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Page 199, Problem 4

By: Ms. May-Ling Lu


Parisay’s comments are in red.
Good job May-Ling!

Problem Statement:
A company produces two products. Relevant information for each product is shown
below:
Product 1 Product 2
Labor Required 4 hours 2 hours
Contribution to Profit $4 $2

The company has a goal of $48 in profits and incurs a $1 penalty for each dollar it falls
short of this goal. A total of 32 hours of labor are available. A $2 penalty is incurred for
each hour of overtime (labor over 32 hours) used, and a $1 penalty is incurred for each
hour of available labor that is unused. Marketing considerations required that at least 7
units of product 1 be produced and at least 10 units of Product 2 be produced. For each
unit (of either product) by which production falls short of demand, a penalty of $5 is
assessed. Formulate an LP that can be used to minimize the total penalty incurred by the
company. Suppose the company sets (in order of importance) the following goals:

Goal 1: Avoid underutilitzation of labor


Goal 2: Meet demand for product 1
Goal 3: Meet demand for product 2
Goal 4: Do not use any overtime

Formulate and solve a preemptive goal programming model for this situation.

Summary of Problem:

Product 1 Product 2 Total Penalty Cost


Labor Required 4 hours 2 hours = 32 Overtime: $2
Under-utilized: $1
Contribution to $4 $2 => 48 Below targeted profit:
profit $1
Product Minimum => 7 (Prod. 1) Below product minimum
Limit (units) => 10 (Prod. 2) limit: $5

Objective Function (OF): Minimize the penalty cost (LP)


Rank goals (GP)

Decision Variable: X1 = Number of Product 1 produced


X2 = Number of Product 2 produced.

Deviational Variables: SiN = Quantity by which goal i is not reached.


SiP = Quantity by which goal i is exceeded.

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II. Problem Formulation:

Description Equation
1. Decision X1 = number of Product 1 generated. X1 and X2
variables X2 = number of Product 2 generated.

2. SiP = the quantity by which goal i (as S1N, S1P, S2N, S2P, S3P, S3N, S4P and S4N.
Deviational given in the constraints) is exceeded.
variables SiN = the quantity by which the goal i (as
given in the constraints) was not reached.

Example:
S1N = the quantity of labor hours that falls
below goal 1 of 32 hours.
S1P = the quantity of labor hours that
exceed goal 1 of 32 hours.
S2N = the quantity of product 1 that falls
below goal 2 of 7 units.
S2P = the quantity of product 1 that exceed
goal 2 of 7 units.

3. Ohjective LP: LP: Z = 2S1P + 1S1N + 5S3N + 5S2N + 1S4N


Function •Minimize the penalty cost due to
(OF) deviation from goals, as given in the
constraints (LP).
•OF Coefficient = penalty cost for failing
to meet goals (LP). GP: Z1 = P1*S1N
Z2 = P2*S2N
GP (by order of importance with 1 being Z3 = P3*S3N
most important): Z4 = P4*S1P
1. Avoid under-utilization of labor.
2. Meet demand of Product 1
3. Meet demand of Product 2
4. Avoid overtime.

4. 1. Total labor hours available is 32. 1. 4X1 + 2X2 + S1N – S1P = 32.
Constraints Overtime and under-utilization of
(or Goals) labor will be penalized.
2. X1 + S2N – S2P = 7.
2. At least 7 units of Product 1 is to be
produced. 3. X2 + S3N – S3P = 10.

3. At least 10 units of Product 2 is to be 4. 4X1 + 2X2 + S4N – S4P = 48 (in LP)


produced. 4X1 + 2X2 => 48 (in GP)

4. Profit is to be at least $48.

5. Sign Decision and deviational variables => 0. Xij, SiN and SiP =>0
Restrictions

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IV. WinQSB Input for LP

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IV. WinQSB Output for LP

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IV. WinQSB Input for Preemptive GP

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IV. WinQSB Output for Preemptive GP (Solution Summary)

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V. Report to Manager

1. Penalty Cost Analysis


The company will meet 4 of its 5 stated goals (do not talk about several goals, here you
have only one OF). It will be able to fulfill the requirements of both Product 1 and
Product 2. Seven units of Product 1 and 10 units of Product 2 can be produced. The
company will also be able to satisfy its minimum profit target of $48. The company,
however, will need more labor hours than is currently available to achieve the
aforementioned goals. It takes 48 hours, or 16 hours of overtime, to manufacture 7 units
of Product 1 and 10 units of Product 2. Thus, there is no under-utilization of labor. The
overtime leads to a penalty cost of $32.00.

Table 1 below summarizes the results: (I think the summary below will not add much
to the discussion above so it can be deleted. However, it is a matter of taste.)

TABLE 1
Description of Goals Target Deviation Penalty Cost Total Penalty
cost per goal
a. Quantity of Product 1 =>7 0 $5/unit 0
(units)
b. Quantity of Product 2 =>10 0 $5/unit 0
(units)
c. Profit ($) =>48 0 $1 for every dollar 0
below target
d. Overtime (hrs) 0 +16 $2/hr $32.00
e. Labor Under-utilization 0 0 $1/hr 0
(hrs)
Total Penalty Cost $32.00

The LP emphasizes more on product generation than on overtime. The reason is the high
penalty cost imposed on the products. It is set at $5/goal. For overtime, the penalty is
only $2. This explains why the production goals of the two products are satisfied, but the
overtime requirement is exceeded by 16 hours. (good observation)

2. Rank Analysis

The following are a summary of the company’s goals and their priorities: (I think it is
better to replace the second column with the output that if we reached the
goal.)

TABLE 2
Rank Priority Goals
1 Highest priority a. Avoid under-utilization of labor.
2 Second highest priority b. Meet demand for Product 1.
3 Third highest priority c. Meet demand for Product 2

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4 Lowest priority d. Do not use any overtime

Given the aforementioned information, the preemptive goal programming (GP) shows
that the company can satisfy the first three goals. The company can avoid the under
utilization of labor. It can also keep up with the demands for both its Products. But
meeting these requirements will result in overtime, a clear violation of the lowest priority
goal not to use any overtime.

To reach the first 3 goals, the company will need to generate 7 units of Product 1 and 10
units of Product 2. It will also need 48 labor hours, or 16 hours of overtime. Clearly,
under-utilization of labor is a non-issue here. There will be no additional profit generated.
The profit stays unchanged at $48.

Table 2 summarizes the results of the GP: (a good summary)

TABLE 2
Rank Goal Target Result Deviation

1 (highest a. Avoid under-utilization of 32 hr 48 hr 0 hr under


priority) labor.
2 (second b. Meet demand for Product 1. =>7 units 7 units 0 units
highest)
3 (third c. Meet demand for Product 2 =>10 units 10 units 0 units
highest)
4 (lowest d. Do not use any overtime 32 hr 48 hr 16
priority)

The above results are applicable to all situations so long as the company desires to
maintain a profit of at least $48. This singular goal overrides all the other goals
regardless of their priorities. That is, even if the budget has a rank of 1, and overtime is
to be restricted, the GP will show the same result. The company must make at least 7
units of Product 1 and 10 units of Product 2 in order to maintain its minimum profit of
$48. Overtime is a necessity here. It is unavoidable. (a good stress on profit
constraint)

On the other hand, if the company is flexible on the issue of profit, the problem of
overtime can be addressed. Under these circumstances, the number of products generated
will have to be adjusted. To accomplish the goal of 32 labor-hours with no overtime,
Product 1 will have to be cutback by 4 units. If the company chooses to cutback on
Product 2 instead, it must reduce the production of Item 2 by 8 units. As a result of this
reduction, the company will experience a decrease in profit. The profit will be lowered
by $16 (from $48 to $32).

Table 3 summarizes the aforementioned analysis:

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TABLE 3
Goal Deviation
Rank 1 2 3 4
(highest (2nd (3rd (lowest Prod. 1 Prod. 2 Overtime Profit Prod. 1 Pr
priority) highest) highest) priority) (Unit) (Unit) (hr) ($) (Unit) (U
**Profit
(most important) Regardless of the order of the no-overtime goal (d), the following results always apply.
d *a b c 0 0 16 0 7
d b c a 0 0 16 0 7
a d c b 0 0 16 0 7
c b d a 0 0 16 0 7
***Overtime
(most important) To achieve no-overtime, either Product 1 is to be reduced by 4 units or Product 2 is to be reduced by 8 units.
d b c a 0 8 0 -16 7
b d c a 0 8 0 -16 7
d a b c 0 8 0 -16 7
d c b a 4 0 0 -16 3
d a c b 4 0 0 -16 3
c d b a 4 0 0 -16 3
Note 1: *a = labor-hours not to be underutilized; b = product 1 must be at least 7 units; c = product 2 must be at leas
d = there is no overtime
Note 2: **The profit goal is not ranked but is built into the constraint of the GP in such a way that it overrides the m
the GP.
Note 3: ***Also, to obtain the results for the case where the profit does not dominate, the profit constraint has been
priority. This priority is not listed in the Table above. If it were, it would always have a rank of 5.

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V. Report to Manager (Sensitivity Analysis)

Sample of WinQSB input to show the dominance of the profit constraint. Minimizing
labor hours (S1P) is ranked as the most important goal. But the result, as shown in the
next page, still shows the use of overtime hours.

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Sample of WinQSB output to show the dominance of the profit constraint. There is 16
hours of overtime (S1P) in the solution.

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Sample of WinQSB input that shows the profit constraint as the lowest priority (rank =5).
In this WinQSB input, the profit constraint is labeled S4.

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Sample of WinQSB output that shows the effect of the profit constraint as the lowest
priority (rank =5).

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