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6 Ansichten11 SeitenManagement accounting

Dec 01, 2018

1.07 Linear Programming

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Management accounting

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6 Ansichten11 Seiten1.07 Linear Programming

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LINEAR PROGRAMMING

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

●

●

● calculate the optimal solution by the use of linear programming using the graphical method

● list the benefits and shortcomings of linear programming

7.1 LINEAR PROGRAMMING

1. Linear programming is a technique used to maximize a revenue or profit function, or

minimize a cost function, subject to constraints, e.g., limited (scarce) resources or

minimum/maximum levels of production, performance, etc. In business, linear

programming is used for planning resource allocations. Managers are often faced with

problems of selecting the most profitable or least costly way to use available resources.

The advantage of linear programming is its applicability to many types of problems and its

usefulness for sensitivity analysis. A major disadvantage is the restrictiveness of its linear

assumptions, for example, that all costs are variable or fixed.

a. EXAMPLE: A manufacturer should minimize production costs while satisfying

production requirements, maintaining required inventory levels, staying within

production capacities, and using available employees. The objective function is the

production cost to be minimized; the constraints are production requirements,

inventory levels, production capacity, and available employees.

b. Other business applications include

1) Selecting a product mix

2) Blending chemical products

3) Scheduling flight crews

4) Assigning jobs to machines

5) Determining transportation routes

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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

per unit sold, and product J contributes $4,000 per unit.

a. The company seeks to maximize profits, so the objective function is

Maximize 5G + 4J (the maximum profit in thousands of dollars)

b. The objective function is subject to the following constraints:

G + J> 5 (minimal production requirement)

G < 3J (market balance requirement)

10G + 15J < 150 (production capacity constraint)

G, J > 0 (nonnegativity constraint)

c. Graphical solution. To plot this set of constraints,

1) Change inequalities to equalities.

2) Plot the equalities.

3) Identify the correct side of the line for the original inequalities.

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function will occur at one of the extreme points or corners of the feasible region.

1) Simultaneously solving the constraints intersecting at those corners and

substituting into the objective function,

a) At point A: G + J=5

–G + 3J = 0

4J = 5

J = 1.25 and G = 3.75

Profit = $5,000(3.75) + $4,000(1.25) = $23,750

10G +15J = 150 + 10G + 15J = 150

15G = 150

G = 10 and J = 3.333

Profit = $5,000(10) + $4,000(3.333) = $63,333

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4 SU 7: Linear Programming

10G +15J = 150

J = 10 and G = 0

Profit = $5,000(0) + $4,000(10) = $40,000

2) The firm should choose to produce at point B (10 of product G and 3.333 of

product J). This solution assumes that partial units of J may be produced. If

product J is produced in single units, the answer may be interpreted to be to

produce at a rate of 3 1/3 units in a given period.

5. Simplex Algorithm

a. A simplex algorithm is a systematic method of examining the corners (also called

vertices or extreme points) of the feasible region while in search of the optimal

solution. The algorithm always moves in the direction of improving the solution and

terminates at the optimal solution.

b. The algorithm proceeds in several iterations.

1) Iteration I seeks an initial corner. If no corner is found, the problem is

inconsistent, and the algorithm terminates.

2) Iteration II generates a set of corners adjacent to the initial corner (found in

Iteration I). The objective function will not become less optimal and will

ordinarily become more optimal at each successive corner.

3) The algorithm terminates after the optimal corner is reached.

c. EXAMPLE (adapted from a CPA question): The Wineroot Company manufactures two

garden benches, small and large. Each model is processed as follows:

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.

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tableau begins with the variables row, which consists first of the constraint

variables (X and Y) and then the slack variables (S1 and S2). It is essentially a

row of labels.

2) The Cj row lists the payoff coefficients for a profit-maximizing problem (or the

cost coefficients for a cost-minimizing problem) given by the coefficients of the

objective function.

a) The slack variables have payoff/cost coefficients of 0.

b) Thus, in constructing this tableau, the Cj row consists of the coefficients

from the objective function (5X + 7Y + 0S1 + 0S2).

c) The Cj row is 5, 7, 0, 0.

3) The machining and polishing constraint rows in the simplex tableau are formed

from the constraint equalities, which were

2X + 4Y + 1S1 + 0S2 = 100

3X + 3Y + 0S2 + 1S2 = 90

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

a) Basic variables exist in the current tableau as a possible solution (not

necessarily optimal).

b) In this example, the initial basic solution sets S1 equal to 100 and S2 equal

to 90.

c) Nonbasic variables are the variables that are equal to zero in the current

solution, e.g., X and Y.

5) The basic variables are those that form an identity matrix. Their corresponding

variable columns consist of zeros and a single 1. The variable columns are

those beneath each variable, i.e., beneath X, Y, S1, and S2.

a) In the sample tableau, S1 has 1, 0 in its column, and S2 has 0, 1.

Consequently, they form an identity matrix.

b) In this tableau, the basic variables are also the slack variables.

i)

But they may not necessarily be next to each other in other

problems.

6) The values for the basic variables are given in the right-hand side (RHS) column

of the tableau.

a) Because the entry 1 for the S1 variable is on the first row of the identity

matrix, the value of S is given in the first row of the RHS column as 100.

b) The entry of 1 for S2 is in the second row, and its value is found in the

second row under RHS to be 90.

c) The values 100 and 90 come from the right-hand side of the constraint

equations. Thus, the RHS values are also the amounts of available

resources.

7) The CB column consists of payoff (cost) coefficients of the basic variables in

profit-maximization (cost-minimization) problems.

a) Hence, the column consists of as many numbers as there are basic

variables (i.e., two for this tableau).

b) The numbers entered are the same as for the basic variables found in the

Cj row (0 and 0).

c) Zj and Cj – Zj are not part of the CB column.

8) The first element of the Zj row is the sum of the products of multiplying each

element in the CB column by each element in the first column [(0 × 2) + (0 × 3)

= 0].

a) The subsequent elements are obtained by multiplying each element in the

CB column by each element in the next column and adding the products.

b) For example, the third element in the Zj row is 0 [(0 × 1) + (0 × 0)].

c) The elements in the Zj row are opportunity costs.

9) The index row is the last (bottom) row. It provides a measure of the direction of

improvement of the objective function value for a corresponding change in the

tableau.

a) It is obtained by subtracting each element in the Zj row from each element

in the Cj row.

Cj – Zj = 5 7 0 0

b) Positive elements in the index row for a maximization problem or negative

elements for a minimization problem indicate that the solution could be

improved.

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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:

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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

from each plant to each warehouse would have to be stated as a separate

variable. The result would be 80 variables (4 plants × 20 warehouses). Each

plant’s capacity and each warehouse’s demand would be a constraint, giving

24 constraints (4 plant constraints + 20 warehouse constraints).

c. The assignment method is a special case of the transportation method. It is used to

assign employees to jobs, jobs to machines, sales associates to territories, bidders to

contracts, etc.

1) The difference from the transportation method is that each agent (employee,

machine, etc.) can be assigned to only one task.

2) The purpose of the assignment is to optimize a given objective, such as

minimizing cost, minimizing time, or maximizing profits.

3) The assignment model can be modified to accommodate certain variations.

They include the following:

a) Tasks exceed the available number of agents.

b) Certain assignments are unacceptable.

c) More than one agent may be required for some tasks.

d. Vogel’s Approximation, or the penalty method, solves transportation problems

easily. The name comes from the extra amount that must be paid (the penalty) if the

lowest cost alternative is not selected in each row and each column.

1) EXAMPLE: Assume that a company has two factories that produce 18 and

14 units of product, respectively, during a period of time. Three distribution

warehouses demand 15, 10, and 7 units, respectively, during the same period.

The table below depicts this information along with the shipping costs per unit

(e.g., $4 to ship one unit from factory 1 to warehouse C). The objective is to

minimize total shipping costs. The penalties (in dollars) are shown in

parentheses to the right of, and below, the table.

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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

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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.

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multiplying the number of units shipped times the shipping cost per unit,

as follows:

1($8) + 10($5) + 7($4) + 14($5) = $156

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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

e) Systematic search for scarce resources

f) Finding the shortest route through a network

b. The key features of dynamic programming problems are

1) The probabilistic (stochastic) nature of the variables. However, deterministic

variations exist.

2) The iterative formulation of the problems. The optimal solution is reached by a

repetitive process.

c. A decision tree with probabilities of occurrence for each branch is a good example of a

multistage decision process that could be evaluated with dynamic programming.

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