Source: Introduction to Management Science (10

th
Edition), Taylor, Bernard III, 2010.

OR 1 June 8, 2013
3FM5
GROUP: 3-1 3-5

I. Human Resource Problem
Universal Claims Processors processes insurance claims for large national insurance companies.
Most claim processing is done by a large pool of computer operators, some of whom are permanent and
some of whom are temporary. A permanent operator can process 16 claims per day, whereas a
temporary operator can process 12 per day, and on average the company processes at least 450 claims
each day. The company has 40 computer work stations. A permanent operator generates about 0.5
claims with errors each day, whereas a temporary operator averages about 1.4 defective claims per day.
The company wants to limit claims with errors to 25 per day. A permanent operator is paid $64 per day,
and a temporary operator is paid $42 per day. The company wants to determine the number of
permanent and temporary operators to hire in order to minimize costs.
a. Formulate a linear programming model for this problem.








SOLUTION:
a. Decision Variables
Let x
1
be the number of permanent operators to be hired
x
2
be the number of temporary operators to be hired

b. Objective Function
Minimize Total Cost (Z)
Min (Z) = 64x
1
+ 42x
2

c. Subject to the Constraints:
1. Minimum number of claims: 16x
1
+ 12x
2
450
2. Number of workstations: x
1
+ x
2
40
3. Limited claims with error: 0.5x
1
+ 1.4x
2
25
Non-negativity Constraint: x
1
, x
2
0

SUMMARY:
Z = 64x
1
+ 42x
2
s.t
16x
1
+ 12x
2
450
x
1
+ x
2
40
0.5x
1
+ 1.4x
2
25
x
1
, x
2
0

Status Claims Errors Cost
Permanent 16 0.5 64
Temporary 12 1.4 42
Available 450 25
*Available Work Station = 40
Source: Introduction to Management Science (10
th
Edition), Taylor, Bernard III, 2010.

II. Marketing Problem
The manager of a department store in Seattle is attempting to decide on the types and amounts of
advertising the store should use. He has invited representatives from the local radio station, television
station, and newspaper to make presentations in which they describe their audiences. The television
station representative indicates that a TV commercial, which costs $15,000, would reach 25,000
potential customers. The breakdown of the audience is as follows:
Male Female
Senior 5,000 5,000
Young 5,000 10,000
The newspaper representative claims to be able to provide an audience of 10,000 potential
customers at a cost of $4,000 per ad. The breakdown of the audience is as follows:
Male Female
Senior 4,000 3,000
Young 2,000 1,000
The radio station representative says that the audience for one of the stations commercials,
which costs $6,000, is 15,000 customers. The breakdown of the audience is as follows:
Male Female
Senior 1,500 1,500
Young 4,500 7,500
The store has the following advertising policy:
1. Use at least twice as many radio commercials as newspaper ads.
2. Reach at least 100,000 customers
3. Reach at least twice as many young people as senior citizens
4. Make sure that at least 30% if the audience is female.
5. Available space limits the number of newspaper ads to seven. The store wants to know the
optimal number of each type of advertising to purchase to minimize total cost



SOLUTION:
a. Decision Variables
Let x
1
be the amount of TV commercials the store should use.
x
2
be the amount of newspaper ads the store should use.
x
3
be the amount of radio commercials the stores should use.

b. Objective Function
Minimize Total Cost (Z)
Min (Z) = 15,000x
1
+ 10,000x
2
+ 6,000x
3

Tools of Advertising Cost of Advertising Audience Total
Potential
Customers
Senior Young Male Female
TV Commercial 15,000 10,000 15,000 10,000 15,000 25,000
Newspaper 4,000 7,000 3,000 6,000 4,000 10,000
Radio 6,000 3,000 12,000 6,000 9,000 15,000
Source: Introduction to Management Science (10
th
Edition), Taylor, Bernard III, 2010.

c. Subject to the constraints:
1. Number of radio commercials against newspaper ads: x
3
2x
2

2. Number of target audience: 25,000x
1
+ 10,000x
2
+ 15,000x
3
10,0000
3. Number of young audience against senior: 15,000x
1
+ 3,000x
2
+ 12,000x
3

2(10,000x
1
+ 7,000x
2
+ 3,000x
3
)
4. Number of female audience: 15,000x
1
+ 4,000x
2
+ 9,000x
3

0.3(25,000x
1
+ 10,000x
2
+ 15000x
3
)
5. Number of newspaper ads: x
2
7
Non-negativity constraint: x
1
, x
2
, x
3
0

SUMMARY:
Z = 15,000x
1
+ 10,000x
2
+ 6,000x
3
s.t
x
3
2x
2
25,000x
1
+ 10,000x
2
+ 15,000x
3
10,0000
15,000x
1
+ 3,000x
2
+ 12,000x
3
2(10,000x
1
+ 7,000x
2
+ 3,000x
3
)
15,000x
1
+ 4,000x
2
+ 9,000x
3
0.3(25,000x
1
+ 10,000x
2
+ 15,000x
3
)
x
2
7
x
1
, x
2
, x
3
0

III. Production Problem
Emerald Isle Press publishes two types of magazines on a monthly basis: a restaurant and
entertainment guide and a real estate guide. The company distributes the magazines free to businesses,
hotels, and stores in Galway. The companys profits come exclusively from the paid advertising in the
magazines. Each of the restaurant and entertainment guides distributed generates $0.50 per magazine
in advertising revenue, whereas the real estate guide generates $0.75 per magazine. The real estate
magazine is a more sophisticated publication that includes color photos, and accordingly it costs $0.25
per magazine to print, compared with only $0.17 for the restaurant and entertainment guide. The
publishing company has a budget of $4000 a month. There is enough rack space to distribute at most
18,000 magazines each month. In order to entice businesses to place advertisements, Emerald Isle Press
promises to distribute at least 8,000 copies of each magazine. The company wants to determine the
number of copies of each magazine it should print each month in order to maximize advertising
revenue.



Magazines Printing Budget Rack Space Profit
Restaurant and
Entertainment
0.17 At least 8,000 0.5
Real Estate 0.25 At least 8,000 0.75
Available 4,000 18,000


Source: Introduction to Management Science (10
th
Edition), Taylor, Bernard III, 2010.

SOLUTION:
a. Decision Variables

Let x
1
be the number of restaurant and entertainment guide magazine published on a
monthly basis
x
2
be the number of real estate guide magazine published on a monthly basis.

b. Objective Function
Maximize total Profit (Z)
Max (Z) = 0.50x
1
+ 0.75x
2

c. Subject to Constraints:
1. Printing budget: 0.17x
1
+ 0.25x
2
4,000
2. Rack Space: x
1
+ x
2
18,000
3. Minimum number of magazine to be distributed: x
1
, x
2
8,000
Non-negativity Constraint: x
1
, x
2
0


SUMMARY:
Z = 0.50x
1
+ 0.75x
2

s.t
0.17x
1
+ 0.25x
2
4,000
x
1
+ x
2
18,000
x
1
, x
2
8,000
x
1
, x
2
0


IV. Finance Problem
Janet Lopez is establishing an investment portfolio that will include stock and bond funds. She has
$720,000 to invest and she does not want the portfolio to include more that 65% stocks. The average
return for the stock fund she plans to invest in is 18%, whereas the average annual return for the bond is
6%. She further estimates that the most she could lose in the next year in the stock fund is 22%,
whereas the most she could lose in the bond fund is 5%. To reduce her risk, she wants to limit her
potential maximum losses to $100,000.

Amount Invested Amount and Risk
willing to lose
Return Portfolio Mix
X
1
22% 18% At most 65%
X
2
5% 6%
Available 720,000 100,000


Source: Introduction to Management Science (10
th
Edition), Taylor, Bernard III, 2010.

SOLUTION:
a. Decision Variable
Let x
1
be the amount to be invested in stocks.
x
2
be the amount to be invested in bond funds.

b. Objective Function
Maximize Return of Investment (Z)
Max (Z) = 0.18x
1
+ 0.06x
2


c. Subject to the Constraints:
1. Available amount to invest: x
1
+ x
2
720,000
2. Portfolio Mix: x
1
0.65(720,000)
3. Amount of Risk willing to lose: 0.22x
1
+ 0.05x
2
100,000
Non-negativity Constraint: X
1
, x
2
0

SUMMARY:
Z = 0.18x
1
+ 0.06x
2
s.t
x
1
+ x
2
720000
x
1
0.65(720,000)
0.22x
1
+ 0.05x
2
100,000
x
1
, x
2
0