5) + (20 × 7) = 190
f. Computer software packages have been developed to manipulate linear programming
problems with numerous constraints. Recognizing the basic method and its
implications is usually sufficient for the management accountant.
6. Transportation Model
a. The transportation model is a special type of LP problem. It involves physical
movement (transportation) of goods from sources of supply (such as factories) to
destinations (warehouses).
1) EXAMPLE: A fleet of trucks may be available for daily deliveries in a city. Each
day the transportation manager must determine the best route for each truck.
Many possible combinations of trucks and destinations satisfy the constraints of
meeting all deliveries with the available trucks, but the manager would like to
have the minimum cost combination. In effect, the manager must allocate the
available trucks (scarce resources) to the required destinations in a way that
minimizes costs.
b. The objective function includes the transportation cost of each item from each source
to each destination.
1) The constraints are the output for each supply point and the demand by each
destination.
2) EXAMPLE: A manufacturer has four plants. Assume that each plant could ship
products to any of 20 warehouses. Each plant has a maximum capacity, and
each warehouse has a minimum demand. Management would like to know
how much should be shipped from each plant to each warehouse in order to
minimize transportation cost.
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8 SU 7: Linear Programming
2
(51
1
4
6$
3
839
a) For row 1: If the lowest cost alternative is not used ($4 for C), the
shipment must go to B, whose cost of shipping is $1 higher than shipping
to C. The firm would suffer a $1 penalty for not selecting the lowest cost
box. For column A, the penalty would be $3 ($8 – $5) if the lowest cost
box is not used.
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SU 7: Linear Programming 9
b) The objective under the penalty method is to avoid the highest penalties;
those columns or rows where the highest penalties might occur are filled
first. Because columns A and C have the highest penalties, one of these
(it does not matter which) should be filled first. Choose column C. The
lowest cost box in the selected column should be filled with the maximum
possible number of units. The maximum that can be placed into box 1C
is 7 units because warehouse C needs only 7 units; this step eliminates
column C from further consideration. Draw a line through column C and
recompute the penalties for the remaining columns and rows (if
necessary) as shown below.
2
(51
1
4
6$
3
83
9
,
. ,
. ,
.
c) Because column A still shares the highest penalty, fill its lowest cost box to
the maximum extent possible; i.e., assign 14 units to box 2A. The row 2
total supply is 14, thus limiting the number of units that can be assigned to
box 2A. This assignment of 14 units equals the row 2 constraint, so row 2
is crossed out (it no longer needs to be considered).
d) The final units are then assigned to row 1, columns A and B, as shown in
the following table.
2
(51
1
4
6$
3
83
9
,
. ,
. ,
.
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10 SU 7: Linear Programming
f) The use of the penalty method resulted in the optimal solution in this
example, which is not always the case. The penalty method will
occasionally result in a very good solution, but not the optimum. There is
a quantitative technique to test for the optimality of a solution, but it is
quite complicated and beyond the scope of this discussion.
7. Goal Programming
a. Goal programming was first introduced as a specialized type of linear programming to
solve problems that had no feasible solution under regular linear programming.
b. Goal programming permits an ordinal specification (ranking) and solution to problems
with multiple goals.
1) With its ability to incorporate multiple goals, the method has the potential for
solving problems with both financial and nonfinancial goals.
8. Integer Programming
a. Integer programming (IP) concerns problems in which some variables are not
continuous. Linear programming, on the other hand, assumes that all variables are
continuous and all functions are linear (i.e., graphed with straight lines). Variables
are thus allowed to take fractional values; 9, 9.367, and 10 are all possible values. In
integer programming, fractions are not possible.
1) EXAMPLE: It might be possible for an oil company to build 12 or 13 gas stations
on a stretch of highway, but it is not clear what an optimal solution of 12.72 gas
stations means.
2) Integer programming problems are also known as discrete models because the
variables take on discrete, noncontinuous values.
b. One way to solve IP problems is to solve them as LP problems and round to satisfy
the integrality condition.
1) In the example, we would decide to build 13 gas stations by rounding 12.72 to
13.0.
2) Rounding raises several problems.
a)
The rounded solution may violate constraints.
b)
The rounded solution may be farther from the optimal solution than some
other integer combination.
c. A certain class of IP problems concerns variables that are constrained to take on
values of 1 or 0. These are yes-and-no or go, no-go decisions. This class of
problems may be solved only with algorithms designed to handle these constraints.
Rounding is never acceptable because the error induced would be too great.
9. Dynamic programming is an approach to solving problems, not a particular algorithm. It
divides a large mathematical model into smaller, more manageable pieces in such a way
that, once the smaller problems have been solved, the result is the optimal solution to the
overall model.
a. This type of model is useful for problems that involve multistage decisions, that is,
decisions affected by previous decisions.
1) Typically, they are applied to much smaller problems than LP, in terms of
number of variables and constraints.
2) Dynamic programming is useful for problems such as
a) Inventory reordering rules
b) Production scheduling in the face of fluctuating demand
c) Spare parts level determination
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SU 7: Linear Programming 11
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