ACCA F5 Revision Linear Programming Worked example Q3 Dec 2010 - F5 Exam a) To solve any linear programming problem at this

s level typical scenario, how many of each of two different items should we produce to maximise profit/contribution you need to follow a series of steps.... 1. Define variables i.e. the two products Variable 1 = cream (X) Variable 2 = lotion (Y) 2. Construct objective function i.e. what you are trying to do..... Aim = Maximise contribution (C) per week ... told this in question But must also include the amount of contribution per unit generated from each of the variables.... Contribution = selling price variable costs Given in this example.... Objective function therefore; Maximise C = 9X + 8Y

3. Define constraints (need one constraint for each element of production that is limited in some way) Elements of production identified as limited in the question are; Skilled labour 9600 minutes a week Silk powder 5000 grams per week Amino acid 1600 grams per week Constraints defined in terms of how much of each limited item is needed to make one of each of the variables, each will be drawn as a line on your LP graph Constraints formulated as.... Skilled labour Silk powder Amino acid Also always have a non-negative constraint for each variable X Y

May also have sales constraints i.e. minimum or maximum production requirement identified. Sales constraint X Y 4. Draw the graph Important to use a sensible scale so good starting point is to work out ends on each axis for the constraint lines identified Skilled labour 4X+5Y=9600 If X=0 , Y = 9600/5 = 1920 If Y = 0, X=9600/4 = 2400 Silk powder

Amino acid

Can see from the above that highest value for X is 2400 and highest value for Y is 3200, use these values to determine scale. Dont forget about sales constraint . Plot lines on the graph making sure you label each line with its constraint equation. Identify and label feasible area (shade in as well if you wish).

5. Determine slope of iso-contribution line and draw on graph. Decide on an amount of contribution the business might want to generate .... pick a number, any number, but best of you pick one which is divisible by contribution of one unit of each product. e.g. 9 x 8 = 72, so contribution of 72 could be generated from either 9X or 8Y problem is numbers are very small, so multiply by 10 or 100, given scale on graph here 100 makes more sense 9X+8Y= 7200 X=800

Y=900 These represent the ends of your iso-contribution line....draw on graph. 6. Determine optimum level of production. This will be the furthest point away from the origin at which two of your constraint lines cross. Use ruler to follow slope of contribution line across the feasible are of your graph until only one possible production point remains i.e. the furthest vortex from the origin At this point two of your constraint lines will cross... need to calculate at this point how many of each item you will be producing by taking the equations of the lines that cross and solving them simultaneously. Which ??? Should find optimum production is Y=1257.14 (because question says you must go to 2 decimal places) X= 828.58 7. Determine contribution that will be generated at optimum level of output. From Y = 8 x 1257.14 and X=9 x 828.58 total = 17514.34

b) Shadow price..... the price you should be prepared to pay for an additional unit of scarce resource could be gram of material or hour of labour. Find this by working out how much additional contribution you would generate by relaxing constraint by, in this case, one extra gram of silk powder. Original optimum production was where silk powder constraint crossed skilled labour constraint. Relax silk powder constraint by one gram and revised equations would be.. 4X + 5Y=9600 3X + 2Y = 5001 Again, solve simultaneously and should end up with values of Y=1256.57 and X=829.29 Multiply by contribution per unit and revised total contribution would be 17,516.17. Original contribution was 17,514.34, so extra contribution is 1.83. Extra contribution = Shadow price Slack.... the amount of a non binding constraint/ resource that you have spare at the optimum production point.

At optimum point amino acid is not binding (constraint line is outside feasible area).Need to calculate how much of this we will use on optimum production and take usage away from available quantity to work out spare or slack 828.58 of X use 1 gram each 1257.14 of Y use .5 grams each Total usage = 1457.15 grams, available = 1600, slack= 142.85 grams