1) Problem #1 Atlantic Seafood Company (20 points)

The Atlantic Seafood Company (ASC) is a buyer and distributor of seafood products that
are sold to restaurants and specialty seafood outlets throughout the Northeast. ASC has a
frozen storage facility in New York City that serves as the primary distribution point for
all products. One of the ASC products is frozen large black tiger shrimp, which are sized
at 16-20 pieces per pound. Each Saturday ASC can purchase more tiger shrimp or sell the
tiger shrimp at the existing New York City warehouse market price. The ASC goal is to
buy tiger shrimp at a low weekly price and sell it later at a higher price. ASC currently
has 20,000 pounds of tiger shrimp in storage. Space is available to store a maximum of
100,000 pounds of tiger shrimp each week. In addition, ASC developed the following
estimates of tiger shrimp prices for the next four weeks:

Week Price/Ib.

1 $6.00
2 $6.20
3 $6.65
4 $5.55

ASC would like to determine the optimal buying-storing-selling strategy for the next four
weeks. The cost to store a pound of shrimp for one week is $0.15, and to account for
unforeseen changes in supply or demand, management also indicated that 25,000 pounds
of tiger shrimp must be in storage at the end of week 4.
Determine the optimal buying-storing-selling strategy for ASC including the projected
four-week profit.
 Decision variables: Purchase decisions: Let x1 be the purchase quantity in week 1 (in
pounds)
x2 be the purchase quantity in week 1 (in pounds)
x3 be the purchase quantity in week 1 (in pounds)
x4 be the purchase quantity in week 1 (in pounds)

Selling decision:
Let x11 be the quantity purchased in week 1 and sold in week 1
x12 be the quantity purchased in week 1 and sold in week 2
x13 be the quantity purchased in week 1 and sold in week 3
x14 be the quantity purchased in week 1 and sold in week 4

Let x22 be the quantity purchased in week 2 and sold in week 2

x23 be the quantity purchased in week 2 and sold in week 3
x24 be the quantity purchased in week 2 and sold in week 4

Let x33 be the quantity purchased in week 3 and sold in week 3

x34 be the quantity purchased in week 3 and sold in week 4

Let x44 be the quantity purchased in week 4 and sold in week 4

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 Inventory variables (outcome variables): y11 be the inventory at the end of week 1 from
purchased quantity in week 1
y12 be the inventory at the end of week 2 from purchased quantity in week 1
y13 be the inventory at the end of week 3 from purchased quantity in week 1
y14 be the inventory at the end of week 4 from purchased quantity in week 1

y22 be the inventory at the end of week 2 from purchased quantity in week 2
y23 be the inventory at the end of week 3 from purchased quantity in week 2
y24 be the inventory at the end of week 4 from purchased quantity in week 2

y33 be the inventory at the end of week 3 from purchased quantity in week 3
y34 be the inventory at the end of week 4 from purchased quantity in week 3

y44 be the inventory at the end of week 4 from purchased quantity in week 4

Note: Purchases are done at the start of the week or end of the prior week. Selling
happens throughout the week. All the quantities mentioned above are in pounds.

Objective function: Objective is to maximize profit i.e. total revenue less of total
purchase cost and total inventory cost.

Total revenue = price in week 1*quantity sold in week 1 + price in week 2*quantity sold
in week 2 + price in week 3*quantity sold in week 3 + price in week 4*quantity sold in
week 4

Quantity sold in week 1 = x11

Quantity sold in week 2 = x12 + x22
Quantity sold in week 3 = x13 + x23 + x33
Quantity sold in week 4 = x14 + x24 + x34 + x44

Total revenue = 6x11 + 6.2(x12 + x22) + 6.65(x13 + x23 + x33) + 5.55(x14 + x24 + x34
+ x44) Eq(1)

Total purchase cost = price in week 1*quantity purchased in week 1 + price in week
2*quantity purchased in week 2 + price in week 3*quantity purchased in week 3 + price
in week 4*quantity purchased in week 4

= 6x1 + 6.2x2 + 6.65x3 + 5.55x4 Eq(2)

Total inventory cost = inventory holding cost per unit per week*total inventory
= 0.15I Eq(3)
I is the total inventory, which is defined in constraints section of the model

Max:
6x11+6.2x12+6.65x13+5.55x14+6.2x22+6.65x23+5.55x24+6.65x33+5.55x34+5.55x44-
6x1-6.2x2-6.65x3-5.55x4-0.15I

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 Note: Objective function is expanded and simplified form of eq(1) – eq(2) – eq(3)

Constraints:
Inventory balance equations for week 1 for quantity purchased in week 1
Inventory at the end of week 1 from quantity purchased in week 1 = Quantity purchased
in week 1 + initial inventory – quantity sold in week 1 and sold in week 1
y11 = x1 + 20000 - x11

Inventory at the end of week 2 from quantity purchased in week 1 = Inventory at the end
of week 1 from quantity purchased in week 1 – quantity sold in week 2 from quantity
purchased in week 1
y12 = y11 - x12

Following similar logic following constraint equations are derived for quantity purchased
in week 1
y13 = y12 - x13
y14 = y13 - x14

For week 2 purchased quantity

Inventory at the end of week 2 from quantity purchased in week 2 = quantity purchased
in week 2 – quantity sold in week 2 from quantity purchased in week 2
y22 = x2 - x22
Following similar logic following constraint equations are derived
y23 = y22 - x23
y24 = y23 + x24

For week 3
y33 = x3 - x33
y34 = y33 - x34

For week 4
y44 = x4 - x44

Total inventory is given by following formula

I = y11 + y12 + y13 + y14 + y22 + y23 + y24 + y33 + y34 + y44

Inventory at the end of week 4 must be 25000 according to management policy

y14 + y24 + y34 + y44 >= 25000

Storage capacity is 100000 pounds therefore for each week total inventory must not
exceed available capacity
For week 1
y11 <= 100000
For week 2
y12 + y22 <= 100000

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 For week 3
y13 + y23 + y33 <= 100000
For week 4
y14 + y24 + y34 + y44 <= 100000

Non-negativity constraints (not required specifically as it is a maximization problem)

Solution using LINDO software is given below. It suggests that purchase 80000 pounds
in week 1 and sell total of 100000 (including initial inventory) in week 3. This happens
due to highest price in week 3.

LP OPTIMUM FOUND AT STEP 5

OBJECTIVE FUNCTION VALUE

1) 12500.00

VARIABLE VALUE REDUCED COST

X11 0.000000 0.000000
X12 0.000000 0.000000
X13 100000.000000 0.000000
X14 0.000000 1.250000
X22 0.000000 0.000000
X23 0.000000 0.000000
X24 0.000000 1.250000
X33 0.000000 0.000000
X34 0.000000 1.250000
X44 0.000000 0.000000
X1 80000.000000 0.000000
X2 0.000000 0.000000
X3 0.000000 0.000000
X4 25000.000000 0.000000
I 225000.000000 0.000000
Y11 100000.000000 0.000000
Y12 100000.000000 0.000000
Y13 0.000000 0.000000
Y14 0.000000 1.250000
Y22 0.000000 0.000000
Y23 0.000000 0.000000
Y24 0.000000 1.250000
Y33 0.000000 0.000000
Y34 0.000000 1.250000
Y44 25000.000000 0.000000

ROW SLACK OR SURPLUS DUAL PRICES

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 2) 0.000000 6.000000
3) 0.000000 6.200000
4) 0.000000 6.650000
5) 0.000000 6.800000
6) 0.000000 6.200000
7) 0.000000 6.650000
8) 0.000000 6.800000
9) 0.000000 6.650000
10) 0.000000 6.800000
11) 0.000000 5.550000
12) 0.000000 -0.150000
13) 0.000000 -5.700000
14) 0.000000 0.050000
15) 0.000000 0.300000
16) 100000.000000 0.000000
17) 75000.000000 0.000000

NO. ITERATIONS= 5

2) EZ-Windows, Inc., manufactures replacement windows for the home remodeling

business. In January, the company produced 15,000 windows and ended the month with
9000 windows in inventory. EZ-Windows management team would like to develop a
production schedule for the next three months. A smooth production schedule is
obviously desirable because it maintains the current workforce and provides a similar
month-to-month operation. However, given the sales forecasts, the production capacities,
and the storage capabilities as shown, the management team does not think a smooth
production schedule with the same production quantity each month possible.

February March April

Sales forecast 15,000 16,500 20,000
Production capacity 14,000 14,000 18,000
Storage capacity 6,000 6,000 6,000

The company's cost accounting department estimates that increasing production by one
window from one month to the next will increase total cost by $1.00 for each unit
increase in the production level. In addition, decreasing production by one unit from one
month to the next will increase total costs by $0.65 for each unit decrease in the
production level.

Ignoring production and inventory carrying costs, formulate and solve a linear
programming model that will minimize the cost of changing production levels while still
satisfying the monthly sales forecasts.

Decision variables: Let x1 be the quantity produced in February

x2 be the quantity produced in March

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 x3 be the quantity produced in April

Inventory variables (outcome variables): y1 be the inventory at the end of February

y2 be the inventory at the end of March
y3 be the inventory at the end of April

Slack/surplus variables: Slack surplus variables are needed to account for change in
production level.
Let s1 be the surplus variable to indicate that production in February is higher than in
January
s2 be the slack variable to indicate that production in February is lower than in January
s3 be the surplus variable to indicate that production in March is higher than in February
s4 be the slack variable to indicate that production in March is lower than in February
s5 be the surplus variable to indicate that production in April is higher than in March
s6 be the slack variable to indicate that production in April is lower than in March

Objective function: Objective is to minimize cost of production change.

Cost of production change = Production increase cost per unit*(s1 + s3 + s5) +

Production decrease cost per unit*(s2 + s4 + s6)
= $1*(s1 + s3 + s5) + $0.65*(s2 + s4 + s6) Eq(1)

Min: s1 + s3 + s5 + 0.65s2 + 0.65s4 + 0.65s6 (simplified form of eq(1))

Constraints:

Inventory balance equations

For February
Inventory at the end of February = Inventory at the end of January + Production in
February – Demand in February (sales forecast)
y1 = 9000 + x1 - 15000
 y1 = x1 – 6000

Inventory at the end of March = Inventory at the end of February + Production in March
– Demand in March (sales forecast)
y2 = y1 + x2 - 16500

Inventory at the end of April = Inventory at the end of March + Production in April –
Demand in April (sales forecast)
y3 = y2 + x3 – 20000

Capacity constraints so that production quantity in each month must not exceed capacity
available in a particular month
x1 <= 14000
x2 <= 14000
x3 <= 18000

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 Storage constraints so that inventory at the end of each month must not exceed storage
space available in a particular month

y1 <= 6000
y2 <= 6000
y3 <= 6000

Equations for production level change

For month of February
Production levee in month of January – Production level in month of February + surplus
variable for month of February – slack variable for the month of February = 0
15000 – x1 + s1 – s2 = 0

Note that both s1 and s2 are non-negative. The variable s1 will take positive value when
x1 is greater than 15000. The value of variable s1 will be equal to x1 – 15000 so that
LHS of the constraint is equal to RHS i.e. 0. The variable s2 will take positive value
when x1 is less than 15000. The value of variable s2 will be equal to 15000 – x1 so that
LHS of the constraint is equal to RHS i.e. 0.

Similarly for the month of March following constraint is required

x1 – x2 + s3 – s4 = 0

For month of April

x2 – x3 + s5 – s6 = 0

Non-negativity constraints are required specifically as this is a minimization problem.

x1, x2, x3, y1, y2, y3, s1, s2, s3, s4, s5, s6 >= 0

Following is the solution obtained using LINDO. The results are as below

February March April

Production 12,000 14,000 16,500

Change from prior month 3000 2000 2500
Inventory 6000 3500 0

(Production increase is marked as underlined)

Total cost of optimal plan is $6450

OBJECTIVE FUNCTION VALUE

1) 6450.000

VARIABLE VALUE REDUCED COST

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 S1 0.000000 1.650000
S3 2000.000000 0.000000
S5 2500.000000 0.000000
S2 3000.000000 0.000000
S4 0.000000 1.650000
S6 0.000000 1.650000
Y1 6000.000000 0.000000
X1 12000.000000 0.000000
Y2 3500.000000 0.000000
X2 14000.000000 0.000000
Y3 0.000000 1.000000
X3 16500.000000 0.000000

ROW SLACK OR SURPLUS DUAL PRICES

2) 0.000000 -1.650000
3) 0.000000 1.000000
4) 0.000000 1.000000
5) 2000.000000 0.000000
6) 0.000000 1.000000
7) 1500.000000 0.000000
8) 0.000000 2.650000
9) 2500.000000 0.000000
10) 6000.000000 0.000000
11) 0.000000 0.650000
12) 0.000000 -1.000000
13) 0.000000 -1.000000
14) 12000.000000 0.000000
15) 14000.000000 0.000000
16) 16500.000000 0.000000
17) 6000.000000 0.000000
18) 3500.000000 0.000000
19) 0.000000 0.000000
20) 0.000000 0.000000
21) 3000.000000 0.000000
22) 2000.000000 0.000000
23) 0.000000 0.000000
24) 2500.000000 0.000000
25) 0.000000 0.000000

NO. ITERATIONS= 7

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