M.COM.

III Semester
Code: MCOHC3.2

COURSE II: QUANTITATIVE TECHNIQUES

Department of Studies and Research in Commerce

Karnataka State Open University
MUKTHAGANGOTHRI, MYSURU
Karnataka – 570 006
https://ksoumysuru.ac.in/
 Course Code: MCOHC3.2

Course 2: Quantitative Techniques

M.Com
III Semester (CBCS)

Department of Studies and Research in Commerce

Karnataka State Open University
Mukthagangothri, Mysuru.
https://ksoumysuru.ac.in/
Credit Page
Programme: M.Com Course II: Quantitative Techniques
Semester: III Code: MCOHC3.2 Credits:04
Expert Committee Course Editorial Board
Dr. Sharanappa V. Halse Dr. Mahesha V. Chairman
Hon’ble Vice-Chancellor, BOS (PG) Chairman,
KSOU, Mysuru. DOS&R in Commerce,
KSOU, Mysuru.
Prof. N. Lakshmi
Dean (Academic), Prof. Nagendra Babu K. External Member
KSOU, Mysuru. Professor,
Department of Commerce,
Dr. Mahesha V. Mysore University, Mysuru.
BOS (PG) Chairman &
Programme Co-ordinator Dr. Naveen G.V. Internal Member
DOS&R in Commerce, Assistant Professor,
KSOU, Mysuru. DOS&R in Commerce,
KSOU, Mysuru.
Dr. Usha C.
Chairperson & Course Designer, Dr. Usha C. Member Convener
DOS&R in Commerce, Chairperson,
KSOU, Mysuru. DOS&R in Commerce,
KSOU, Mysuru.
Course Preparation Team
Block Course Writer Course Editor
Block I (Unit: 1-4)
Dr. Anitha H.S. Dr. Usha C.
Block II (Unit: 5-8)
Professor, Chairperson,
Block III (Unit: 9-12) DoS&R in Commerce, DOS&R in Commerce,
Davangere University, Tholahunase. KSOU, Mysuru.
Block IV (Unit: 13-16)
Publication Coordinator:
Dr. Santhosh Naik, Director, Prasaranga (University Publications), KSOU.
ISBN: 978-93-3011-700-9
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 Preface

Dear Learner,

Greetings to the diligent and aspiring learners pursuing third semester M.Com (CBCS)
through Open and Distance Learning to the self-learning material for the course “Quantitative
Techniques”. In today's fast-paced and data-driven world, the ability to analyze, model, and
optimize complex business processes is paramount. Quantitative Techniques provide the
analytical tools necessary to enhance decision-making and solve intricate problems across
various domains. This course equips you with the skills to transform raw data into valuable
insights, empowering you to drive efficiency, innovation, and strategic thinking. This material
offers a comprehensive understanding of mathematical modeling, optimization, simulation and
many more methods and techniques that are integral to making informed and effective
decisions in diverse contexts.

This self-learning material is a testament to the collective wisdom of accomplished

academicians, experts, and researchers who have generously shared their insights. Their
contributions have elevated the content to meet the highest academic standards and practical
relevance.

As you embark on this journey of exploration and skill-building, remember that the
pursuit of knowledge is a transformative endeavor. Embrace the challenges posed by
quantitative analysis, engage with the exercises, and apply the concepts to real-world situations.
By the conclusion of this course, you will possess the proficiency to harness Quantitative
Techniques as powerful tools in your academic and professional pursuits to optimize the
decision making.

Wishing you a rewarding and enriching learning experience!

Dr. Usha C.
Chairperson,
DOS& R in Commerce,
KSOU, Mysuru.
Karnataka State Open University
Mukthagangothri, Mysuru – 570 006
[email protected] III SEMESTER M.COM
QUANTITATIVE TECHNIQUE
COURSE CODE:MCOHC3.2

Department of Studies and Research in Commerce

BLOCK
1

Page No.

UNIT – 1: INTRODUCTION TO QUANTITATIVE TECHNIQUES 1-9

UNIT – 2: LINEAR PROGRAMMING: GRAPHICAL METHOD 10-48

UNIT – 3: LINEAR PROGRAMMING: SIMPLEX METHOD 49-70

UNIT – 4: ARTIFICIAL VARIABLE TECHNIQUE 71-86

 BLOCK – I

INTRODUCTION

This block initially attempts to explain the historical background of quantitative

techniques, it's development and introduction continued by methodology of quantitative
techniques, scope and linear programming models available to analyse the scenario and to take
a feasible decision, covering firstly the graphical method, it’s properties, essential
characteristics, formulation of linear programming model, maximization and minimization
model, computation of feasible solution under graphical method. Secondly simplex method,
additional variables used in solving linear programming problems, steps, minimization and
maximization of linear programming problems followed by degeneracy, unbound solutions,
duality under linear programming problems. At last, artificial variable technique, introduction,
Big M method, steps to be followed funder Big M method and illustrations are discussed in
this block.

This block comprises four units as presented below:

Unit – 1: Introduction to Quantitative Techniques

Unit – 2: Linear Programming – Graphical Method

Unit – 3: Linear Programming - Simplex Method

Unit – 4: Artificial Variable Technique

 BLOCK - I
UNIT-1 INTRODUCTION TO QUANTITATIVE TECHNIQUES
Structure:

1.0 Objectives

1.1 Introduction

1.2 Historical Development

1.3 Quantitative Techniques

1.4 Methodology of Quantitative Techniques

1.5 Scope of Quantitative Techniques

1.6 Check Your Progress

1.7 Summary

1.8 Keywords

1.9 Questions for Self-Study

1.10 References

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1.0 OBJECTIVES
After studying this unit, you will be able to;

• Throw a light on historical development of Quantitative Technique.

• Discuss the methodology of Quantitative Technique.

• Explain the scope of Quantitative Technique.

1.1 INTRODUCTION
Scientific methods have been man’s outstanding asset to pursue an ample number of
activities. It is analysed that whenever some national crisis, emerges due to the impact of
political, social, economic or cultural factors the talents from all walks of life amalgamate together
to overcome the situation and rectify the problem. In this chapter we will see how the
quantitative techniques had facilitated the organization in solving complex problems on time
with greater accuracy. The historical development will facilitate in managerial decision-
making & resource allocation, The methodology helps us in studying the scientific methods with
respect to phenomenon connected with human behaviour like formulating the problem,
defining decision variable and constraints, developing a suitable model, acquiring the input
data, solving the model, validating the model, implementing the results. The major advantage of
mathematical model is that its facilitatesin taking decision faster and more accurately.

Managerial activities have become complex and it is necessary to make right decisions
to avoid heavy losses. Whether it is a manufacturing unit, or a service organization, the
resources have to be utilized to its maximum in an efficient manner. The future is clouded with
uncertainty and fast changing, and decision-making – a crucial activity – cannot be made on a
trial-and-error basis or by using a thumb rule approach. In such situations, there is a greater
need for applying scientific methods to decision-making to increase the probability of coming up
with good decisions. Quantitative Technique is a scientific approach to managerial decision-
making. The successful use of Quantitative Technique for management would help the
organization in solving complex problems on time, with greater accuracy and in the most
economical way. Today, several scientific management techniques are available to solve
managerial problems and use of these techniques helps managers become explicit about their
objectives and provides additional information to select an optimal decision. This study material is
presented with variety of these techniques with real life problem areas.

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1.2 HISTORICAL DEVELOPMENT
During the early nineteen hundreds, Fredrick W. Taylor developed the scientific
management principle which was the base towards the study of managerial problems. Later,
during World War II, many scientific and quantitative techniques were developed to assist in
military operations. As the new developments in these techniques were found successful, they
were later adopted by the industrial sector in managerial decision-making and resource
allocation. The usefulness of the Quantitative Technique was evidenced by a steep growth in
the application of scientific management in decision-making in various fields of engineering
and management. At present, in any organization, whether a manufacturing concern or service
industry, Quantitative Techniques and analysis are used by managers in making decisions
scientifically.

1.3 QUANTITATIVE TECHNIQUES

Quantitative Techniques adopt a scientific approach to decision-making. In this approach,
past data is used in determining decisions that would prove most valuable in the future. The use
of past data in a systematic manner and constructing it into a suitable model for future use
comprises a major part of scientific management. For example, consider a person investing in
fixed deposit in a bank, or in shares of a company, or mutual funds, or in Life Insurance
Corporation. The expected return on investments will vary depending upon the interest and time
period. We can use the scientific management analysis to find out how much the investments
made will be worth in the future. There are many scientific method software packages that have
been developed to determine and analyze the problems.

In case of complete non-availability of past data, quantitative factors are considered in

decision-making. In cases where the scope of quantitative data is limited, qualitative factors
play a major role in making decisions. Qualitative factors are important situations like sudden
change in tax-structures, or the introduction of breakthrough technologies. Application of
scientific management and Analysis is more appropriate when there is not much of variation
in problems due to external factors, and where input values are steady. In such cases, a model
can be developed to suit the problem which helps us to take decisions faster. In today's
complex and competitive global marketplace, use of Quantitative Techniques with support of
qualitative factors is necessary.

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 Quantitative Technique is the scientific way to managerial decision-making, while emotion
and guess work are not part of the scientific management approach. This approach starts with
data. Like raw material for a factory, this data is manipulated or processed into information that
is valuable to people making decision. This processing and manipulating of raw data into
meaningful information is the heart of scientific management analysis.

1.4 METHODOLOGY OF QUANTITATIVE TECHNIQUES

The methodology adopted in solving problems is as follows:

Formulating the problem

Defining decision variables and

constraints.

Developing a suitable model

Acquiring the Input Data

Solving the model

Validating the model

Implementing the results

Figure 1.1: Methodology of Quantitative Techniques

1.4.1 Formulating the Problem

As a first step, it is necessary to clearly understand the problem situations. It is important

to know how it is characterized and what is required to be determined. Firstly, the key

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decision and the objective of the problem must be identified from the problem. Then, the number
of decision variables and the relationship between variables must be determined. The
measurable guaranties that are represented through these variables are notified. The
practical limitations or constraints are also inferred from the problem.

1.4.2 Defining the Decision Variables and Constraints

In a given problem situation, defining the key decision variables are important. Identifying
these variables helps us to develop the model. For example, consider a manufacturer who is
manufacturing three products A, B and C using two machines, I and II. Each unit of product A
takes 2 minutes on machine I and 5 minutes on machine II. Product B takes 1 minute on
machine I and 3 minutes on machine II. Similarly, product C takes 4 minutes and 6 minutes on
machine I and machine II, respectively. The total available time on machine I and machine II
are 100 hours and 120 hours, respectively. Each unit of A yields a profit of ₹ 3.00, B yields ₹
4.00 and C yields ₹ 5.00. What should be level of production of products A, B and C that should
be manufactured by the company so as to maximize the profit?

The decision variables, objective and constraints are identified from the problem.

The company is manufacturing three products A, B and C. Let A be X1, B be X2 and

C be X3. X1, X2 and X3 are the three decision variables in the problem. The objective is to
maximize the profits. Therefore, the problem is to maximize the profit, i.e., to know how many
units of X1, X2 and X3 are to be manufactured. There are two machines available, machine I
and machine II with total machine hours available as 100 hours and 120 hours. The machine
hours are the resource constraints, i.e., the machines cannot be used more than the given
number of hours.

To summarize,

Key decision : How many units of X1, X2 and X3 are to be manufactured

Decision variables : X1, X2 and X3

Objective : To maximize profit

Constraint : Machine hours

1.4.3 Developing a Suitable Model

A model is a mathematical representation of a problem situation. The mathematical

model is in the form of expressions and equations that replicate the problem. For example, the

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total profit from a given number of products sold can be determined by subtracting selling
price and cost price and multiplying the number of units sold. Assuming selling price, sp as ₹
40 and cost price, cp as ₹ 20, the following mathematical model expresses the total profit, tp
earned by selling number of unit x.

TP = (SP – CP) X
= (40 – 20) X
TP = 20 X
Now, this mathematical model enables us to identify the real situation by understanding
the model. The models can be used to maximize the profits or to minimize the costs. The
applications of models are wide, such as:

• Linear Programming Model

• Integer Programming

• Sensitivity Analysis

• Goal Programming

• Dynamic Programming

• Non Linear Programming

• Queuing Theory

• Inventory Management Techniques

• PERT/CPM (Network Analysis)

• Decision Theory

• Games Theory

• Transportation and Assignment Models.

1.4.4 Acquiring the Input Data

Accurate data for input values are essential. Even though the model is well constructed,
it is important that the input data is correct to get accurate results. Inaccurate data will lead to
wrong decisions.

1.4.5 Solving the Model

Solving is trying for the best result by manipulating the model to the problem. This is done

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by checking every equation and its diverse courses of action. A trial and error method can be
used to solve the model that enables us to find good solutions to the problem.

1.4.6 Validating the Model

A validation is a complete test of the model to confirm that it provides an accurate

representation of the real problem. This helps us in determining how good and realistic the
solution is. During the model validation process, inaccuracies can be rectified by taking
corrective actions, until the model is found to be fit.

1.4.7 Implementing the Results

Once the model is tested and validated, it is ready for implementation. Implementation
involves translation/application of solution in the company. Close administration and
monitoring is required after the solution is implemented, in order to address any proposed changes
that call for modification, under actual working conditions.

1.5 SCOPE OF QUANTITATIVE TECHNIQUES

The scope and areas of application of scientific management are very wide in engineering
and management studies. Today, there are a number at quantitative software packages
available to solve the problems using computers. This helps the analysts and researchers to take
accurate and timely decisions. This book is brought out with computer based problem solving.
A few specific areas are mentioned below.

• Finance and Accounting: Cash flow analysis, Capital budgeting, Dividend and
Portfolio management, Financial planning.

• Marketing Management: Selection of product mix, Sales resources allocation and

Assignments.

• Production Management: Facilities planning, Manufacturing, Aggregate planning,

Inventory control, Quality control, Work scheduling, Job sequencing, Maintenance and
Project planning and scheduling.

• Personnel Management: Manpower planning, Resource allocation, Staffing,

Scheduling of training programmes.

• General Management: Decision Support System and Management of Information

Systems, MIS, Organizational design and control, Software Process Management and
Knowledge Management.

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 From the various definitions of Quantitative Technique, it is clear that scientific
management hen got wide scope. In general, whenever there is any problem simple or
complicated the scientific management technique can be applied to find the best solutions. In
this head we shall try to find the scope of M.S. by seeing its application in various fields of
everyday lift this include define operation too.

1.6 CHECK YOUR PROGRESS

1 Write True or False against each statement:

(a) Accurate data for input values are essential.

(b)Key decision and objective of the problem must be identified in defining decision
variables from the problem.

(c) The methodology helps us in studying the scientific method.

(d)Model does not facilitate managers to take decisions.

2 Fill in the blanks:

(a) Once the ______ in tested and validated, it is ready for implementation.

(b)Quantitative factors are considered in ______

(c) Fredrich W. Taylor developed the ______ management principle.

Answers to Check Your Progress:

1. (a) True (b) True (c) True (d) False

2. (a) model (b) decision-making (c) scientific
1.7 SUMMARY
So far, as we have discussed the changes in the structure of human organisation,
perfection in various fields and introduction of decision had given birth to quantitative
technique. The application of quantitative techniques methods helps in making decisions in such
complicated situation. Evidently the primarily objective of quantitative techniques is to study
the different components of an organisation by employing the methods of mathematical
statistics in order to get the behaviour with greater degree of control on the system. In short,
the objective of quantitative technique is to make available scientific basis to the decision-
maker, for solving the problem involving the interaction of different components of the
organisation by employing a team of scientists from distinguish disciplines, all working in concert
for finding a solution which is in the best interest of organisation as a whole. The best solution

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thus obtained is known as optimal decision.

1.8 KEYWORDS
Model : It is an idealized representation of the real life situation
and represents one or more aspects of reality

Decision-Making : Decision-making in operations management is the

decision-making process about efficiently using
resources to produce goods or services

Algorithms : These are the engine at the core of the computerized

solution of any mathematical model.

1.9 QUESTIONS FOR SELF-STUDY

1. How useful are the Quantitative Techniques in decision-making?

2. Give the areas of application where Quantitative Techniques can be applied.

3. Explain the methodology adopted in solving Quantitative problems.

4. What is constraints in quantitative technique.

5. What is model? How a model can be used to maximize the profits?

6. What is a model? Explain with a suitable example.

7. What is meant by validation of model?

1.10 REFERENCES
1. Bonani, Hausman & Bierman, Quantitative Analysis for Management, 9th Edition, Mc.
Graw Hill, 1997.
2. Billy E Gillert, “Introduction to Operation Research”, Mc. Grow Hill Education, 1979
3. Franklyn A Lindsay, “New Technique for Management Decision-making”, Creative
Media Partners, LLC, 2021.
4. Acnoff R. L. & Sasieni M. W., “Fundamentals of Operation Research”, 1968.
5. Norbert Lloyd, Enrich, “Management Operation Research”.
6. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT-2 LINEAR PROGRAMMING: GRAPHICAL METHOD
Structure:

2.0 Objectives

2.1 Introduction

2.2 Essential Characteristics of Linear Programming Model

2.3 Properties of Linear Programming Model

2.4 Formulation of Linear Programming Model

2.5 General Linear Programming Model

2.6 Maximization and Minimization Models

2.7 Feasible Solution

2.8 Graphical Method

2.9 Check Your Progress

2.10 Summary

2.11 Keywords

2.12 Questions for Self-Study

2.13 References

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2.0 OBJECTIVES
After studying this unit, you will be able to;

• List out the essential characteristics of linear programming model.

• Highlight the properties of liner programming model.
• Formulate the linear programming model.
• Solve linear programming under graphical method.

2.1 INTRODUCTION
Linear programming is a widely used mathematical modeling technique to determine the
optimum allocation of scarce resources among competing demands. Resources typically include
raw materials, manpower, machinery, time, money and space. The technique is very powerful
and found especially useful because of its application to many different types of real business
problems in areas like finance, production, sales and distribution, personnel, marketing and
many more areas of management. As its name implies the linear programming model
consists of linear objectives and linear constraints, which means that the variables in a model
have a proportionate relationship. For example, an increase in manpower resource will result
in an increase in work output. Thus, this unit focuses on understanding the concepts of linear
programming using various illustrations under graphical method.

2.2 ESSENTIAL CHARACTERISTICS OF LINEAR PROGRAMMING MODEL

For a given problem situation, there are certain essential conditions that need to be
solved by using linear programming. Therefore, let us look into the characteristics of linear
programming model given below:

1. Limited resources : Limited number of labour, material equipment and finance.

2. Objective : It refers to the aim to optimize (maximize the profits or

minimize the costs).

3. Linearity : Increase in labour input will have a proportionate increase in

output.

4. Homogeneity : The products, workers' efficiency, and machines are assumed

to be identical.

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5. Divisibility : It is assumed that resources and products can be divided into
fractions. In case the fractions are not possible, like
production of one-third of a computer, a modification of
linear programming called integer programming can be used.

2.3 PROPERTIES OF LINEAR PROGRAMMING MODEL

The following properties form the linear programming model:

1. Relationship among decision variables must be linear in nature.

2. A model must have an objective function.

3. Resource constraints are essential.

4. A model must have a non-negativity constraint.

2.4 FORMULATION OF LINEAR PROGRAMMING MODEL

Formulation of linear programming is the representation of problem situation in a
mathematical form. It involves well defined decision variables, with an objective function and set
of constraints.

Objective function

The objective of the problem is identified and converted into a suitable objective function.
The objective function represents the aim or goal of the system (i.e., decision variables) which
has to be determined from the problem. Generally, the objective in most cases will be either to
maximize resources or profits or, to minimize the cost or time.

For example, assume that a furniture manufacturer produces tables and chairs. If the
manufacturer wants to maximize his profits, he has to determine the optimal quantity of tables
and chairs to be produced.

Let,

X1 = Optimal production of tables

P1 = Profit from each table sold

X2 = Optimal production of chairs

P2 = Profit from each chair sold.

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Hence,

Total profit from tables = P1 X1

Total profit from chairs = P2 X2

The objective function is formulated as below,

Maximize Z or Zmax = P1 X1 + P2 X2

Constraints

When the availability of resources are in surplus, there will be no problem in making
decisions. But in real life, organizations normally have scarce resources within which the job has
to be performed in the most effective way. Therefore, problem situations are within confined
limits in which the optimal solution to the problem must be found.

Considering the previous example of furniture manufacturer, let w be the amount of

wood available to produce tables and chairs. Each unit of table consumes w1 unit of wood
and each unit of chair consumes w2 units of wood.

For the constraint of raw material availability, the mathematical expression is,

W1 X1 + W2 X2 ≤ W

In addition to raw material, if other resources such as labour, machinery and time are

also considered as constraint equations.

Non-negativity constraint

Negative values of physical quantities are impossible, like producing negative number of chairs,
tables, etc., so it is necessary to include the element of non-negativity as a constraint i.e.,

X1 + W2 X2 ≥ 0

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2.5 GENERAL LINEAR PROGRAMMING MODEL
A general representation of LP model is given as follows:

Maximize or Minimize, Z = P1 X1 + P2 X2 ………………………………….Pn Xn

Subject to constraints,

W11X1 + W12X2 + ………………W1nXn  or = or  W1……………………………(i)

W21X1 + W22X2 ………………W2nXn  or = or  W2 …............................(ii)

. . . .

. . . .

. . . .

Wm1X1 + Wm2X2 +………………WmnXn  or =  Wm…...............................(iii)

Non-negativity constraint,

Xi  0 (where i = 1,2,3…………n)

2.6 MAXIMIZATION AND MINIMIZATION MODELS

Illustration 1:

A biscuit manufacturing company plans to produce two types of biscuits, one with a round
shape and another with a square shape. The following resources are used in manufacturing the
biscuits,

(i) Raw material, of which daily availability is 150 kg.

(ii) Machinery, of which daily availability is 25 machine hours.

(iii) Labour, of which daily availability is 40 man-hours.

The resources used are shown in Table 2.1 If the unit profit of round and square
biscuits is Rs 3.00 and ₹ 2.00 respectively, how many round and square biscuits should be
produced to maximize total profit?

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 Table 2.1: Resources Used

Daily
Resources Requirement/Unit
availability

Round Square

Raw Material 100 115 1500 grams

Machine 10 12 720 minutes

Manpower 3 2 240 minutes

Solution:

Key Decision: To determine the number of round and square biscuits to be produced.

Decision Variables:

Let, x1 be the number of round biscuits to be produced daily, and

x2 be the number of square biscuits to be produced daily

Objective function: It is given that the profit on each unit of round biscuits is ₹ 3.00 and of
square biscuits is ₹ 2.00. The objective is to maximize profits, therefore, the total profit will
be given by the equation,

Zmax = 3X1+2X2

Constraints: Now, the manufacturing process is imposed by a constraint with the limited
availability of raw material. For the production of round biscuits, 100x1 of raw material is used
daily and for the production of square biscuits, 115x2 of raw material is used daily. It is given
that the total availability of raw material per day is 1500 grams.

Therefore, the constraint for raw material is, 100X1 + 115X2 ≤ 1500

Similarly, the constraint for machine hours is,

10X1+12X2 ≤ 720

and for the manpower is,

3X1 +2 X2 ≤ 240

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 Since the resources are to be used within or below the daily available level, in equality
sign of less than or equal sign (≤) is used. Further, we cannot produce negative number of units
of biscuits which is a non-negative constraint expressed as,

X1≥ 0 and X2≥ 0

Thus, the linear programming model for the given problem is,

Maximize Z = 3X1 + 2X2

Subject to constraints,

100 X1 +115 X2 ≤ 1500………………………………………………………….......….(i)

10 X1 +12 X2 ≤ 720…………………………………………………………….…….…(ii)

3 X1+2 X2 ≤ 240………………………………………………………………………......(iii)

Where, X1 ≥ 0, X2 ≥ 0

Illustration 2:

Rahul Ads, an advertising company is planning a promotional campaign for the client's product,
i.e., sunglasses. The client is willing to spend ₹ 5 lakhs. It was decided to limit the campaign
media to a weekly magazine, a daily newspaper and TV advertisement. The product is targeted
at middle-aged men and women, and the following data was collected (Table 2.2).

Table 2.2: Data Collected

Campaign Media Cost per Advertisement (₹) Expected Viewers

Weekly Magazine 30,000 1,15,000

Daily Newspaper 45,000 2,05,000

TV Advertisement 1,25,000 7,00,000

The client is interested to spend only ₹ 1 lakh on the ads in the weekly magazine which
expecting a viewership of a minimum of 21 lakh people in the case of the television
advertising. Maximize the viewers to the advertisements.

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Solution:

Key Decision: To determine number of advertisements on weekly magazine, daily newspaper

and TV.

Decision Variable:

Let, X1 be the number of weekly magazine advertisements.

X2 be the number of daily newspaper advertisements.

X3 be the number of TV advertisements.

Objective function: The objective is to maximize the number of viewers through all media.
The total viewers will be given by the equation,

Zmax = 115000X1 + 205000X2+ 700000X3

Constraints: Firstly, the client is willing to spend ₹ 500000 on all media,

30000X1 + 45000X2 + 125000X3 ≤ 500000

or

30X1 + 45X2+ 125X3 ≤ 500……………………………………………………(i)

Secondly, a minimum of 21,00,000 people should view the television advertising,

700000X3 ≥ 2100000

or

X3 ≥ 3 …………………………………………………………………………………..(ii)

Lastly, the client is interested to pay only ₹ 100000 in weekly magazine advertising,

30000X1 ≤ 100000

or

3X1 ≤ 10 …………………………………………………………………….(iii)

Summarizing the LP model for the given problem,

Maximize Z = 115000X1 + 205000 X2 + 700000X3

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Subject to constraints,

30X1 + 45X2 + 125X3 ≤ 500 .................................................................................(i)

X3 ≥ 3............................................................................................................. (ii)

3X1 ≤ 10 .................................................................................................................... (iii)

where X1, X2, X3 ≥ 0

Illustration 3:

The data given in Table 2.3 represents the shipping cost (in ₹) per unit for shipping from each
warehouse to each distribution centre. The supply and demand data of each warehouse and
distribution centre is given. Determine how many units should be shipped from each warehouse
to each centre in order to minimize the overall transportation cost.

Table 2.3: Data Shows Shipping Cost from Warehouse to Distribution

Distribution Centre
Warehouse 1 2 3 Supply
1 9 10 11 150
2 4 6 8 250
Demand 150 100 150 400

Solution:

Key decision: To determine the number of units to be shipped from each warehouse to each
distribution centre.

Decision Variables:

Let xij be the number of units to be shipped from warehouse i to distribution centre j.

X11 be the number of units to be shipped from warehouse 1 to distribution centre 1.

X12 be the number of units to be shipped from warehouse 1 to distribution centre 2.

X13 be the number of units to be shipped from warehouse 1 to distribution centre 3.

X21 be the number of units to be shipped from warehouse 2 to distribution centre 1.

X22 be the number of units to be shipped from warehouse 2 to distribution centre 2.

X23 be the number of units to be shipped from warehouse 2 to distribution centre 3.

- 18 -
Objective Function: The Table 4.3 shows the transportation cost from each warehouse to each
distribution centre. Therefore, 9X11 represents the total cost of shipping X11 units from
warehouse 1 to distribution centre 1. The objective function is to minimize the transportation
cost. Therefore, the objective function is,

Minimize Z = 9X11 + 10X12+11X13+4X21+6X22+8X23

Constraints: The supply and demand constraints to ship the units from warehouses are, to ship
the units and distribution centres must receive the shipped units. Since the given table is a 2 × 3
matrix, we have a total 5 constraints apart from the non-negativity constraint. The constraints
are as follows,

X11 + X12 + X13 ≤ 150…………………………………………………………….. (i)

X21 + X22 + X23 ≥ 250……………………………………………………………...(ii)

X11 + X21 = 150…………………………………………………………………(iii)

X12 + X22 = 100…………………………………………………………………(iv)

X13 + X23 = 150…………………………………………………………………(v)

Where Xij ≤ 0 (i = 1,2 and j = 1,2,3)

Thus the LP model for the given transportation problem is summarized as,

Minimize Z = 9X11 + 10X12+11X13+4X21+6X22+8X23

Subject to constraints,

X11+ X12+ X13 ≤ 150 ..........................................................................................................(i)

X21+ X22+ X23 ≤ 250 ........................................................................................................ .(ii)

X11 + X21 = 150 .............................................................................................................. ..(iii)

X12 + X22 = 100 ............................................................................................................... ..(iv)

X13 + X23 = 150 ................................................................................................................ ..(v)

Where Xij > 0 (i =1,2, and j = 1,2,3)

Illustration 4:

Sivakumar & Co., manufactures two types of T-shirts, one with collar and another without
collar. Each T-shirt with collar yields a profit of ₹ 20, while each T- shirt without collar yields

- 19 -
₹ 30. Shirt with collar requires 15 minutes of cutting and 25 minutes of stitching. Shirt without
collar requires 10 minutes of cutting and 20 minutes of stitching. The full shift time is available
for cutting in an 8 hour shift, but only 6 hours are available for stitching. Formulate the problem
as an LP model to maximize the profit.

Solution:

Key decision: To determine the number of T-shirts with collar and without collar to be
manufactured.

Table 2.4: Resources Used

T-Shirts
Shifts Available
With Collar Without Collar

Profit (₹) 20 30 -

Cutting Time 15 min 10 min 8 hours

Stitching 25 min 20 min 6 hours

Decision variables:

Let X1 be the number of T-shirts with collar

X2 be the number of T-shirts without collar

Objective Function:

Zmax = 20X1 + 30X2

Constraints:

15X1 + 10X2 ≤ 8 × 60 (Cutting) ........................................................................................... (i)

25X1 + 20X2 ≤ 6 × 60 (Stitching) ........................................................................................ (ii)

Non-negativity constraints:

X1 ≥ 0 , X2 ≥ 0

The linear programming model is,

Zmax = 20x1 + 30x2

- 20 -
Subject to constraints,

15x1 + 10x2 ≤ 480 ....................................................................................................................... (i)

25x1 + 20x2 ≤ 360 ...................................................................................................................... (ii)

where X1 , X2 ≥ 0

Illustration 5:

An agricultural urea company must daily produce 500 kg of a mixture consisting of

ingredients X1, X2 and X3. Ingredient X1 costs ₹ 30 per kg, X2 ₹ 50 per kg and X3 ₹ 20 per
kg. Due to raw material constraint, not more than 100 kg of X1, 70 kg of X2 and 45 kg of X3
must be used. Determine how much of each ingredient should be used if the company wants to
minimize the cost.

Solution:

Key Decision: To determine the quantity of ingredient should be used for production.

Decision variable:

Let X1 be the kg of ingredient X1 to be used

X2 be the kg of ingredient X2 to be used

X3 be the kg of ingredient X3 to be used

The objective is to minimize the cost,

Minimize Z = 30X1 + 50X2 + 20X3

Subject to constraints,

X1+ X2+ X3 = 500 (total production)……………………………..(i)

X1≤ 100 (max. use of x1)…………………………….. (ii)

X2≤ 70 (max. use of x2 )…………………………….(iii)

X3 ≤ 45 (max. use of x3)……………………………...(iv)

Where X1 , X2 , X3 ≥ 0 (non-negativity)

- 21 -
Illustration 6:

Chandru Bag Company produces two types of school bags: deluxe and ordinary. If the
company is producing only ordinary bags, it can make a total of 200 ordinary bags a day.
Deluxe bag requires twice as much labour and time as an ordinary type. The demand for
deluxe bag and ordinary bag are 75 and 100 bags per day respectively. The deluxe bag yields
a profit of ₹ 12.00 per bag and ordinary bag yields a profit of ₹ 7.00 per bag. Formulate the
problem as LP model.

Solution:

Let X1 be deluxe bags to be produced per day

X2 be ordinary bags to be produced per day

Objective function: The objective is to maximize the profit. Deluxe bag yields a profit of ₹
12.00 per bag and ordinary bag yields a profit of ₹ 7.00 per bag.

Maximize Z = 12X1 + 7X2

Constraints: There are two constraints in the problem, the "number of bags" constraint and
"demand" constraint. It is given that the deluxe bag takes twice as much time of ordinary bag
and if only ordinary bags alone are produced, the company can make 200 bags.

The constraint is,

2X1 + X2 ≤ 200

The demand for the deluxe bag is 75 bags and ordinary bag is 100 bags .

The constraints are,

X1 ≤ 75

X2 ≤ 100

and the non-negativity constraint is,

X1≥ 0 , X2 ≥ 0

The LP formulation is

Maximize, Z = 12x1+ 7x2

- 22 -
Subject to constraints,

2 X1 + X2 ≤ 200………………………………………………….(i)

X1 ≤ 75…………………………………………………………………(ii)

X2 ≤ 100………………………………………………………….…(iii)

where X1, X2 ≥ 0

Illustration 7:

Geetha Perfume Company produces both perfumes and body spray from two flower extracts
F1 and F2 .The following data is provided:

Table 2.5: Data Collected

Litres of Extract

Perfume Body Spray Daily Availability (litres)

Flower Extract, F1 8 4 20

Flower Extract, F2 2 3 8

Profit Per litre (₹) 7 5

The maximum daily demand of body spray is 20 bottles of 100 ml each. A market survey
indicates that the daily demand of body spray cannot exceed that of perfume by more than 2
litres. The company wants to find out the optimal mix of perfume and body spray that
maximizes the total daily profit. Formulate the problem as a linear programming model.

Solution:

Let

X1be the litres of perfume produced daily

X2 be the litres of body spray produced daily

Objective function: The company wants to increase the profit by optimal product mix

Zmax = 7X1+5X2

- 23 -
Constraints: The total availability of flower extract F1 and flower extract F2 are 20 and 8
litres respectively. The sum of flower extract F1 used for perfume and body spray must not
exceed 20 litres. Similarly, flower extract F2 must not exceed 8 litres daily.

The constraints are,

8 X1 +4 X2 ≤ 20 (Flower extract F1)

2X1+3X2 ≤ 8 (Flower extract F2)

The daily demand of body spray x2 is limited to 20 bottles of 100ml each (i.e, 20 × 100 = 2000 ml
= 2 litres)

Therefore, X2 ≤ 2

Again, there is an additional restriction, that the difference between the daily production of
perfume and body spray , x2 – x1 does not exceed 2 litres, which is expressed as

X2–X1 ≤ 2

(or)

–X1 + X2 ≤ 2.

The model for Geetha perfumes company is,

Maximize , Z = 7X1+ 5X2

Subject to constraints,

8X1+ 4X2 ≤ 20 …………………………………………………………………….(i)

2X1 + 3X2 ≤ 8 ...……………………………………………………………..…...(ii)

–X1 + X2 ≤ 2…………………………………………………………………..….(iii)

X2 ≤ 2……………………………………………………………………………………(iv)

where X1, X2 ≥ 0

2.7 FEASIBLE SOLUTION

Any values of x1 and x2 that satisfy all the constraints of the model constitute a
feasible solution. For example, in the above problem if the values of X1 = 2 and X2 = l are
substituted in the constraint equation, we get

- 24 -
(i) 8(2) + 4(1) ≤ 20

20 ≤ 20

(ii) 2(2) + 3 (1) ≤ 8

7 ≤8

(iii) – 2 +1 ≤ 2

– 1 ≤2

(iv) 1 ≤2

All the above constraints (including non-negativity constraint) are satisfied. The objective
function for these values of X1 = 2 and X2 = 1, are

Zmax = 7(2 ) + 5(1)

= 14 + 5 = ₹ 19.00

As said earlier, all the values that do not violate the constraint equations are feasible
solutions. But, the problem is to find out the values of x1 and x2 to obtain the optimum
feasible solution that maximizes the profit. These optimum values of x1 and x2 can be found
by using the Graphical Method or by Simplex Method.

2.8 GRAPHICAL METHOD

Linear programming problems with two variables can be represented and solved
graphically with ease. Though in real-life, the two variable problems are practiced very little,
the interpretation of this method will help to understand the simplex method.

STEPS TO FIND OPTIMAL SOLUTION UNDER GRAPHICAL METHOD

Step 1: Convert the inequality constraint as equations and find co-ordinates of the line.

Step 2: Plot the lines on the graph.

(Note: If the constraint is ≥ type, then the solution zone lies away from the centre. If
the constraint is ≤ type, then solution zone is towards the centre.)

Step 3: Obtain the feasible zone.

Step 4: Find the co-ordinates of the objectives function (profit line) and plot it on the graph
representing it with a dotted line.

- 25 -
Step 5: Locate the solution point.

(Note: If the given problem is maximization, Zmax then locate the solution point at the
far most point of the feasible zone from the origin and if minimization, Zmin then
locate the solution at the shortest point of the solution zone from the origin).

Step 6: Solution type

i. If the solution point is a single point on the line, take the corresponding values of X1 and
X2.
ii. If the solution point lies at the intersection of two equations, then solve for X1 and X2
using the two equations.
iii. If the solution appears as a small line, then a multiple solution exists.
iv. If the solution has no confined boundary, the solution is said to be an unbound solution.

Illustration 8:

A company manufactures two types of boxes, corrugated and ordinary cartons. The boxes
undergo two major processes: cutting and pinning operations. The profits per unit are ₹ 6 and ₹
4 respectively. Each corrugated box requires 2 minutes for cutting and 3 minutes for pinning
operation, whereas each carton box requires 2 minutes for cutting and 1 minute for pinning. The
available operating time is 120 minutes and 60 minutes for cutting and pinning machines.
Determine the optimum quantities of the two boxes to maximize the profits.

Solution:

Key Decision: To determine how many (number of) corrugated and carton boxes are to be
manufactured.

Table 2.6: Resources Used

Boxes
Corrugated Ordinary Available Operating
Box Cartons Time
Profit 6 4 -
Cutting (min) 2 2 120
Pinning (min) 3 1 60
Decision variables:

Let Xl be the number of corrugated boxes to be manufactured.

X2 be the number of carton boxes to be manufactured.

- 26 -
Objective Function: The objective is to maximize the profits. Given profits on corrugated box
and carton box are ₹ 6 and ₹ 4 respectively.

The objective function is,

Zmax = 6X1 + 4X2

Constraints: The available machine-hours for each machine and the time consumed by each
product are given.

Therefore, the constraints are,

2 X1 + 3 X2 ≤ 120……………………………………………………..(i)

2 X1 + X2 ≤ 60…………………………………………………………(ii)

Where X1 , X2 ≥ 0

Graphical Solution: As a first step, the inequality constraints are removed by replacing ‘equal
to’ sign to give the following equations:

2X1 + 3X2 = 120…………………………………………………………………….(1)

2X1 + X2 = 60………………………………………………………………………(2)

Find the co-ordinates of the lines by substituting X1 = 0 and X2 = 0 in each equation.

In equation (1), put X1 = 0 to get X2 and vice versa

2X1 + 3X2 = 120

2(0) + 3X2 = 120, X2 = 40

Similarly, put X2 = 0,

2X1 + 3X2 = 120

2X1 + 3(0) = 120, X1 = 60

The line 2X1 + 3X2 = 120 passes through co-ordinates (0, 40) (60, 0).

- 27 -
In equation(2), let assume X1=0 to get X2 and Vice versa.

2X1 + X2 = 60

2(0) + X2 = 60

X2 = 60

Similarly, let X2 = 0

2X1 + X2 = 60

2 X1+ 0 = 60

2 X2 = 60

X1 =60/2

⸫ X1 = 30

The line 2X1 + X2 = 60 passes through co-ordinates (0,60)(30,0).

The lines are drawn on a graph with horizontal and vertical axis representing boxes X1 and
X2 respectively. Figure 2.1 shows the first line plotted.

X2
Scale: 1cm = 1 points

Max Z: 6X1 + 4X2

80
No. of carton boxes x2

70
60
50
40
30
20
10
0 10 20 30 40 50 60 70 80 X1

No. of corrugated boxes x1

Fig 2.1 : Graph Considering first constraint

- 28 -
The inequality of the first line is (less than or equal to) ≤ type which means the feasible
solution zone lies towards the origin. The no shaded portion can be seen is the feasible area
shown in Figure 2.2 (Note: if the constraint type is ≥ then the solution zone area lies away
from the origin in the opposite direction). Now the second constraints line is drawn.

80 Scale : 1 cm. = 10 Points

Max. Z = 6X1 + 4X2

70

60 C (0,60)

50 2X1 + X2 = 60

Feasible region (OAPD)

40 A(0,40)
X2
P(?, ?)
L2 30

20

10 2X1 + 3X2 = 120

D(30,0) B(60,0)
X
O 10 L1 20 30 40 50 60 70 80

X1
Figure 2.2: Graph Showing Feasible Area

When the second constraint is drawn, you may notice that a portion of feasible area is
cut. This indicates that while considering both the constraints, the feasible region gets reduced
further. Now any point in the shaded portion will satisfy the constraint equations.

Find the co-ordinates for point ‘P’

2X1 + 3X2 = 120…………………………………………………………………….(1)

2X1 + X2 = 60………………………………………………………..……………...(2)

- 29 -
Subtracting equation (2) from (1)

2X2 = 60

X2 = 30

Substitute the value of X2 in equation (2),

2X1 + X2 = 60

2X1 + 30 = 60

2X1 = 60 – 30

X1 = 15

Therefore, co-ordinates for region P is (15,30).

Therefore, the co-ordinates for the region ‘P’ line are (0,15), (30,0) as indicated by dotted
line L1 and L2 in Figure 2.2. The objective function line contains all possible combinations of
values of Xl and X2.

Take the corresponding values of X1 and X2 from point P, which is 15 and 30

respectively, and are the optimum feasible values of X1 and X2.

To find optional solution, let us calculate value of Z

Corper Points Value of Z = 6X1 + 4X2

O (0,0) 0

A (0,40) 160

P (15,30) 210 (Max. Value of Z)

D (30,0) 180

Therefore, we conclude that to maximize profit, 15 numbers of corrugated boxes and 30

numbers of carton boxes should be produced to get a maximum profit. Substituting
X1= 15 and X2= 30 in objective function, we get

Zmax = 6X1 + 4X2

= 6(15) + 4(30)

Maximum profit= ₹ 210.00

- 30 -
Illustration – 9:

Maximise ‘Z’ = 2x1 + 3x2 (Subject to constraints)

x1 + x2 ≤ 400

2x1 + x2 ≤ 600

x1, x2 ≥ 0 (Non-negativity constraints)

Solution:

Step 1: Find the divisible points on inequalities

Equation X1 X2

X1 + X2 = 400 400 400

2X1 + X2 = 600 300 600

Step 2: Fix up the graphic scale

Maximum points = 600

Minimum points = 300

1 cms. = 100 points

- 31 -
Step 3: Graph the data

Y
Scale: 1cm = 10 Points
70 Max.Z = 8000x1 + 7000x2

60

50

D(?,?) X2 ≤ 40
E(0,40) 40
C(?,?)

30
Feasible region (OABCDE

20

10 B(?,?)

X
O 10 20 30 40 50 60
A(20,0) X1

Figure 2.3: Graph Showing Feasible Area

- 32 -
Step 4: Find the co-ordinates of the corner points

Corner Points X1 X2

O 0 0
A 300 0
B 200 200
C 0 400

At ‘B’: x1 + x2 = 400 ….(1)

2x1+ x2 = 600 ….(2)

Subtracting equation (1) from equation (2)

X1 = 200

Substitute the value of X1 to equation (1)

200 + x2 = 400

x2 = 400 – 200

x2 = 200

Step 5: Subscribe the co-ordinates of the corner points into objective function

Maximise ‘Z’ = 2x1 + 3x2

At ‘O’, Z = 2(0) + 3(0) = 0

At ‘A’, Z = 2(300) + 3(0) = 600

At ‘B’, Z = 2(200) + 2(200)= 1,000

At ‘C’, Z = 2(0) + 3(400) = 1,200

Conclusion:

Hence to maximize the profit of Rs. 1,200, 400 units of only type B are to be manufactured.

- 33 -
Illustration – 10:

Maximise ‘Z’ = 8,000x1 + 7,000x2 (Subject to constraints)

3x1 + x2 ≤ 66

x1 ≤ 20

x2 ≤ 40

x1 + x2 ≤ 45

x1, x2 ≥ 0 (Non-negativity constraints)

Solution:

Step 1: Find the divisible of the points on inequalities.

Equation X1 X2

3x1 + x2 = 66 22 66
x1 = 20 20 0
x2 = 40 0 40
x1 + x2 = 45 45 45

Step 2: Fix up the graphic scale

Maximum points = 66

Minimum points = 20

1 cm. = 10 points

- 34 -
Step 3: Graph the data

Y
Scale: 1cm = 10 Points
70 Max.Z = 8000x1 + 7000x2

60

50

D(?,?) X2 ≤ 40
E(0,40) 40
C(?,?)

30
Feasible region (OABCDE)

20

10 B(?,?)

X
O 10 20 30 40 50 60
A(20,0) X1

Figure 2.4: Graph Showing Feasible Area

Step 4: Find the co-ordinates of the corner points

Corner points X1 X2

0 0 0
A 20 0
B 20 6
C 10.5 34.5
D 5 40
E 0 40

At ‘C’ = 3x1 + x2 = 66 …..(1)

(-) x1 + x2 = 45 …..(2)

- 35 -
 2x1 = 21

Therefore, x1 = 10.5

Substituting x1 10.5 in eq. (2)

x1 + x2 = 45

10.5 + x2 = 45

x2 = 34.5

Therefore, coordinates for C (10.5, 34.5)

At ‘B’: x1 = 20,

Therefore 3x1 + x2 = 66

3(20) + x2 = 66

x2 = 66 – 60

x2 = 6.

Therefore, coordinates for B (20, 6)

At ‘D’: x2 = 40

Therefore, x1 + x2 = 45

x1 + 40 = 45

Therefore x1 =5

Therefore, coordinates for D(5, 40)

Step 5: Substituting the co-ordinates of corner points into objective function.

Maximise ‘Z’ = 8000x1 + 7000x2

At ‘O’, Z = 8000(0) + 7000(0) = 0

At ‘A’, Z = 8000(20) + 7000(0) = 1,60,000

At ‘B’, Z = 8000(20) + 7000(6) = 2,02,000

At ‘C’, Z = 8000(10.5) + 7000(34.5) = 3,25,500

At ‘D’, Z = 8000(5) + 7000(40) = 3,20,000

At ‘E’, Z = 8000(0) + 7000(40) = 2,80,000

- 36 -
Conclusion:

To maximize the profit, i.e., at Rs. 3,25,500 the company has to manufacture 10,500 bottles
of type A medicine and 34,500 bottles of type B medicine.

Illustration – 11:

Maximise ‘Z’ = 0.50x2 – 0.10x1, (Subject to constraints)

2x1 + 5x2 ≤ 80

x1 + x2 ≤ 20

x1, x2 ≥ 0

Solution:

Step 1: Find the divisible of the points on inequalities

Equation X1 X2

2x1 + 5x2 = 80 40 16
x1 + x2 = 20 20 20

Step 2: Fix up the graphic scale

Maximum points = 40

Minimum points = 17

1 cm. = 5 points

- 37 -
Step 3: Graph the data

40 Scale : 1 cm. = 5 Points

Max. Z = 0.50X2 – 0.10X1

35

30

25

Feasible region
20 ‘O A B C’
X2
C
15 B (?,?)

10

A
O 5 10 15 20 25 30 35 40
X1

Figure 2.5: Graph showing Feasible Area.

Step 4: Find the co-ordinates of the corner points.

Corner points X1 X2

O 0 0
A 20 0
B 6.67 13.33
C 0 16

At ‘B’: 2x1 + 5x2 = 80 ….(1)

x1 + x2 = 20 ….(2)

Multiplying eq. (2) by 2 and (1), (3) subtracting from (1)

- 38 -
 2x1 + 5x2 = 80
2x1 + 2x2 = 40
3x2 = 40
x2 = 13.33
Put x2 = 13.33 in eq. (2), x1 + x2 = 20
x1 + 13.33 = 20
x1 = 20 – 13.33
Therefore x1 = 6.67
Step 5: Substitute the co-ordinates of the corner points into objective function.
Maximise ‘Z’ = 0.50x2 – 0.10x1
At ‘O’, Z = 0.50(0) – 0.10(0) = 0
At ‘A’, Z = 0.50(0) – 0.10(20) = -2
At ‘B’, Z = 0.50(13.33) – 0.10(6.67) = 5.983
At ‘C’, Z = 0.50(16) – (0.10)(0) = 8
Conclusion: The company should manufacture 16 units of type B only if it has to maximize
the profit, i.e., Rs. 8

Illustration – 12:

A rubber company is engaged in producing 3 different kinds of tyres A, B and C. These three
different tyres are produced at the company’s 2 different plants with different production
capacities. In a normal 8 hrs. working day plant 1 produces 50, 100 and 100 tyres of A, B and
C respectively. Plant 2 produce 60,60 and 200 tyres of type A, B and C respectively. The
monthly demand for tyre A, B and C is 2,500, 3,000 and 7,000 units respectively. The daily
cost of operation of plant 1 and 2 is Rs. 2,500 and Rs. 3,500 respectively. Find the minimum
number of days of operation per month at 2 different plants to minimize the total costs while
meeting the demand.

Solution:

Let x1 be the daily cost of operation in plant 1

x2 be the daily cost of operation in plant 2
Minimise ‘Z’ = 2,500x1 + 3,500x2 (Subject to constraints)

50x1 + 60x2 ≥ 2,500

100x1 + 60x2 ≥ 3,000

- 39 -
 100x1 + 200x2 ≥ 7,000 (Demand Constraints)
x1, x2 ≥ 0 (Non-negativity constraints)

Step 1: Find the divisible of the points on inequalities.

Equation X1 X2

50x1 + 60x2 = 2,500 50 41.67

100x1 + 60x2 = 3,000 30 50
100x1 + 200x2 = 7,000 70 35

Step 2: Fix up the graphic scale

Minimum points = 30
Maximum points = 70
1 cm. = 10 points
Step 3: Graph the data
Y

80 Scale : 1cm. = 10 Points

Min. Z = 2500x1 + 3500x2

70

60

50 D

X2
40
(?,?) C Unbounded Feasible region
‘A B C D’
30

20 (?,?)B

10
A
O 10 20 30 40 50 60 70 80
X
X1
Figure 2.6: Graph Showing Feasible Area

- 40 -
Step 4: Find the co-ordinates of the corner points

Corner Points x1 x2
A 70 0
B 20 25
C 10 33.33
D 0 50
At ‘B’ 100x1 + 200x2 = 7,000 …..(1)

50x1 + 60x2 = 2,500 …..(2)

Divide eq. (1) by 2, we get,

50x1 + 100x2 = 3,500

50x2 + 60x2 = 2,500

40x2 = 1,000

Therefore x2 = 25

Put x2 = 25 in eq. (2), 50x1 + 60(25) = 2,500

50x1 + 1,500 = 2,500

50x1 = 1,000

Therefore x1 = 20

At ‘C’ = 100x1 + 60x2 = 3,000 …..(1)

50x1 + 60x2 = 2,500 …..(2)

50x1 = 500

Therefore x1 = 10

Put x1 = 10 in eq. (2)

50(10) + 60x2 = 2,500

60x2 = 2,000

Therefore x2 = 33.33

Step 5: Substitute the co-ordinates of the corner points in the objective.

Minimise ‘Z’ = 2,500x1 + 3,000x2

At ‘A’, Z = 2,500(70) + 3,000(0) = 1,75,000

- 41 -
 At ‘B’, Z = 2,500(20) + 3,000(25) = 1,25,000
At ‘C’, Z = 2,500(10) + 3,000(33.33)= 1,24,990
At ‘D’, Z = 2,500 (0) + 3,000 (50) = 1,50,000
Conclusion:

Thus, the rubber company can minimize its total cost to Rs. 1,24,990 by producing 10
units of product in plant 1 and 33.33 units in plant 2.

2.9 CHECK YOUR PROGRESS

1. Write True or False against each statement:

a) LP is a widely used mathematical modelling technique.

b) LP consists of linear objectives and linear constraints.
c) Limited resources means limited number of labour, material equipment and finance.
d) The objective function represents the aim or goal of the system, which has to be
determined from the solution.

2. Fill in the blanks with suitable answers:

a) Organization normally have ______ resources.

b) A model has a constraint.
c) ______ reference to the products, workers’, efficiency, and machines are assumed to
be identical.
d) The ______ function represents the aim or goal of the system.

Answers to Check Your Progress:

1. (a) True (b) True (c) True (d) False

2. (a) scarce (b) non-negative (c) Homogeneity (d) objective

2.10 SUMMARY
To summarize, we can say that LP is a method of planning whereby objective function is
maximized or minimized while at the same time satisfying the various restrictions placed on
the potential solution. In technical words, linear programming is defined as a methodology
whereby a linear function in optimized (minimized or maximized) subject to a set of linear
constraints in the form of equalities or inequalities. Thus, LP is a planning technique of selecting
the best possible (optimal) strategy among number of alternatives.

- 42 -
2.11 KEYWORDS
Linear Programming : It is a mathematical Modeling technique in which a
linear function is maximized or minimized when
subjected to various constraints.

Constrains Profit : The linear inequalities or equations or restrictions

on the variables of a linear programming problem.

Optimality : Any point of feasible region of a linear

programming problem that gives the optional value
of (maximizing or Minimizing) of the objective
function.

Objective Function : The real valued function whose value is to be either

minimized or maximized subject to the constraints.

2.12 QUESTIONS FOR SELF-STUDY

1. Define Linear Programming.

2. What are the essential characteristics required for a linear programming model?

3. What is meant by objective function in LP model?

4. What is a constraint? Give a few examples of constraints in real life situations.

5. Enumerate the steps involved in solving a LPP by graphical approach.

6. What is the major limitation of the graphical method?

7. List out the various constraint types in formulating a LP model.

8. Define the feasible area.

9. What are the possible solution types that can result in the graphical method?

10. What is meant by an unbounded solution?

11. How are multiple solutions interpreted in the graphical method?

Exercise Problems

1. For the problem given in Illustration-7, formulate the constraints for the following
without any change in R.H.S.:

(a) The flower extract F1 must be used at most to 15 litres and at least 5 litres.

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 (b) The demand for perfume cannot be less than the demand for body spray.

(c) The daily demand of body spray exceeds that of perfume by at least 2 litres.

2. Determine the feasible space for each of the following constraints:

(a) 2X1 – 2X2 ≤ 5 (b) 5X1 + 10X2 ≤ 60

(c) X1 – X2 ≤ 0

(d)4X1 + 3X2 ≥ 15

(e) X2 ≤ 5

(f) X2 ≤ 30

3. A company manufactures two types of products, A and B. Each product uses two
processes, I and II. The processing time per unit of product A on process I is 6 hours
and on the process II is 5 hours. The processing time per unit of product B on process I is
12 hours and on process II is 4 hours. The maximum number of hours available per
week on process I and II are 75 and 55 hours respectively. The profit per unit of selling
A and B are ₹12 and ₹10 respectively.

(i) Formulate a linear programming model so that the profit is maximized.

(ii) Solve the problem graphically and determine the optimum values of product A
and B.

4. Formulate the following data as a linear programming model.

Time required (minutes/unit) Profit

Products
Lathe Drilling Cleaning

A 25 30 15 25

B 15 5 10 30

C 20 15 10 50

Hours Available 250 400 200

5. A nutrition scheme for babies is proposed by a committee of doctors. Babies can be

given two types of food (I and II) which are available in standard sized packets,
weighing 50 gms. The cost per packet of these foods are ₹ 2 and ₹ 3 respectively. The
vitamin availability in each type of food per packet and the minimum vitamin

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 requirement for each type of vitamin are summarized in the table given. Develop a linear
programming model to determine the optimal combination of food type with the
minimum cost such that the minimum requirement of vitamin is each type is satisfied.

Details of food type

Vitamin availability per product

Minimum
Food Food
Vitamin Daily
Type I Type II
requirement

1 1 1 6

2 7 1 14

Cost/Packet (₹) 2 3

6. Formulate the problem as a LP model

Products/unit
Resources/Constraints Availability
A B

Budget (₹) 8 4 4000

Machine Time 2 1 1000 hours

Assembly Time 3 4 750 hours

Selling Price ₹ 20 ₹ 40

Cost Price ₹5 ₹ 20

7. Solve the Chandru Bag company problem graphically.

a. Determine the values of X1, X2 and Zmax.

b. If the company has increased the demand for ordinary bag from 100 to 150, what is
the new Zmax value?

c. If the demand for deluxe bags has reduced to 50 bags, determine the optimal profit
value.

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8. Solve the following linear programming model graphically:

Maximize Z = 30X1 + 100X2

Subject to constraints,

4X1 + 6X2 ≤ 90

8X1 + 6X2 ≤ 100

5X1 + 4X2 ≤ 80

where X 1 , X2 ≥ 0

9. Solve the following LP graphically:

Maximize Z = 8X1 + 10X2

Subject to constraints,

2X1 + 3X2 ≥ 20

4X1 + 2X2 ≥ 25

where X 1 , X2 ≥ 0

10. Solve the two variable constraints using graphical method.

Maximize Z = 50X1 + 40X2

Subject to constraints

X1 ≥ 20

X2 ≤ 25

2X1 + X2 ≤ 60

where X1 , X2 ≥ 0

11. Solve the following LP graphically.

Maximize Z = 1200X1 + 1000X2

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 Subject to constraints,

10X1 + 4X2 ≥ 600

7X1 + 10X2 ≥ 300

2X1 + 4X2 ≤ 1000

9X1 + 7X2 ≤ 2500

5X1 + 4X2 ≤ 1200

where X1 , X2 ≥ 0

12. Solve graphically:

Maximize Z = 2X1 + 3X2

Subject to constraints,

X 1 – X2 ≤ 0

– 3X1 + X2 ≤ 25

13. Where X1 , X2 ≥ 0Solve the following LP graphically:

Maximize Z = 8X1 + 10X2

Subject to constraints,

0.5X1 + 0.5X2 ≤ 150

0.6X1 + 0.4X2 ≤ 145

X1 ≥ 30

X1 ≤ 150

X2 ≥ 40

X2 ≤ 200

where X1 , X2 ≥ 0

14. Determine the optimal values of X1 and X2 and hence find the maximum profits forthe
following LP problem under graphical method.

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 Maximize Z = 4X1 + 5X2

Subject to constraints

X1 + 3X2 ≤ 24X1

5X2 ≤ 6

where X1 , X2 ≥ 0

2.14 REFERENCES
1. William H, Model Building in Mathematical Programming, Wiley New York.
2. Rohn E., "A New LP Approach to Bond Portfolio Management", Journal of Financial
& Quantitative Analysis 22 (1987): 439-467.
3. Wagner H, Principles of OR, 2nd ed. Englewood Cliffs, N.J: Prentice Hall, 1975.
4. Moondra S.,“An LP Model for Workforce Scheduling in Banks", Journal of Bank
Research (1976).
5. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT-3 LINEAR PROGRAMMING: SIMPLEX METHOD
Structure:

3.0 Objectives

3.1 Introduction

3.2 Additional Variables Used in Solving LPP

3.3 Steps in Linear Programming Problem under Simplex Method

3.4 Illustrations

3.5 Minimization LP Problems

3.6 Degeneracy in LP Problems

3.7 Unbounded Solutions in LPP

3.8 Duality in LPP

3.9 Check Your Progress

3.10 Summary

3.11 Keywords

3.12 Questions for Self-Study

3.13 References

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3.0 OBJECTIVES
After studying this unit, you will be able to;

• Identify the additional variables used in solving LPP.

• Differentiate basic variable and non-basic variable.
• Explain the procedure involved in simplex method to determine the optimum solution.
• Solve linear programming problem under simplex method using different techniques.

3.1 INTRODUCTION
In practice, most problems contain more than two variables and are consequently too
large to be tackled by conventional means. Therefore, an algebraic technique is used to solve
large problems using Simplex Method. This method is carried out through iterative process
systematically step by step, and finally the maximum or minimum values of the objective
function are attained.

The basic concepts of simplex method are explained using various illustrations in this
unit. The simplex method solves the linear programming problem in iterations to improve the
value of the objective function. The simplex approach not only yields the optimal solution but also
other valuable information to perform economic and 'what if' analysis.

3.2 ADDITIONAL VARIABLES USED IN SOLVING LPP

Three types of additional variables are used in simplex method such as,

(a) Slack variables (S1, S2, S3..… Sn): Slack variables refer to the amount of unused
resources like raw materials, labour and money.

(b) Surplus variables (-S1,-S2, -S3..… -Sn): Surplus variable is the amount of resources by
which the left hand side of the equation exceeds the minimum limit.

(c) Artificial Variables (A1, A2, A3..… An): Artificial variables are temporary slack
variables which are used for purposes of calculation, and are removed later.

The above variables are used to convert the inequalities into equality equations, as given in the
Table 3.1 below.

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 Constraint Type Variable added Format

a) Less than or equal to < Add Slack Variable +S

b) Greater than or equal to Subtract surplus variable and -S+a

> add artificial variable

c) Equal to = Add artificial variable +a

3.3 STEPS IN LINEAR PROGRAMMING PROBLEM UNDER SIMPLEX

METHOD
1. Convert the inequalities into equalities by adding slack variables, surplus variables or
artificial variables, as the case may be.

2. Identify the co-efficients of equalities and put them into a matrix form

AX = B

Where “A” represents a matrix of co-efficients, “X” represents a vector of unknown

quantities and B represents a vector of constants, leads to AX = B [This is according to
system of equation].

3. Tabulate the data into the first iteration of Simplex Method.

Specimen

Basic(BV) CB XB Y1 Y2 S1 S2 Minimum Ratio

Variable XBi/Yij; Yij > 0
S1
S2
Zj
Cj
Zj - Cj
a. Cj is the co-efficient of unknown quantities in the objective function.

Zj = ∑ CBiYij (Multiples and additions of co-efficients in the table, i.e.,

CB1 x Y1 + CB2 x Y2)

b. Identify the Key or Pivotal column with the minimum element of Zj - Cj denoted as
‘KC’ throughout to the problems in the chapter.

c. Find the ‘Minimum Ratio’ i.e., XBi / Yij

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 d. Identify the key row with the minimum element in a minimum ratio column. Key row
is denoted as ‘KP’.

e. e. Identify the key element at the intersecting point of key column and key row, which
is put into a box ( ) throughout to the problems in the chapter.

4. Reinstate the entries to the next iteration of the simplex method.

a. The pivotal or key row is to be adjusted by making the key element as ‘1’ and
dividing the o other elements in the row by the same number.

b. The key column must be adjusted such that the other elements other than key
elements should be made zero.

c. The same multiple should be used to other elements in the row to adjust the rest of the
elements. But, the adjusted key row elements should be used for deducting out of the
earlier iteration row.

d. The same iteration is continued until the values of Zj – Cj become either ‘0’ or
positive.

5. Find the ‘Z’ value given by CB, XB

3.4 ILLUSTRATIONS
Illustration- 1:
Maximise ‘Z’ = 5X1 + 3X2 [Subject to constraints]

X1 + X2 ≤ 2

5X1 + 2X2 ≤ 10

3X1 + 8X2 ≤ 12

Where, X1, X2 ≥ 0

Solution:

Step 1: Conversion of inequalities into equalities by adding slack variables.

X1 + X2 + X3 = 2

5X1 + 2X2 + X4 = 100

3X1 + 8X2 + X5 = 12

Where, X3, X4 & X5 are slack variables.

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Step 2: Fit the data into the matrix form A X = B.

Y1 Y2 S1 S2 S3 X1

X1 X2 X3 X4 X5 2 X2

1 1 1 0 0 B = 10 X= X3

A= 5 2 0 1 0 12 X4

3 8 0 0 1 X5

Step 3: Fit the data into 1st iteration of Simplex Method

BV CB XB Y1 Y2 S1 S2 S3 Min. Ratio

S1 0 2 1 1 1 0 0 2/1 = 2(KR)
S2 0 10 5 2 0 1 0 10/5 = 2
S3 0 12 3 8 0 0 1 12/3 = 4
Zj 0 0
Cj 5 3
Zj – Cj -5 -3
( KC)

Therefore Z = CB XB

= (0x2) + (0x10) + (0x12)

=0

Step 4: Fit the data into 2nd iteration of Simplex Method.

BV CB XB Y1 Y2 S1 S2 S3 Min.
Ratio
Y1 5 2/1 = 2 1/1 = 1 1/1 = 1 - - - -
S2 0 10 – 2(5) = 0 5 – 1(5) = 0 2-1(5) = -3 - - - -
S3 0 12 – 2(3) = 6 3 – 1(3) = 0 8-1(3) = 5 - - - -
Zj 5 5
Cj 5 3
Zj – Cj 0 2
Therefore Z = CB XB

= (5x2) + (0x0) + (0x6)

Therefore Z = 10

Therefore Maximum value of ‘Z’ = 10

- 53 -
Illustration – 2:

Maximise ‘Z’ = 2X1 + 3X2 [Subject to constraints]

X1 + X2 ≤ 1

3X1 + X2 ≤ 4

Where, X1, X2 ≥ 0

Solution:

Step 1: Conversion of inequalities into equalities by adding slack variables.

X1 + X2 + X3 = 1

3X1 + X2 + X4 = 4

Where x1 & x4 are slack variables.

Step 2: Identify the co-efficients.

Y1 Y2 S1 S2 X1
X1 X2 X3 X4 X2
A = 1 1 1 0 X = X3 B= 1
3 1 0 1 X4 4

Step 3: First iteration of Simplex Method.

BV CB XB Y1 Y2 S1 S2 Min. Ratio
S1 0 1 1 1 1 0 1/1 = 1
(KR)
S2 0 4 3 1 0 1 4/1 = 4
Zj 0 0
Cj 2 3
Zj – Cj -2 -3
( KC)

Therefore Z = CBXB

=0+0

=0

- 54 -
Step 4: Second iteration of Simplex Method.

BV CB XB Y1 Y2 S1 S2 Min. Ratio
y2 3 1/1 = 1 1/1 = 1 1/1 = 1 - - -
S2 0 4-1(1) = 3 3-1(1) = 2 1-1(1) = 0 - - -
Zj 3 3
Cj 2 3
Zj – Cj 1 0
Therefore, Z = CB XB

=3+0

=3

Therefore, Maximum value of ‘Z’ = 3

Illustration- 3:

Maximise ‘Z’ = 4X1 + 3X2 [Subject to constraints]

2X1 + X2 ≤ 30

X1 + X2 ≤ 24

Where, X1, X2 ≥ 0

Solution:

Step 1: Convert the inequalities into equalities by adding slack variables

2x1 + x2 + x3 = 30

x1 + x2 + x4 = 24

Where x3 & x4 are slack variables.

Step 2: Fit the data into a matrix form.

Y1 Y2 S1 S2 X1
X1 X2 X3 X4 X2
A= 2 1 1 0 X= X3 B= 30
1 1 0 1 X4 24

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Step 3: 1st iteration of Simplex Method

BV CB XB Y1 Y2 S1 S2 Min. Ratio

S1 0 30 2 1 1 0 30/2 = 15 (KR)
S2 0 24 1 1 0 1 24/1 = 24
Zj 0 0
Cj 4 3
Zj – Cj -4 -3
( KC)

Therefore Z = (0 x 30) + (0 x 24)

=0

Step 4: 2nd iteration of Simplex Method

BV CB XB Y1 Y2 S1 S2 Min. Ratio
Y1 4 30/2 = 15 2/2 = 1 1/2 = 0.5 - - 15/0.5 = 30
S2 0 24 – 15(1) = 9 1 – 1(1) = 2 1 – 0.5(1) = 0.5 - - 9/0.5 = 18
(KR)
Zj 4 2
Cj 4 3
Zj – Cj 0 -1
( KC)

Therefore Z = CBXB

= (4 x 15) + (0 x 9)

= 60

Step 5: 3rd iteration of Simplex Method.

BV CB XB Y1 Y2 S1 S2 Min.
Ratio
Y1 4 15 – 18(0.5) = 6 1 – 0(0.5) = 1 0.5 – 1(0.5) = 0 - - -
S2 3 9/0.5 = 18 0/0.5 = 0 0.5/0.5 = 1 - - -
Zj 4 3
Cj 4 3
Zj – Cj 0 0
Therefore Z = CBXB

= (4 x 6) + (3x 18)

= 78

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Illustration – 4:

Maximise ‘Z’ = 5X1 + 3X2 [Subject to constraints]

X1 + X2 ≤ 12

5X1 + 2X2 ≤ 10

3X1 + 8X2 ≤ 12

Where X1, X2 ≥ 0

Solution:

Step 1: Convert the inequalities into equalities by adding slack variables

X1 + X2 + X3 = 12

5X1 + 2X2 + X4 = 10

3X1 + 8X2 + X5 = 12

Where x3, x4 & x5 are slack variables.

Step 2: Fit the data into a matrix form.

Y1 Y2 S1 S2 S3 X1
X1 X2 X3 X4 X5 X2 12
A= 1 1 1 0 0 X= X3 B= 10
5 2 0 1 0 X4 12
3 8 0 0 1 X5

Step 3: 1st iteration of Simplex Method.

BV CB XB y1 y2 S1 S2 S3 Min. Ratio
S1 0 12 1 1 1 0 0 12/1 = 12

S2 0 10 5 2 0 1 0 10/5 = 2(KR)
S3 0 12 3 8 0 0 1 12/3 = 4
Zj 0 0
Cj 5 3
Zj – C j -5 -3
( KC)

- 57 -
Therefore Z = CBXB

= (0 x 12) + (0 x 10) + (0 x 12) = 0

Step 4: 2nd iteration of Simplex Method.

BV CB XB Y1 Y2 S1 S2 S3 Min.Ratio
S1 0 12 -2(1) = 10 1-1(1) = 0 1 – 0.4(1) = 0.6 - - - 10/0.6 = 16.67
Y1 5 10/5 = 2 5/5 = 1 2/5 = 0.4 - - - -2/0.4 = 5
- - -
S3 0 12 – 2(3) = 6 3 – 1(3) = 0 8 – 0.4(3) = 6.8 6/6.8 = 0.88(KR)
Zj 5 2
Cj 5 3
Zj – Cj 0 -1
( KC)

Therefore Z = CBXB

= (0 x 10) + (5 x 2) + (0 x 6) = 10

Step 5: 3rd iteration of Simplex Method.

BV CB XB Y1 Y2 S1 S2 S3 Min.Ratio
S1 0 10-0.88(0.6) = 9.47 0 0.6-1(0.6) = 0 - - - -
Y1 5 2-0.88(0.4)=1.698 1 0.4-1(0.4) = 0 - - - -
Y2 3 6/6.8 = 0.88 0 6.8/6.8 = 1 - - - -

Zj 5 3
Cj 5 3
Zj – Cj 0 0
Therefore Z = CBXB

=(0 x 9.47) + (5 x 1.698) + (3 x 0.88)

Therefore maximum value of Z = 10.88.

Illustration – 5:

Solve the following LPP using simplex method.

Max Z = 15X1 + 6X2 + 9X3 +2X4

Subject to 2X1 + X2 + 5X3 + 6X4 ≤ 20

3X1 + X2 + 3X3 + 25X4 ≤ 24
7X1 + X4 ≤ 70
X1 , X2 , X3 , X4 ≥ 0

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Solution: Rewrite the inequality of the constraint into an equation by adding slack variable S1
S2 and S3 the standard form of LPP becomes.

Max Z = 15X1 + 6X2 + 9X3 +2X4 + 0S1+0S2+0S3

Subject to 2X1 + X2 + 5X3 + 6X4 +S1 = 20

3X1 + X2 + 3X3 + 25X4 + S2 = 24

7X1 + X4 + S3 = 70

X1 , X2 , X3 , X4 , S1, S2, S3 ≥ 0

The initial basic feasible solution is S1 = 20, S2 = 24, S3 = 70

(X1 = X2 = X3 = X4 = 0 non basic)

The initial simplex table is given by

Cj 15 6 9 2 0 0 0
CB B XB X1 X2 X3 X4 S1 S2 S3 X
Min XB
1
0 S1 20 2 1 5 6 1 0 0 20/10=10
0 S2 24 (3) 1 3 25 0 1 0 24/3=8
0 S3 70 7 0 0 1 0 0 1 70/7=10
Zj 0 0 0 0 0 0 0 0
Zj- Cj -15 -6 -9 -2 0 0 0
⸫As some of Zj - Cj ≤ 0 the current basic feasible solution is not optimum. Zj – C1 = -15 is the
most negative value and hence X1 enters the basis and the variable S2 leaves the basis.

First iteration

Cj 15 6 9 2 0 0 0
CB B XB X1 X2 X3 X4 S1 S2 S3 X
Min XB
1
0 S1 4 0 1/3 3 -32/3 1 -2/3 0 4/1/3=12
15 X1 8 1 1/3 1 -25/3 0 1/3 0 8/1/3=24
0 S3 14 0 -7/3 -7 -172/3 0 -7/3 1 -
Zj 120 15 5 15 0 0 0 0
Zj- Cj 0 -1 6 123 0 5 0
Since Z2 – C2 = -1 < 0 the solution is not optimal and therefore, X2 enters the basis and the
basic variable S1 leaves the basis.

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Second iteration

Cj 15 6 9 2 0 0 0
CB B XB X1 X2 X3 X4 S1 S2 S3
6 X2 12 0 1 9 -32 3 -2 0
15 X1 4 1 0 -2 57/3 -1 1 0
0 S3 42 0 0 14 -132 7 -7 1
Zj 132 15 6 24 93 3 3 0
Zj- Cj 0 0 15 91 3 3 0
Since all Zj - Cj ≥ 0, the solution is optimal and is given by

Max Z = 132, X1 = 4, X2 =12, X3 =0, X4 = 0.

3.5 MINIMIZATION LP PROBLEMS

In real life we need to minimize cost or time in certain situations. The objective now is
minimization. Procedure for minimization problems is similar to maximization problems. The
only difference is, enter the coefficients of the objective function in the simplex table without
changing the sign.

Another way to solve minimization problems is by converting the objective function as a

maximization problem by multiplying the equation by (– 1). For example, if the objective
function is,

Minimize Z =10X1+ 5X2

Convert the objective function into maximization and solve

Maximize Z = – 10X1 – 5X2

3.6 DEGENERACY IN LP PROBLEMS

Normally ‘Degeneracy occurs in simplex, when there is a ‘tie’ between two outgoing
vectors/those vectors which are eligible for leaving the basis (where the Min. Ratio may not
be unique). Even arbitrary selection temporarily resoles the degeneracy, sometimes optimum
solution cannot be obtained in all the cases. Hence, a procedure is followed through to
resolve the degeneracy

Degeneracy can be identified from graphical representation also. Under graphical

solutions; degeneracy occurs if some of the constraints do not hae any effect on feasible
region or they lie outside the feasible region (see eg no. 1)

- 60 -
Steps:

1. Locate the rows in which smallest non – mega ratios are tied.

2. Find the co-efficients of the slack variables and divide each co-efficient by
corresponding positive numbers of the key column in the row, starting from left to
right in order to break tie. If the ratios do not break tie, find the similar ratios for co-
efficient of the decision variables.

3. Compare the resulting ratios, column by

4. Select the row, which contains smallest ratio. This row becomes the key row.

5. Apply the Simplex Iterative process after resolving the degeneracy.

Illustration – 6:

Max ‘Z’ 2X1 + 5X2 [subject to constraints]

X1 ≤ 40
X2 ≤ 30 X1 + X3 = 40
X1 + X2 ≤ 30 X2 + X4 = 30
X1, X2 ≥ 0 X1 + X2 + X5 =30

Y1 Y2 S1 S2 S3

A= X1 X2 X3 X4 X5
1 0 1 0 0
1 1 0 0 1
First Iteration

BV CB XB Y1 Y2 S1 S2 S3 MR
S1 0 40 1 0 1 0 0 -
S2 0 30 0 1 0 1 0 30/1 = 30
KR
S3 0 30 1 1 0 0 1 30/1 30
Zj 0 0 0 0 0
Cj 2 5 0 0 0
Zj - Cj -2 -5 0 0 0

- 61 -
 Second Iteration

BV CB XB Y1 Y2 S1 S3 MR
S1 0 40-30(0) = 40 1-0(0) = 0 0-1(0)=1 1-0(0) =1 0-0(0)=0 40/1=40
Y2 5 30/1 = 30 0/1 = 0 1/1=1 0/1=0 0/1=0 -
S3 0 30-30(1) = 0 1 – 0(1) = 1 1-1(1)=0 0-0(1)=0 1-0(1)=1 0/1=0
Zj 0 5 0 0
Cj 2 5 0 0
Zj - Cj -2 0 0 0
Third Iteration

BV CB XB Y1 Y2 S1 MR
S1 0 40-0(1)=40 1-1(1)=0 0-0(1)=0 1-0(1)=1
y2 5 30-0(0)=30 0-1(0)=0 1-0(0)=1 0-0(0)=0
y1 2 0/1=0 1/1=1 0/1=0 0/1=0
Zj 2 5 0
Cj 2 5 0
Zj - Cj 0 0 0
Resolving Degeneracy

S1 S2 S3
0/1 = 0 1/1 = 1 0/1 = 0 [ Tie between S2 & for y2 col]
0/1 = 0 0/1 = 0 1/1 = 1
Fourth Iteration

BV CB XB Y1 Y2 S1 S2 MR
S1 0 40-30(0) = 40 1-1(0)=1 0-1(0)=0 1-0(0)=1 0-0(1)=0
S2 0 30 – 30(1)=0 0-1(1) = -1 1-1(1)=0 0-0(1)=0 1-0(1)=0
Y2 5 30/1 = 30 1/1 = 1 1/1=1 0/1=0 0/1=0
Zj 5 5 0 0
Cj 2 5 0 0
Zj - C j 3 0 0 0
Conclusion:

Notice that one of the basic variables in the final table of simplex is zero (x1=0) leading to a
degenerate solution. The maximum profit is delivered even without producing one of the
products (x1). Hence the solution is degenerate optimal solution. A graphical presentation
shows the evidence.

- 62 -
 Equation X1 X2

X1 = 40 40 0

X2 = 30 0 30

X1 + X2 =30 30 30
FR in OAB where x1 ≤ 40 is purely a redundant constraint

A = 30 0 = ( 2 x 30) + 0= 60

B = 0 30 = 0 + (30 x 5) = 150

Where no units of x1 are to be produced show degenerate solutions of redundancy of

the first constraint.

3.7 UNBOUNDED SOLUTIONS IN LPP

Illustration – 7:

Maximise ‘Z’ = 4X1 + X2 + 3X2 + 5X4

Sub to -4X1 + 6X2 + 5X3 – 4X3 ≤ 20
3X1 – 2X2 + 4X3 + X4 ≤ 10
8X1 – 3X2 + 3X3 + 2X4 ≤ 20
X1, X2, X3, X4 ≥ 0
Solution:

Maximise ‘Z’ = 4X1 + X2 + 3X3 + 5X4

-4X1 + 6X2 + 5X3 – 4X4 + S1 = 20

3X1 - 2X2 + 4X3 + X4 + S2 = 10

8X1 – 3X2 + 3X3 + 2X4 + S3 = 20

Where, S1, S2 and S3 are slack variables.

First Iteration

BV CB XB X1 X2 X3 X4 S1 S2 S3 Min. Ratio
S1 0 20 -4 6 5 -4 - - -
S2 0 10 3 -2 4 1 - - - 10/1 = 10
S3 0 20 8 -3 3 2 - - - 20/2 = 10
Zj 0 0 0 0 0
Cj 4 4 1 3 5
Zj - Cj -0 4 -1 -3 -5

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Second Iteration

BV CB XB x1 x2 x3 X4 Min. Ratio
S1 0 60 12 0 11 0
S2 0 10 -1 -0.5 2.5 0 10/1 = 10
S3 0 10 4 -1.5 1.5 1 20/2 = 10
Zj 20 -7.5 7.5 5
Cj 4 1 3 5
Zj - Cj 16 -8.5 4.5 0
At the end of second iteration, observe that x5 should enter the basis. But there is no
chance for outgoing vector from the basis since y’s are zero or negative. Hence, the solution
is unbounded.

3.8 DUALITY IN LPP

All linear programming problems have another problem associated with them, which is
known as its dual. In other words, every minimization problem is associated with a
maximization problem and vice-versa. The original linear programming problem is known as
primal problem, and the derived problem is known as its dual problem. The optimal solutions
for the primal and dual problems are equivalent.

Conversion of primal to dual is done because of many reasons. The dual form of the
problem, in many cases, is simple and can be solved with ease. Moreover, the variables of the
dual problem contain information useful to management for analysis.

Procedure

Step 1: Convert the objective function if maximization in the primal into minimization inthe dual
and vice versa. Write the equation considering the transpose of RHS ofthe constraints

Step 2: The number of variables in the primal will be the number of constraints in the dual
and vice versa.

Step 3: The co-efficient in the objective function of the primal will be the RHS constraints in the
dual and vice versa.

Step 4: In forming the constraints for the dual, consider the transpose of the body matrix of the
primal problems.

Note: Constraint inequality signs are reversed

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Illustration 8:

Construct the dual to the primal problem

Maximize Z = 6X1 + 10X2

Subject to constraints,

2X1 + 8X2 ≤ 60……………………………………………………………………(i)

3X1 + 5X2 ≤ 45…………………………………………………………………...(ii)

5X1 - 6X2 ≤ 10……………………………………………………………………(iii)

X2 ≤ 40…………………………………………………………………………….(iv)

where X1, X2 ≥ 0

Solution:

Minimize W = 60y1 + 45y2 + 10y3 + 40y4

Subject to constraints,

2Y1 +3Y2 +5Y3 + 0Y4 ≥ 6

8Y1 + 5Y2 + 6Y3 + Y4 ≥ 10

where Y1 , Y2 , Y3 , Y4 ≥ 0

Illustration 9:

Construct a dual for the following primal

Minimize Z = 6X1 – 4X2+ 4X3

Subject to constraints,

6X1– 10X2 + 4X3 ≥ 14…………………………………….………………………..(i)

6X1+ 2X2 + 6X3 ≥ 10……………………………………………………………..(ii)

7X1 – 2X2 + 5X3 ≤ 20……………………………………………………………(iii)

X1 – 4X2 + 5X3 ≥ 3……………………………………………………………….(iv)

4 X1+ 7X2 – 4X3 ≥ 20………………………………………………………..……..(v)

where X1 , X2 , X3 ≥ 0

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Solution:

Convert 'less than' constraints into 'greater than' type by multiplying by (–1) on both sides (i.e.,
for e.g. iii).

6X1 – 10X2 + 4X3 ≥ 14

6X1+ 2X2 + 6X3 ≥ 10

– 7 X1+2 X2–5 X3≥20

X1– 4 X2+ 5 X3 ≥ 3

4X1 + 7X2 – 4X3 ≥20

The dual for the primal problem is,

Maximize W = 14Y1+10Y2+20Y3+3Y4+20Y5

Subject to constraints,

6Y1+ 6Y2 – 7Y3+ Y4 + 4Y5 ≤ 6

10Y1+ 2Y2 + 2Y3 – 4Y4+7Y5 ≤ – 4

4Y1+ 6Y2 – 5Y3+ 5Y4 – 4Y5 ≤ 4

where Y1, Y2, Y3, Y4 and Y5 ≥ 0

3.9 CHECK YOUR PROGRESS

Write True or False against each statement:

(a) Artificial variable are imaginary and do not have any physical meaning.

(b) Simplex method solve the LPP in iteration to enhance the value of the objective function.

(c) Linear programming techniques are used in optimise the resources for best result.

(d) Unbounded solution can be identified when all the values of key column are positive.

Answers to Check Your Progress

a) True
b) True
c) True
d) False

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3.10 SUMMARY
To conclude, Linear Programming is a planning technique of selecting the best possible
(optimal) strategy among number of alternatives. The chosen strategy is said to be the best
because it involves minimization/maximization of source desired action e.g., maximization of
profits, minimization of costs, smoothening running of the business. Simplex method is an
approach to solving linear programming models by hand using slack variables as a means to
finding the optimal solution of an optimization problem. The simplex method is a systematic
procedure used for systems of inequalities involving two or more than two variables. Various
techniques like maximization, minimization, degeneracy, unbounded solutions, duality and
many more techniques used under this method to find possible optimal solution.

3.11 KEYWORDS
Slack : It is variable used to convert the inequalities into equity
equation when the resources are limited.

Surplus : It is variable used to convert the inequalities into equity

equation when the equation exceeds the minimum limit.

Simplex Method : It is an approach to solving linear programming problems

with a large number of variables.

Variable : It is a set of quantities to be determined for solving the

problem.

Solution : A solution to a linear program is a setting of the variables.

3.12 QUESTIONS FOR SELF-STUDY

1. What are the different types of additional variable used in simplex method?

2. Explain the procedure involved in the simplex method to determine the optimum
solution.

3. What is Duality concept?

4. What are slack, surplus and artificial variables?

5. What is degeneracy in LP problems? When does it occur? How can degeneracy

problem be resolved?

6. What is a basic variable and a non-basic variable?

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 7. Explain what is an unbounded solution in LPP.

8. Differentiate between primal and dual problems.

9. Why is the simplex method more advantageous than the graphical method?

10. What are the rules in selecting key column, key row and pivotal element?

11. What is meant by degeneracy in Linear Programming?

Exercise Problems

1. A company manufactures three products A, B and C, which require three raw

materials I, II and III. The table given below shows the amount of raw materials
required per kg of each product. The resource availability per day and the profit
contribution for each product is also given

Product
A B C Availability (kg)
Raw Material
I 4 1 6 800
II 5 6 8 1500
III 2 4 1 1200
Profit per unit (Rs) 9 10 6
i. Formulate the problem as a linear programming problem.

ii. Solve the problem and determine the optimal product mix.

2. A metal fabricator manufactures three types of windows. Each of the windows needs
four processes. The time taken on various machines differ due to the size of windows.
The time taken and available hours are given in the table below:

Window Type Cutting Heat Treating Forging Grinding

A 5 7 1 4
B 7 4 4 8
C 4 8 6 2
Available time (Hrs) 20 24 28 22

The profit contribution for windows A, B and C are ₹ 3.00, ₹ 4.00 and ₹ 5.00
respectively.

a. Formulate the problem.

b. Solve the problem using simplex method to maximize the profit.

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 c. Determine the excess time available in each processes and by how much.

3. Solve the following LPP using simplex method.

Maximize, Z = 2X1 + X2

Subject to constraints,

4X1+ 3X2 ≤12……………………………………………………………......(i)

4X1 + X
2
≤ 8………………………………………………………..…...........(ii)

4X1 – X2 ≤ 8………………………………………………………..……...(iii)

where X1, X2 ≥ 0

4. Solve the following LPP:

Zmax = 20X1 + 28X2 + 23X3

Subject to constraints,

4X1 + 4X
2
≤ 75……………………………………………………………..(i)

2X1+ X2 + 2X3 ≤ 100……………………………………………………..(ii)

3X1+ 2X2 + X3 ≤ 50……………………………………………………...(iii)

where X1, X2 , X
3
≥0

5. Three high precision products are manufactured by a Hi-Tech Machine Tools

Company. All the products must undergo process through three machining centers A,
B and C. The machine hours required per unit are,

Product
Machining Center
I II III
A 2 4 6
B 3 6 2
C 3 2 1
The available time in machine hours per week is

Machining Center Machine Hours Per Week

A 150
B 100
C 120

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 It is estimated that the unit profits of the product are

Product Unit Profits (Rs)

I 3
II 4
III 6
a. Formulate the problem as a LPP.

b. Solve the problem to determine the optimal solution. What is the number of units
to be made on each product.

c. Does machining center C has any extra time to spare? If so, how much spare time is
available?

d. If additional 10 machine hours are available with machining center A, then what is
the optimal product mix ? What is the change in the value of profit ?

6. Raghu Constructions is considering four projects over the next 3 years. The expected
returns of each project and cash outlays for these projects are listed in the tables
given. All values are in Lacs of Rupees.

Cash outlay (lakh ₹)

Project Return
Year 1 Year 2 Year 3
1 12.32 11.10 9.50 42.25
2 11.15 9.75 8.11 31.20
3 7.65 5.50 4.75 15.10
4 10.71 10.31 7.77 12.05
Available funds 110.00 40.00 35.00
(lakh ₹)
Raghu has to decide to undertake construction projects. Ignore the time value of
money. As a consultant, what suggestion you would like to give Raghu in deciding about
the projects to select. Determine the solution using TORA.

3.14 REFERENCES
1. William H, Model Building in Mathematical Programming, Wiley Newyork.
2. Rohn E., "A New LP Approach to Bond Portfolio Management", Journal of Financial
& Quantitative Analysis 22 (1987): 439-467.
3. Wagner H, Principles of OR, 2nd ed. Englewood Cliffs, N.J: Prentice Hall, 1975.
4. Moondra S.,“An LP Model for Workforce Scheduling in Banks", Journal of Bank
Research (1976).
5. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT-4 ARTIFICIAL VARIABLE TECHNIQUE
Structure:

4.0 Objectives

4.1 Introduction

4.2 Big M Method

4.3 Steps to be followed under Big M-Method

4.4 Illustrations

4.5 Check Your Progress

4.6 Summary

4.7 Keywords

4.8 Questions for Self-Study

4.9 References

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4.0 OBJECTIVES
After studying unit, you will be able to;

• Give the meaning of Big M-Method

• Discuss the steps to be followed to find solution under Big M-Method.
• Solve some illustrations under Big M-Method.

4.1 INTRODUCTION
In the previous units of this block, we have discussed the various important concept of
LPP such as formulation of LPP model, finding optimal solution using graphical method and
simplex method. In this unit, we are focussing towards finding an optimal solution under
simplex using BIG-M method. LPP in which constraints may also have ≥ and = signs after
ensuring that at all b 0 i ≥ are considered in this section. In such cases basis of matrix cannot
be obtained as an identity matrix in the starting simplex table, therefore we introduce a new
type of variable called the artificial variable. These variables are fictitious and cannot have
any physical meaning. The artificial variable technique is a device to get the starting basic
feasible solution, so that simplex procedure may be adopted as usual until the optimal
solution is obtained. To solve such LPP there are two methods.

The Big M Method or Method of Penalties.

The Two-phase Simplex Method.

4.2 BIG M METHOD

The Big-M-Method is an alternative method of solving a linear programming problem
involving artificial variables. To solve a L.P.P by simplex method, we have to start with the
initial basic feasible solution and construct the initial simplex table. In the previous problems
we see that the slack variables readily provided the initial basic feasible solution. However, in
some problems, the slack variables cannot provide the initial basic feasible solution. In these
problems atleast one of the constraint is of = or ≥ type. “Big-M-Method is used to solve such
L.P.P.

So far, we have seen the linear programming constraints with less than type. We come
across problems with ‘greater than’ and ‘equal to’ type also. Each of these types must be
converted as equations. In case of ‘greater than’ type, the constraints are rewritten with a
negative surplus variable S1 and by adding an artificial variable a. Artificial variables are simply
used for finding the initial basic solutions and are thereafter eliminated. In case of an ‘equal

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to’ constraint, just add the artificial variable to the constraint.

The co-efficient of artificial variables a1, a2,….. are represented by a very high value M,
and hence the method is known as BIG-M Method.

4.3 STEPS TO BE FOLLOWED UNDER BIG M-METHOD

1. Express the problem in the standard form by using slack, surplus & artificial variables.

2. Select slack variables & artificial variables as the initial basic variables with the cost
co-efficients as ‘0’ or ‘-M’ respectively.

3. Use simplex procedure for iterations & obtain optimum solution. During the iterations,
one can notice that the artificial variables leave the basis first & then the slack variables
with improved value of objective function at each iteration to obtain the optimum
solution.

4.4 ILLUSTRATIONS
Illustration- 1:

Minimize ‘Z’ = -X1 – 2X2 [Subject to constraints]

-X1 + 3X2 ≤ 10

X1 + X2 ≤ 6

X1 - X2 ≤ 2

Where X1, X2 ≥ 0

Solution:

Step 1: Convert the minimization problem into maximisation case by changing the signs of
the decision variables in the objective function.

Therefore ‘Z’ = X1 + 2X2 [Subject to constraints]

Step 2: Convert the inequalities into equalities by adding slack variables

-X1 + 3X2 + X3 = 10

X1 + X2 + X4 = 6

X1 – X2 + X5 = 2

Where X3, X4 & X5 are slack variables.

- 73 -
 Step 3: Fit the data into a matrix form.
Y1 Y2 S1 S2 S3 X1
X1 X2 X3 X4 X5 X2 10
A = -1 3 1 0 0 X = X3 B= 6
1 1 0 1 0 X4 2
1 -1 0 0 1 X5

Step 4: 1st iteration of Simplex Method.

BV CB XB Y1 Y2 S1 S2 S3 Min. Ratio
S1 0 10 -1 3 1 0 0 10/3 = 3.3 (KR)
S2 0 6 1 1 0 1 0 6/1 = 6
S3 0 2 1 -1 0 0 1 2/-1= -2
Zj 0 0
Cj 1 2
Zj – Cj -1 -2
( KC)

Therefore Z = CBXB
0+0+0=0

Step 5: 2nd iteration of Simplex method

BV CB XB Y1 Y2 S1 S2 S3 Min. Ratio
Y2 2 10/3 = 3.33 -1/3 =- 0.33 3/3 = 1 3.33/-0.33 = -10.09
S2 0 6 – 3.33(1) =2.67 1 – 1(-0.33)(1) = 1.33 1-1(1) = 0 2.67/1.33 = 2.00
(KR)
S3 0 2 – 3.33(-1) = 5.33 1-(-0.33)(-1) = 0.67 -1-1(-1) = 0 5.33/0.67 = 8.00
Zj -0.66 2
Cj 1 2
Zj – Cj -1.66 0
( KC)

Therefore Z = CBXB
= (2 x 3.33) + (2 x 2.67) + (0 x 5.33)
= 6.66 + 0 + 0
= 6.66

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Step 6: 3rd iteration of Simplex Method.

BV CB XB Y1 Y2 S1 S2 S3 Min.
Ratio
Y2 2 3.33 – 2(-0.33) = 3.99 -0.33 – 1(-0.33) = 0 1 - - - -
Y1 1 2.67/1.35 = 2 1.33/1.33 = 1 0 - - - -
S3 0 5.33 – 2(0.67) = 3.99 0.67 – 1(0.67) = 0 0 - - - -
Zj 1 2 -
Cj 1 2
Zj – Cj 0 0 - -

Max. Z = CBXB
= (2 x 3.99) + (1 x 2) + (0 x 3.99)
= 7.98 + 2 + 0
=9.98
Therefore, Z = 9.98

Illustration- 2:

Minimise ‘Z’ = -X1 – 3X2 + 2X3 [Subject to constraints]

3X1 – X2 + 3X3 ≤ 7

-2X1 + 4X2 ≤ 12

-4X1 + 3X2 + 8X3 ≤ 10

Where, X1, X2, X3 ≥ 0

Solution:

Step 1: Conversion of the minimization case into maximisation case.

Therefore Maximise Z = -X1 + 3X2 – 2X2 [Subject to constraints]

Step 2: Convert of the inequalities into equalities by adding slack variables.

Therefore 3X1 – X2 + 3X3 + X4 = 7

-2X1 + 4X2 + X5 = 12

-4X1 + 3X2 + 8X3 + X6 = 10

Where, X4, X5 & X6 are slack variables.

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 Step 3: Fit the data into matrix form.

Y1 Y2 Y3 S 1 S2 S3 X1
X1 X2 X3 X4 X5 X6 X2 7
A= 3 -1 3 1 0 0 X = X3 B= 1
-2 4 0 0 1 0 X4 0
-4 3 8 0 0 1 X5
X6

Step 4: 1st iteration of Simplex Method.

BV CB XB Y1 Y2 Y3 S1 S2 S3 Min. Ratio
S1 0 7 3 -1 3 1 0 0 7/-1 = -7
S2
0 12 -2 4 0 0 1 0 12/4 = 3
(KR)
S3 0 10 -4 3 8 0 0 1 10/3 = 3.33
Zj 0 0 0
Cj -1 3 -2
Zj – Cj 1 -3 2
( KC)

Therefore Z = CBXB

=0+0+0

=0

Step 5: 2nd iteration of Simplex Method.

BV CB XB Y1 Y2 Y3 S1 S2 S3 Min. Ratio

S1 0 7-3(-1) = 10 3 + 0.5(-1) = 2.5 -1+1(-1)=0 3-0(-1)=3 - - - 10/2.5 =4 (KR)

Y2 3 12/4 = 3 -2/4 = -0.5 4/4=1 0 - - - 3/-0.5 = -6
S3 0 10 – 3(3) = 1 -4 + (-0.5)(3)=-5.5 3-1(3)=0 8-0(3)=8 - - - 1/-5.5 = -0.18
Zj -1.5 3 0
Cj -1 -3 -2
Zj – Cj -0.5 -0 2
( KC)
Therefore Z = CBXB
= (0 x 0) + (3 x 3) + (0 x 1)
=0+9+0
=9

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Step 6: 3rd iteration of Simplex Method.

BV CB XB Y1 Y2 Y3 S1 S2 S3 Min.
Ratio
Y1 -1 10/2.5=4 2.5/2.5 = 1 0 3/2.5 = 1.2 - - - -
S2 3 3-4(-0.5)=5 -0.5-1(-0.5)=0 1 0 - - - -
S3 0 1-4(-2.5)=11 -2.5-1(-2.5)=0 0 8 – 1(-2.5) = 10.5 - - - -
Zj -1 3 -1.2
Cj -1 3 -2
Zj-Cj 0 0 0.8

Therefore Maximise ‘Z’ = CBXB

= -4 + 15 + 0

= 11

Therefore Minimise Z = -11

Illustration- 3:

Minimise ‘Z’ = -10X1 – 12X2 – 15X3 [Subject to constraints]

0.10X1 + 12X2 + 0.15X3 ≤ 36

0.06X1 + 0.05X2 + 0.09X3 ≤ 30

0.18X1 + X2 + 0.07X3 ≤ 37

0.13X1 + 0.10X2 + 0.08X3 ≤ 38

X1 ≤ 200

X2 ≤ 100

X3 ≤ 180

Where X1, X2, X3 ≥ 0

Solution

Step 1: Conversion of minimization case into maximisation case.

Therefore Maximise ‘Z’ = 10X1 + 12X2 + 15X3 [Subject to constraints]

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Step 2: Convert the inequalities into equalities by adding slack variables

0.10X1 + 0.12X2 + 0.15X3 + X4 = 36

0.06X1 + 0.05X2 + 0.09X3 + X5 = 30

0.18X1 + X2 + 0.07X3 + X6 = 37

0.13X1 + 0.10X2 + 0.08X3 + X7 = 38

X1 + X8 = 200

X2 + X9 = 100

X3 + X10 = 180

Where, X4, X5, X6, X7, X8, X9 & X10 are slack variables.

Step 3: Fit the data into matrix form.

Y1 Y2 Y3 S1 S2 S3 S4 S5 S6 S7 X1
X1 X2 X3 X4 X5 X6 X7 X8 X9 X10 X2 36
0.10 0.12 0.15 1 0 0 0 0 0 0 X3 30
0.06 0.05 0.09 0 1 0 0 0 0 0 X4 37
0.18 1 0.07 0 0 1 0 0 0 0 X= X5 B = 200
A= 0.13 0.10 0.08 0 0 0 1 0 0 0 X6 200
1 0 0 0 0 0 0 1 0 0 X7 100
0 1 0 0 0 0 0 0 1 0 X8 180
0 0 1 0 0 0 0 0 0 1 X9
X10

Step 4: 1st iteration of Simplex Method

BV CB XB Y1 Y2 Y3 S1 S2 S3 S4 S5 S6 S7 Min Ratio
S1 0 36 0.10 0.12 0.15 1 0 0 0 0 0 0 36/0.15=240
S2 0 30 0.06 0.05 0.09 0 1 0 0 0 0 0 30/0.09=333.3
S3 0 37 0.18 1 0.07 0 0 1 0 0 0 0 37/0.07=529
S4 0 38 0.13 0.10 0.08 0 0 0 1 0 0 0 38/0.08=475
S5 0 200 1 0 0 0 0 0 0 1 0 0 200/0=0
S6 0 100 0 1 0 0 0 0 0 0 1 0 100/0=0
S7 0 180 0 0 1 0 0 0 0 0 0 1 180/1 = 180(KR)
Zj 0 0 0
Cj 10 12 15
Zj – Cj -10 -12 -15
( KC)

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 Therefore Z = CBXB
= (0 x 36) + (0 x 30) + (0 x 37) + (0 x 38) + (0 x 200) + (0 x 100) + (0 x 180)
=0 +0+0+0+0+0+0
=0

Step 5: 2nd iteration of Simplex Method.

BV CB XB Y1 Y2 Y3 S1 S2 S3 S4 S5 S6 S7 Min Ratio
S1 0 36–180 (0.15) 0.10-0 (0.15) 0.12-0 (0.15) 0.15-0 (0.15) - - - - - - - 9/0.12 = 75
=9 =0.10 =0.12 =0
S2 0 30–180 (0.09) 0.06-0 (0.09) 0.05-0(0.09) 0.09 – 1 (0.09) - - - - - - - 13.80/0.05 =
=13.8 =0.06 =0.05 =0 276
S3 0 37–180 (0.07) 0.18-0 (0.07) 1-0(0.07) 0.07-1 (0.07) - - - - - - - 24.4/1=24.4
=24.4 =0.18 =1 =0 (KR)
S4 0 38–180 (0.08) 0.13-0 (0.08) 0.10 – 0 (0.08) 0.08 – 1 (0.08) - - - - - - - 23.6/0.10 =
=23.6 =0.13 =0.10 =0 236
S5 0 200-180(0) 0.1 - 0(0) = 1 0–0=0 0 - - - - - - - 200/0 = 0
= 200
S6 0 100-180(0) 0–0=0 1 – 0(0)=1 0 - - - - - - - 100/1=100
=100
Y3 15 180/1 = 180 0 0 1/1 = 1 - - - - - - -
Zj 0 0 15
Cj 10 12 15
Zj – Cj -10 -12 0
( KC)
Therefore Z = CBXB
= (0 x 9) + (0 x 13.8) + (0 x 24.4) + (0 x 23.6) + (0 x 200) + (0 x 100) + (15 x 180)
= 2700
Step 6: 3rd iteration of Simplex Method.
BV CB XB Y1 Y2 Y3 S1 S2 S3 S4 S5 S6 S7 Min Ratio
S1 0 9 – 24.4 (0.12) 0.10 – 0.18 (0.12) 0.12 – 1 (0.12) 0 - - - - - - - 6.072/0.078
=6.07 =0.078 =0 =77.85(KR)
S2 0 13.8-24.4 (0.05) 0.06 – 18 (0.05) 0.05 – 1 (0.05) 0 - - - - - - - 12.58/0.05
=12.58 = 0.05 =0 =246.67
S3 0 24.4/1=24.4 0.18/1 = 0.18 1/1 = 1 0 - - - - - - - 24.4/0.18
=135.56
S4 0 23.6-24.4 (0.10) 0.13 – 0.18 (0.10) 0.10 – 1 (0.10) 0 - - - - - - - 21.16/0.112
=21.16 =0.112 =0 =188.93
S5 0 200 - 24.4 (0) 1-0.18(0) = 1 0 0 - - - - - - - 200/1 = 200
= 200
S6 0 100 – 24.4 (1) 0 – 0.18(1) = -0.18 1 – 1(1) = 0 0 - - - - - - - 75.6/-0.18 =
= 75.6 -420
Y3 15 180 – 0 = 180 0 0 1 - - - - - - - 180/0 = 0
Zj 2.16 12 15
Cj 10 12 15
Zj – Cj -7.84 0 0
( KC)

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 Therefore Z = CBXB
= (0 x 6.072) + (0 x 12.58) + (12 x 24.4) + (0 x 21.16) + (0 x 200) + (0 x 75.6)
+ (15 x 180)
= 2,992.8

Step 7: 4th iteration of Simplex Method.

BV CB XB Y1 Y2 Y3 S1 S2 S3 S4 S5 S6 S7 Min
Ratio
Y1 10 6.072/0.078 = 77.85 0.078/0.078 = 1 0 0 - - - - - - - -
S2 0 12.58 – 7.85(0.051) 0.051 – 0 0 - - - - - - - -
= 8.61 1(0.051) = 0
Y2 12 24.4 – 77.85(0.18) (0.18) – 1(0.18) 1 0 - - - - - - - -
=10.387 =0
S4 0 21.16 – 7.85(0.112) 0.112 – (0.112) 0 0 - - - - - - - -
= 12.44 =0
S5 0 200 – 77.85(1) 1 – 1(1) = 0 0 0 - - - - - - - -
=122.15
S6 0 75.6 – 77.85(-0.18) -0.18 – 1(-0.18) 0 0 - - - - - - - -
=89.613 =0
Y3 15 180 – 77.85(0) 0 0 1 - - - - - - - -
= 180
Zj 10 12 15
Cj 10 12 15
Zj – Cj 0 0 0

Therefore Z = CBXB
= (10 x 77.85) + (12 x 10.387) + (15 x 180) + 0 + 0 + 0 + 0
= 778.5 + 124.644 + 2,700 + 0 + 0 + 0 + 0
= 3,603.144
Therefore Minimise Z = 3,603.144

Illustration- 4:

Minimise ‘Z’ = 4X1 + 8X2 + 3X3 [Subject to constraints]

X1 + X2 ≥ 2

2X1 + X3 ≥ 5

Where, X1, X2 ≥ 0

- 80 -
Solution

Step 1: Conversion of minimization case into maximisation case.

Therefore ‘Z’ = -4X1 – 8X2 – 3X3 [Subject to constraints]

Step 2: Conversion of inequalities into equalities by adding slack variables & artificial
variables.

-X1 + X2 – X4 + X6 = 2

2X1 + X3 – X5 + X7 = 5

Where, X4 & X5 are surplus variables, X6 & X7 are artificial variables.

Step 3: Bring the objective function into a standard form.

Therefore Maximise ‘Z’ = -4X1 – 8X2 – 3X3 + 0X4 + 0X5 – MX6 – MX7

Step 4: Find out the matrix form of equalities

Y1 Y2 Y3 S1 S2 A1 A2 X1
X1 X2 X3 X4 X5 X6 X7 X2 2
A = 1 1 0 -1 0 1 0 X = X3 B= 5
2 0 3 0 -1 0 1 X4
X5

Step 5: 1st iteration of Simplex Method.

BV CB XB Y1 Y2 Y3 S1 S2 A1 A2 Min. Ratio
A1 -M 2 1 1 0 -1 0 1 0 2/1 = 2(KR)
A2 -M 5 2 0 1 0 -1 0 1 5/2=2.5
Zj -3M -M -M
Cj -4 8 -3
Zj – Cj -3M+4 -M+8 -M+3

Therefore Z = CBXB

= (-M x 2) + (-M x 5)

= -2M – 5M

= -7M

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Step 6: 2nd iteration of Simplex Method.

BV CB XB Y1 Y2 Y3 S1 S2 A1 A2 Min. Ratio
Y1 -4 2/1 = 2 1/1 = 1 1 0 -1 0 1 0 2/0 = 0
A2 -M 5 – 2(2) = 2 – 1 (2) = -2 0-1(2) = - 1-0(2) = 1 - - - - 1/1 = 1
1 2 (KR)
Zj -4 -4 + 2M -M
Cj -4 -8 -3
Zj – Cj 0 4 + 2M M+3
( KC)

Therefore Z = (-4 x 2) + (-M x 1)

= -8 – M

Step 7: 2nd iteration of Simplex Method

BV CB XB Y1 Y2 Y3 S1 S2 A1 A2 Min.
Ratio
Y1 -4 2-1(0) = 2 1-1(0) = 1 1 – (-2)(0) = 1 0 - - - - -
Y3 -3 1/1 = 1 0 -2/1 = -2 1/1 = 1 - - - - -
Zj -4 2 -3
Cj -4 -8 -3
Zj – Cj 0 10 0

Therefore Maximize Z = CBXB

= (-4 x 2) + (-3 x 1)
= -8 -3
= -11
Therefore Minimize Z = 11
Illustration- 5:
Minimise ‘Z’ = 3X1 + 5X2 [Subject to constraints]
2X1 + 8X2 ≥ 40
3X1 + 4X2 ≥ 50
X1, X2 ≥ 0

Solution:

Step 1: Convert the above minimization case into maximisation case.

Therefore Maximise Z = -3X1 – 5X2

Step 2: Convert the inequalities into equalities by adding slack variables & artificial
variables.

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 2X1 + 8X2 – X3 + X5 = 40
3X1 + 4X2 – X4 + X6 = 50
Where, x3 & x4 are surplus variables and x5 & x6 are artificial variables.

Step 3: Bring the objective function into a standard form.

Maximise ‘Z’ = -3X1 – 5X2 – 0X3 + 0X4 – MX5 – MX6

Step 4: Fit the data into a matrix form

X1
Y1 Y2 S 1 S2 A1 A2 X2 40
X1 X2 X3 X4 X5 X6 X = X3 B = 50
A= 2 8 -1 0 1 0 X4
3 4 0 -1 0 1 X5
X6

Step 5: 1st iteration of Simplex Method.

BV CB XB Y1 Y2 S1 S2 A1 A2 Min. Ratio
A1 -M 40 2 8 -1 0 1 0 40/8 = 5 (KR)
A2 -M 50 3 4 0 -1 0 1 50/4 = 12.5
Zj -5M -12M
Cj -3 -5
Zj – Cj -5M +3 12M + 5
Therefore Z = CBXB

= (40x –M) + (50x – M)

= -40M – 50M

= -90M

Step 6: 2nd iteration of Simplex Method.

BV CB XB Y1 Y2 S1 S2 A1 A2 Min. Ratio
Y2 -5 40/8=5 2/8=0.25 8/8 = 1 - - - - 5/0.25 = 20
A2 -M 50-5(4) = 30 3-0.25(4)= 2 4-1(4)=0 - - - - 30/2=15(KR)
Zj -2M – 1.25 -5
Cj -3 -5
Zj – Cj -2M + 1.75 0
( KC)

Therefore Z = (-5 x 5) + (-M x 30)

= -30M – 25

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Step 7: 3rd iteration of Simplex Method.

BV CB XB Y1 Y2 S1 S2 A1 A2 Min. Ratio
Y2 -5 5-15 (0.25) =1.25 0.25 – 1(0.25) = 0 1-0(0.25)=1 - - - -
Y1 -3 30/2 = 15 2/2 = 1 0/2 = 0 - - - -
Zj -3 -5
Cj -3 -5
Zj – Cj 0 0

Therefore Z = CBXB

= (-5x1.25) + (-3x15)

= -6.25 – 45

= -51.25

Therefore Maximise Z = -51.25

Therefore Minimise Z = 51.25

4.5 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. In case of an ‘equal to’ constraint______ variable should added to convert the equation.
2. To convert the minimisation problem into maximisation problem, the objective function
can be multiplied by using ______.
3. The co-efficient of artificial variables A1 , A2 …..are represented by a very high value
‘M’, hence the method is called ______.

Answers to Check Your Progress:

1. Artificial
2. (-1)
3. Big M- Method

4.6 SUMMARY
So far, we have discussed Big-M method under linear programming to solve optimal
and feasible solutions to the linear programming problem. Big-M method is a method of
solving linear programming problems using the simplex algorithm. The Big-M method
extends the simplex algorithm to problems that contain “greater than” constraints. The Big-M
method is a modified version of the simplex method in linear programming in which we
assign a very large value (M) to each of the artificial variables.

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4.7 KEYWORDS
Constraints : The linear equations or equations or restrictions on a
variables of a linear programming problem.

Simplex Algorithm : It is a well-known algorithm for linear programming. In the

simplex method, we find an initial basic solution. It is also
called as simplex method algorithm.

Big-M Method : It is the more advanced method of solving problems of linear

programming when there is a greater than constraints.

5.8 QUESTIONS FOR SELF-STUDY

1. What is Big M – Method? Explain the procedure to find optimal solution under this
method.
2. Solve the following LP Problem using Big M Method.
Minimize, Z = 2X1+ 9X2 + X3

Subject to constraints,

X1 + 4X
2
+ 32X ≥ 5……………………………………………………………(i)
3X1 + X
2
+ 2X
3
≥ 4…………………………………………………………..(ii)
where X1 , X
2
, 3X ≥ 0
3. Solve the following LPP

Zmin = -2X1 - X2

Subject to constraints

X1 + X2 ≥ 2
X1 + X2 ≤ 4
X1 , X2 ≥ 0

4. Minimise: Z= 14X1 + 13X2 + 11X3 + 13X4 + 13X5 + 12X6

Subject to X1 + X2 + X3 = 1200
X4 + X5 + X6 = 1000
X1 + X4 = 1000
X2 + X5 = 700
X3 + X6 = 500

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 With all variables non-negative.
6. Minimise: Z= 3X1 + 4X2
Subject to 2X1 + X2 ≤ 6
2X1 + 3X2 ≤ 9
With, X1, X2 non-negative.
7. Minimise: Z= X1 + 2X2
Subject to X1 + 3X2 ≥ 11
2X1 + X2 ≥ 9

With, X1, X2 non-negative.

4.9 REFERENCES
1. William H, Model Building in Mathematical Programming, Wiley Newyork.
2. Rohn E., "A New LP Approach to Bond Portfolio Management", Journal of Financial
& Quantitative Analysis 22 (1987): 439-467.
3. Wagner H, Principles of OR, 2nd ed. Englewood Cliffs, N.J: Prentice Hall, 1975.
4. Moondra S.,“An LP Model for Workforce Scheduling in Banks", Journal of Bank
Research (1976).
5. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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Karnataka State Open University
Mukthagangothri, Mysuru – 570 006
[email protected] III SEMESTER M.COM
QUANTITATIVE TECHNIQUE
COURSE CODE:MCOHC3.2

Department of Studies and Research in Commerce

BLOCK
2

Page No.

UNIT – 5: TRANSPIRATION MODEL 87-131

UNIT – 6: ASSIGNMENT MODEL 132-154

UNIT – 7: NETWORK ANALYSIS - I 155-168

UNIT – 8: NETWORK ANALYSIS - II 169-196

 BLOCK – II
INTRODUCTION
This block explains the models used under quantitative techniques starting from transportation
model introduction, network representation of transportation problems, balanced transportation
problems, unbalanced transportation problems, procedure to solve transportation problems
using Northwest Corner Method, Least Cost Method, Vogel’s Approximation Method
continued by Assignment Model, its introduction, mathematical structure of assignment
problem, network representation of assignment problem, types of assignment problem which
include Hungarian Method for solving assignment problem. Further, unbalanced assignment
problem, restricted assignment problem and maximization problems are also covered.
Followed by basic concepts of Network Analysis including basic terminologies used under
network analysis, errors to be avoided while constructing a network, rules for constructing a
network, numbering the events using Fulkerson’s rule and construction of a network are
explained. Finally, illustration on Network Analysis which covers critical path analysis,
determination of float and slack times, project evaluation review technique, Cost Analysis and
project crashing are detailed in this block.

This block comprises four units as presented below:

Unit – 5: Transportation Model

Unit – 6: Assignment Model

Unit – 7: Networking Analysis – I

Unit – 8: Networking Analysis – II

 BLOCK -II

UNIT-5 TRANSPORTATION MODEL

Structure:

5.0 Objectives

5.1 Introduction

5.2 Meaning of Transportation Problem

5.3 Network Representation of Transportation Model

5.4 General Representation of Transportation Model

5.5 Balanced Transportation Problem

5.6 Unbalanced Transportation Problem

5.7 Procedure to Solve Transportation Problem

5.8 Illustrations

5.8.1 Illustrations on North West Corner Method

5.8.2 Illustrations on Least Cost Method

5.8.3 Illustrations on Vogel’s Approximation Method (VAM)

5.8.4 Illustrations under all the Methods

5.9 Check Your Progress

5.10 Summary

5.11 Keywords

5.12 Questions for Self-Study

5.13 References

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5.0 OBJECTIVES
After studying this unit, you will be able to;

• Solve transportation problem using North-West Corner Method.

• Solve transportation problem using Least Cost Method.
• Solve transportation problem using Vogel’s Approximation Method.

5.1 INTRODUCTION
In this unit we would be able to learn the Time Management Models. i.e. Transportation
and Assignment Models, thus would be able to learn transportation models in this lesson and also
we will talk about transshipment problems.

Transportation problem is a particular class of linear programming, which is associated

with day-to-day activities in our real life and mainly deals with logistics. It helps in solving problems
on distribution and transportation of resources from one place to another. The transportation model
can also be used in making location decisions. The model helps in locating a new facility, a
manufacturing plant or an office when two or more number of locations is under consideration.
The total transportation cost, distribution cost or shipping cost and production costs are to be
minimized by applying the model.

5.2 MEANING OF TRANSPORTATION PROBLEM

The goods are transported from a set of sources (e.g., factory) to a set of destinations
(e.g., warehouse) to meet the specific requirements. In other words, transportation problems deal
with the transportation of a product manufactured at different plants (supply origins) to a number of
different warehouses (demand destinations). The objective is to satisfy the demand at destinations
from the supply constraints at the minimum transportation cost possible. To achieve this objective,
we must know the quantity of available supplies and the quantities demanded. In addition, we must
also know the location, to find the cost of transporting one unit of commodity from the place of
origin to the destination. The model is useful for making strategic decisions involved in selecting
optimum transportation routes so as to allocate the production of various plants to several
warehouses or distribution centers.

The transportation problem applies to situations where a single commodity is to be

transported from various sources of supply (origins) to various demands (destinations).
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5.3 NETWORK REPRESENTATION OF TRANSPORTATION MODEL

The transportation model is represented by a network diagram in Figure 5.1.

Factory Source Destination Warehous

c11 : x11 e
1 1

Supply 2 2 Demand

Sm m n
cmn : xmn

Figure 5.1: Network Transportation Model

where,
m be the number of sources,
n be the number of destinations,
Sm be the supply at source m,

Dn be the demand at destination n

Cij be the cost of transportation from source i to destination j, and

Xij be the number of units to be shipped from source i to destination j.

The objective is to minimize the total transportation cost by determining the unknowns xij, i.e., the
number of units to be shipped from the sources and the destinations while satisfying all the
supply and demand requirements.

5.4 GENERAL REPRESENTATION OF TRANSPORTATION MODEL

The Transportation problem can also be represented in a tabular form as shown in Table 5.1

Let Cij be the cost of transporting a unit of the product from ith origin to jth destination.

ai be the quantity of the commodity available at source i,

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bj be the quantity of the commodity needed at destination j, and

Xij be the quantity transported from ith source to jth destination.

Table 5.1: Tabular Representation of Transportation Model

To Supply
D1 D2 … Dn
From Ai
S1 C11 C12 … C1n A1
x11 x12
S2 C21 C22 … C2n A2
x21 x22
. . . … . .
. . . … . .
. . . … . .
Sm Cm1 Cm2 … Cmn Am
xm1 xm2

m n
Bj B1 B2 … Bn  ai =  b j
i=1 j=1

m n

 ai =  b j

i=1 j=1

If the total supply is equal to total demand, then the given transportation problem is a balanced
one.

5.5 BALANCED TRANSPORTATION PROBLEM

When the total supplies of all the sources are equal to the total demand of all destinations, the
problem is a balanced transportation problem.

Total supply = Total demand

𝑚 𝑛
𝑎 𝑏
∑ − ∑
𝑖 𝑗
𝑖=1 𝑗=1

The problem given in illustration-1 represents a balanced transportation problem.

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5.6 UNBALANCED TRANSPORTATION PROBLEM
When the total supply of all the sources is not equal to the total demand of all destinations, the
problem is an unbalanced transportation problem.

Total supply ≠ Total demand

𝑚 𝑛
𝑎 𝑏
∑ − ∑
𝑖 𝑗
𝑖=1 𝑗=1

A. Demand Less than Supply

In real-life, supply and demand requirements will rarely be equal. This is because of variation in
production from the supplier end, and variations in forecast from the customer end. Supply
variations may be because of shortage of raw materials, labour problems, improper planning and
scheduling. Demand variations may be because of change in customer preference, change in
prices and introduction of new products by competitors. These unbalanced problems can be easily
solved by introducing dummy sources and dummy destinations. If the total supply is greater
than the total demand, a dummy destination (dummy column) with demand equal to the supply
surplus is added.

Illustration 1:

Check whether the given transportation problem shown in Table 5.2 is a balanced one. If not,
convert the unbalanced problem into a balanced transportation problem.

Table 5.2: Transportation Model with Supply Exceeding Demand

Destination
Source Supply
1 2 3
1 25 45 10 200
2 30 65 15 100
3 15 40 55 400
Demand 200 100 300

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Solution: For the given problem, the total supply is not equal to the total demand.
3 3
𝑎 𝑏
∑ = 700 and ∑ = 600
𝑖 𝑗
𝑖=1 𝑗=1

since,
3 3
𝑎 𝑏
∑ > ∑
𝑖 𝑗
𝑖=1 𝑗=1

The given problem is an unbalanced transportation problem. To convert the unbalanced

transportation problem into a balanced problem, add a dummy destination (dummy column).

i.e., the demand of the dummy destination is equal to,

3 3
𝑎 𝑏
∑ − ∑
𝑖 𝑗
𝑖=1 𝑗=1

Thus, a dummy destination is added to the table, with a demand of 100 units. The modified table is
shown in Table 5.3 which has been converted into a balanced transportation table. The unit costs
of transportation of dummy destinations are assigned as zero.

Table 5.3: Dummy Destination Added

Destination
Source 1 2 3 4 Supply
1 25 45 10 0 200
2 30 65 15 0 100
3 15 40 55 0 400
Demand 200 100 300 100 700/700
Similarly,
3 3
𝑎 𝑏
If ∑ = 700 and ∑ = 600 then include a dummy source to supply the excess demand
𝑖 𝑗
𝑖=1 𝑗=1

- 92 -
B. Demand Greater than Supply

If the total demand is greater than the total supply, a dummy source (dummy row) with
supply equal to the demand surplus is added. The unit transportation cost for the dummy column and
dummy row are assigned zero values, because no shipment is actually made in case of a dummy
source and dummy destination.

Illustration 2:
Convert the transportation problem shown in Table 5.4 into a balanced problem.

Table 5.4: Demand Exceeding Supply

Destination
Source 1 2 3 4 Supply
1 10 16 9 12 200
2 12 12 13 5 300
3 14 8 13 4 300
Demand 100 200 450 250 1000/800

Solution: The given problem is,

4 3
𝑏 𝑎
∑ > ∑
𝑗 𝑖
𝑗=1 𝑖=1

3 4
𝑎 𝑏
∑ = 800 and ∑ = 1000
𝑖 𝑗
𝑖=1 𝑗=1

The given problem is an unbalanced one. To convert it into a balanced transportation problem,
include a dummy source (dummy row) as shown in Table 5.5.

Table 5.5: Balanced TP Model

Source Destination
1 2 3 4 Supply
1 10 16 9 12 200
2 12 12 13 5 300
3 14 8 13 4 300
4 0 0 0 0 200
Demand 100 200 450 250 1000/1000

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5.7 PROCEDURE TO SOLVE TRANSPORTATION PROBLEM
Step 1: Formulate the problem.

Formulate the given problem and set up in a matrix form. Check whether the problem is a
balanced or unbalanced transportation problem. If unbalanced, add dummy source (row) or
dummy destination (column) as required.

Step 2: Obtain the initial feasible solution.

The initial feasible solution can be obtained by any of the following threemethods:

(i) Northwest Corner Method (NWC)

(ii) Least Cost Method (LCM)
(iii) Vogel’s Approximation Method (VAM)

The transportation cost of the initial basic feasible solution through Vogel’s approximation
method, VAM will be the least when compared to the other two methods which gives the value
nearer to the optimal solution or optimal solution itself. Algorithms for all the three methods to find
the initial basic feasible solution are given.

Algorithm for North-West Corner Method (NWC)

(i) Select the North-west (i.e., upper left) corner cell of the table and allocate the maximum
possible units between the supply and demand requirements. During allocation, the
transportation cost is completely discarded (not taken into consideration).
(ii) Delete that row or column which has no values (fully exhausted) for supply or demand.
(iii) Now, with the new reduced table, again select the North-west corner cell and allocate the
available values.
(iv) Repeat steps (ii) and (iii) until all the supply and demand values are zero.
(v) Obtain the initial basic feasible solution.

Algorithm for Least Cost Method (LCM)

(i) Select the smallest transportation cost cell available in the entire table and allocate the
supply and demand.
(ii) Delete that row/column which has exhausted. The deleted row/column must not be
considered for further allocation.

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 (iii) Again select the smallest cost cell in the existing table and allocate. (Note: In case, if there
are more than one smallest costs, select the cells where maximum allocation can be made)
(iv) Obtain the initial basic feasible solution.

Algorithm for Vogel’s Approximation Method (VAM)

(i) Calculate penalties for each row and column by taking the difference between the smallest
cost and next highest cost available in that row/column. If there are two smallest costs,
then the penalty is zero.
(ii) Select the row/column, which has the largest penalty and make allocation in the cell having
the least cost in the selected row/column. If two or more equal penalties exist, select one
where a row/column contains minimum unit cost. If there is again a tie, select one where
maximum allocation can be made.
(iii) Delete the row/column, which has satisfied the supply and demand.
(iv) Repeat steps (i) and (ii) until the entire supply and demands are satisfied.
(v) Obtain the initial basic feasible solution.

Remarks: The initial solution obtained by any of the three methods must satisfy the following
conditions:

a) The solution must be feasible, i.e., the supply and demand constraints must be satisfied
(also known as rim conditions).
b) The number of positive allocations, N must be equal to m+n-1, where m is the number
of rows and n is the number of columns.

Step 3: Check for degeneracy

The solution that satisfies the above said conditions N = m + n – 1 is a non-degenerate

basic feasible solution otherwise, it is a degenerate solution. Degeneracy may occur either at the initial
stage or at subsequent iterations.

If number of allocations, N = m + n – 1, then degeneracy does not exist. Go to Step 5.

If number of allocations, N π m + n – 1, then degeneracy does exist. Go toStep 4.

Step 4: Resolving degeneracy

To resolve degeneracy at the initial solution, allocate a small positive quantity e to one or more
unoccupied cell that have lowest transportation costs, so as to make m + n – 1 allocations (i.e., to

- 95 -
satisfy the condition N = m + n – 1). The cell chosen for allocating e must be of an independent
position. In other words, the allocation of e should avoid a closed loop and should not have a path.

The following Table 5.6 shows independent allocations.

Table 5.6: Independent Allocations

* *
* * * *
* * *

The following Tables 5.6 (a), (b) and (c) show non-independent allocations.
Table 5.6(a): Non - Independent Allocations

* *
* *

Table 5.6(b)

* *

* *

Table 5.6(C)

* *
*

* *
Optimal Solution

Step 5: Test for optimality

The solution is tested for optimality using the Modified Distribution

(MODI)method (also known as U-V method).

Once an initial solution is obtained, the next step is to test its optimality.
An optimal solution is one in which there are no other transportation
routes that would reduce the total transportation cost, for which we
have to evaluate each unoccupied cell in the table in terms of
opportunity cost. In this process, if there is no negative opportunity cost,

- 96 -
 and the solution is anoptimal solution.

(i) Row 1, row 2,…, row i of the cost matrix are assigned with
variables U1, U2, …,Ui and the column 1, column 2,…, column j
are assigned with variables V1, V2, …,Vj respectively.

(ii) Initially, assume any one of Ui values as zero and compute the values for U1,

U2, …,Ui and V1, V2, …,Vj by applying the formula for occupied cell.

For occupied cells,

Cij + Ui + Vj = 0

U1
A
Vj
(iii) Obtain all the values of Cij for unoccupied cells by applying the formula for

unoccupied cell.

For unoccupied cells,

Opportunity Cost, Cij = Cij + Ui + Vj

Ui
Ci Vj

If Cij values are > 0 then, the basic initial feasible solution is optimal. Go to step 7.
If Cij values are = 0 then, the multiple basic initial feasible solution exists. Go to step 7.
If Cij values are < 0 then, the basic initial feasible solution is not optimal. Go to step 6.

Step 6: Procedure for shifting of allocations

Select the cell which has the most negative Cij value and introduce a positive quantity
called ‘q’ in that cell. To balance that row, allocate a ‘– q’ to that row in occupied cell. Again, to
balance that column put a positive ‘q’ in an occupied cell and similarly a ‘-q’ to that row.
Connecting all the‘q’s and ‘-q’s, a closed loop is formed.

Two cases are represented in Table 5.7(a) and 5.7(b). In Table 5.7(a) if all the q allocations
are joined by horizontal and vertical lines, a closed loop is obtained.

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The set of cells forming a closed loop is

CL = {(A, 1), (A, 3), (C, 3), (C, 4), (E, 4), (E, 1), (A, 1)}

The loop in Table 5.7(b) is not allowed because the cell (D3) appears twice.

Table 5.7(a): Showing Closed Loop

1 2 3

* 4

* *

* *

Table 5.7(b)
1 3

* *

* * *

* *
Conditions for forming a loop

(i) The start and end points of a loop must be the same.

(ii) The lines connecting the cells must be horizontal and vertical.

(iii) The turns must be taken at occupied cells only.

(iv) Take a shortest path possible (for easy calculations).

Remarks on forming a loop

(i) Every loop has an even number of cells and at least four cells

(ii) Each row or column should have only one ‘+’ and ‘–’ sign.

(iii) Closed loop may or may not be square in shape. It can also be a rectangle or a stepped
shape.

(iv) It doesn’t matter whether the loop is traced in a clockwise or anti- clockwise direction.

- 98 -
Take the most negative '– q' value, and shift the allocated cells accordingly by adding the value in
positive cells and subtracting it in the negative cells. This gives a new improved table. Then go to
step5 to test for optimality.

Step 7: Calculate the Total Transportation Cost.

Since the Cij values are positive, optimality is reached and hence the present allocations
are the optimum allocations. Calculate the total transportation cost by summing the product of
allocated units and unit costs.

5.8 ILLUSTRATIONS
5.8.1 ILLUSTRATIONS ON NORTH WEST CORNER METHOD

Illustration – 3

Find the initial basic feasible solution of the following transportation problem with the given cost
matrix:

(Supply)
Warehouse W1 W2 W3 W4
Factory Capacity
Factory F1 19 30 50 10 7
F2 70 30 40 60 9
F3 40 8 70 20 18
Warehouse
5 8 7 14 34
Requirements
Solution:

Step 1: Fit the given data into a Transportation Algorithm:

Warehouse W1 W2 W3 W4 Supply
Factory F1 19 5 30 2 50 10 7
F2 70 30 6 40 3 60 9
F3 40 8 70 4 20 14 18
Warehouse 5 8 7 14 34

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Step 2: Determination of Minimum Total Transportation Cost (M.T.T.C.):

Cell Entry x Allotted Entry = Total Cost (₹)

W1 19 X 5 = 95
F1
W2 30 X 2 = 60

W2 30 X 6 = 180
F2
W3 40 X 3 = 120

W3 70 X 4 = 280
F3
W4 20 X 14 = 280

Therefore M.T.T.C. = 1015

Inference:

In order to move 34 tons of the product from 3 factories namely, F1, F2, F3 to various
destinations, the minimum total transportation cost thus found out by following the North-West
Corner Rule is ₹ 1,015.

Illustration – 4:

In three plants, A, B and C is the tonnage of production are 100, 120 and 120 respectively. The
product is to be distributed to 5 ware houses W1, W2, W3, W4 and W5. Each of which must
receive is quota 40, 50, 70, 90 and 90 tonnes respectively. From the transportation cost matrix
given below, work out a suitable plan such that the total cost of moving the load of 340 tonnes
will be minimum. Use North-West Corner Rule.

Warehouse W1 W2 W3 W4 W5
Plant A 4 1 2 6 9
B 6 4 3 5 7
C 5 2 6 4 8

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Solution:

Step 1: Fit the given data into a Transportation Algorithm:

Supply
Warehouse W1 W2 W3 W4 W5
(tones)
Plant A 4 40 1 50 2 10 6 9 100 0
B 6 4 3 60 5 60 7 120 0
C 5 2 6 4 30 8 90 120 0
Demand 40 0 50 0 70 0 90 0 90 0 340
Step 2: Calculation of Minimum Total Transportation Cost (M.T.T.C):

Cell Entry X Allotted Entry = Total Cost (₹)

W1 4 X 40 = 160
A W2 1 X 50 = 50
W2 2 X 10 = 20

W1 0 X 0 = 00
B W3 3 X 60 = 180
W4 5 X 60 = 300

W1 0 X 0 = 00
00
C W4 4 X 30 = 120
W5 8 X 90 = 720

Therefore M.T.T.C. = 1,550

Inference:

In order to move 340 tonnes of the product from 3 plants namely A, B, C to various destinations,
the minimum total transportation cost thus found out by following the North-West Corner Rule is
₹ 1,550.

Illustration – 5:

Determine an initial feasible basic solution to the following transportation problem using North-
West Corner Rule.

Destinations A’ B’ C’ D’ E’ Supply
Origins A 2 11 10 3 7 4
B 1 4 7 2 1 8
C 3 9 4 8 12 9
Demand 3 3 4 5 6 21

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Solution:

Step 1: Fit the given data into a Transportation Algorithm:

Destinations A’ B’ C’ D’ E’ Supply
Origins A 2 3 11 1 10 3 7 4 0
B 1 4 2 7 4 2 2 1 8 0
C 3 9 4 8 3 12 6 9 0
Demand 3 0 3 0 4 0 5 0 6 0 21
Step 2: Calculation of Minimum Cost of Total Transportation Cost (M.T.T.C):

Cell Entry X Allotted Entry = Total Cost

(₹)
A’ 2 X 3 = 6
A
B’ 11 X 1 = 11

B’ 4 X 2 = 8
B C’ 7 X 4 = 28
D’ 2 X 2 = 4

D’ 8 X 3 = 24
C
E’ 12 X 6 = 72
Therefore M.T.T.C. = 153
Inference:

In order to move the product of 21 tonnes from 3 origins namely, A, B, C to various destinations,
the minimum total transportation cost thus found out by following the North-West Corner Rule is
₹ 153.

Illustration – 6:

Solve the following transportation problem to reach the optimum solution by using North-West
Corner Rule where ai represents the factory capacity and bj represents warehouse demand.

Warehouse W1 W2 W3 W4 ai
Factory F1 30 25 40 20 100
F2 29 26 35 40 250
F3 31 33 37 30 150
bj 90 160 200 50 500

- 102 -
Solution:

Step 1: Fit the given data into a Transportation Algorithm:

Warehouse W1 W2 W3 W4 ai
Factory F1 30 90 25 10 40 20 100 0
F2 29 26 150 35 100 40 250 0
F3 31 33 37 100 30 50 150 0
bj 90 0 160 0 200 0 50 0 500
Step 2: Calculation of Minimum Total Transportation Cost (M.T.T.C.):

Total Cost
Cell Entry X Allotted Entry =
(₹)
W1 30 X 90 = 2,700
F1
W2 25 X 10 = 250
W2 26 X 150 = 3,900
F2
W3 35 X 2 = 3,500
W3 37 X 100 = 3,700
F3
W4 30 X 500 = 1,500
Therefore M.T.T.C. = 15,550

5.8.2 ILLUSTRATIONS ON LEAST COST METHOD

Under this method, the process of allocation starts from the minimum cost cell and
subsequently the next allotment to the next best minimum cost cell of the given cost matrix.
While making such an allotment, the demand and supply constraints are to be fulfilled in turn
which helps in determining the minimum total transportation cost.

Steps:

1. Start allocating from the lowest cost entry cell.

2. While allotting verify whether they fulfill the demand and supply constraints.

3. The allocation should be repeated subsequently with the next lowest cost entry cell and

an initial basic feasible solution is arrived at.

4. Find the minimum total transportation cost.

- 103 -
Illustration – 7:

Find the initial basic feasible solution of the following transportation problem with the given cost
matrix:

(Supply)
Warehouse W1 W2 W3 W4
Factory Capacity
Factory F1 19 30 50 10 7
F2 70 30 40 60 9
F3 40 8 70 20 18
Warehouse
5 8 7 14 34
Requirements
Solution:

Step 1: Fit the given data into Transportation Algorithm:

Warehouse W1 W2 W3 W4 Capacity
Factory F1 19 30 50 10 7 7 0
F2 70 2 30 40 7 60 9 0
F3 40 3 8 8 70 20 7 18 0
Demand 5 0 8 0 7 0 14 0 34
Step 2: Calculation of Minimum Transportation Cost.

Cell Entry x Allotted Entry = Total Cost (₹)

F1 W4 10 X 7 = 70

W1 70 X 2 = 140
F2
W2 40 X 7 = 280

W1 40 X 3 = 120
F2 W2 8 X 8 16
W4 20 X 7 = 140
Therefore M.T.T.C. = 814
Inference:

In order to move 34 tonnes of the product from 3 origins to various destinations, the
minimum total transportation cost thus found out by the Least Cost Method is ₹ 814.

- 104 -
Illustration – 8:

In three plants, A, B and C is the tonnage of production are 100, 120 and 120 respectively. The
product is to be distributed to 5 ware houses W1, W2, W3, W4 and W5. Each of which must
receive is quota 40, 50, 70, 90 and 90 tonnes respectively. From the transportation cost matrix
given below, work out a suitable plan such that the total cost of moving the load of 340 tonnes
will be minimum. Use Least Cost Method.

Warehouse W1 W2 W3 W4 W5
Plant A 4 1 2 6 9
B 6 4 3 5 7
C 5 2 6 4 8
Solution:

Step 1: Fit the given data into a Transportation Algorithm:

Warehouse W1 W2 W3 W4 W5 Production
Capacity
Plants A 4 1 50 2 50 6 9 100 0
B 6 10 4 3 20 5 7 90 120 0
C 5 30 2 6 4 90 8 120 0
Demand 40 0 50 0 70 0 90 0 90 0 340
Step 2: Calculation of Minimum Total Transport Cost (M.T.T.C.)

Cell Entry X Allotted Entry = Total Cost

(₹)
A W2 1 X 50 = 50
W3 2 X 50 = 100
B W1 6 X 10 = 60
W2 3 X 20 = 60
W3 7 X 90 = 630
F2 W4 4 X 90 = 360
W5 5 X 30 = 150
Therefore M.T.T.C. = 1,410
Inference:

In order to move 340 tonnes of the product from 3 origins product from 3 origins namely, A, B,
C to various destinations the minimum total transportation cost thus found out by following the
Least Cost Method is ₹ 1,410.

- 105 -
Illustration – 9:

Determine an initial feasible basic solution to the following transportation problem using Least
cost method.

Destinations A’ B’ C’ D’ E’ Supply
Origins A 2 11 10 3 7 4
B 1 4 7 2 1 8
C 3 9 4 8 12 9
Demand 3 3 4 5 6 21
Solution:

Step 1: Fit the given data into a Transportation Algorithm:

Destinations A’ B’ C’ D’ E’ Supply
Origins A 2 11 10 4 3 7 4 0
B 1 3 4 7 2 1 5 8 0
C 3 9 3 4 4 8 1 12 1 9 0
Demand 3 0 3 0 4 0 5 0 6 0 21
Step 2: Calculation of Minimum Total Transportation Cost:

Cell Entry X Allotted Entry = Total Cost (₹)

A D’ 3’ X 4 = 12
B A’ 1’ X 3 = 3
B’ 1’ X 5 = 5
B’ 9’ X 3 = 27
C C’ 4’ X 4 = 16
D’ 8’ X 1 = 8
E’ 12’ X 1 = 12
Therefore M.T.T.C. = 85
Inference:

In order to move the product of 21 tonnes from 3 origins namely, A, B, C to different

destinations the minimum total transportation cost thus found out by following the Least Cost
Method is ₹ 85.

- 106 -
Illustration – 10:

Solve the following transportation problem to reach the optimum solution by using Least Cost
Method where ai represents the factory capacity and bj represents warehouse demand.

Warehouse W1 W2 W3 W4 ai
Factory F1 30 25 40 20 100
F2 29 26 35 40 250
F3 31 33 37 30 150
bj 90 160 200 50 500
Solution:

Step 1: Fit the given data into a Transportation Algorithm

Warehouse W1 W2 W3 W4 ai
Factory F1 30 25 50 40 20 50 100 0
F2 29 90 26 110 35 50 40 250 0
F3 30 33 37 150 30 150 0
bj 90 0 160 0 200 0 50 0 500
Step 2: Calculation of Minimum Total Transportation Cost

Cell Entry x Allotted Entry = Total Cost (₹)

W2 25 X 50 = 1,250
F1
W4 20 X 50 = 1,000

W1 29 X 90 = 2,610
F2 W2 26 X 110 = 2,860
W3 35 X 50 = 1,750

F3 W3 37 X 150 = 5,550
Therefore M.T.T.C. = 15, 020
Inference:

According to Least Cost MEthod, the Minimum Total Transportation Cost is ʻ 15,020 to
move 500 tonnes of the product from 3 origins namely, F1, F2, F3 to various destinations.

- 107 -
5.8.3 ILLUSTRATIONS ON VOGEL’S APPROXIMATION METHOD (VAM)

In order to overcome the loopholes of the earlier two methods namely, North-West
Corner Rule and Least Cost Method, Vogel’s Approximation Method is used.

Under the North-West Corner Rule the apparent demerit is while calculating the
optimum/minimum total transportation cost, there is no possibility of making an allocation to
diagonally opposite cells for North-West cells. And, in case of Matrix Minimum Method, one
cross one ( 1 x 1) is not possible. This appears to be the limitation of this method. Hence,
Vogel’s Approximation Method is used.

Under this method, by identifying the row penalities and column penalities, an allocation
process is carried on.

Steps

1. Select the minimum cost entry and the next minimum cost entry in each row and each
column and find their differences to denote them as ‘penalities’:

2. Select the maximum penalty and the corresponding minimum cost entry in the row or
column and satisfy the masimum possible demand or supply constraints.

3. Consider the difference of the allocated supply of the demand value for the respective entry
and eliminate the row or column which is completely satisfied and notice the change in the
total supply/or total demand.

4. Repeat the process for the reduced matrix until all constraints are satisfied.

5. Find out the total cost for the allocated cell entries.

Illustration – 11:

Find the initial basic feasible solution of the following transportation problem with the given cost
matrix:

(Supply)
Warehouse W1 W2 W3 W4
Factory Capacity
Factory X 1 2 1 4 30
X 3 3 2 1 50
Z 4 2 9 9 20
Warehouse
20 40 30 10 100
Requirements
- 108 -
Solution:

Warehouse A B C D Supply
Factory X 1 2 1 4 30
Y 3 3 2 1 50
Z 4 2 9 9 20
Demand 20 40 30 10 100
Step 1:

Warehouse A B C D Supply Penalty

Factory X 1 2 1 4 30 0
Y 3 3 2 1 10 50 40 1
Z 4 2 9 9 20 2
Demand 20 40 30 10 10 100 90
Penalty 2 0 1 3
Step 2:

Warehouse A B C Supply Penalty

Factory X 1 20 2 1 30 10 0
Y 3 3 2 40 1
Z 4 2 9 20 2
Demand 20 0 40 30 90 70
Penalty 2 0 1
Step 3:

Warehouse B C Supply Penalty

Factory X 2 1 30 1
Y 3 2 40 1
Z 2 9 20 s 7
Demand 40 20 30 70 50
Penalty 0 1
Step 4:

Warehouse B C Supply Penalty

Factory X 2 1 10 10 1
Y 3 20 2 20 40 0 1
Demand 20 0 30 50
Penalty 1 1

- 109 -
Step 5:

Warehouse A B C D Supply Penalty

Factory X 1 20 2 1 10 4 30 0 0
Y 3 3 20 2 20 1 10 50 0 1
Z 4 2 20 5 9 20 0 2
Demand 20 0 40 0 30 0 10 0 100
Penalty 2 0 1 3
Step 6: Calculation of Total Transportation Cost:

Origins destinations Cell Entry X Allotted Entry = Total Cost (₹)

A 1 X 20 20
X
C 1 X 10 10

B 3 X 20 60
Y D 1 X 10 10
C 2 X 20 40

Z B 2 X 20 40
Therefore M.T.T.C. = 180
Inference:

With the use of Vogel’s Approximate Method in the given matrix, the minimum total
transportation cost thus found out amounts to ₹ 180.

Illustration – 12:

In three plants, A, B and C is the tonnage of production are 100, 120 and 120 respectively. The
product is to be distributed to 5 ware houses W1, W2, W3, W4 and W5. Each of which must
receive is quota 40, 50, 70, 90 and 90 tonnes respectively. From the transportation cost matrix
given below, work out a suitable plan such that the total cost of moving the load of 340 tonnes
will be minimum. Use North-West Corner Rule.

Warehouse W1 W2 W3 W4 W5
Plant A 4 1 2 6 9
B 6 4 3 5 7
C 5 2 6 4 8

- 110 -
Solution:

Warehouse W1 W2 W3 W4 W5 Supply Penalty

Plant A 4 1 2 6 9 100 1
B 6 4 3 5 7 120 1
C 5 2 50 6 4 8 120 70 2
Demand 40 50 0 70 90 90 340 290
Penalty 1 1 1 1 1
Step 1:

Warehouse W1 W2 W3 W4 Supply Penalty

Plant A 4 2 70 6 9 100 30 2
B 6 3 5 7 120 2
C 5 6 4 8 70 1
Demand 40 70 0 90 90 290 220
Penalty 1 1 1 1
Step 2:

Warehouse W1 W4 W5 Supply Penalty

Plant A 4 30 6 9 30 0 2
B 6 5 7 120 1
C 5 4 8 70 1
Demand 40 10 90 90 220 190
Penalty 1 1 1
Step 3:

Warehouse W1 W4 W3 Supply Penalty

Plant B 6 10 5 20 7 90 120 0 1
C 5 4 70 8 70 0 1
Demand 10 0 90 0 90 0 190 0 1
Penalty 1 1 1
Step 4:

Warehouse W1 W2 W3 W4 W5 Supply Penalty

Plant A 4 30 1 2 70 6 9 100 0 -
B 6 10 4 3 5 20 7 90 120 0 -
C 5 2 50 6 4 70 8 120 0 -
Demand 40 0 50 0 70 0 90 0 90 0 340
Penalty 1 1 1 1 1

- 111 -
Step 5: Calculation of Total Transportation Cost:

From To Cell Entry X Allotted Entry = Total Cost (₹)

W1 4 X 30 = 120
A
W3 2 X 70 = 140

W1 6 X 10 = 60
B W4 5 X 20 = 100
W5 7 X 90 = 630

W2 2 X 50 = 100
C
W4 4 X 70 = 280
Therefore M.T.T.C. = 1,430
Inference:

With the use of VAM the given matrix the minimum total transportation cost thus found out
amounts to ₹ 1,430.

5.8.4 ILLUSTRATIONS UNDER ALL THE METHODS

Illustration – 13:

A company has 3 factories A, B and C which supply to 5 warehouses its small car fans. The
production capacity of factories and the demand of customers – assumed constant. And
distribution cost are given in the following table. The objective is to supply the wholesalers with
their demand in a cheapest way. Use,

a. North-West Corner Rule.

b. Least Cost Method.

c. VAM for optimal solution.

Available
Wholesalers A B C D E
Units
Factories a 5 7 10 5 3 5
b 8 6 9 12 4 10
c 10 9 8 10 15 10
Requirement 3 3 10 5 4 25

- 112 -
Solution:

a. North-West Corner Rule:

Step 1:

A B Available
Wholesalers C D E
Units
Factories a 5 3 7 2 10 5 3 5 0
b 8 6 1 9 9 12 4 10 0
c 10 9 8 1 10 5 15 4 10 0
Requirement 3 0 3 0 10 0 5 0 4 0 25
Step 2: Calculation of Total Transportation Cost:

From To Cell Entry x Allotted Entry = Total Cost

A 5 X 3 = 15
a
B 7 X 2 = 14

B 6 X 1 = 6
b
C 9 X 9 = 81

C 8 X 1 = 8
c D 10 X 5 = 50
E 15 X 4 = 60
Therefore M.T.T.C = 234
b. Least Cost Method:

Step 1:

D E Available
Wholesalers A B C
Units
Factories a 5 7 10 5 1 3 4 5 0
b 8 3 6 3 9 12 4 4 10 0
c 10 9 8 10 10 15 10 0
Requirement 3 0 3 0 10 0 5 0 4 0 25

- 113 -
 Step 2: Calculation of Minimum Total Transportation Cost:

From To Cell Entry x Allotted Entry = Total Cost

D 5 X 1 = 5
a
E 3 X 4 = 12

A 8 X 3 = 24
b B 6 X 3 = 18
D 12 X 4 = 48

c C 8 X 10 = 80
Therefore Minimum Total Transportation Cost = 187
c. VAM

Step 1:

Units
Factories A B C D E Row Penalties
Available
a 5 7 10 5 5 3 5 0 2 - - - - -
b 8 3 6 3 9 12 4 4 10 0 2 2 2 1 - -
c 10 9 8 10 10 15 10 0 1 1 1 2 - -
Requirements 3 0 3 0 10 0 5 0 4 4 25 0
Column
3 1 1 5 1
Penalties
2 3 1 - 11
2 - 1 - -
2 - 1 - -
Step 2:

From To Cell Entry X Allotted Entry = Total

Cost

a D 5 X 5 = 25

A 8 X 3 = 24
b B 6 X 3 = 18
E 4 X 4 = 16

c C 8 X 10 = 80
Total Cost = 163

- 114 -
Inference:

With the use of Vogel’s Approximation Method, the company can arrive at a transportation
schedule by which it can incur a minimum transportation cost of ₹ 163, compared to other
methods like North-West Corner Rule incurring a cost of ₹ 234 and Least Cost Cell Method
incurring a cost of ₹ 187.

Illustration – 14:

A departmental store wishes to purchase the following qualities of dresses:

Dress type: A B C D E
Quantity 150 100 75 250 200
Tenders are submitted by 4 different manufacturers who undertake supply of not more than the
quantities indicated below:

Manufacturer W X Y Z
Quantity 300 250 150 200
The store estimated that its profit per dress will vary with the manufacturer as shown in the
following table:

Dress type A B C D E
Manufacturer W 2.75 3.50 4.25 2.25 1.50
X 3.00 3.25 4.50 1.75 1.00
Y 2.50 3.50 4.75 2.00 1.25
Z 3.25 2.75 4.00 2.50 1.75
How should the orders for dresses be placed?

Note: All the profit figures in the given matrix are in decimals and as they are
measured in units of rupee, convert these profits into multiples of 0.25 ps. and reduce the
problem into a minimization problem.

Solution:

Step 1: Fit the data into a matrix:

Dress type A B C D E Supply

Manufacturer W 2.75 3.50 4.25 2.25 1.50 300
X 3.00 3.25 4.50 1.75 1.00 250
Y 2.50 3.50 4.75 2.00 1.25 150

- 115 -
 Z 3.25 2.75 4.00 2.50 1.75 200
Purchases 150 100 75 250 200
The above matrix is an unbalanced one.

Step 2: Convert the problem into a balanced transportation problem by adding a dummy

column and converting and profit elements into multiples of 0.25 ps:

Dress type A B C D E F Supply

Manufacturer W 11 14 17 9 6 0 300
X 12 13 18 7 4 0 250
Y 10 14 19 8 5 0 150
Z 13 11 16 10 7 0 200
Purchases 150 100 75 250 200 125 900
Step 3: Conversion of existing maximization problem into minimization case:

a. North-West Corner Method:

Dress type A B C D E F Supply

Manufacturer W 8 150 5 100 2 50 10 13 19 300 0
X 7 6 1 25 12 225 15 19 250 0
Y 9 5 0 11 25 14 125 19 150 0
Z 6 8 3 9 12 75 19 125 200 0
Purchased 150 0 100 0 75 0 250 0 200 0 125 0 900 0
Calculation of Total Transportation Cost and Total Profit:

From To Cell Allotted Profit Total Profit Total Cost (₹)

Entry Entry Element (A.E x P.E) (C.E x A.E)
A 8 150 11 2,650 1,200
W B 5 100 14 1,400 500
C 2 50 17 850 100

C 1 25 18 450 25
X
D 12 225 7 1,575 2,700

C 11 25 8 200 275
Y
D 14 125 5 625 1,750

E 12 75 7 525 900
Z
F 19 125 0 0 2,375
7,275 9,725

- 116 -
 Therefore Minimum Cost = 9,825 x 0.25 ps.

= ₹ 2,475.25

Total Maximum Profit = 7,725 x 0.25 Ps.

= ₹ 1,818.75

b. Least Cost Method:

Dress type A B C D E F Supply

W 8 5 100 2 10 200 13 19 300 0
X 7 6 1 12 15 125 19 125 250 0
Y 9 5 0 75 11 14 75 19 150 0
Z 6 150 8 3 9 50 12 19 200 0
Demand 150 0 100 0 75 0 250 0 200 0 125 0 900 0
Calculation of Total Transportation Cost:

From To Cell Entry x Allotted Entry = Total Cost (₹)

B 5 X 100 = 500
W
D 10 X 200 = 2,000

E 15 X 125 = 1,875
X
F 19 X 125 = 2,375

C 0 X 75 = 0
Y
E 14 X 75 = 1,050

A 6 X 150 = 900
Z
D 9 X 50 = 450
9,150
Therefore Total Cost of Transportation = 9,150 x 0.25 ps. = ₹ 2,287. 50

Therefore Cost of Transportation = 9,150 x 0.25 ps.

= ₹ 2,287.50

- 117 -
 Calculation of Total Profit:

From To Cell Entry x Allotted Entry = Total Cost (₹)

B 14 X 100 = 1,400
W
D 9 X 200 = 1,800

E 4 X 125 = 500
X
F 0 X 125 = 000

C 19 X 75 = 1,425
Y
E 5 X 75 = 375

A 13 X 150 = 1,950
Z
D 10 X 50 = 500
7,950
Max. Total Profit = 7,950 x 0.25
= ₹ 1,987.50
c. Vogel’s Approximation Method:

Factories A B C D E F Supply Row Penalties

W 8 5 25 2 10 50 13 200 19 25 300 0 3 3 3 2 3
X 7 150 6 1 12 15 19 100 250 0 5 1 1 5 3
Y 9 5 75 0 75 11 14 19 150 0 5 4 - - -
Z 6 8 3 9 200 12 19 200 0 3 2 2 3 3
Requirements 150 0 100 0 75 0 250 0 200 0 125 0 900 0
Column
1 0 1 1 1 0
Penalties
1 0 - 1 1 0
1 1 - 1 1 0
1 - - 1 1 0
- - - 1 1 0

- 118 -
Calculation of Total Transportation cost and Total Profit.

Total Total
Cell Allotted Profit Allotted
From To X = Cost X Profit
Entry Entry Entry Entry
(₹) (₹)
B 5 X 25 = 125 14 X 25 350
D 10 X 50 = 500 9 X 50 450
W E 13 X 200 = 2,600 6 X 200 1,200
F 19 X 25 = 475 0 X 25 000
A 7 X 150 = 1,050 12 X 150 1,800
X
F 19 X 100 = 1,900 0 X 100 000
B 5 X 75 = 375 14 X 75 1,050
Y C 0 X 75 = 000 19 X 75 1,425
Z D 9 X 200 = 1,800 10 X 200 2,000
8,825 8,275
Total Transportation Cost = 8,825 x 0.25

= ₹ 2,206.25

Total Transportation Profit =8,275 x 0.25

= ₹ 2,068. 75

Inference:

Thus, by following Least Cost Method the departmental store can get a maximum of profit of
₹ 1,987.50, whereas by following Vogel’s Approximation Method, it can be increased to
₹ 2,068.75.

Illustration - 15

A company has 4 factories F1, F2, F3 and F4 manufacturing the same product. The
production and raw material cost differ from one factory to another and are given in the
following table.

In the first two rows the transportation cost from factory to sales depots S1, S2 and S3 are
also given. The last 2 columns give the sale prices and the total requirement at each depot. The
production capacity of each factory is given in the last row.

- 119 -
 Factory F1 F2 F3 F4 Sale Price Per Unit Requirement
Production cost (₹) 15 18 14 13 - -
Raw Material cost (₹) 10 9 12 9 - -
Depots S1 3 9 5 4 34 50
S2 1 7 4 5 32 120
S3 5 8 3 6 31 150
Capacity 10 150 50 100
Determine the most preferable production and distribution schedule and the
corresponding profit. The surplus production should be taken to zero profit.

Solution:

Requirement No. 1: Determination of profit matrix:

Sales Depots S1 S2 S3 Capacity

Factory F1 6 6 1 10
F2 -2 -2 -4 150
F3 3 2 2 50
F3 8 5 3 100
Requirement 80 120 150
The above matrix is an unbalanced matrix.

Requirement 2: Conversion of unbalanced matrix and maximization case into a balanced

and minimization case:

Sales Depots S1 S2 S3 Capacity

Factory F1 2 2 7 10
F2 10 10 12 150
F3 5 6 6 50
F4 0 3 5 100
F5 0 0 0 40
Requirement 80 120 150 350
a. North-West Corner Rule:

Step 1:

Sales Depots S1 S2 S3 Capacity

Factory F1 2 10 2 7 10 0
F2 10 70 10 80 12 150 0
F3 5 6 40 6 10 50 0
F4 0 3 5 100 100 0
F5 8 8 8 40 40 0
Requirement 80 0 120 0 150 0 350 0

- 120 -
Step 2: Calculation of Total Profit:

From To Cell Entry x Allotted Entry = Total Cost (₹)

F1 S1 2 X 10 = 20

S1 10 X 70 = 700
F2
S2 10 X 80 = 800

S2 6 X 40 = 240
F3
S3 6 X 10 = 60

F4 S3 5 X 100 = 500

F5 S3 0 X 40 = 000
Total Profit = 2,320
b. Least Cost Method:

Step 1:

Sales Depots S1 S2 S3 Capacity

Factory F1 2 2 10 7 10 0
F2 10 10 12 150 150 0
F3 5 6 50 6 50 0
F4 0 80 3 20 5 100 0
F5 8 8 40 8 40 0
Requirement 80 0 120 0 150 0 350 0
Step 2: Calculation of Total Profit:

From To Cell Entry x Allotted Entry = Total Cost (₹)

F1 S2 2 X 10 = 20

F2 S3 12 X 150 = 1,800

F3 S2 6 X 50 = 300

S1 0 X 80 = 00
F4
S2 3 X 20 = 60

F5 S2 8 X 40 = 320
Total Profit = 2, 500

- 121 -
c. Vogels Approximation Method.

Step 1:

Sales Deposits S1 S2 S3 Capacity Row Penalties

Factory F1 2 2 10 7 10 0 0 5 - - -
F2 10 10 90 12 60 150 0 0 2 2 2 2
F3 5 6 6 50 50 0 1 0 0 0 -
F4 0 80 3 20 5 100 0 3 2 2 - -
F5 8 8 8 40 40 0 0 0 0 0 0
Requirements 80 0 120 0 150 0 350 0
Column
3 1 1
Penalties
- 1 1
- 3 1
- 2 2
- 2 4
Step 2: Calculation of Total Profit:

From To Cell Entry x Allotted Entry = Total Cost (₹)

F1 S2 2 X 10 = 20

S2 10 X 90 = 900
F2
S3 12 X 60 = 720

F3 S3 6 X 50 = 300

S1 0 X 80 = 0
F4
S2 3 X 20 = 60

F5 S3 8 X 40 = 320
Total Profit = 2, 500
Inference:

The company can maximize its profit to ₹ 2,500 by following either Least Cost Method or
Vogel’s Approximation Method compared to North-West Corner Rule where profit is only
₹ 2,320.

- 122 -
5.9 CHECK YOUR PROGRESS
1. Write True or False against each statement:
(a) Transportation Problem is a special type of liner programming

(b) Dummy rows to dummy column are assigned source values.

(c) Initial Basic solution can be obtained by MODI method.

(d) Least cost method is a best method to find initial basic solution.

(e) In maximisation the objective is to maximise the total profit.

2. Fill in the blanks:

(a) In the transportation problem______are always transported.

(b) Initial basis feasible solution through VAM will be _______.

(c) Demand variation may occur because of change in _______ preference.

(d) Transportation Problem deals with the transportation of a_______manufactured.

(e) In real life supply and demand requirement will be rarely _______.

Answers to Check Your Progress:

1.(a)True (b)False (c) False (d) False (e) True

2. (a) Consignment (b) Least (c) Customer (d) Product (e) Equal

5.10 SUMMARY
So far as the transportation problem is concerned, the use of transportation models are to
minimize the cost of shipping from a number of source to number of destinations. In most general
form, a transportation problems has a number of origins and a number of destination. A number
of techniques are there to compute the initial basic feasible solution of a TP. These are NWC, LCM,
VAM. Further there can be an optimum solution while could obtained from MODI and stepping
stone. Transportation problem can be generalized into transshipment problem where shipment
could be feasible from origin to origin.

- 123 -
5.11 KEYWORDS
Origin : Origin of a Transportation Problem is the from which
shipments are dispatched.

Destination : It is a point to where shipment are transported.

Source : Supply location of a Transportation Problem.

Northwest Corner : A systematic procedure for establishing our initial feasible

solution to an optimal

Degeneracy : A situation that occurs where the number of occupied squares

in any solution is less than number of row play number of

column in a transportation basic.

Unbalance Problem : A situation is which demand in not equal to supply.

Summary Destination : An artificial destination.

VAM : Vogel Approximation Method is an interactive proceeded of

a feasible solution.

5.12 QUESTIONS FOR SELF-STUDY

1. What is a transportation problem?

2. What is the difference between a balanced transportation problem and an unbalanced

transportation problem?

3. What are the methods used to find the initial transportation cost?

4. Which of the initial three methods give a near optimal solution?

5. Explain Vogel’s approximation method of finding the initial solution.

6. What is degeneracy in a transportation problem? How is it resolved?

7. What are the conditions for forming a closed loop?

8. How are the maximization problems solved using transportation model?

9. How is optimality tested in solving transportation problems?

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 10. In what ways is a transshipment problem different from a transportation problem?

Exercise Problems

1. Develop a network representation of the transportation problem for a company that

manufactures products at three plants and ships them to three warehouses. The plant
capacities and warehouse demands are shown in the following table:

The transportations cost per unit (in ₹) is given in matrix.

Plant
Plant Warehouse Capacity
(no. of units)
W1 W2 W3
P1 22 18 26 350
P2 12 12 10 450
P3 14 20 10 200
Warehouse
demand 250 450 300
(no. of units)
2. Determine whether a dummy source or a dummy destination is required to balance the model
given.

(a) Supply a1 = 15, a2 = 5, a3 = 4, a4 = 6

Demand b1 = 4, b2 = 15, b3 = 6, b4 = 10

(b) Supply a1 = 27, a2 = 13, a3 = 10

Demand b1 = 30, b2 = 10, b3 = 6, b4 = 10

(c) Supply a1 = 2, a2 = 3, a3 = 5

Demand b1 = 3, b2 = 2, b3 = 2, b4 = 2, b5 = 1.

3. A state has three power plants with generating capacities of 30, 40 and 25 million KWH that
supply electricity to three cities located in the same state. The demand requirements
(maximum) of the three cities are 35, 40 and 20 million KWH. The distribution cost (₹ in
thousand) per million unit for the three cities are given in the table below:

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 City

1 2 3
1 60 75 45
Plant
2 35 35 40
3 55 50 45

A. Formulate the problem as a transportation model.

B. Determine an economical distribution plan.

C. If the demand is estimated to increase by 15%, what is your revised plan?

D. If the transmission loss of 5% is considered, determine the optimal plan.

4. Find the initial transportation cost for the transportation matrix given using North- West
corner method, Least cost method and Vogel’s Approximation Method.

Destination
1 2 3 4 Supply
A 5 6 7 8 25
Source B 7 5 4 2 75
C 6 1 3 2 15
Demand 50 30 20 15

5. In problem No. 4, if the demand for destination 4 increases from 15 units to 25 units,
develop the transportation schedule incorporating the change.

6. The Sharp Manufacturing Company produces three types of monoblock pumps for domestic
use. Five machines are used for manufacturing the pumps. The production rate varies for each
machine and also the unit product cost. Daily demand and machine availability are given
below.

Demand Information
Product
A B C
Demand (units) 2000 15000 700

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 Machine Availability Details

Machine capacity (units)

1 2 3 4 5
Available 700 1000 1500 1200 800

Unit Product Cost

Product
Machine A B C
1 150 80 75
2 120 95 60
3 112 100 60
4 121 95 50
5 125 75 50
Determine the minimum production schedule for the products and machines.

7. A company has plants at locations A, B and C with the daily capacity to produce chemicals
to a maximum of 3000 kg, 1000 kg and 2000 kg respectively. The cost of production (per kg)
are ₹ 800, ₹ 900 and ₹ 750 respectively. Customer’s requirement of chemicals per day is as
follows:

Customer Chemical Required Price offered

1 2000 200
2 1000 215
3 2500 225
4 1000 200
Transportation cost (in rupees) per kg from plant locations to customer’s place is given in table.

Customer
1 2 3 4
A 5 6 7 8
Plant B 7 5 4 2
C 6 1 3 2

Find the transportation schedule that minimizes the total transportation cost.

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8. A transportation model has four supplies and five destinations. The following table shows the
cost of shipping one unit from a particular supply to a particular destination

Source Destination Supply

1 2 3 4 5
1 13 6 9 6 10 13
2 8 2 7 7 9 15
3 2 12 5 8 7 13
Demand 10 15 7 10 2
The following feasible transportation pattern is proposed:

x11 = 10, x12 = 3, x22 = 9, x23 = 6, x33 = 9, x34 = 4, x44 = 9, x45 = 5.

Test whether these allocations involve least transportation cost. If not, determine the optimal
solution.

9. A company has four factories situated in four different locations in the state and four
company showrooms in four other locations outside the state. The per unit sale price,
transportation cost and cost of production is given in table below, along with weekly
requirement.

Cost of production
Factory Showrooms
(₹)
1 2 3 4
A 9 4 5 3 12
B 4 4 4 4 17
C 4 6 5 6 19
D 8 7 7 4 17

Weekly Capacity Weekly demand

Factory
(units) (units)
A 15 10
B 20 14
C 25 20
D 20 22
Determine the weekly distribution schedule to maximize the sales profits.

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10. Solve the given transportation problem to maximize profit.

Source Profit / unit Supply

1 2 3 4 5 6
A 65 30 77 31 65 51 200
B 60 51 65 42 64 76 225
C 70 62 21 71 45 52 125
Demand 45 55 40 60 25 70
11. A computer manufacturer has decided to launch an advertising campaign on television,
magazines and radio. It is estimated that maximum exposure for these media will be 70, 50,
and 40 million respectively. According to a market survey, it was found that the minimum
desired exposures within age groups 15-20, 21-25, 26- 30, 31-35 and above 35 are 10, 20, 25,
35 and 55 million respectively. The table below gives the estimated cost in paise per
exposure for each of the media. Determine an advertising plan to minimize the cost.

Media Age Groups

15-20 21-25 26-30 31-35 above 35
TV 14 9 11 11 12
Radio 11 7 6 7 8
Magazine 9 10 7 10 8
Solve the problem and find the optimal solution, i.e., maximum coverage at minimumcost.

12. A garment manufacturer has 4 units I, II, III, and IV, the production from which are
received by 4 direct customers. The weekly production of each manufacturing unit is 1200
units and all the units are of the same capacity. The company supplies the entire production
from one unit to one supplier. Since the customers are situated at different locations, the
transportation cost per unit varies. The unit cost of transportation is given in the table. As
per the company’s policy, the supply from unit B is restricted to customer 2 and 4, and from
unit D to customer 1 and 3. Solve the problem to cope with the supply and demand
constraints.

Manufacturing unit 1 2 3 4
A 4 6 8 3
B 4 – 5 –
C 6 5 5 9
D – 7 – 6

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13. Check whether the following transportation problem has an optimal allocation:

Warehouse

1 2 3 4 5 Supply
A 100 100
B 25 25
C 25 50 75
D 50 100 50 200
Dummy 100 100
Demand 150 50 50 100 150
14. A company dealing in home appliances has a sales force of 20 men who operate from
three distribution centers. The sales manager feels that 5 salesmen are needed to distribute
product line I, 6 to distribute product line II, 5 for product line III and 4 to distribute product
line IV. The cost (in ₹) per day of assigning salesmen from each of the offices are as
follows:

Product Line

I II III IV
A 10 12 13 9
Source B 9 11 12 13
C 7 8 9 10

Currently, 8 salesmen are available at center A, 5 at center B and 7 at center C. How many
salesmen should be assigned from each center to sell each product line, in order to minimize
the cost? Is the solution unique?

15. Solve the following degenerate transportation problem:

Destination
I II III Supply
A 7 3 4 2
Source B 2 1 3 3
C 3 4 6 5
Demand 4 1 5

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 16. Three water distribution tanks with daily capacities of 7, 6 and 9 lakh litres respectively,
supply three distribution areas with daily demands of 5, 8 and 9 lakh litres respectively.
Water is transported to the distribution areas through an underground network of pipelines.
The cost of transportation is ₹ 0.50 per 1000 litres per pipeline kilometer. The table shows the
pipeline lengths between the watertanks and the distribution areas.

Distribution Area
1 2 3
A 75 95 120

Source B 250 150 80

C 300 250 140

A. Formulate the transportation model

B. Determine the optimum distribution schedule.

5.13 REFERENCES
1. Render, B. E. Stair, R.M., Management Science: A self-correcting approach, Boston Allyn
and Bacon, Inc.
2. Bowman E., Production Scheduling by the transportation method of LP, “Operation
Research”.
3. Srinivasan V., “A transshipment model for cost management decision.” Management
Science, Vol. 20, June 1974.
4. Sadleir C.D., Use of Transportation Method of LP in Production Planning: A Case Study,
“Operation Research” Vol. 21. No. 4.
5. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT – 6 ASSIGNMENT MODEL
Structure:

6.0 Objectives

6.1 Introduction

6.2 Mathematical Structure of Assignment Problem

6.3 Network Representation of Assignment Problem

6.4 Types of Assignment Problem

6.5 Hungarian Method for Solving Assignment Problem

6.5.1 Unbalanced Assignment Problem

6.5.2 Restricted Assignment Problem

6.5.3 Maximisation Problem

6.6 Illustrations

6.7 Check Your Progress

6.8 Summary

6.9 Keywords

6.10 Questions for Self-Study

6.11 References

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6.0 OBJECTIVES
After studying this unit, you will be able to;

• State the types of assignment problem.

• Solve the assignment problem using Hungarian method.
• Convert the unbalanced assignment problem into balanced assignment problem.
• Solve maximisation assignment problem.

6.1 INTRODUCTION
In this unit we would be able to learn assignment of various work activities using various
methods of assignment problems, solving both maximization and minimization problems and both
bounded and unbounded solutions of assignment problem. The basic objective of an assignment
problem is to assign n number of resources to n number of activities so as to minimize the total
cost or to maximize the total profit of allocation in such a way that the measure of effectiveness is
optimized. The problem of assignment arises because available resources such as men, machines,
etc., have varying degree of efficiency for performing different activities such as job. Therefore
cost, profit or time for performing the different activities is different. Hence the problem is, how
should the assignments be made so as to optimize (maximize or minimize) the given objective.
The assignment model can be applied in many decision-making processes like determining
optimum processing time in machine operators and jobs, effectiveness of teachers and subjects,
designing of good plant layout, etc. This technique is found suitable for routing travelling salesmen
to minimize the total travelling cost, or to maximize thesales.

6.2 MATHEMATICAL STRUCTURE OF ASSIGNMENT PROBLEM

The structure of assignment problem of assigning operators to jobs is shown in Table 6.1

Table 6.1: Structure of Assignment Problem

Operator
1 2 …….. j ….. n
1 t11 t12 … t1j ……. t1n
2 t21 t22 …. t2j ……. t2n
Job . .
I ti1 ti2 tij tin
. . .
n tn1 tn2 tnj tnn

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Let n be the number of jobs and number of operators. tij be the processing time of job i taken by
operator j. A few applications of assignment problem are:

i. assignment of employees to machines.

ii. assignment of operators to jobs.

iii. effectiveness of teachers and subjects.

iv. allocation of machines for optimum utilization of space.

v. salesmen to different sales areas.

vi. clerks to various counters.

In all the cases, the objective is to minimize the total time and cost or otherwise maximize the sales
and returns.

6.3 NETWORK REPRESENTATION OF ASSIGNMENT PROBLEM

An assignment model is represented by a network diagram shown in Figure 6.1 for an
operator – job assignment problem, given in Table 6.2 the time taken (in mins.) by operators to
perform the job.

Table 6.2: Assignment Problem

Job
Operator
1 2 3
A 10 16 7
B 9 17 6
C 6 13 5
The assignment problem is a special case of transportation problem where all sources and
demand are equal to 1.

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 Source Destinatio
n
Operator 10
Job
A 16 1

1
Operator 17 Job Demand
Supply 1 2
B

13

Operator Job
C 3

Figure 6.1: Network Diagram for an Operator-job Assignment Problem

6.4 TYPES OF ASSIGNMENT PROBLEM

The assignment problems are of two types (i) balanced and (ii) unbalanced. If the number of
rows is equal to the number of columns or if the given problem is a square matrix, the problem is
termed as a balanced assignment problem. If the given problem is not a square matrix, the
problem is termed as an unbalanced assignment problem.

If the problem is an unbalanced one, add dummy rows /dummy columns as required so that
the matrix becomes a square matrix or a balanced one. The cost or time values for the dummy
cells are assumed as zero.

6.5 HUNGARIAN METHOD FOR SOLVING ASSIGNMENT PROBLEM

Step 1: In a given problem, if the number of rows is not equal to the number of columns and
vice versa, then add a dummy row or a dummy column. The assignment costs for
dummy cells are always assigned as zero.

Step 2: Reduce the matrix by selecting the smallest element in each row and subtract with other
elements in that row.

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Step 3: Reduce the new matrix column-wise using the same method as given in step 2.

Step 4: Draw minimum number of lines to cover all zeros.

Step 5: If Number of lines drawn = order of matrix, then optimally is reached, so proceed to
step 7. If optimally is not reached, then go to step 6.

Step 6: Select the smallest element of the whole matrix, which is NOT COVERED by lines.
Subtract this smallest element with all other remaining elements that are NOT
COVERED by lines and add the element at the intersection of lines. Leave the elements
covered by single line as it is. Now go to step 4.

Step 7: Take any row or column which has a single zero and assign by squaring it. Strike off the
remaining zeros, if any, in that row and column (X). Repeat the process until all the
assignments have been made.

Step 8: Write down the assignment results and find the minimum cost/time.

Note: While assigning, if there is no single zero exists in the row or column, choose any one
zero and assign it. Strike off the remaining zeros in that column or row, and repeat the
same for other assignments also. If there is no single zero allocation, it means multiple
number of solutions exist. But the cost will remain the same for different sets of
allocations.

6.5.1 UNBALANCED ASSIGNMENT PROBLEM

If the given matrix is not a square matrix, the assignment problem is called an unbalanced
problem. In such type of problems, add dummy row(s) or column(s) with the cost elements as
zero to convert the matrix as a square matrix. Then the assignment problem is solved by the
Hungarian method.

6.5.2 RESTRICTED ASSIGNMENT PROBLEM

In real practice, situations may arise where a particular machine cannot be assigned to an
operator because he may not be skilled enough to operate it. Because of this, no assignment is
made for the operator on that machine. This situation is overcome by assigning a large value, or
by assigning M. This will result in no assignment made to the restricted combinations.

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6.5.3 MAXIMIZATION PROBLEM

In maximization problem, the objective is to maximize profit, revenue, etc. Such problems can
be solved by converting the given maximization problem into a minimization problem.

i. Change the signs of all values given in the table.

ii. Select the highest element in the entire assignment table and subtract all the elements of the
table from the highest element.

6.6 ILLUSTRATIONS
Illustrations – 1:

Solve the following assignment problem and find the minimum cost.

Jobs I II III IV
Workers A 10 12 19 11
B 5 10 7 8
C 12 14 13 11
D 8 15 11 9
Solution:

Using Reduction Rules

Step 1: Row-wise Reduction of the matrix:

Jobs I II III IV
Workers A 0 2 9 1
B 0 5 2 3
C 1 3 2 0
D 0 7 3 1
Step 2: Column-wise Reduction of the matrix:

Jobs I II III IV
Workers A 0 0 7 1
B 0 3 0 3
C 1 1 0 0
D 0 5 1 1

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Step 3: Assignment of jobs to workers:

Jobs I II III IV
Workers A 0 0 7 1
B 0 3 0 3
C 1 1 0 0
D 0 5 1 1

Step 4: Calculation of the Minimum total job cost associated with the assignment:

Workers Jobs Total Cost (₹)

A II 12
B III 7
C IV 11
D I 8
Therefore Total job cost 38
Inference:

The minimum total cost required to complete the assignment is ₹ 38.

Illustration – 2:

A departmental head has 4 subordinates and 4 tasks are to be performed. Subordinates differ in
efficiency and tasks differ in their intrinsic difficulty. Time each man would take to perform each
task is given in the effective matrix. How the tasks should be allocated to each person so as to
minimize the total man hours?

Subordinates I II III IV
Tasks A 8 26 17 11
B 13 28 4 26
C 38 19 18 15
D 19 26 24 10
Solution:

Using Reduction Rules

Step 1: Row-wise reduction of the matrix:

Subordinates I II III IV
Tasks A 0 18 9 3
B 9 24 0 22
C 23 4 3 0
D 9 16 14 0
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Step 2: Column-wise reduction of the matrix:

Subordinates I II III IV
Tasks A 0 14 9 3
B 9 20 0 22
C 23 0 3 0
D 9 12 14 0
Step 3: Assignment of tasks to subordinates

Subordinates I II III IV
Tasks A 0 14 9 3
B 9 20 0 22
C 23 0 3 0
D 9 12 14 0
Step 4: Calculation of the minimum total man hours associated with the assignment:

Subordinates Tasks Total Man Hours

I A 8
II C 19
III B 4
IV D 10
41
Inference:

Therefore, the minimum man hours required to complete the assignment are 41.

Illustration – 3:

International Engineers Limited has 4 technicians each of whom is qualified to do any of the 4
jobs. However, the cost of 4 technicians on a job order basis is not the same and it is given in the
table below. The management wishes to assign the available technicians to the available jobs in
such a way that the total cost of doing jobs is minimized.

Cost matrix Job cost (₹)

Job Nos. 1 2 3 4
Technicians A 25 30 20 27
B 28 32 24 20
C 24 22 18 25
D 23 20 21 18

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Solution:

Using Reduction Rules

Step 1: Row-wise reduction of the matrix

Job Nos. 1 2 3 4
Technicians A 5 10 0 7
B 8 12 4 0
C 6 4 0 7
D 5 2 3 0
Step 2: Column-wise reduction of matrix.

Job Nos. 1 2 3 4
Technicians A 0 8 0 7
B 3 10 4 0
C 1 2 0 7
D 0 0 3 0
Step 3: Trial assignment of jobs to technicians.

Job Nos. 1 2 3 4
Technicians A 0 8 0 7
B 3 10 4 0
C 1 2 0 7
D 0 0 3 0
Step 4: Calculation of the minimum total cost associated with the assignment

Technicians Job Nos. Total Cost (₹)

A 1 25
B 4 20
C 3 18
D 2 20
83
Inference:

The minimum total cost required to complete the jobs by 4 technicians is ₹ 83.

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Illustration – 4:

Find the minimum cost through initial basic feasible solution.

Person A B C
Tasks 1 120 100 80
2 80 90 110
3 110 140 120
Solution:

Using Reduction Rules

Step 1: Row-wise reduction of the matrix.

Person A B C
Tasks 1 40 20 0
2 0 10 30
3 0 30 10
Step 2: Column-wise reduction of the matrix:

Person A B C
Tasks 1 40 10 0
2 0 0 30
3 0 20 10
Step 3: Trial assignment:

Persons A B C
Tasks 1 40 10 0
2 0 0 30
3 0 20 10
Step 4: Calculation of the minimum total cost associated with the assignment:

Persons Tasks Cost (₹)

A 3 110
B 2 90
C 1 80
Min. Total Cost 280
Inference:

Therefore, the total cost associated to perform the assignment by 3 persons is ₹ 280.

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Illustration – 5

National truck rendering service has a surplus of 1 truck in each of the cities 1,2,3,4,5 and 6 and
there deficit of 1 truck in each of the cities 7,8,9,10,11 and 12. The distances (km.) between the
cities with a surplus and cities with a deficit are displayed below.

To 7 8 9 10 11 12
From 1 31 62 29 42 15 41
2 12 19 39 55 71 40
3 17 29 50 41 22 22
4 35 40 38 42 27 23
5 19 80 29 16 2 23
6 72 30 30 50 41 20
How should the trucks be dispersed so as to minimize the total distance travelled?

Solution:

Using Reduction Rules

Step 1: Row-wise reduction of the matrix:

To 7 8 9 10 11 12
From 1 16 47 14 27 0 26
2 0 7 27 43 59 28
3 0 12 33 24 5 5
4 12 17 15 19 4 0
5 17 78 27 14 0 21
6 52 10 10 30 21 0
Step 2: Column-wise reduction of the matrix:

To 7 8 9 10 11 12
From 1 16 40 4 13 0 26
2 0 0 17 29 59 28
3 0 5 23 10 5 5
4 12 10 5 5 4 0
5 17 71 17 0 0 21
6 52 3 0 16 21 0

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Step 3: Trial assignment:

To 7 8 9 10 11 12
1 16 40 4 13 0 26
From 2 0 0 17 29 59 28
3 0 5 23 10 5 5
4 12 10 5 5 4 0
5 17 71 17 0 0 21
6 52 3 0 16 21 0
Step 4: Calculation of the total distance travelled:

From To Distance (Km.)

1 11 15
2 8 19
3 7 17
4 12 23
5 10 16
6 9 30
Distance Travelled = 120
Inference:

Therefore, the minimum total distance to be travelled by the trucks to reach their
destinations is 120 km. Maximisation Cases

Illustration – 6

Alpha Corporation has 4 plants, each of which can manufacture any one of the 4 products.
Production cost differs from one plant to another plant, so also the sales revenue. Given the
revenue and the cost data below, obtain which product each plant should produce to maximize
the profit.

Sales revenue (₹ In 000s)

Product 1 2 3 4
Plant A 50 68 49 62
B 60 70 51 74
C 55 67 53 70
D 58 65 54 69

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 Production cost(₹ in’ 000s)

Product 1 2 3 4
Plant A 49 60 45 61
B 55 63 45 69
C 52 62 49 68
D 55 64 48 66

Solution:

Case – A: Maximization matrix

Step 1: Determination of profit matrix:

Product 1 2 3 4
Plant A 1 8 4 1
B 5 7 6 5
C 3 5 4 2
D 3 1 6 3

Step 2: Conversion of profit matrix into cost matrix:

Product 1 2 3 4
Plant A 7 0 4 7
B 3 1 2 3
C 5 3 4 6
D 5 7 2 5

Using Reduction Rules

Step 3: Row-wise reduction of the matrix:

Product 1 2 3 4
Plant A 7 0 4 7
B 2 0 1 2
C 2 0 1 3
D 3 5 0 3

Step 4: Column-wise reduction of the matrix:

Product 1 2 3 4
Plant A 5 0 4 5
B 0 0 1 0
C 0 0 1 1
D 1 5 0 1

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Step 5: Trial Assignment:

Product 1 2 3 4
Plant A 5 0 4 5
B 0 0 1 0
C 0 0 1 1
D 1 5 0 1

Step 6: Determination of profit associated with the assignment:

Plant Product Total Profit (₹)

A 2 8,000
B 4 5,000
C 1 3,000
D 3 6,000
Total Profit 22,000
Case – B: When negative signs are used to make the optimal assignment

Step 1: Profit matrix with (-)ve signs:

Product 1 2 3 4
Plant A -1 -8 -4 -1
B -5 -7 -6 -5
C -3 -5 -4 -2
D -3 -1 -6 -3

Step 3: Row-wise reduction of the matrix:

Product 1 2 3 4
Plant A 7 0 4 7
B 2 0 1 2
C 2 0 1 3
D 3 5 0 3

Step 3: Column-wise reduction of the matrix:

Product 1 2 3 4
Plant A 5 0 4 5
B 0 0 1 0
C 0 0 1 1
D 1 5 0 1

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Step 4: Trial assignment:

Product 1 2 3 4
Plant A 5 0 4 5
B 0 0 1 0
C 0 0 1 1
D 1 5 0 1

Step 5: Determine of profit associated with the assignment:

Plant Product Total Profit (₹)

A 2 8,000
B 4 5,000
C 1 3,000
D 3 6,000
Total Profit 120
Inference:

Hence to get a maximum profit of ₹ 22,000, Alpha Corporation should produce 2

products in plant A, B should manufacture product 4, C plant should manufacture product 1 and
D plant should manufacture product 3.

Illustration – 7:

A company has 4 territories and 4 salesman available for assignment. The territories are not
qually rich in their sales potential; it is estimated that a typical salesman operating in each
territory would bring in the following annual sales:

Territory I II III IV
Annual Sales (₹ ) 60,000 50,000 40,000 30,000
Four salesmen are also considered to differ in their ability. It is estimated that working
under the same conditions, their yearly sales would be proportionately as follows:

Salesmen A B C D
Proportion 7 5 5 4
If the criterion is the maximum expected total sales cum the intuitive answer is to assign
the best salesman to the richest territory, the next best salesman to the second richest and so on.
Verify this answer by assignment model.

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Solution:

Step 1: Matrix showing the proportion of sales revenue:

Territory (in’000) I(6) II(5) III(4) IV(3)

Sales A (7) 42 35 28 21
B (5) 30 25 20 15
C (5) 30 25 20 15
D (4) 24 20 16 12
Step 2: Calculation of sales revenue associated with the assignment based on intuition

Salesman Territory Total Profit (₹)

A I 42,000
B II/III 25,000/20,000
C III/II 20,000/25,000
D IV 12,000
99,000
Step 3: Verification of the results intuitively found with the use of assignment model.

A. Conversion of sales revenue matrix into cost matrix.

Territory I II III IV
Salesman A 0 7 14 21
B 12 17 22 27
C 12 17 22 27
D 18 22 26 30

Step 4: Using reduction rules

Row-wise reduction of the matrix:

Territory I II III IV
Salesman A 0 7 14 21
B 0 5 10 15
C 0 5 10 15
D 0 4 8 12

Step 5: Column-wise reduction of the matrix:

Territory I II III IV
Salesman A 0 3 6 9
B 0 1 2 3
C 0 1 2 3
D 0 0 0 0

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Note: The above matrix which would have been used for making a trial assignment is not an
effective matrix because all the zeros either fall on a row or a column and further the
matrix cannot be reduced because each row has a zero element and each column has a
zero element respectively. Hence, Hungarian approach is to be used to over-come this
limitation.

B. Hungarian Approach:

Step 1:

Territory I II III IV
Salesman A 0 3 6 9
B 0 1 2 3
C 0 1 2 3
D 0 0 0 0
L1 L2

Step 2:

Territory I II III IV
Salesman A 0 2 5 8
B 0 0 1 2
C 0 0 1 2
D 1 0 0 0
Step 3: Further reduction of the matrix:

Territory I II III IV
Salesman A 0 2 5 8
B 0 0 1 2
C 0 0 1 2
D 0 0 0 0
L1 L2 L3

Step 4: Trial assignment:

Territory I II III IV
Salesman A 0 2 4 6
B 0 0 0 1
C 0 0 0 1
D 2 0 0 0

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 Step 5: Calculation of total sales revenue:

Salesman Territory Total Sales Revenue (₹ )

A I 42,000
B II/III 25,000/20,000
C III/II 20,000/25,000
D IV 12,000
99,000
Inference:

Thus, by following the above assignment schedule for allocating the territories to the 4 salesmen,
the sales revenue can be maximized to ₹ 99,000.

6.7 CHECK YOUR PROGRESS

1.Write True or False against each statement:

(a) Basic objective of an assignment problem is to assign n-number of resources to a

number of activities.

(b)Application of assignment problem is an allocation of machine for optimum utilization

of space.

(c) Hungarian method could also be applicable to transportation model.

(d)Assignment problem not consider the allocation of number of jobs to a number of

person.

(e) An optimal assignment is found, if the number of assigned cells equal the number of
row (columns).

2. Fill in the blank:

(a)Assignment model can be applied in many______.

(b)If the given matrix is not a______ matrix, the assignment problem is called
an______problem.

(c)Transportation model is used for ______values.

(d)A dummy job is an ______ job.

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Answers to Check Your Progress:

1. (a)True (b) True (c) False (d) False (e) True

2. (a)decision-making (b) square, unbalanced (c) assignment (d) imaginary

6.8 SUMMARY
So far we have learnt that assignment problem bring into play the allocation of a number
of jobs to a number of persons in order to minimize the completion time. Although an assignment
problem can be formulated as LPP, it solved by a special method known a Hungarian method. The
Hungarian method of assignment provides us with an efficient means of finding the optimal
solution without having to make a direct comparison of every option. Further we will take into
consideration the opportunity cost. This is a next best alternative cost.

6.9 KEYWORDS
Balanced Assigned Problem : It is assignment problem where the number of
facilities is equalities is equal to the number of jobs.

Unbalanced Assignment Problem : It is an assignment problem is where the number of

facilities is not equal to the number of jobs.

Hungarian Method : It is used to find the minimum cost in assignment

problems that involve assigning people to activities.

Dummy Job : It is running without job control and without its

own action within entire operations.

Opportunity Cost : It is loss of other alternatives when one alternative

is chosen.

6.10 QUESTIONS FOR SELF-STUDY

1. What is an assignment problem? Give its areas of application.

2. Explain the structure of an assignment problem with objectives as maximization and

minimization.

3. How can an assignment problem be solved using linear programming? Illustrate with a
suitable example.

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 4. Explain the steps involved in solving an assignment problem.

5. What is meant by an unbalanced assignment problem?

6. How is an assignment problem solved when certain assignments are restricted?

7. What is the difference between a multiple and a unique solution in an assignment problem?

8. How is a maximization problem dealt with, in solving assignment problems?

9. What is Travelling-salesman problem? How does it differ from an assignment problem?

10. Discuss how assignment problems are solved using transportation model.

Exercise Problems:

1. Consider the assignment problem having the following cost table:

Job
Men 1 2 3
A 7 9 6
B 5 8 7
C 4 5 6
a. Draw the network representation of the problem.

b. Solve the problem and determine the optimal assignment for each man.

2. Consider the assignment problem having the following table. Find the optimal solution
that minimizes the total cost:

Job
Operator 1 2 3 4 5
A 12 14 16 11 10
B 9 13 17 9 7
C 10 12 20 7 8
D 13 10 21 6 12
E 15 9 15 11 13

3. Four trucks are used for transporting goods to four locations. Because of varying costs of
loading and unloading the goods, the cost of transportation also varies for each truck. The
cost details (in ₹) is given in the table below. There is no constraint, and any truck can be
sent to any location. The objective is to assign the four trucks to minimize the total
transportation cost. Formulate and solve the problem.

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 Location
Truck 1 2 3 4
A 525 825 320 200
B 600 750 250 175
C 500 900 270 150
D 620 800 300 160

4. A two-wheeler service station head has four workmen and four tasks to be performed
daily as a routine work. Before assigning the work, the service station head carried out a
test by giving each work to all the workmen. The time taken by workmen is given in the
table, below.

Time Taken (in mins)

Work Workman
1 2 3 4
A 20 28 19 13
B 15 30 16 23
C 40 17 20 13
D 17 28 22 8

How should the service station head assign the work to each workman so as to minimize
the total time?

5. Consider an unbalanced assignment problem having the following cost table:

Task
Operator 1 2 3 4
A 12 14 15 16
B 10 11 13 21
C 8 9 17 23

6. Consider the following assignment problem:

Destination Unit cost (₹) Supply

1 2 3 4
Source
1 30 61 45 50 1
2 25 54 49 52 1
3 27 60 45 54 1
4 31 57 49 55 1
Demand 1 1 1 1

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 a. Draw the network representation of the assignment problem.

b. Formulate a linear programming model for the assignment problem.

7. Five operators have to be assigned to five machines. Depending on the efficiency and
skill, the time taken by the operators differs. Operator B cannot operate machine 4 and
operator D cannot operator machine 2. The time taken is given in the following table.

Machine
Operator 1 2 3 4 5
A 6 6 3 --- 5
B 6 7 2 5 3
C 5 6 4 6 4
D 7 --- 7 6 7
E 5 4 3 6 5

Determine the optimal assignment.

8. A consumer durables manufacturing company has plans to increase its product line,
namely, washing machine, refrigerator, television and music system. The company is
setting up new plants and considering four locations. The demand forecast per month for
washing machine, refrigerator, television and music system are 1000, 750, 850 and 1200,
respectively. The company decides to produce the forecasted demand. The fixed and
variable cost per unit for each location and item is given in the following table. The
management has decided not to set-up more than one unit in one location.

Location Fixed cost (lakhs) Variable cost / unit

WM RF TV MS WM RF TV MS
Chennai 30 35 18 16 4 3 6 2
Coimbatore 25 40 16 12 3 2 4 4
Madurai 35 32 15 10 4 2 7 6
Selam 20 25 14 12 2 1 3 7

Determine the location and product combinations so that the total cost is minimized.

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 9. Solve the following travelling salesman problem so as to minimize the cost of travel.

City
A B C D E
A -- 13 22 21 11
B 2 -- 11 16 3
C 9 9 -- 20 10
D 13 12 27 -- 16
E 12 10 28 26 --

10. Solve the travelling salesman problem for the given matrix cell values which represent
the distances between cities.

C12 = 31, C13 = 10, C14 = 15,

C21 = 9, C23 = 12, C31 = 10,

C34 = 9, C41 = 18, C42 = 25.

There is no route between cities i and j if value for Cij is not given.

6.11 REFERENCES
1. Ross, G.T. and Soaland, R.H, “Modeling facility location problem as generalized
assignment problems”, Management Science.
2. U.L. Gupta, D.T. Lee, J.T. Leung, An optimal solution for the channel-assignment
problem.
3. Abara J., Applying Integer Linear Programming to the Fleet Assignment Problem,
Interfaces, Vol. 19, No. 41, pp. 20-28.
4. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT – 7 NETWORK ANALYSIS - I
Structure:

7.0 Objectives

7.1 Introduction

7.2 Basic Terms

7.3 Errors to be avoided in Constructing a Network

7.4 Rules in Constructing a Network

7.5 Numbering the Events using Fulkerson’s Rule

7.6 Constructing a Network (Illustrations)

7.7 Check Your Progress

7.8 Summary

7.9 Keywords

7.10 Questions for Self-Study

7.11 References

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7.0 OBJECTIVES

After studying this unit, you will be able to;

• State the rules for constructing a network.

• Number the events using Fulkerson’s Rule.
• Avoid the errors while constructing a network.
• Construct a network diagram.

7.1 INTRODUCTION

In the previous units, we had focused on finding optimum solution using transportation
model and assignment model. This unit concentrates on analyzing the project using network
analysis. Any project involves planning, scheduling and controlling a number of interrelated
activities with use of limited resources, namely, men, machines, materials, money and time. The
projects may be extremely large and complex such as construction of a power plant, a highway, a
shopping complex, ships and aircraft, introduction of new products and research and
development projects. It is required that managers must have a dynamic planning and scheduling
system to produce the best possible results and also to react immediately to the changing
conditions and make necessary changes in the plan and schedule. A convenient analytical and
visual technique of PERT and CPM prove extremely valuable in assisting the managers in
managing the projects.
Both the techniques use similar terminology and have the same purpose. PERT stands for
Project Evaluation and Review Technique developed during 1950’s. The technique was
developed and used in conjunction with the planning and designing of the Polaris missile project.
CPM stands for Critical Path Method which was developed by DuPont Company and applied
first to the construction projects in the chemical industry. Though both PERT and CPM
techniques have similarity in terms of concepts, the basic difference is, PERT is used for analysis
of project scheduling problems. CPM has single time estimate and PERT has three time
estimates for activities and uses probability theory to find the chance of reaching the scheduled
time.

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Project management generally consists of three phases.
• Planning: Planning involves setting the objectives of the project. Identifying various
activities to be performed and determining the requirement of resources such as men,
materials, machines, etc. The cost and time for all the activities are estimated, and a
network diagram is developed showing sequential interrelationships (predecessor and
successor) between various activities during the planning stage.
• Scheduling: Based on the time estimates, the start and finish times for each activity are
worked out by applying forward and backward pass techniques, critical path is identified,
along with the slack and float for the non-critical paths.
• Controlling: Controlling refers to analyzing and evaluating the actual progress against the
plan. Reallocation of resources, crashing and review of projects with periodical reports are
carried out.

7.2 BASIC TERMS

To understand the network techniques one should be familiar with a few basic term of which
PERT and CPM are special applications.
1. Network: It is the graphical representation of logically and sequentially connected arrows
and modes representing activities and events of a project. Networks are also called arrow
diagram.
2. Activity: An activity represents an action and consumption of resources (time, money,
energy) required to complete a portion of a project. Activity is represented by an arrow,
(Figure 7.1).

A
i j A is called as an Activity

Figure 7.1: An Activity

3. Event: An event (or node) will always occur at the beginning and end of an activity. The
event has no resources and is represented by a circle. The ith event and jth event are the tail
event and head event respectively, (Figure 7.2).

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 A
i j

Tail Event Head Event

Figure 7.2: An Event

4. Merge and Burst Events: One or more activities can start and end simultaneously at an
event (Figure 7.3 a, b).

i j

(a) Merge Event (b) Burst Event

Figure 7.3 Merge and Burst Event

5. Preceding and Succeeding activities: Activities performed before given events are known
as preceding activities (Figure 7.4), and activities performed after a given event are known
as succeeding activities

i j
i j

Figure 7.4: Preceding and Succeeding Activities

Activities A and B precede activities C and D respectively.
6. Dummy Activity: An imaginary activity which does not consume any resource and time is
called a dummy activity. Dummy activities are simply used to represent a connection
between events in order to maintain a logic in the network. It is represented by a dotted line
in a network, see Figure 7.5.

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 3
B
A
2 Dummy
1

C 4

Figure 7.5: Dummy Activity

7.3 ERRORS TO BE AVOIDED IN CONSTRUCTING A NETWORK
a. Two activities starting from a tail event must not have a same end event. To ensure this, it
is absolutely necessary to introduce a dummy activity, as shown in Figure 7.6.

Dummy

A
1 2 1 2

Incorrect Correct

Figure 7.6: Correct and Incorrect Activities

b. Looping error should not be formed in a network, as it represents performance of
activities repeatedly in a cyclic manner, as shown below in Figure 7.7.

Incorrect

Figure 7.7: Looping Error

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 c. In a network, there should be only one start event and one ending event as shown below, in
Figure 7.8.

Dummy

A
1 2 1 2

Figure7.8: Only One Start and End Event

d. The direction of arrows should flow from left to right avoiding mixing of direction as
shown in Figure 7.9.

Incorrect
Figure 7.9 Wrong Direction of Arrows

7.4 RULES IN CONSTRUCTING A NETWORK

1. No single activity can be represented more than once in a network. The length of an
arrow has no significance.

2. The event numbered 1 is the start event and an event with highest number is the end
event. Before an activity can be undertaken, all activities preceding it must be completed.
That is, the activities must follow a logical sequence (or – inter- relationship) between
activities.

3. In assigning numbers to events, there should not be any duplication of event numbers in a
network.

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4. Dummy activities must be used only if it is necessary to reduce the complexity of a
network.

5. A network should have only one start event and one end event.

Some conventions of network diagram are shown in Figure 8.10 (a), (b), (c), (d) below:

(a) Activity B can be performed

only after completing activity A,
B C and activity C can be performed
only after completing activity B.
(b) Activities B and C can start
simultaneously only after
completing A.

(c) Activities A and B must be

completed before start of
activity C.

(d) Activity C must start only after

completing activities A and B.
But activity D can start after

Figure 7.10 (a), (b), (c), (d): Some Conventions followed in making Network Diagrams

7.5 NUMBERING THE EVENTS USING FULKERSON’S RULE

After then network is drown in a logical sequence, every event is assigned a number. The
number sequence must be such so as to reflect the flow of the network. In numbering the events,
the following rules should be observed.

After the network is drown in a logical sequence every event is assigned a number. The
number sequence must be such so as to reflect the flow of the network. In numbering the events
the following rules should be observed.

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 (i) Event number should be unique.
(ii) Event numbering should be carried out on a sequential basis from left to right.
(iii)The initial event which has all outing arrows with no incoming arrow is numbered as 1.
(iv) Delete all arrows emerging from all the numbered events. This will create at least one
new start event out of the preceding events.
(v) Number all new start events 2,3 and so on. Repeat this process until all the terminal
event without any successor activity is reached.
Number the terminal node suitably.

Note: The head of an arrow should always bear a number higher than the one assigned to the tail
of the arrow.
7.6 CONSTRUCTING A NETWORK (ILLUSTRATIONS)
Illustration - 1:
Draw a network for a house construction project. The sequence of activities with their
predecessors are given in Table 7.1, below.

Table 7.1: Sequence of Activities for House Construction Project

Name Starting Description of activity Predeces Time

of the and sor duratio
activity finishing n (days)
event
A (1,2) Prepare the house plan -- 4
B (2,3) Construct the house A 58
C (3,4) Fix the door / windows B 2
D (3,5) Wiring the house B 2
E (4,6) Paint the house C 1
F (5,6) Polish the doors / windows D 1

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Solution:

Prepare the 4
house plan
house
6
1 2 3

D
5
Wiring the

Figure 7.11: Network diagram representing house construction project.

The network diagram in Figure 7.11 shows the procedure relationship between the
activities. Activity A (preparation of house plan), has a start event 1 as well as an ending event 2.
Activity B (Construction of house) begins at event 2 and ends at event 3. The activity B cannot
start until activity A has been completed. Activities C and D cannot begin until activity B has
been completed, but they can be performed simultaneously. Similarly, activities E and F can start
only after completion of activities C and D respectively. Both activities E and F finish at the end
of event 6.

Illustration 2:

Consider the project given in Table 7.2 and construct a network diagram.

Table 7.2: Sequence of Activities for Building Construction Project

Activi Descript Predeces
ty ion sor
A Purchase of Land -
B Preparation of building plan -
C Level or clean the land A
D Register and get approval A, B
E Construct the building C
F Paint the building D
Solution:

The activities C and D have a common predecessor A. The network representation shown
in Figure 7.12 (a), (b) violates the rule that no two activities can begin and end at the same

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events. It appears as if activity B is a predecessor of activity C, which is not the case. To
construct the network in a logical order, it is necessary to introduce a dummy activity as shown
in Figure 7.12.

7.12(a)

A C E

B D F

Figure 7.12 (a) & (b):Network representing the Error

C
E
A

DUMMY

B F
D

Figure 7.13: Correct representation of Network using Dummy Activity

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Illustration - 3:
Construct a network for a project whose activities and their predecessor relationship are given in
Table 7.3.

Table 7.3: Activity Sequence for a Project

Activity A B C D E F G H I J K
Predecessor - - - A B B C D E H, I F, G
Solution:

The network diagram for the given problem is shown in Figure 8.14 with activities A, B and C
starting simultaneously.

D H
2 5 8
J
A
I
B E
1 3 6 9
F

C K
4 7
G

Figure 7.14: Network Diagram

Illustration - 4:
Draw a network diagram for a project given in Table 8.4.
Table 7.4: Project Activity Sequence
Activity A B C D E F G H I J K L
Immedia - A B A D C, E D D H H F, H G,
te J
Predeces
sor

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Solution:
An activity network diagram describing the project is shown in Figure 8.15, below:

C F I
F F
B K
S
A E Dummy
o
H J l
u
D L
t
i
G o
Figure 7.15: Network Diagram n
:
7.7 CHECK YOUR PROGRESS
A
Write true or false against each statement: n

1. Network should have only one start event and one end event. a
2. An imaginary activity always consumes resource and time. c
t
3. Two important components of any activity are cost and time. i
v
4. Network Analysis involved in planning, scheduling and controlling.
i
t
Answer to your Check Your Progress: y
1) True
n
2) False e
t
3) True
w
4) True. o
r
7.8 SUMMARY k

Network analysis, as stated above, is a technique related to sequencing

d problems which
i
are linked with minimizing same measure of performance of the system like the total
a
consumption time of the project. This is a very productive technique for gdescribing the elements
r
in a complex situation for purpose of designing, coordinating, planning,a analysing, controlling
m
and making decision. The new most popular form of network analysis is PERT and CPM.
d
e
s
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r
i
b
i
7.9 KEYWORDS
Critical path : Is a network and a continuous chain of activities
that connect the initial event to the terminal event.

Activity : An activity represents an action and consumption of

sources.

Arrow : Direction shows the general progression in time.

Network : Is a series of related activities which result in once

produces (or services). It is a pictorial presentation
of the various events and activities covering a
project.

Event : An event represents the start or completion of

activity.

7.10 QUESTIONS FOR SELF-STUDY

1. Explain the logic in constructing a network diagram. What are the network
components?

2. List out the rules in constructing a network diagram.

3. What is a dummy activity?

4. What are critical path activities and why are they considered important?

Exercise Problems

1. You are required to prepare a network diagram for constructing a 5 floor apartment. The
major activities of the project are given as follows:

Activity Description Immediate

Predecessor
A Selection of site -
B Preparation of drawings -
C Arranging the for finance A
D Selection of contractor A
E Getting approval from A
Govt.
F Laying the foundation E

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 G Start construction D, F
H Advertise in newspaper B, C
I Allocation of tenants G, H

2. An assembly having the following sequence of activities given along with their
predecessor in the table below. Draw a network diagram for the assembly.

Activit Description Predecess

y or
A Pick bolt & washer -
B Insert washer in screw A
C Fix the bolt in flange A
D Screw the nut with bolt B, C
E Pick the spanner D
F Tighten the nut E
G Place the assembly F
apart

3. Draw a network diagram for the project:

Activity A B C D E F G H I J
Predecessor - A B B B C C F, G D, E, F I

7.11 REFERENCES
1. Bierman and Hausman, Quantitative Analysis for Business Decision.

2. Billy E Gillert, "Introduction to OR"

3. Franklyn A Lindsay, "New Technique for Management Decision-making"

4. Herbert G. Hicks, "New Management of Organisation".

5. Joseph L. Massie, "Essentials of Management."

6. Acnoff R. L. and Sasieni M. W., "Fundamentals of OR".

7. Norbert Lloyd, Enrich, "Management OR".

8. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT – 8 NETWORK ANALYSIS - II
Structure:

8.0 Objectives

8.1 Introduction

8.2 Critical Path Analysis

8.3 Determination of Float and Slack Times

8.4 Certificate Path Method (CPM)

8.5 Project Evaluation Review Technique (PERT)

8.6 Cost Analysis

8.7 Project Crashing

8.8 Check Your Progress

8.9 Summary

8.10 Keywords

8.11 Questions for Self-Study

8.12 References

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8.0 OBJECTIVES
After studying this unit, you will be able to;

• Bring out the procedure for computation forward pass and backward pass.
• Determine floats and slack times.
• Identify the critical path using Critical Path Method (CPM).

8.1 INTRODUCTION
In the pervious unit, we learnt the basic of network analysis and how to draw a network.
Network analysis is a method of studying the relationships between entities in a network. It
involves analyzing the connections, or between the entities, as well as the characteristics of the
entities themselves. Network Analysis is useful in many living application tasks. It helps us in
deep understanding the structure of relationship in social networks, a structure of process of
change in natural phenomenon, or even the analysis of biological systems of organisms. A
crucial application of network analysis is identifying the important node in a network. This task
is called Measuring Network Centrality. In social network analysis, it can refer to the task of
identifying member, or the representative of the group. Network analysis also plays important
role in time series analysis, natural language processing, telecommunication network analysis,
etc. Recently, the technology of Machine Learning (Deep Learning) is also used in network
analysis. Thus, this unit we are going to discuss the various network model like Critical Path
Method (CPM) and Project Evaluation Review Technique (PERT).

8.2 CRITICAL PATH ANALYSIS

The critical path for any network is the longest path through the entire network. Since all
activities must be completed to complete the entire project, the length of the critical path is also
the shortest time allowable for completion of the project. Thus if the project is to be completed in
that shortest time, all activities on the critical path must be started as soon as possible. These
activities are called critical activities. If the project has to be completed ahead of the schedule,
then the time required for at least one of the critical activity must be reduced. Further, any delay
in completing the critical activities will increase the project duration.

The activity, which does not lie on the critical path, is called non-critical activity. These
non-critical activities may have some slack time. The slack is the amount of time by which the

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start of an activity may be delayed without affecting the overall completion time of the project.
But a critical activity has no slack. To reduce the overall project time, it would require more
resources (at extra cost) to reduce the time taken by the critical activities to complete.

Scheduling of Activities: Earliest Time and Latest Time

Before the critical path in a network is determined, it is necessary to find the earliest and latest
time of each event to know the earliest expected time (TE) at which the activities originating
from the event can be started and to know the latest allowable time (TL) at which activities
terminating at the event can be completed.

Forward Pass Computations (To calculate Earliest Time TE)

Procedure

Step 1: Begin from the start event and move towards the end event.

Step 2: Put TE = 0 for the start event.

Step 3: Go to the next event (i.e node 2) if there is an incoming activity for event 2, add
calculate TE of previous event (i.e event 1) and activity time. Note: If there are
more than one incoming activities, calculate TE for all incoming activities and
take the maximum value. This value is the TE for event 2.

Step 4: Repeat the same procedure from step 3 till the end event.

Backward Pass Computations (to calculate Latest Time TL)

Procedure

Step 1: Begin from end event and move towards the start event. Assume that the direction
of arrows is reversed.

Step 2: Latest Time TL for the last event is the earliest time. TE of the last event.

Step 3: Go to the next event, if there is an incoming activity, subtract the value of TL of
previous event from the activity duration time. The arrived value is TL for that
event. If there are more than one incoming activities, take the minimum TE value.

Step 4: Repeat the same procedure from step 2 till the start event.

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8.3 DETEMINATION OF FLOAT AND SLACK TIMES
As discussed earlier, the non – critical activities have some slack or float. The float of an activity
is the amount of time available by which it is possible to delay its completion time without
extending the overall project completion time.

For an activity i = j, let

tij = duration of activity

TE = earliest expected time

TL= latest allowable time

ESij = earliest start time of the activity

EFij = earliest finish time of the activity

LSij = latest start time of the activity

LFij = latest finish time of the activity

Total Float (TFij): The total float of an activity is the difference between the latest start time and
the earliest start time of that activity.

TFij = LS ij– ESij --------------------------------------------------- (1)

or

TFij = (TL – TE) – tij ---------------------------------------------- (2)

Free Float (FFij): The time by which the completion of an activity can be delayed from its
earliest finish time without affecting the earliest start time of the succeeding activity is called
free float.

FFij = (Ej – Ei) – tij ----------------------------------------------- (3)

FFij = Total float – Head event slack

Independent Float (IFij): The amount of time by which the start of an activity can be delayed
without affecting the earliest start time of any immediately following activities, assuming that the
preceding activity has finished at its latest finish time.

IFij = (Ej – Li) – tij ------------------------------------------------ (4)

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IFij = Free float – Tail event slack

Where tail event slack = Li – Ei

The negative value of independent float is considered to be zero.

8.4 CRITICAL PATH METHOD (CPM)

The iterative procedure of determining the critical path is as follows.

Step 1: List all the jobs and then draw arrow (network) diagram. Each job is indicated by an
arrow with the direction of the arrow showing the sequence of jobs. The length of the arrows has
no significance. The arrows are placed based on the predecessor, successor, and concurrent
relation within the job.

Step 2: indicate the normal time (tij) for each activity (I, j) above the arrow which is
deterministic.

Step 3: Calculate the earliest start time and the earliest finish time for each event an write time Ei
for each event I in the . Also calculate the latest finish and latest start time. From this we
calculate the latest time Lj for each event j and put in the .

Step 4: Tabulate the various times namely normal time, earliest time and latest time on the arrow
diagram.

Step 5: Determine the total float for each activity by taking the difference between the earliest
start and the latest start time.

Step 6: Identify the critical activities and connect them with the beginning event and the ending
event in the network diagram by double line arrows. Which gives the critical path.

Step 7: Calculate the total project duration.

Note: the earliest start, finish time of an activity, and the latest start, finish time of an activity are
shown in the table. These are calculated by using the following hints.

To find the earliest time we consider the tail event of the activity. Let the starting time of
the project namely ESi = 0. Add the normal time with the starting time to get earliest finish time.
The earliest starting time for the tail event of the next activity is given by the maximum of the
earliest finish time for the head event of the previous activity.

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 Similarly, to get the latest time, we consider the head event of the activity.

The latest finish time of the head event of the final activity is given by the target time of
the project. The latest start time can be obtained by subtracting the normal time of that activity.
The latest finish time for the head event of the next activity is given by the minimum of the latest
start time for the tail event of the previous activity.

Illustration - 1:

A project schedule has the following characteristics as shown in Table 8.1.

Table 8.1: Project Schedule

Activity Name Time Activity Name Time (days)
1-2 A 4 5-6 G 4
1-3 B 1 5-7 H 8
2-4 C 1 6-8 I 1
3-4 D 1 7-8 J 2
3-5 E 6 8-10 K 5
4-9 F 5 9-10 L 7
i. Construct network diagram.

ii. Compute TE and TL for each activity.

iii. Find the critical path.

Solution:

(i) From the data given in the problem, the activity network is constructed as shown in
Figure 8.1

1 5
2 4 9
7
4 5 10
1 7 2
1 8
8 1
1 3 6 5 4
6

Figure 8.1: Activity Network Diagram

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(ii) To determine the critical path, compute the earliest, time TE and latest time TL for each of
the activity of the project. The calculations of TE and TL are as follows:

To calculate TE for all activities,

TE1 = 0

TE2 = TE1 + t1, 2 = 0 + 4 = 4

TE3 = TE1 + t1, 3 = 0 + 1 =1

TE4 = max (TE2 + t2, 4 and TE3 + t3, 4)

= max (4 + 1 and 1 + 1) = max (5, 2)

=5days

TE5 = TE3 + t3, 6 = 1 + 6 = 7

TE6 = TE5 + t5, 6 = 7 + 4 = 11

TE7 = TE5 + t5, 7 = 7 + 8 = 15

TE8 = max (TE6 + t6, 8 and TE7 + t7, 8)

= max (11 + 1 and 15 + 2) = max (12, 17)

= 17 days

TE9 = TE4 + t4, 9 = 5 + 5 = 10

TE10 = max (TE9 + t9, 10 and TE8 + t8, 10)

= max (10 + 7 and 17 + 5) = max (17, 22)

= 22 days

To calculate TL for all activities

TL10 =TE10 = 22

TL9 = TE10 – t9,10 = 22 – 7 = 15

TL8 = TE10 – t8, 10 = 22 – 5 = 17

TL7 = TE8 – t7, 8 = 17 – 2 = 15

TL6 = TE8 – t6, 8 = 17 – 1 = 16

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TL5 = min (TE6 – t5, 6 and TE7 – t5, 7)

= min (16 – 4 and 15 –8) = min (12, 7)

= 7 days

TL4 = TL9 – t4, 9 = 15 – 5 =10

TL3 = min (TL4 – t3, 4 and TL5 – t3, 5 )

= min (10 – 1 and 7 – 6) = min (9, 1)

= 1 day

TL2 = TL4 – t2, 4 = 10 – 1 = 9

TL1 = Min (TL2 – t1, 2 and TL3 – t1, 3)

= Min (9 – 4 and 1 – 1) = 0

Table 8.2: Various Activities and their Floats

Activity Normal Earliest Time Latest Time Total

Activity
Name Time Start Finish Start Finish Float

1-2 A 4 0 4 5 9 5
1-3 B 1 0 1 0 1 0
2-4 C 1 4 5 9 10 5
3-4 D 1 1 2 9 10 8
3-5 E 6 1 7 1 7 0
4-9 F 5 5 10 10 15 5
5-6 G 4 7 11 12 16 5
5-7 H 8 7 15 7 15 0
6-8 I 1 11 12 16 17 5
7-8 J 2 15 17 15 17 0
8-10 K 5 17 22 19 22 0
9-10 L 7 10 17 15 22 5

(iii) From the Table 8.2, we observe that the activities 1 – 3, 3 – 5, 5 – 7,7 – 8 and 8 – 10
are critical activities as their floats are zero.

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 5 10 10 15
TE TL TE TL
1 5
0 0 22 22
15 15
10

17 17

1 1 7 11 16

Figure 8.2: Critical Path of the Project

The critical path is 1-3-5-7-8-10 (shown in double line in Figure 8.2) with the project duration of
22 days

Illustration- 2:
The following Table 8.3 gives the activities in construction project and timeduration.

Table 8.3: Project Schedule with Time Duration

Activity Preceding Activity Normal time (days)

1-2 - 20
1-3 - 25
2-3 1-2 10
2-4 1-2 12
3-4 1-3,2-3 5
4-5 2-4,3-4 10
a. Draw the activity network of the project.

b. Find the total float and free float for each activity.

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Solution:

a. From the activity relationship given, the activity network is shown in Figure 8.3below:

Figure 8.3: Activity Network Diagram

b. The total and free floats for each activity are calculated as shown in Table 8.4

Table 8.4: Calculation of Total and Free Floats

Normal time Earliest Time Latest Time Float

Activity
(days) Start Finish Start Finish Total Free
1-2 20 0 20 0 20 0 0
1-3 25 0 25 5 30 5 5
2-3 10 20 30 20 30 0 0
2-4 12 20 32 23 35 3 3
3-4 5 30 35 30 35 0 0
4-5 10 35 45 35 45 0 0
Illustration - 3:

Draw the network for the following project given in Table 8.5.

Table 8.5 Project Schedule

Activity Preceded by Initial Duration (weeks)

activity
a - 10
b A 9
c A 7
d B 6
e B 12
f C 6
g C 8
h F 8

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 i D 4
j G,H 11
k E 5
l I 7
Number the events by Fulkerson’s rule and find the critical path. Also find the time for
completing the project.

Solution:

The network is drawn as shown in Figure 8.4 using the data provided. Number the events using
Fulkerson’s rule and find the Earliest and Latest time and total float is computed for each activity
to find out the critical path as given Table 8.6.

Table 8.6: TL, TL and TFij Calculated

Activity Duration Earliest Time Latest Time Total

weeks Float
Start Finish Start Finish
a 10 0 10 0 10 0
b 9 10 19 16 25 6
c 7 10 17 10 17 0
d 6 19 25 25 31 6
e 12 19 31 25 37 6
f 6 17 23 17 23 0
g 8 17 25 23 31 6
h 8 23 31 23 31 0
i 4 25 29 31 35 6
j 11 31 42 31 42 0
k 5 31 36 37 42 6
l 7 29 36 35 42 6

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 19 25 25 31 29 35

d i
3 5 10

0 0 b l
e
1 a 2 k
6 11

10 10 25 31 42 42
8
c Dummy j
g

4 f 7 9
h
31 31
17 17 23 23

Figure 8.4: Activity Network Diagram

The critical path is a – c – f – h– j and the minimum time for the completion of the project is 42
weeks.
8.5 PROJECT EVALUATION REVIEW TECHNIQUE (PERT)
In the critical path method, the time estimates are assumed to be known with certainty. In certain
projects like research and development, new product introductions, it is difficult to estimate the
time of various activities. Hence PERT is used in such projects with a probabilistic method using
three time estimates for an activity, rather than a single estimate, as shown in Figure 8.5.
Probability

Optimistic time (tO)

Pessimistic time (tp)

Most likely time (tm)

Expected time (te)

(te)©©

Time duration of activity

Figure8.5: PERT Using Probability Method with 3 Time Estimates

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Optimistic time tO:

It is the shortest time taken to complete the activity. It means that if everything goes well then
there is more chance of completing the activity within this time.

Most likely time tm:

It is the normal time taken to complete an activity, if the activity were frequently repeated under
the same conditions.

Pessimistic time tp:

It is the longest time that an activity would take to complete. It is the worst time estimate that an
activity would take if unexpected problems are faced.

Taking all these time estimates into consideration, the expected time of an activity is arrived at.

The average or mean (ta) value of the activity duration is given by,
t0 + 4tm + tp
Ta = ……………………….(5)
6

The variance of the activity time is calculated using the formula,

t0 + 4tm + tp
Ta = ……………………….(6)
6

Probability for Project Duration

The probability of completing the project within the scheduled time (Ts) or contracted time may
be obtained by using the standard normal deviate where Te is the expected time of project
completion.
Ts−Te
Z0 = ………………………. (7)
√∑ 2 𝑖𝑛 𝑐𝑟𝑖𝑡𝑖𝑐𝑎𝑙 𝑝𝑎𝑡ℎ

Probability of completing the project within the scheduled time is,

P (T< Ts) = P ( Z< Z0 ) (from normal tables) ………………………. (8)

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Illustration – 4:

An R & D project has a list of tasks to be performed whose time estimates are given in the Table
8.7, as follows.

Table 8.7: Time Estimates for R & D Project

Activity Activity Name T0 tm tp

i j ( in days)
1-2 A 4 6 8
1-3 B 2 3 10
1-4 C 6 8 16
2-4 D 1 2 3
3-4 E 6 7 8
3-5 F 6 7 14
4-6 G 3 5 7
4-7 H 4 11 12
5-7 I 2 4 6
6-7 J 2 9 10
a. Draw the project network.
b. Find the critical path.
Solution:

Calculate the time average ta and variances of each activity as shown in Table 8.8.
Table 8.8: T & s2 Calculated

Activity To Tm Tp Ta 2
1-2 4 6 8 6 0.444
1-3 2 3 10 4 1.777
1-4 6 8 16 9 2.777
2-4 1 2 3 2 0.111
3-4 6 7 8 7 0.111
3-5 6 7 14 8 1.777
4-6 3 5 7 5 0.444
4-7 4 11 12 10 1.777
5-7 2 4 6 4 0.444
6-7 2 9 10 8 1.777
Time expected for each activity is calculated using the formula (5):

t 0 + 4t m + t p
Ta =
6

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 4+ 4(6)+ 8 36
= =
6 6

= 6 days for activity A

Similarly, the expected time is calculated for all the activities.

The variance of activity time is calculated using the formula (6).

2
(Tp − T0 )
2 =
6
(8 − 4)2
=
6
= 0.444

Similarly, variances of all the activities are calculated. Construct a network diagram and calculate
the time earliest, TE and time Latest TL for all the activities

6 9

2 16 16
6
6 2 5 8

0 0
1 9 4 10 7
11 11
24 24
7
4 5 4
3
8
12 20
4 4

Figure 8.6: Network Diagram

From the network diagram shown in figure 8.6, the critical path is identified as 1-4, 4-6,
6-7, with a project duration of 22 days.

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8.6 COST ANALYSIS

The two important components of any activity are the cost and time. Cost is directly
proportional to time and vice versa. For example, in constructing a shopping complex, the
expected time of completion can be calculated using be time estimates of various activities. But
if the construction has to the finished earlier, it requires additional cost to complete the project.
We need to arrive at a time / cost trade-off between total cost of project and total time required to
complete it.

Normal time: Normal time is the time required to complete the activity at normal conditions and
cost.

Crash time: Crash time is the shortest possible activity time; crashing more than the normal
time will increase the direct cost.

Cost Slope

Cost slope is the increase in cost per unit of time saved by crashing. A linear cost curve is shown
in Figure 8.7

Cost

Crash cost

Normal cost
Time
Crash time Normal time

Figure 8.7: Linear Cost Curve

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 Crash cost Cc – Normal cost Nc
Cost slope = = Normal cost Nt−Crash time Ct

Cc - Nc.
= --------------------------- (9)
Nt - Ct

Illustration - 5:

An activity takes 4 days to complete at a normal cost of ₹ 500.00. If it is possible to complete the
activity in 2 days with an additional cost of ₹ 700.00, what is the incremental cost of the activity?

Solution:

Cc - Nc
Incremental Cost or Cost Slope =
Nt - Ct
= Y00 – 500 = ₹ 100.00
It means, if one day is reduced we have to spend ₹ 100/- extra per day.

8.7 PROJECT CRASHING

Procedure for crashing

Step1: Draw the network diagram and mark the Normal time and Crash time.

Step2: Calculate TE and TL for all the activities.

Step3: Find the critical path and other paths.

Step 4:Find the slope for all activities and rank them in ascending order.

Step 5:Establish a tabular column with required field.

Step 6:Select the lowest ranked activity; check whether it is a critical activity. If so, crash the
activity, else go to the next highest ranked activity.

Note: The critical path must remain critical while crashing.

Step 7:Calculate the total cost of project for each crashing.

Step 8:Repeat Step 6 until all the activities in the critical path are fully crashed.

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Illustration - 9:

The following Table 8.9 gives the activities of a construction project and other data.

Table 8.9: Construction Project Data

Normal Crash
Activity Time Cost (₹) Time Cost (₹)
(days) (days)
1-2 6 50 4 80
1-3 5 80 3 150
2-4 5 60 2 90
2-5 8 100 6 300
3-4 5 140 2 200
4-5 2 60 1 80
If the indirect cost is ₹ 20 per day, crash the activities to find the minimum duration of the project
and the project cost associated.

Solution: From the data provided in the table, draw the network diagram (Figure 8.8) and find the
critical path.

6 6
8
2 5
0 0 14 14
6
5 2
1
11 12
5 3 4

5
5 7

Figure 8.8: Network Diagram

From the diagram, we observe that the critical path is 1-2-5 with project duration of 14 days

The cost slope for all activities and their rank is calculated as shown in Table 8.10

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 Crash cost Cc – Normal cost Nc
Cost slope =
Normal cost Nt – Crash time Ct
80−50 30
Cost of Slope for activity 1-2 = = =15
6−4 2

Table 8.10: Cost Slope and Rank Calculated

Activity Cost Slope Rank

1-2 15 2
1-3 35 4
2-4 10 1
2-5 100 5
3-4 20 3
4-5 20 3

The available paths of the network are listed down in Table 8.11 indicating the sequenceof crashing
(see Figure 8.11).
Table 8.11: Sequence of Crashing

Path Number of days crashed

1-2-5 14 12 11 10
1-2-4-5 13 11 10
11
1-3-4-5 12 12 10
11

8 - b 55
2
6-4
2-1
1 4 5–2
5–3 3 4
5–2

3
Figure 8.9: Network Diagram Indicating Sequence of Crashing

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 The sequence of crashing and the total cost involved is given in Table 8.9

Initial direct cost = Sum of all normal costs given

= ₹ 490.00
Table 8.12: Sequence of Crashing & Total Cost

Activity Project Indirect Cost Total

Critical Path Direct Cost in (₹)
Crashed Duration (in ₹) Cost (in ₹)
– 14 1–2–5 490 14 × 20 = 280 770
1 – 2(2) 12 1–2–5 12 × 20 = 240 760
490 + (2 × 15) = 520

2 – 5 (1) 11 1–2–5 520 + (1 × 100) + (1 × 20) =640 11 × 20 = 220 860

2 – 5 (1) 11 1–2–5 520 + (1 × 100) + (1 × 20) =640 11 × 20 = 220 860
3 – 4 (1) 1–3–4–5
2 – 5 (1) 10 1–2–5 640 + (1 × 100) + (1 × 10) +(1 × 20) = 770 10 × 20 = 200 970
2 – 4 (1) 1–3–4–5
3 – 4 (1) 1–2–4–5

It is not possible to crash more than 10 days, as all the activities in the critical path are fully
crashed. Hence the minimum project duration is 10 days with the total cost of ₹ 970.00.

8.8 CHECK YOUR PROGRESS

1. Write True or False against each statement:

(a) Critical path for any network is the longest path through the entire network.

(b)An imaginary activity always consumes resource and time.

(c) Slack is the amount of time by which the start of an activity may be delayed.

(d)Crash time is the maximum possible activity time.

(e) An activity which lies on the critical path is called non-critical activity.

2. Fill in the blanks:

(a) ______ is the shortest possible activity time.

(b)CPM is a ______time estimate and PERT has time estimate.

(c) Cost single is the increase in cost per ______.

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 (d)______time is the shortest time taken to complete the activity.

Answer to Check Your Progress:

1. (a) True (b) False (c) True (d) False (e) False
3. (a) Crash time (b) single, three (c) unit (d) optimistic

8.9 SUMMARY

As far as the network analysis is concerned, it is comprised with graphical representations

of the relationships between variables (nodes). Network analysis provides the capacity to
estimate complex patterns of relationships and the network structure can be analysed to reveal
core features of the network.

The two best-known techniques for network analysis are Critical Path Method (CPM) and
Programme Evaluation and Review Technique (PERT), both of which were developed between
1956-58.

CPM was developed by the du Pont Corporation as an application to a construction

project. It is used to formulate a time frame for a project to determine where potential delays are
most likely to occur.

PERT was developed for the US navy to schedule the research and development
activities for Polaris missiles programme. Originally, it focused only on time variables, but later
incorporated cost variables also.

The striking difference between the two methods is in time estimates employed in this
unit.

8.10 KEYWORDS

PERT : Project Evaluation Review Technique — is a unique

and important controlling device. The PERT take
into consideration the three types of time optimistic
time, pessimistic time and likely time.

CPM : Critical Plan Method is a diagrammatical technique for

planning and scheduling of projects.

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Float : It is used in the context of network analysis. Float
may be +ve or –ve.

Slack : Normally associated with events. It indicates the

amount of latitude.

8.11 QUESTIONS FOR SELF-STUDY

1. You are required to prepare a network diagram for constructing a 5 floor apartment. The
major activities of the project are given as follows:

Activity Description Immediate

Predecessor
A Selection of site -
B Preparation of drawings -
C Arranging the for finance A
D Selection of contractor A
E Getting approval from A
Govt
F Laying the foundation E
G Start construction D, F
H Advertise in newspaper B, C
I Allocation of tenants G, H

And also determine the Time earliest and Time latest, and the critical activities

Activity A B C D E F G H I
Time 3 5 7 2 5 20 60 2 10
(days)

2. Determine the critical path and project duration for the following project:

Activity Immediate Time

Predecessor (days)
A - 3
B - 7
C A 4
D B 2
E C,D 5
F A 6
G E,F 3

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3. A national conference is planned in a college. The activities are listed down along with
their predecessors and time taken. Prepare a network diagram and determine the critical
activities.

Activity Description Immediate Duration

(days)
Predecessor
A Confirm lead speaker and topic - 5
B Prepare brochure - 1
C Send letters to other speakers B 2
D Get confirmation from speakers C 5
E Send letters to participants C,D 2
F Obtain travel plans from speakers D 2
G Arrange for accommodation for F 1
speakers
H Get handouts from speakers F 4
I Finalize registrations G,H 10
J Arrange hall and AV I 1
K Conduct of programme J 1
4. Consider the following project with the list of activities:

Activity Predecessors Duration (months)

A - 1
B A 3
C B 4
D B 3
E B 3
F C 4
G D,E 5
H F 1
I G,H 4
J I 3
K I 4
L J 3
M K 5
N L 5

a. Construct the project network diagram.

b. Compute the earliest start time and earliest finish time.

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 c. Find the latest start and latest finish time.
d. Find the slack for each activity.
e. Determine the critical path and project duration.
5. You are alone at home and have to prepare a bread sandwich for yourself. The preparation
activities and time taken are given in the table below:

Task Description Predecessor Time

(minutes)
A Purchase of bread - 20
B Take cheese and apply on A 5
bread
C Get onions from freezer A 1
D Fry onions with pepper B,C 6
E Purchase sauce for bread - 15
F Toast Bread B,C 4
G Assemble bread and fried F 2
onions
H Arrange in plate G 1

a. Determine the critical activities and preparation time for tasks given in table.
b. Find the earliest time and latest time for all activities.
c. While purchasing sauce, you met a friend and spoke to him for 6 minutes. Did this
cause any delay in preparation?
6. An amusement park is planned at a suitable location. The various activities are listed with
time estimates. Using TORA, determine the critical path. Also, find whether the
amusement park can be opened for public within 35 days from the start of the project work.

Activity : A B C D E F G H I J K
Time (days) : 9 6 2 7 10 3 6 1 7 2 5
The predecessor activities are given below:

Activity Predecessor
A -
B -
C A
D A
E C
F B
G E,F

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 H D
I H,E
J I
K G

7. Draw the network from the following activity and find the critical path and total duration
of project.

Activity Duration (days)

1-2 5
1-3 3
1-4 6
2-3 8
2-5 7
3-5 2
4-5 6

8. Draw a network diagram and determine the project duration

Activity Duration (weeks)

1-2 2
1-4 4
1-3 7
2-5 6
3-4 (Dummy) 0
4-6 6
3-6 8
5-7 10
5-6 9
5-8 2
6-7 6
7-9 2
8-9 5

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9. Determine the critical path and project duration for the network given.

A 2 Dummy
(5) D (0)
E G
1 3 5 7
C (8) (7) (6)
(1) I
(0)Dummy H (4)
B (6)
4 6

10. For the PERT problem find the critical path and project duration. What is the
probability that the project will be completed in 25 days?

Time
Activity Predecessor
Optimistic Most likely Pessimistic
A - 2 5 14
B - 1 10 12
C A 0 0 6
D A 1 4 7
E C 3 10 15
F D 3 5 7
G B 1 2 3
H E,F 5 10 15
I G 3 6 9
11. The following table lists the jobs of a network along with their estimates.

Time (Weeks) Cost

Activity (Rs)
Normal Crash Normal Crash
1-2 9 4 1300 2400
1-3 15 13 1000 1380
2-3 7 4 7000 1540
2-4 7 3 1200 1920
2-5 12 6 1700 2240

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 3-6 12 11 600 700
4-5 6 2 1000 1600
5-6 9 6 900 1200
a. Draw the project network diagram.

b. Calculate the length and variance of the critical path.

c. What is the probability that the jobs on the critical path can be completed in 41 days?

12. The following table gives data at normal time and cost crashed time and project.

Time (Weeks) Cost (₹)

Activity
Normal Crash Normal Crash
1-2 9 4 1300 2400
1-3 15 13 1000 1380
2-3 7 4 7000 1540
2-4 7 3 1200 1920
2-5 12 6 1700 2240
3-6 12 11 600 700
4-5 6 2 1000 1600
5-6 9 6 900 1200
Find the optimum project time and corresponding minimum total project cost by crashing
appropriate activities in proper order. Show the network on time-scale at each step.
Indicated cost per day is ₹ 400.00.

13. Solve the following project, and find the optimum project time and project cost.

Time (weeks) Cost (₹)

Activity Crash
t0 tm tp Normal Crash
time
1-2 1 5 3 1 500 900
2-3 1 7 4 3 800 1400
2-4 1 5 3 2 400 600
2-5 5 11 8 7 500 600
3-6 2 6 4 2 300 500
4-6 5 7 6 4 200 360
5-7 4 6 5 4 1000 1400
6-7 1 5 3 1 700 1060

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8.12 REFERENCES

1. Ross, G.T. and Soaland, R.H, “Modeling facility location problem as generalized
assignment problems”, Management Science.
2. U.L. Gupta, D.T. Lee, J.T. Leung, An optimal solution for the channel-assignment
problem.
3. Abara J., Applying Integer Linear Programming to the Fleet Assignment Problem,
Interfaces, Vol. 19, No. 41, pp. 20-28.
4. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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Karnataka State Open University
Mukthagangothri, Mysuru – 570 006
[email protected] III SEMESTER M.COM
QUANTITATIVE TECHNIQUE
COURSE CODE:MCOHC3.2

Department of Studies and Research in Commerce

BLOCK
3

Page No.

UNIT – 9: GAME THEORY 197-219

UNIT – 10: REPLACEMENT PROBLEM 220-236

UNIT – 11: QUEUING THEORY 237-259

UNIT – 12: SEQUENCING PROBLEMS 260-279

 BLOCK – III
INTRODUCTION
This block covers other set of models come under quantitative techniques starting from Game
Theory, its introduction, terminology, two person zero sum game, game with the saddle point,
mixed strategies, game without saddle point, dominance property. Further, Replacement
Problem, meaning, types of replacement problem, items that deteriorate with time, replacement
of items that fail completely are discussed. Queuing theory, introduction, characteristics, the
arrival pattern, the service mechanism, the queue discipline, number of customers allowed in
the system, number of service channels, attitude of customers, symbols and notations,
classification of queuing models and equations are further covered. Followed by sequencing
problems, important basic terminologies used, principal assumptions, processing of N jobs
through two machines, processing of N jobs through three machines, problems with n jobs and
M jobs.

This block comprises four units as presented below:

Unit – 9: Game Theory

Unit – 10: Replacement Problem

Unit – 11: Queuing Theory

Unit – 12: Sequencing Problems

 BLOCK -III
UNIT-9 GAME THEORY
Structure:

9.0 Objectives

9.1 Introduction

9.2 Terminology of Game theory

9.3 Two-Person Zero-Sum Game

9.4 Pure Strategies: Game with Saddle Point

9.5 Mixed Strategies: Game Without Saddle Point

9.6 Dominance Property

9.7 Check Your Progress

9.8 Summary

9.9 Keywords

9.10 Questions for Self-Study

9.11 References

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9.0 OBJECTIVES
After studying this unit, you will be able to;

• Give the meaning of game theory.

• Solve the game using strategies with saddle point.
• Solve the game using mixed strategies without saddle point.
• Solve the game under dominance property.

9.1 INTRODUCTION
In this unit, we are going to discuss about the various strategies of players. This is done
through games theory. A game refers to the situation in which two three players are competing.

Game theory applies to those competitive situations which are technically known as
“competitive games” or in general known an games. As the game is a competition involving
two or more decisions makers each of whom is keen to win. The basic aim of this chapter is to
study about how the optimal strategies are formulated in the conflict. Thus we can say that
game theory is not related with finding an optimum or winning strategy for a particular conflict
situation. Afterwards we can say that the theory of game is simply the logic of rational
decisions. After reading this unit, you should be able to know how to take decision under the
cut-throat competition and know that outcome of our business enterprise depends on what the
competitor will do.

In today’s business world, decisions about many practical problems are made in a
competitive situation, where two or more opponents are involved under the conditions of
competition and conflict situations. The outcome does not depend on the decision alone but
also the interaction between the decision-maker and the competitor.

The objective, in theory, of games is to determine the rules of rational behaviour in

game situations, in which the outcomes are dependent on the actions of the interdependent
players. A game refers to a situation in which two or more players are competing. A player
may be an individual, a group or an organization. Game Theory has formulated mathematical
models that can be useful in decision-making in competitive situations. To get a better insight
of the concept, we consider an example of a simple game.

Let us assume that there are only two car manufacturers, company A and company B.
The two companies have market shares for their product. Company A is planning to increase
their market share for the next financial year. The vice-president of company A has come up

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with two strategies. One strategy is to modify the outer shape of the car and to advertise on TV.
Company B, knowing that if these strategies are adopted by company A, it may lead to decrease
in its market share, develops similar strategies to modify the shape of their car and to advertise
on TV. Table 9.1 below, gives the pay off if both the companies adopt these strategies.

Table 9.1: The Pay Off if Both Companies Modify Shape & Advertise on TV
Company B
Modify Shape Advertise
Company A Modify Shape 4 6
Advertise 8 -5
The pay off given is with respect to company A and represents company A. Company
B’s pay off is the opposite of each element. For example, it means that for modification strategy,
Company A wins 4 and company B loses 4.

In a game, each player has a set of strategies available. A strategy of a player is the list
of all possible actions (course of action) that are taken for every pay-off (outcome). Theplayers
also know the outcome in advance. The players in the game strive for optimal strategies. An
optimal strategy is the one, which provides the best situation (maximumpay-off) to the players.

Payoff Matrix: Company A has strategies A1, A2,…, Am, and Company B has strategies
B1,B2,….,Bn. The number of pay-offs or outcomes is m × n. The pay-off amn represents
company A’s gains from Company B, if company A selects strategy m and company B selects
strategy n. At the same time, it is a loss for company B (–amn). The pay-off matrix is given
(Table 9.2) with respect to company A.

The game is zero-sum because the gain of one player is equal to the loss of other and
vice-versa.

Table 9.2: Pay-off Matrix

Company B Strategies
B1 B2 B3 ….. Bn
A1 a11 a12 a13 ….. a1n
A2 a21 a22 a23 ….. a2n
Company A A3 a31 a32 a33 ….. a3n
Strategies . . . . ….. .
. . . . ….. .
Am am1 am2 am3 ….. amn

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9.2 TERMINOLOGY OF GAME THEORY
The participants to the game who act as a decision-makers are called players. In a game
two or more participants may be in the conflict. The former of these is called a two person
game and the latter one is known as a person game. Where it does not necessarily imply that
in its play exactly n people would be involved, but rather that the participants can be classified
into n mutually exclusive categories and members of each of the categories have identical
interest.

A finite or infinite number of possible courses of action available to a player are called
strategies.

For example, let x and y be two manufacturers and x is faced with a problem of deciding
whether it is worthwhile to reduce the price of the product to counteract competition. He has
two strategies:

(i) Reduce the price, and

(ii)Maintain the price. Then y too has the same strategies to counter act x’s
strategies.

Play

A play occurs when each player selects one of his available strategies. Two basic
assumptions in a play are:

(a) The choice of courses of action by players are made imultaneously.

(b)No player knows the choice of his opponents until he has decided on his own.

Outcome

Every combination of strategies of players determines an outcome called pay-off, where

pay-off is nothing but a gain to a player. A loss is considered as a negative gain.

Pay-off Matrix

The gains resulting from a game is presented in the form of a table called “ pay-off
matrix”. A pay-off matrix comprises n rows and m columns. Where n and m indicates the
number of strategies of first player and second player respectively. The pay-offs of each
combination of the strategies of players are placed as elements of matrix. A positive element
shows the gain to the first player (that is payment from II to I) and negative entry indicates the
loss to the I player 9 (that is payment from I to II).
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For instance, consider the following pay-off matrix:

Table 9.3: Pay-off Matrix

1 2 3 4 5
1 4 8 -2 6 4
2 3 6 5 3 2
3 2 -9 1 7 10
If the player chooses the first strategy and the II player uses second strategy, then the I
player gains 8 units and the II player pays 8 units and similarly, if the 1 player chooses the third
strategy and second player uses II strategy, then the 1 player loses 9 units and pays it to the II
player and II player gains 9 units.

Strategies are classified into 2 types, namely, Pure strategy and Mixed Strategy.

A pure Strategy is a decision of the player to always select the same strategy.

A Mixed Strategy is a decision of the player to select more and more than one strategy
with fixed probabilities. A mixed strategy is advantageous since the opponent is always kept
guessing.

Value of the Game

The value of the game is the “expected gain to a player” if he and his opponent use their
best strategies.

Saddle Point

A saddle point in a pay-off matrix corresponds to that element of the matrix which
represents the ‘Maximin’ value of a player and Minimax value of his opponent.

For this we find Maximum element of each column and then find the Minimum value
of column Maxima known as Minimax. Similarly, we identify minimum element of each row
and then find the Maximum of those entries known as Maximin. If Minimax = Maximum of
those entries known as Maximin. If Minimax = Maximin, then saddle point exists and the value
of the game is equal to Minimax to Maximin.

If Minimax ≠ Maximin, then no saddle point exists.

If Minimax = Maximin, then the pure strategies are called optimum strategies.

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 Usually, Maximin ≤ value of the game ≤ Minimax. If Maximin = Minimax = 0, the
game is fair. If Maximin = Minimax, the game is strictly determinable. The value of the game
is the average pay-off that would suit the game was played over and over again.

9.3 TWO – PERSON ZERO – SUM GAME

In a game with two players, if the gain of one player is equal to the loss of another player,
then the game is a two person zero-sum game.

A game in a competitive situation possesses the following properties:

i. The number of players is finite.

ii. Each player has finite list of courses of action or strategy.

iii. A game is played when each player chooses a course of action (strategy) out of the
available strategies. No player is aware of his opponent’s choice until he decides his own.

iv. The outcome of the play depends on every combination of courses of action. Each outcome
determines the gain or loss of each player.

9.4 PURE STRATEGIES: GAME WITH SADDLE POINT

The aim of the game is to determine how the players must select their respective
strategies such that the pay-off is optimized. This decision-making is referred to as the
minimax-maximin principle to obtain the best possible selection of a strategy for the players.

In a pay-off matrix, the minimum value in each row represents the minimum gain for
player A. Player A will select the strategy that gives him the maximum gain among the row
minimum values. The selection of strategy by player A is based on maximin principle. Similarly, the
same pay-off is a loss for player B. The maximum value in each column represents the
maximum loss for Player B. Player B will select the strategy that gives him the minimum loss
among the column maximum values. The selection of strategy by player B is based on minimax
principle. If the maximin value is equal to minimax value, the game has a saddle point (that is
equilibrium point). Thus, the strategy selected by player A and player B are optimal.

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Illustration - 1:

Consider the example to solve the game whose pay-off matrix is given in Table 9.4 as follows:

Table 9.4: Game Problem

Player B
1 2
1 1 3
Player A 2 -1 6

Solution:

The game is worked out using minimax procedure. Find the smallest value in each row
and select the largest value of these values. Next, find the largest value in each column and select
the smallest of these numbers. The procedure is shown in Table 9.5.

Table 9.5: Minimax Procedure

Player B
1 2 Row Min
Player A 1 1 3 1
2 -1 6 -1
Col Max 1 6

If Maximum value in row is equal to the minimum value in column, then saddle point exists.

Max Min = Min Max

1=1

Therefore, there is a saddle point. The strategies are,

Player A plays Strategy A1, (A A1).

Player B plays Strategy B1, (B B1).

Value of game = 1.

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Illustration – 2:

Solve the game with the pay-off matrix for player A as given in Table 9.6.

Table 9.6: Game Problem

Player B
B1 B2 B3
A1 –4 0 4
Player A A2 1 4 2
A3 –1 5 –3

Solution:
Find the smallest element in rows and largest elements in columns as shown in Table 9.7.

Table 9.7: Minimax Procedure

Player B

B1 B2 B3 Row
min
Player A A1 –4 0 4 –4

A2 1 4 2 1

A3 –1 5 –3 –3

Column Max 1 5 4
Select the largest element in row and smallest element in column. Check for the minimax
criterion,

Max Min = Min Max

1=1

Therefore, there is a saddle point and it is a pure strategy.

Optimum Strategy:

Player A A2 Strategy

Player B B1 Strategy

The value of the game is 1.

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Illustration - 3:

Check whether the following game is given in Table 9.8, determinable and fair.

Table 9.8: Game Problem

Player B
1 7 0
Player A 2 0 8

Solution:
The game is solved using maximin criteria as shown in Table 9.9.

Table 9.9: Maximin Procedure

Player B
1 2 Row Min
1 7 0 0
Player A
2 0 8 0
Column Max 7 8
Max Min ≠ Min Max

that is 0 ≠ 7

The game is strictly neither determinable nor fair.

Illustration – 4:

Identify the optimal strategies for player A and player B for the game, given below in Table
9.10. Also find if the game is strictly determinable and fair.

Table 9.10: Game Problem

Player B
1 2
1 4 0
Player A
2 1 -3

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Solution:

Table 9.11(a): Maximin Procedure

Player B
1 2 Row Min
1 4 0 0
Player A
2 1 -3 -3
Column Max 4 0
Max Min = Min Max

0=0

The game is strictly determinable and fair. The saddle point exists and the game has a pure
strategy. The optimal strategies are given in Table 9.11 (b, c).

Table 9.11(b and c): Optimal Strategies

1 2 1 2
p1 p2 q1 q2
(a) SA and (b) SB
1 0 0 1

Illustration – 5:
Solve the game with the pay off matrix given in Table 9.12 and determine the best strategies for
the companies A and B and find the value of the game for them.

Table 9.12: Game Problem

Company B
2 4 2
Company A 1 –5 4
2 6 –2

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Solution:

The matrix is solved using maximin criteria, as shown in Table 9.13 below.
Table 9.13: Maximin Procedure
Company B
1 2 3 Row Min

1 2 4 2 2
Company A 2 1 -5 -4 5
3 2 6 -2 -2
Column Max 2 6 2
Therefore, there is a saddle point and it is a pure strategy.

Optimal Strategy:

Company A A1 Strategy

Company B B1 Strategy

The value of the game is 2.

9.5 MIXED STRATEGIES: GAMES WITHOUT SADDLE POINT

For any given pay off matrix without saddle point the optimum mixed strategies areshown in
Table 9.14.

Table 9.14: Game Problem

Player B
B1 B2
Player A A1 a11 a12
A2 a21 a22

Let p1 and p2 be the probability for Player A.

Let q1 and q2 be the probability for Player B.

Let the optimal strategy be SA for player A and SB for player B.

Then the optimal strategies are given in Tables 9.14 a & b.

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 Table 9.14 (a), (b): Optimum Strategies

A1 A2 B1 B2
(a) SA = and (b) SB=
P1 P1 q1 q2

p1 and p2 are determined by using the formula,

a22 − a21
p1 = and p2 = 1- p1
(a11 +a22 )− (a12 +a21 )

a22 − a12
q1 = and q2 = 1- q1
(a11 +a22 )− (a12 +a21 )

and the value of the game with respect to player A is given by, a11 a22 – a12 a21

Value of the game, v = (a11+a22) – (a12+a21)

Illustration – 6:

Solve the pay-off given Table 9.15 matrix and determine the optimal strategies and the value
of game.

Table 9.15: Game Problem

Player B
1 2
1 5 2
Player A
2 3 4
Solution:

Let the optimal strategies of SA and SB be as shown in Tables 9.16 (a, b).

Table 9.16(a) and (b): Optimal Strategies

A1 A2 B1 B2
(a) SA = and (b) SB =
p1 p2 q1 q2

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The given pay-off matrix is shown below in Table 9.17.

Table 9.17: Pay-off Matrix or Maximin Procedure

Player B
1 2 Row Min

1 5 2 2
Player A
2 3 4 3
Column Max 5 4
Max Min ≠ Min Max

3≠4

Therefore, there is no saddle point and hence it has a mixed strategy.

Applying the probability formula,

a22 − a21
p1 = (a11 +a22 )− (a12 +a21 )

4− 3 1 1
= = 9−5 = 4
(5+4)−(2+3)

p2 = 1 – p1 = 1 – ¼ = ¾
a22 − a12
q1 =
(a11 +a22 )− (a12 +a21 )

4− 2 2 2 1
= = 9−5 = 4 = 2
(5+4)−(2+3)

q2 = 1 – q1 = 1 – ½ = ½
a22 − a21
Value of the game, v = (a
11 +a22 )− (a12 +a21 )

(5 x 4)−(2 x 3) 14
= = = 3.5
(5+4)−(2+3) 4

The optimum mixed strategies are shown in Table 9.18 (a,b) below.

Table 9.18(a) and (b): Optimum Mixed Strategies

A1 A2 B1 B2
SA = and (b) SB =
p1 p2 q1 q2
Value of the game = 3.5

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9.6 DOMINANCE PROPERTY
In case of pay-off matrices larger than 2 × 2 size, the dominance property can be used
to reduce the size of the pay-off matrix by eliminating the strategies that would never be selected.
Such a property is called a dominance property.

Illustration - 7: Solve the game given below in Table 9.19 after reducing it to 2 × 2 game:

Table 9.19: Game Problem

Player B
1 2 3
1 1 7 2
Player A 2 6 2 7
3 5 1 6
Solution: Reduce the matrix by using the dominance property. In the given matrix for player A,
all the elements in Row 3 are less than the adjacent elements of Row 2. Strategy 3 will not be
selected by player A, because it gives less profit for player A. Row 3 is dominated by Row 2.
Hence delete Row 3, as shown in Table 9.20.

Table 9.20: Reduced the Matrix by Using Dominance Property

Player B
1 2 3
1 1 7 2
Player A 2 6 2 7

For Player B, Column 3 is dominated by column 1 (here the dominance is opposite because
Player B selects the minimum loss). Hence delete Column 3. We get the reduced 2 × 2 matrix as
shown below in Table 9.21.

Table 9.21: Reduced 2 x 2 Matrix

Player B
1 2
1 1 7
Player A 2 6 2

Now, solve the 2 × 2 matrix, using the maximin criteria as shown below in Table 9.22.
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 Table 9.22: Maximin Procedure
Player B
1 2 Row Min
1 1 7 1
Player A
2 6 2 2
Column Max 6 7
Max Min ≠ Min Max
2≠6
Therefore, there is no saddle point and the game has a mixed strategy. Applying the probability
formula,
2− 6
p1 = (1+2)−( 7+6)

−4 4 2
= = =5
3−12 10

2 3
p2 =1-5=5

2− 7 −5 5 1
q1 = = = 10 = 2
(1+2)−(7+6) 3−13

q2 = 1 – q1 = 1 – ½ = ½
(1 x 2)−(7 x 6) 2−42 40
Value of the game, v = = 3−13 = 10 = 4
(1+2)−(7+6)

The optimum strategies are shown in Table 9.23 (a, b)

Table 9.23 (a, b): Optimum Strategies
A1 A2 A3 B1 B2 B3
(a) SA = and (b) SB =
2 3
/5 /5 0 ½ ½ 0
Value of the game, V = 4

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Illustration – 8:
Is the following two-person zero-sum game stable? Solve the game given below in Table 9.24.

Table 9.24: Two-Person Zero-Sum Game Problem

Player B
1 2 3 4
1 5 -10 9 0
Player A 2 6 7 8 1
3 8 7 15 1
4 3 4 -1 4
Solution: Solve the given matrix using the maximin criteria as shown in Table 9.25.

Table 9.25: Maximin Procedure

Player B
1 2 3 4 Row Min
1 5 -10 9 0 10
Player A 2 6 7 8 1 1
3 8 7 15 1 1
4 3 4 -1 4 -1
Column Max 8 7 15 4
Max Min ≠ Min
Max3 ≠ 1

Therefore, there is no saddle point and hence it has a mixed strategy.

The pay-off matrix is reduced to 2×2 size using dominance property. Compare the rows to find
the row which dominates other row. Here for Player A, Row 1 is dominated by Row 3 (or row
1 gives the minimum profit for Player A), hence delete Row 1. The matrix is reduced as shown
in Table 9.26.

Table 9.26: Use Dominance Property to Reduce Matrix (Deleted Row 1)

Player B
1 2 3 4
2 6 7 8 1
Player A 3 8 7 15 1
4 3 4 -1 4

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When comparing column wise, column 2 is dominated by column 4. For Player B, the minimum
profit column is column 2, hence delete column 2. The matrix is further reduced as shown in Table
9.27.

Table 9.27: Matrix Further Reduced to 3×3 (2 Deleted Column)

Player B
1 3 4
2 6 8 1
Player A 3 8 15 1
4 3 –1 4

Now, Row 2 is dominated by Row 3, hence delete Row 2, as shown in Table 9.28.

Table 9.28: Reduced Matrix (Row 2 Deleted)

Player B
1 3 4
Player A 3 8 15 1
4 3 –1 4

Now, as when comparing rows and columns, no column or row dominates the other. Since there
is a tie while comparing the rows or columns, take the average of any two rows and compare.
We have the following three combinations of matrices as shown inTable 9.29(a) (b) and (c).

Table 9.29 (a, b, c): Matrix Combinations

(a) B (b) B (c) B
R1 +R3 R3 +R4 R1 +R4
R3 R1 R2
2 2 2

11.5 1 8 8 15 4.5
A A A
1 4 3 1.5 -1 3.5
× ✓ ×
When comparing column 1 and the average of column 3 and column 4, column 1 is dominated
by the average of column 3 and 4. Hence delete column 1. Finally, we get the 2 × 2 matrix as
shown in Table 9.30.

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 Table 9.30: 2×2 Matrix After Deleting Column 1

Player B

3 4

Player A 3 15 1

4 –1 4

The strategy for the arrived matrix is a mixed strategy; using probability formula, we find p1, p2 and
q1, q2.

4−(−1)
p1 =
(15+4)−( 1+(−1)

5
= 19

5 14
p2 = 1 - 9 = 9

4−1 3
q1 = = 19
19

3 16
q2 = 1 – 19 = 19

(15 x 4)−(1 x (−1))

Value of the game, v = (15+4)−(1+(−1))

60+1
= 19

61
= 19

The optimum mixed strategies are given below in Table 9.3

Table 9.31(a) and (b): Optimum Mixed Strategies 1 (a, b)
A1 A2 A3 A4 B1 B2 B3 B4
(a) SA = and (b) SB =
0 0 5/19 14/19 0 0 3/19 16/19

9.7 CHECK YOUR PROGRESS

1. Write True or False against each statement:

(a) Graphical method can only be used in games with no saddle point.

(b) Concept of dominance is very useful for expanding the size of the matrix.

(c) Saddle point in a pay off matrix is one which is smallest value in its row and the

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 largest value in its column.

(d) In two-person zero-sum game there will be more than two choices.

2. Fill in the blank:

(a) Game theory applies to those situation which are technically known as
“competitive game”.

(b) Strategy could be or one.

(c) A game involving n-players is called a game.

(d) Every course of action is a strategy.

(e) In game theory all players act .

Answer to Check Your Progress:

1. (a) True (b) False (c) True (d) False

2. (a) competitive (b) pure, mixed (c) n-person (d) pure (e) intelligently.

9.8 SUMMARY
We have discussed the concept of game theory and learnt how to find an optimal
solution. A comprehensive overview of games theory has been applicable to those competitive
situation which are technically known as “competitive games”. If we elaborately go into the depth
of the word “competitions” it is a watchword of contemporary life and competitive situation exists
if two or more individually are making decisions in a circumstances that involves conflicting
interests and in which the result is controlled by the decision of all parties concerned. The initial
discussion study with the zero person game and moves to saddle point further principle of
dominance applicable to reduce the size of matrix and their is a 2×n of m×2 games which can
be solved with the help of graphical method. In short, the game theory facilitates us to learn
how to approves and comprehend a conflict circumstance and to enhance the decision
procedure.

9.9 KEYWORDS
Two Person Game : A game that only has two players.

Zero Sum Game : A game in which one player wins and other player loses.

Dominance : A process by which the size of the game will be reduced.

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Strategy : The strategy of a player is the list of all possible actions
that he takes for every pay-off. The strategy is classified
into pure strategy and mixed strategy.

Pure Strategy : Pure strategy is always selecting a particular course of

action with the probability of 1. For example, in case of
two strategies, probability of selecting the strategies for
players A is p1 = 0 and p2 = 1.

Mixed Strategy : Mixed strategy is to choose at least two courses of action.

The probability of selecting an individual strategy will be
less than 1, but the sum of the strategies will be 1. For
example, if player A plays a mixed strategy, then the
probability of selection of mixed strategy is p1 = 0.45 and
p2 = 0.55. But the sum of the strategies is 0.45 + 0.55 = 1.

Saddle Point : Saddle point is a situation where both the players are
facing pure strategies. When there is no saddle point, it
indicates the players will play both the strategies.

Minimax Criterion : Minimax criterion is selecting the strategies that

minimize the loss for each player. In other words, the
player always anticipates worst possible outcome and
chooses the strategy to get maximum for profit and
minimum for loss.

Value of the Game : The Value of the game is the expected gain of player A if
both players use their best strategies. The best strategy is
arrived at using minimax criterion.

9.10 QUESTION FOR SELF-STUDY

1. What are the properties of Two-person Zero-sum game?

2. Define Pure strategy and Mixed strategy.

3. What is meant by the saddle point?

4. What is meant by a Fair Game?

5. Explain how games can be solved using the dominance property.

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Exercise Problems
1. Using maximin criteria, identify whether the players play pure strategy or mixed strategies
(a) Player B
1 2
1 –7 3
2 –5 –2

(b) Player B
1 2
1 7 2
2 1 5

2. Solve the game and determine whether it is strictly determinable.

(a) Player B
B1 B2 B3
A1 3 -1 2
Player A A2 -2 5 7
A3 2 3 5

(b) Player B
B1 B2 B3
A1 6 10 8
Player A A2 -4 10 14
A3 4 6 10

3. Determine the optimum strategies of players.

B B
1 2 3 4 1 2 3 4
1 10 -30 20 -40 1 -1 2 -2 1
A 2 5 -5 10 15 A 2 3 -2 0 1
3 20 20 -30 10 3 4 -2 3 2
4 5 -10 20 15 4 0 1 3 2

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4. Solve the game.
Company B Company B
(a) B1 B2 B3 (b) 1 2 3
A1 15 25 35 A1 7 5 2
Company A A2 5 10 45 Company A A2 -1 3 -2
A3 65 55 35 A3 4 3 -7

5. Consider the payoff matrix of payer A and solve.

Player B
(a) 1 2 3 4 5 6
1 6 3 7 -4 6 8
Player A
2 7 -11 8 4 7 9

6. Solve the following sequence game using dominance property.

I II III IV
A 14 4 8 18
Company B B 8 3 2 12
C 8 7 6 16
D 6 5 12 10

7. Use dominance property to solve the following game.

B1 B2 B3 B4 B5
A1 4 4 2 4 -6
A2 8 6 8 -4 0
A3 10 2 4 0 12
8. Solve the following two-person zero-sum game to find the value of the game.
Company B
I II III IV
1 2 -2 4 1
Company A 2 6 1 12 3
3 -3 2 0 6
4 2 -3 7 7

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 9. Solve the game whose payoff matrix is given for a 2 x 2 matrix.

(a) 5 -2 (b) 2 5
-1 7 2 -2

10. Formulate a liner programming model for the following game.

Player B
1 2 3 4 5
1 6 15 30 21 6
Player A 2 3 3 6 6 4
3 12 12 24 36 3
9.11 REFERENCES
1. Davis. M, Game Theory: A Nontechnical Introduction, New York; Basic Books, Inc.
2. Lucas, “An Overview of the Mathematical Theory of Game” Management ScienceVol.
8, No. 8, Part-II.
3. Luce R.D. & Raiffa. H, Game & Decisions, New York, John Wiley & Sam.
4. Rapport, A., Two Person Game Theory, Anne Arbric, Michiger: The University of
Nichigan Press, 1966.
5. Shubik. M, The Uses & Methods of Game Theory, New York; American Elsevier.
6. Van Neumain, J. & Morgen Stan. O, Theory of Games & Economic Behaviour.
7. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT – 10 REPLACEMENT PROBLEM
Structure:

10.0 Objectives

10.1 Introduction

10.2 Types of Replacement Problem

10.3 Replacement of items that Deteriorate with Time

10.4 Replacement of items that Fail Completely

10.5 Replacement of items when Value of Money does not Change with Time

10.6 Check Your Progress

10.7 Summary

10.8 Keywords

10.9 Questions for Self-Study

10.10 References

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10.0 OBJECTIVES
After studying this unit, you will be able to;

• State the different types of the situation in which the replacement of an asset is needed.
• Find the optimum replacement age of an equipment under different situations.
10.1 INTRODUCTION
In Industries, all equipments are put to continuous use which reduces the efficiency of
the equipment. The study of replacement is concerned with situations that arise when some
items such as machines, electric-light bulbs, etc., need replacement due to their deteriorating
efficiency, failure or breakdown. The deteriorating efficiency or complete breakdown may be
either gradual or all of a sudden. In all such situations, there is a need to formulate a most
economic replacement policy for replacing faulty units or to take some remedial special action
to restore the efficiencyof deteriorating units. A replacement is also needed for the equipment
if the cost incurred in operating and maintaining the equipment exceeds the benefit derived out
of it. The objective of the Replacement problem is therefore to determine the optimal time at
which the equipment is to be replaced with new one. Thus in this unit we will discuss the
concept to find an optimum age to replace the assets using replacement problem under different
situations.

10.2 TYPES OF REPLACEMENT PROBLEM

Replacement problems, in general, are of three types.

1. Replacement of items that deteriorate with time.

2. Replacement of items that break down completely, and

3. Replacement of items that becomes out of date due to new developments.

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 Figure-10.1: Types of Replacement

Replacement Model

Replacement of items Replacement of items that

that detoriated with fails suddenly
time

Considering Individual Group

Ignoring Time time value of Replacement Replacement
value of money money Policy Policy

.10.3 REPLACEMENT OF ITEMS THAT DETERIORATE WITH TIME

Generally, the maintenance cost of certain items, for example, machine, always
increases gradually with time and a stage comes when the maintenance cost becomes so large
that it is better and economical to replace the item with a new one. There may be a number of
alternative choices and in each choice we make a comparison between various alternatives by
considering the safety risks.

Illustration - 1:

A firm is considering replacement of a machine, whose cost price is ₹ 12,200 and the scrap
value is ₹ 200. The running (maintenance and operating) cost are found from experience are as
follows:

Year 1 2 3 4 5 6 7 8
Running Cost 200 500 800 1200 1800 2500 3200 4000

When should the machine be replaced?

Solution:

In the problem given above we are provided with running cost f(t), Scrap Value S=200 and the
cost of the machine C = ₹ 12,200.

In order to find out the optimal time n when the machine would be replaced, we will calculate
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the average total cost per year during the life of the machine as shown in the table below:

Years Running Cumulative Depreciation Total Cost TC Average Total

Cost f(n) running cost Cost = C-S = (3) + (4) CostA(n)= (5)/(1)
(1) (2) ∑ f(n) (4) (5) (6)
(3)
1 200 200 12000 12,200 12,200
2 500 700 12000 12,700 6,350
3 800 1500 12000 13,500 4,500
4 1200 2700 12000 14,700 3,675
5 1800 4500 12000 16,500 3,300
6 2500 7000 12000 19,000 3,167
7 3200 10200 12000 22,200 3,171
8 4000 14200 12000 26,200 3,275
Inference:

From the above table we can see that the average total cost A(n) is minimum at the end
of 6th year and then from 7th year onwards it starts increasing, hence we would take a decision
to replace the machine at the end of the 6th year where the value of A(n) is minimum.

Illustration - 2:

The data collected in running a machine, the cost of which is ₹ 60,000 are given below

Year 1 2 3 4 5
Resale Value 42000 30000 20400 14400 9650
Cost of Spares 4000 4270 4880 5700 6800
Cost of Labour 14000 16000 18000 21000 25000
Determine the optimum period for the replacement of the machine.

Solution:

To determine the running cost we add the cost of spares and cost of labour.

Years Running Cumulative Resale Depreciation Total Cost Average Total

(1) Cost f(n) running cost ∑ Value Cost = C-S TC = (5) +(3) Cost A(n)=
(2) f(n) (4) (5) (6) (6)/(1)
(3) (7)
1 18000 18000 42000 18,000 36,000 36,000
2 20270 38270 30000 30,000 68,270 34,135
3 22880 61150 20400 39,600 1,00,750 33,583
4 26700 87850 14400 45,600 1,33,450 33,362
5 31800 1,19,650 9650 50,350 1,70,000 34,000

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Inference:

From the above table we can see that the average total cost A(n) is minimum at the end
of 4th year and then from 5th year onwards it starts increasing, hence we would take a decision
to replace the machine at the end of the 4th year where the value of A(n) is minimum i.e
₹ 33,362/-

10.4 REPLACEMENT OF ITEMS THAT FAIL COMPLETELY

We always come across practical situations in real life where the failure of certain
item occurs all of a sudden, instead of gradual deterioration (e.g., the failure of an electric light-
bulb). The failure of the item may result in complete breakdown of the system.

If the time of failure can be predicted, preventive replacement will often be the
appropriate course of action. However, in many cases it may not bepossible to predict failure
time accurately. In such cases we shall assume that the probability distribution of failure time
may be obtained, based on the past experience. Here it is assumed that the failure occurs only
at the end of a certain period, say till time (t). The problem is to determine an optimal value of
‘t’ so as to minimize the total cost involved in thesystem.

In such situation, there are two types of replacement policies are being followed:

(a) Individual Replacement Policy: Under this policy, an item is replaced immediately
upon its failure.

(b) Group Replacement Policy: Under this policy, it is decided to replace all the items
after a certain time period irrespective of the facts that items have failed or have not failed
with an option that if any item before the optimal time, it may be individually replaced.

Illustrations – 3:

The cost of a machine is ₹ 6, 100 and its scrap value is ₹ 100 only. The maintenance costs are
found from experience to be:

Year 1 2 3 4 5 6 7 8
Maintenance Cost 100 250 400 600 900 1,250 1,600 2,000

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Solution:
Table showing optimum period of replacement of the machine

Replacement Running Cumulative Rn C–S Total cost Average cost

at the end of cost Rn ∑Rn Tc
the year
1 100 100 6,000 6,100 6,100
2 250 350 6,000 6,350 3,175
3 400 750 6,000 6,750 2,250
4 600 1,350 6,000 7,350 1,837.05
5 900 2,250 6,000 8,250 1,650
6 1,250 3,500 6,000 9,500 1,583.33
7 1,600 5,100 6,000 11,100 1,585.07
8 2,000 7,100 6,000 13,100 1,637.05
Inference:
The machine has to be replaced at the end of the 6th year or at the beginning of the
7th year as the maintenance cost of the 7th year becomes higher than the average cost of
maintaining the machine at the end of the 6th year.
Illustration - 4:
A machine owner finds from his past records that the costs per year of maintaining a machine
different which are given below:

Year 1 2 3 4 5 6 7 8
Maintenance cost in (₹) 1,000 1,200 1,400 1,800 2,300 2,800 3,400 4,000
Resale price 3,000 1,500 750 375 200 200 200 200
If the purchase price of that machine is Rs. 6,000, then at what age the replacement is due?
Solution:
Table showing optimum period of replacement of the machine:

n Rn ∑Rn C–S Tc Average cost

1 1,000 1,000 3,000 4,000 4,000
2 1,200 2,200 4,500 6,700 3,350
3 1,400 3,600 5,250 8,850 2,950
4 1,800 5,400 5,625 11,025 2,756.25
5 2,300 7,700 5,800 13,500 2,700
6 2,800 10,500 5,800 16,300 2,716.67
7 3,400 13,900 5,800 19,700 2,814.28
8 4,000 17,900 5,800 23,700 2,962.05
Inference:
The machine has to be replaced at the end of the 5th year at the beginning of the 6th
year as the maintenance cost of the 6th year becomes higher than the average cost of
maintaining the machine at the end of the 5th year.

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Illustration - 5:
A firm is considering replacement of a machine whose cost is₹ 12, 200 and scrap value is ₹
200. The maintenance costs are found from experience to be as follows:

Year 1 2 3 4 5 6 7 8
Maintenance cost 200 500 800 1,200 1,800 2,500 3,200 4,000
When should the machine be replaced?
Solution:
Table showing the period of replacement

n Rn ∑Rn C–S Tc Average Cost

1 200 200 12,000 12,200 12,.200
2 500 700 12,000 12,700 6,350
3 800 1,500 12,000 13,500 4,500
4 1,200 2,700 12,000 14,700 3,675
5 1,800 4,500 12,000 16,500 3,300
6 2,500 7,000 12,000 19,000 3,166.07
7 3,200 10,200 12,000 22,200 3,171
8 4,000 14,200 12,000 26,200 3,275
Inference:
The machine is to be replaced at the end of the 6th year or at the beginning of the 7th
year as the maintenance cost of the 7th year becomes higher than the average cost of
maintaining the machine at the end of the 6th year.
Illustration – 6:
The following table gives the running costs per year and resale price of a certain equipment.
Its purchase price is ₹ 5,000

Year 1 2 3 4 5 6 7 8

Running costs (₹) 1,500 1,600 1,800 2,100 2,500 2,900 3,400 4,000

Resale value (₹) 3,500 2,500 1,700 1,200 800 500 500 500

At what year the replacement is due?

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Solution:
Table showing optimum period of replacement of machine

n Rn ∑Rn C–S Tc Average cost

1 1,500 1,500 1,500 3,000 3,000
2 1,600 3,100 2,500 5,600 2,800
3 1,800 4,900 3,300 8,200 2,733
4 2,100 7,000 3,800 10,800 2,700
5 2,500 9,500 4,200 13,700 2,740
6 2,900 12,400 4,500 16,900 2,817
7 3,400 15,800 4,500 20,300 2,900
8 4,000 19,800 4,500 24,300 3,038
Inference:
The machine has to be replaced at the end of the 5th year or at the beginning of the 6th
year as the maintenance cost of the 6th year becomes higher than the average cost of the 5th
year.
Illustration – 7:
A truck with first cost are ₹ 80,000 has the depreciation and the service pattern as shown below:

Year 1 2 3 4 5 6
Depreciation during the year(₹) 28,000 20,000 14,000 5,000 4,000 4,000
Annual Service cost(₹) 18,000 21,000 25,000 29,000 34,000 40,000
Assume that no interest charges are necessary for the evaluation. How many years
should the truck be kept in service before replacing it?
Solution:
Table showing optimum period of replacement of truck

n Rn ∑Rn C–S Tc Average Cost

1 18,000 18,000 28,000 46,000 46,000
2 21,000 39,000 20,000 59,000 29,500
3 25,000 64,000 14,000 78,000 26,000
4 29,000 93,000 5,000 98,000 24,500
5 34,000 1,27,000 4,000 1,31,000 26,200
6 40,000 1,67,000 4,000 1,71,000 28,500
Inference:
The machine has to be replaced at the end of the 3rd year or at the beginning of the 4th
year as the maintenance cost of 4th year is higher than the average cost of maintaining the truck
at the end of the 3rd year.

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10.5 REPLACEMENT OF ITEMS WHEN VALUE OF MONEY DOES NOT
CHANGE WITH TIME
The objective here is to determine the optimum replacement age of an equipment/ item
whose running/maintenance cost increases with time and the value of money remains static
during that period.

An optimum replacement policy suggest that replace the equipment at the end of n years,
if the average total cost in the (n+1)th year is more than the average total cost in the nth year
and the nth year’s maintenance cost is less than the previous year’s average total cost.

Let C = Capital Cost of Equipment,

S= Scrap value of equipment

n = Number of years that equipment would be in use

f (t) =Maintenance cost function

A(n) = Average total annual cost.

With time ‘t’ is a continues variable:

If the equipment is used for n years then the total cost incurred during this period is
given by

Tc = Capital Cost – Scrap Value + Maintenance Cost

Average Annual Total Cost A (n) = 1/n TC.

Illustration – 8:

The following failures have been observed for a certain type of transistors in a digital computer:

End of Week 1 2 3 4 5 6 7 8
Probability of failure to date .05 .13 .25 .43 .68 .88 .96 1.00
Total number of transistors at the beginning of assembly is 1000 units. The cost of replacing
the individual failed transistors is Rs. 1.25/-. The decision is made to replace all these transistors
simultaneously at fixed intervals and to replace the individual transistors as they fails in service.
If the cost of group replacement is 30 paisa per transistors, what is the best interval between
group replacement?

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Solution:

Let Pi be the probability that a transistors which was new when placed in position for use, fails
during the ith week of its life. Thus, we have,

P1 = 0.05 P2 = 0.13 – 0.05 = 0.08

P3 = 0.25 – 0.13 = 0.12 P4 = 0.43 – 0.25 = 0.18

P5 = 0.68 – 0.43 = 0.25 P6 = 0.88 – 0.68 = 0.20

P7 = 0.96 – 0.88 = 0.08 P8 = 1.00 – 0.96 = 0.04

Let Ni denotes the number of replacement made at the end of ith week. Then we have,

N0 = Number of transistors at the beginning = 1000

N1 = N0P1 = 1000 * 0.05 = 50

N2= N0P2 + N1P0 = 1000*0.08 + 50*0.05 = 82

N3= N0P3 + N1P2 + N2P1 = 1000*0.12 + 50*0.08 + 82*0.05 = 128

N4= N0P4 + N1P3 + N2P2 + N3P1 = 199

N5= N0P5 + N1P4 + N2P3 + N3P2 + N4P1 = 289

N6 = N0P6 + N1P5 + N2P4 + N3P3 + N4P2 + N5P1 = 272

N7 = N0P7 + N1P6 + N2P5 + N3P4 + N4P3 + N5P2 + N6P1 = 194

N8 = N0P8 + N1P7 + N2P6 + N3P5 + N4P4 + N5P3 + N6P2 + N7P1 = 195

Now, as we know that group replacement of all the 1000 transistors at one go cost 30 paisa per
transistors and the replacement of individual transistors on failure cost ₹1.25, the average cost
for different group replacement policies are given as under:

End of Individual Total Cost

Average Cost
Week Replacement (Individual + Group Replacement)
1 50 50*1.25 + 1000 x 0.30 = 363 363
2 50+82=132 132*1.25 + 1000*0.30 = 465 232.50
3 132+128=260 260*1.25 + 1000 * 0.30 = 625 208.30
4 260+199= 459 459 * 1.25 + 1000 * 0.30 = 874 218.50
5 459+289= 748
6 748+272= 1020
7 1020+194= 1214
8 1214+195 = 1409

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Inference:

Since the average cost is lowest at week 3 hence the optimum interval between group
replacement is 3 weeks.

Illustration – 9:

The following failure rates have been observed for a special type of light bulbs.

Months 1 2 3 4 5
% Failing at the end of each month 10 25 50 80 100
In an industrial unit there are 1,000 special type of bulbs in use, and it costs ₹ 10 to
replace an individual bulb which has burnt out. If all bulbs are replaced simultaneously, it
would cost ₹ 2.50 per bulb. It is proposed to replace all bulbs at fixed intervals, whether or not
they have burnt out and to continue replacing burnt out bulbs as they fail. At what intervals of
time the manager should replace all the bulbs.

Solution:

Let ‘N0’ be the number of bulbs originally put into use.

Let ‘Fi’ be the number of failures of bulbs and replaced during the same period.

Let ‘P’ be the probability rate indicating failure of bulbs.

N = 1,000.

Individual replacement cost = ₹ 10 per bulb

Group replacement cost = ₹ 2.50

Calculation of probability of failure of bulbs at the end of the each month

Month Working Rate of failure

1 P1 = 10/100 0.10
2 P2 = 25 – 10/100 0.15
3 P3 = 50-25/100 0.25
4 P4 = 80-50/100 0.30
5 P5 = 100-80/100 0.20
Total probability of failure 1.00
The sum of probability can never be greater than 1. Therefore, the probability in the
subsequent/next months will be equal to zero. Hence, bulbs which have spent 5 months are
ought to fail.

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 Calculation of number of bulbs failing at the end of each month

Month Working No. of bulbs failing

1 NoP1 = 1,000 x 0.10 100
2 NoP2 + F1P2 = 1000 x 0.15 + 100 x 0.10 160
3 NoP3 + F1P2 + F2P1 = 1000 x 0.25 + 160 x 0.15 +
100 x 0.10 281
4 NoP4 + F1P3 + F2P2 + F3P1 = 1000 x 0.30 + 100 x
0.25 + 160 x 0.15 + 281 x 0.10 377.1
5 NoP5 + F1P4 + F2P3 + F3P2 + F4P1
=1000 x 0.2 + 100 x 0.30 + 160 x 0.25 + 281 x 0.15
+ 3771 x 0.10 350

It can be seen from the above calculation that the expected number of bulbs failed in
each month goes on increasing until the 4th month and decreases in the 5th month. This
oscillation continues until it reprocates to the average number of bulbs per month for the whole
life.

Calculation of average no. of bulbs failing and the associated costs:

Mean Life
1 x 0.10 = 0.10
Average number of bulbs = N/Mean life 2 x 0.15 = 0.30
= 1,000 0.25 x 3 = 0.75
3.35 0.30 x 4 = 1.20
= 299 bulbs 5 x 0.20 = 1.00
3.35
Cost of replacing individual bulbs = 299 bulbs x Rs. 10
= ₹ 2,990
Calculation of average cost of group replacement:

Individual
No. of Cumulative Group
replacement Total Average
Month bulbs No. of bulbs replacement
at Rs. cost(Rs.) cost(Rs.)
failing failing at Rs. 2.50
10/bulb
1 100 100 1,000 2,500 3,500 3,500
2 160 200 2,600 2,500 5,100 2,550
3 281 541 5,410 2,500 7,910 2,637
4 377 918 9,180 2,500 11,650 2,928
5 350 1,268 12,680 2,500 15,150 3,056

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Inference:

Since, the average cost is lowest against the second month, the optimal interval between
group replacement is 2 months. Further, since the average cost for group replacement (₹ 2,550)
which is less than the average cost of individual replacement (₹2,990), the policy should be
group replacement.

Illustration – 10:

The following failure rates have been observed for a certain type of fuses:

Week 1 2 3 4 5
Percentage failing by the end of the
5 15 35 75 100
week
There are 1,000 fuses in use and it costs ₹ 5 to replace an individual fuse. If all fuses
are replaced simultaneously it would cost ₹ 1.25/fuse. It is proposed to replace all fuses at fixed
intervals of time, whether or not they have got burnt and to continue replacing burnt out fuses
as they fail. At what intervals the group replacement should be made? Aslo prove that this
optimal policy is superior to the straight forward policy of replacing each fuse only, when it
fails.

Solution:

Let ‘No’ be the number of fuses originally put into use.

Let ‘Fi’ be the rate of failure of fuses and the fuses replaced during the same period.

‘Pi’ be the probability rate indicating failure of fuses.

No = 1,000 fuses

Individual replacement cost = ₹ 5/fuse

Group replacement cost = ₹ 1.25/fuse

Calculation of the probability of failure of fuses at the end of the week

Week Working Failure rate

0.05
1 5/100 0.10
2 15 – 5/100 0.20
3 35 – 15/100 0.40
4 75 – 35/100 0.25
5 100 – 75/100
1.00
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 Calculation of number of fuses failing at the end of each week

Number of
Week Working
fuses failing
1 NoP1 = 1,000 x 0.05 50
2 NoP2 + F1P2 = 1,000 x 0.10 + 50 x 0.05 102.5
3 NoP3 + F1P2 + F2P1 = 1,000X 0.2 + 50 x 0.10 + 102.5 x 0.05 210.125
4 NoP4 + F1P3 + F2P2 + F3P1 431
= 1,000 + 0.4 + 50 x 0.2 + 10.25 x 0.1 + 210.125 x 0.05
5 NoP5 + F1P4 + F2P3 + F3P2 + F4P1 = 1,000 x 0.25 + 50 x 0.40 333
+ 102.5 x 0.20 + 210.125 x 0.10 + 431 x 0.05

Calculation of average number of fuses failing if they are replaced individually

Average number of fuses failing = N Mean life

Mean life
= 1000/3.70 1 x 0.05 + 2 x 0.10
= 270 fuses
+ 3 x 0.2 + 4 x 0.4
+ 5 x 0.25 = 3.70

Average cost of individual replacement = 270 x ₹ 5

= ₹ 1,350
Calculation of average cost of group replacement:

Group
Cumulative Individual
No. of fuses replacement Total Average
Week No. of fuses replacement
failing at ₹ cost Cost
failing at ₹ 5/fuse
1.25/fuse
1 50 50 250 1,250 1,500 1,500
2 102 152 760 1,250 2,010 1,005
3 210 362 1,810 1,250 3,060 1,020
4 431 793 3,965 1,250 5,215 1,304
5 333 1,126 5,630 1,250 6,880 1,376
Inference:

Optimum interval between two replacements is 2 weeks. Moreover, as the average cost
of individual replacement is higher than the average cost of group replacement, it is better to
adopt the group replacement policy.

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10.6 CHECK YOUR PROGRESS
Give an appropriate answer for the following questions:

1. Asset should be replaced when its costs increases – True/False.

2. Main objective of replacement is to

a. Minimize the cost.

b. Maximize the profit.

c. Increase the cost.

d. Only (a) and (b).

3. Total cost is calculated by using the formula of ______.

4. When Time value of money is considered, we shall assume that, the equipment has no
salvage value.

Answer to Check Your Progress:

1. True 2. (d) 3. Tc = Capital Cost – Scrap Value + Maintenance Cost 4. True

10.7 SUMMARY
To conclude, replacement problems involve items that degenerate with use or with the
passage of time and those that fail after a certain amount of use or time. Sometimes the
equipment fails completely and effects the whole system. The maintenance costs (running
costs) of an equipment also go on increasing with time. Thus, the problem is to determine when
to replace such items and how much maintenance (particularly preventive) to perform so that
the sum of the operating, maintenance, and investment costs is minimized.

10.8 KEYWORDS
Capital Cost : It is the total cost incurred on purchase of fixed assets

Present value : It is the current value of a future sum of money given a

specified rate of return.

Deterioration : The action or process of becoming impaired or inferior

in quality.

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10.9 QUESTIONS FOR SELF-STUDY
1. What is a replacement problem?

2. Describe various types of replacement problems.

3. What are the situations which make the replacement of item necessary?

4. Discuss the replacement problem where items are such that maintenance costs increase
with time and the value of money also changes with time.

5. Write a note on group replacement and individual replacement policies.

6. There are 1,000 bulbs in the system, survival rate is given below:

Week 0 1 2 3 4
Bulbs in operation at the end of the week 1,000 850 500 200 0
The group replacement of 100 bulbs costs ₹ 100 and individual replacement is ₹ 50 per
bulb. Suggest suitable replacement policy.

7. The following morality rates have been observed for a certain type of light bulbs:

Week 1 2 3 4 5
Bulbs in operation at the end of the week 10 25 50 80 100
There are 1,000 bulbs in use and it costs ₹ 2 to replace an individual bulb which has burnt
out. If all were replaced simultaneously it would cost 50 paise per bulb. It is proposed to
replace all bulbs at fixed interval, whether or not they have burnt out, and to continue
replacing burnt out bulbs, as they fail. At what interval should all the bulbs be replaced?

8. A large computer installation contains 2,000 components of identical nature which are
subject to failure as per probability distribution given below:

Week end: 1 2 3 4 5
Percentage failure of date: 10 25 50 80 100
Components which fail have to be replaced for efficient functioning of the system. If they
are replaced as and when failure occur, the cost of replacement per unit is ₹3.
Alternatively, if all components are replaced in one lot at periodical intervals and
individually replaced only as such failures occur between group replacement, the cost of
component replaced is ₹ 1.

(a) Assess which policy of replacement would be economical?

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 (b)If group replacement is economical at current costs then assess at what cost of
individual replacement would group replacement be uneconomical?

(c) How high can the cost per unit in group replacement be to make a preference for
individual replacement policy?

9. A truck is priced at ₹ 2,00,000 and running costs are estimated at ₹ 10,000 for each of
first four years increasing by ₹ 2000 per year in the 5th and subsequent years. If the time
value of money is 10% when should the truck be replaced? Assume zero salvage value.

10. A fleet owner finds from his past records that the costs per year of running a truck,
whose purchase price is ₹ 1,60,000, is as follows:

Year 1 2 3 4 5 6 7
Running cost (in ₹): 10,000 12,000 14,000 18,000 23,000 28,000 34,000
Resale value (in ₹): 1,30,000 1,15,000 75,000 37,000 20,000 20,000 20,000
Determine at what age is replacement due?

12. A group of process plants in an oil refinery are fitted with valves. Over a period of time,
it has been observed that the failure pattern 400 of these valves is:

Month 1 2 3 4 5 6 7 8
No. of failings 8 20 48 104 120 56 32 12
If there are 500 values and they cost ₹ 50 each to replace individually and ₹ 25
each to replace on a planned group maintenance system, what is the least expensive
programme?

10.10 REFERENCES
1. Davis. M, Game Theory: A Nontechnical Introduction, New York; Basic Books, Inc.
2. Lucas, “An Overview of the Mathematical Theory of Game” Management Science
Vol. 8, No. 8, Part-II.
3. Luce R.D. & Raiffa. H, Game & Decisions, New York, John Wiley & Sam.
4. Rapport, A., Two Person Game Theory, Anne Arbric, Michiger: The University of
Nichigan Press, 1966.
5. Shubik. M, The Uses & Methods of Game Theory, New York; American Elsevier.Van
Neumain, J. & Morgen Stan. O, Theory of Games & Economic Behaviour.
6. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT - 11 QUEUING THEORY
Structure:

11.0 Objectives

11.1 Introduction

11.2 Queuing Systems

11.3 Characteristics of Queuing System

11.4 Symbols and Notations

11.5 Kendall’s Notation

11.6 Classification of Queuing Models

11.7 Queuing Equations

11.8 Illustrations

11.9 Check Your Progress

11.10 Summary

11.11 Keywords

11.12 Questions for Self-Study

11.13 References

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11.0 OBJECTIVES
After studying this unit, you will be able to;

• State the meaning of queuing theory.

• Explain the characteristics of queuing system.
• Discuss the symbols, formulas and notations used in queuing system.
• Solve various illustrations under queuing system.

11.1 INTRODUCTION
In this unit, we are going to talk about the queuing theory which is also known as
waiting line. These queuing theory will facilitate in solving the queue related problem of the
industry. The most important point will be taken into consideration in the designing queue
system which should balance service to customers.

Queuing theory deals with problems that involve waiting (or queuing). It is quite
common that instances of queue occurs everyday in our daily life. Examples of queues or long
waiting lines might be

• Waiting for service in banks and at reservation counters.

• Waiting for a train or a bus.

• Waiting for checking out at the Supermarket.

• Waiting at the telephone booth or a barber's saloon.

Whenever a customer arrives at a service facility, some of them usually have to wait
before they receive the desired service. This forms a queue or waiting line and customers feel
discomfort either mentally or physically because of long waiting queue.

We infer that queues form because the service facilities are inadequate. If service
facilities are increased, then the question arises how much to increase? For example, how many
buses would be needed to avoid queues? How many reservation counters would be needed to
reduce the queue? Increase in number of buses and reservation counters requires additional
resource. At the same time, costs due to customer dissatisfaction must also be considered.

In designing a queuing system, the system should balance service to customers (short
queue) and also the economic considerations (not too many servers). Queuing theory explores
and measures the performance in a queuing situation such as average number of customers
waiting in the queue, average waiting time of a customer and average server utilization.
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11.2 QUEUING SYSTEMS
The customers arrive at service counter (single or in groups) and are attended by one or
more servers. A customer served leaves the system after getting the service. In general, a queuing
system comprises with two components, the queue and the service facility. The queue is where
the customers are waiting to be served. The service facility is customers being served and the
individual service stations. A general queuing system with parallel server is shown in Figure
11.1 below:

(x) Customers
Customers Departure
Arrival (x)

(x) Customers
Departure

Queue Service Facility

Queuing System

Figure 11.1: A typical queuing system

11.3 CHARACTERISTICS OF QUEUING SYSTEM

In designing a good queuing system, it is necessary to have a good information about
the model. The characteristics listed below would provide sufficient information.

1. The arrival pattern.

2. The service mechanism.

3. The queue discipline.

4. The number of customers allowed in the system.

5. The number of service channels.

11.3.1 The Arrival Pattern

The arrival pattern describes how a customer may become a part of the queuing system.
The arrival time for any customer is unpredictable. Therefore, the arrival time and the number
of customers arriving at any specified time intervals are usually random variables. A Poisson

- 239 -
distribution of arrivals correspond to arrivals at random. In Poisson distribution, successive
customers arrive after intervals which independently are and exponentially distributed. The
Poisson distribution is important, as it is a suitable mathematical model of many practical
queuing systems as described by the parameter "the average arrival rate".

11.3.2 The Service Mechanism

The service mechanism is a description of resources required for service. If there are
infinite number of servers, then there will be no queue. If the number of servers is finite, then
the customers are served according to a specific order. The time taken to serve a particular
customer is called the service time. The service time is a statistical variable and can be studied
either as the number of services completed in a given period of time or the completion period
of a service.

11.3.3 The Queue Discipline

The most common queue discipline is the "First Come First Served" (FCFS) or "First-
in, First-out" (FIFO). Situations like waiting for a haircut, ticket-booking counters follow FCFS
discipline. Other disciplines include "Last In First Out" (LIFO) where last customer is serviced
first, "Service In Random Order" (SIRO) in which the customers are serviced randomly
irrespective of their arrivals. "Priority service" is when the customers are grouped in priority
classes based on urgency. "Preemptive Priority" is the highest priority given to the customer
who enters into the service, immediately, even if a customer with lower priority is in service.
"Non-preemptive priority" is where the customer goes ahead in the queue, but will be served
only after the completion of the current service.

11.3.4 The Number of Customers allowed in the System

Some of the queuing processes allow the limitation to the capacity or size of the waiting
room, so that the waiting line reaches a certain length, no additional customers is allowed to
enter until space becomes available by a service completion. This type of situation means that
there is a finite limit to the maximum queue size.

11.3.5 The Number of Service Channels

The more the number of service channels in the service facility, the greater the overall
service rate of the facility. The combination of arrival rate and service rate is critical for
determining the number of service channels. When there are a number of service channels

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available for service, then the arrangement of service depends upon the design of the system's
service mechanism.

Parallel channels means, a number of channels providing identical service facilities so

that several customers may be served simultaneously. Series channel means a customer go
through successive ordered channels before service is completed. The arrangements of service
facilities are illustrated in below figure. A queuing system is called a one-server model, that is
when the system has only one server, and a multi-server model that is when the system has a
number of parallel channels, each with one server.

(a) Arrangement of service facilities in series

Customer Served
s Facility
XXXX Served
Customers

(1) Single Queue Single Server

XXXX

(2) Single Queue, Multiple Server

(b) Arrangement of Service facilities in Parallel

Customers

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 (c) Arrangement of Mixed Service facilities

Customers

XXXX

Served
Customer

Figure 11.2: Arrangements of Service Facilities (a, b, c)

11.3.6 Attitude of Customers

Patient Customer: Customer arrives at the service system, stays in the queue until served, no
matter how much he has to wait for service.

Impatient Customer: Customer arrives at the service system, waits for a certain time in the
queue and leaves the system without getting service due to some reasons like long queue before
him.

Balking: Customer decides not to join the queue by seeing the number of customers already in
service system.

Reneging: Customer after joining the queue, waits for some time and leaves the service
system due to delay in service.

Jockeying: Customer moves from one queue to another thinking that he will get served faster
by doing so.

11.4 SYMBOLS AND NOTATIONS

The symbols and notations used in queuing system are as follows:

n = Number of customers in the system (both waiting and in service).

 = Average number of customers arriving per unit of time.

µ = Average number of customers being served per unit of time.

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 /µ = P, traffic intensity.

C = Number of parallel service channels (i,e., servers).

Ls = Average or expected number of customers in the system (both waiting and in

service).

Lq = Average or expected number of customers in the queue.

Ws = Average waiting time in the system (both waiting and in service).

Wq = Average waiting time of a customer in the queue.

Pn = Time independent probability that there are n customers in the system (both
waiting and in service).

Pn (t) = Probability that there are n customers in the system at any time t (both waiting
and in service).

11.5 KENDALL’S NOTATION

Generally, queueing model may be completely specified in the following symbol from (a/b/c):
(d/e) where,

a = probability law for the arrival (inter-arrival) time

b = probability law according to which the customers are being served

c = number of channels (or service stations)

d = capacity of the system, that is the maximum number allowed in the

system (in service and waiting)

e = queue discipline

11.6 CLASSIFICATION OF QUEUEING MODELS

The queuing models are classified as follows:

Model I: (M/M/1): (ꝏ/FCFS)

This denotes Poisson arrival (exponential inter arrival), Poisson departure (exponential service
time), Single server, infinite capacity, and First come first served service disciple. The letter M
is used due to Makeovian property of exponential process.

Model II: Multiservice Model (M/M/S): (ꝏ/FCFS)

This model takes the number of service channel as S.

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Model III: (M/M/1): (N/FCFS)

In this model, the capacity of the system is limited (finite), say N. Obviously, the number of
arrivals will not exceed the number N in any case.

Model IV: (M/M/S): (N/FCFS)

This model is essentially the same as model II except the maximum number of customers in
the system is limited to N, where (N>S).

11.7 QUEUING EQUATIONS

The evaluation of Model I is listed below:

1. Expected number of customers in the system,

 
La = =
− 1−
2. Expected number of customers in the queue,
 
La = =
( − ) 1−
3. Average waiting time in the system,

Ws =
−
4. Average waiting time in the queue,

Wq =
 ( − )
 Average waiting time for a customer,
 
W(W/W>0) = or
( − ) −
7. Expected length of non-empty queue,

(L/L > 0) =
 ( − )
7. Probability that there are n customers in the system,
  n 
Pn = P0 = 1-
  
8. Probability that there is nobody in the system,

P0 =
 ( − )

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 9. Probability that there is at least one customer or queue is busy,
Pb = 1-P0
10. Traffic intensity,

 =

11.8 ILLUSTRATIONS
Illustration – 1:

A T.V. repairman finds that the time spent on his jobs has an exponential distribution with
mean 30 minutes. If he repairs sets in the order in which they come in. If the arrival of sets is
approximately Poisson with an average rate of 10 per 8-hour day, what is the repairman’s
expected idle time each day? How many jobs are ahead of the average set just brought in?

Solution:
10 1
Here,  =   = 8 X 60 = 48

Expected number of jobs are


 
Ls = =
X −
−

1
48
= 1 = 1 2/3 jobs.
30
−1/48

Since the fraction of the time the repairman is busy equals to    , the number of hours for
which the repairman remains busy in 8-hours day

 
=8 =8 X = 5 hours
 
Therefore, the time for which the repairman remains idle in an 8-hour day = (8-5) hours = 3
hours.

Illustration – 2:

Arrivals at a telephone booth are considered to be Poisson with an average time of 10 minutes
between one arrival and the next. The length of a phone call is assumed to be distributed
exponentially with mean 3 minutes.
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 (a) What is the probability that a person arriving at the booth will have to wait?
(b) What is the average length of the queue that forms from time to time?
(c) The telephone department will install a second booth when convinced that an arrival
would except to have to wait at least three minutes for the phone. By how much must
the flow of arrivals be increased in order to justify second booth?

Solution:

Given  =   = 

  
(a) Prob. (w>0) = 1 – P0 = = X = 3/10 = 0.3
  

(b) (L/L0) =  ( −)

1 1
= - 10 = 1.43 persons
3 3

(c) Wq = 
 (−)
Since Wq = 3,  =    = ₹ for second booth.

₹
3=
1 1
- ₹
3 3

1 1
3x - ₹ = ₹
3 3

1
- ₹ = ₹
3

1
2 ₹ =
3
1
₹ =
6
₹ = 0.16

Hence, increase in the arrival rate = 0.16-0.10=0.06 arrival per minute.

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Illustration – 3:
Consider a situation where the mean arrival rate (l) is one customer every 4 minutes and the
mean service time (m) is 2½ minutes. Calculate the average numberof customers in the system,
the average queue length and the time taken by a customer in the system and the average time a
customer waits before being served.

Solution: Given, Average Arrival Rate l = 1 customer every 4 minutes or 15 customers per hour

Average Service -Rate m = 1 customer every 2½ minutes or 24 customers per hour

(i) The average number of customers in the system:


Ls =
−
15
= = 1.66 customers
24 – l5

(ii) The average queue length:

 
Lq =
  −

 
= X
 −

=  Customers.

(iii) The average time a customer spends in the system:


Ws =
−


=
 − 
=  X 60
=6.66 minutes

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(iv) The average time a customer waits before being served:

Wq =
 ( − )

=
(−)
=  X 60
= 4.16 minutes

Illustration – 4:
Trucks at a single platform weigh-bridge arrive according to Poisson probability distribution.
The time required to weigh the truck follows an exponential probability distribution. The mean
arrival rate is 12 trucks per day, and the mean service rate is 18 trucks per day. Determine the
following:

(a) What is the probability that no trucks are in the system?

(b) What is the average number of trucks waiting for service?
(c) What is the average time a truck waits for weighing service to begin?
(d) What is the probability that an arriving truck will have to wait for service?
Solution:

Given l = 12 trucks per days, m = 18 trucks per day.

(a) Probability that no trucks are waiting for service:


P0 = 1-



= 1-


= 0.333 or 33.33%

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 (b) Average number of trucks waiting for service:

 
Lq =
  −

 
= X
 −

=  Trucks
(c) Average time a truck waits for weighing service to begin:


Ws =
−

=
( − )

= 0.1111 days or 53.3 minutes.

(d) Probability that an arriving truck will have to wait for service:

P0 = 1 – P0

= 1 – 0.333

= 0.6667 or 66.67%

Illustration 5:
Auto car service provides a single channel water wash service. The incoming arrivals occur at
the rate of 4 cars per hour and the mean service rate is 8 cars per hour. Assume that arrivals
follow a Poisson distribution and the service rate follows an exponential probability
distribution. Determine the following measures of performance:
(a) What is the average time that a car waits for water – wash to begin?
(b)What is the average time a car spends in the system?
(c) What is the average number of cars in the system?

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Solution:
Given  = 4 cars per hour,  = 8 cars per day.
(a) Average time that a car waits for water - wash to begin:

Wq =
( − )

4
=
4(8 − 4)

= 0.125 hours or 7.5 mins.

(b) Average time a car spends in the system:
1
Ws =
−

1 1
= = = 0.25 hours or 15 mins.
8−4 4
(c) Average number of cars in the system:
  
Ls = = = = 1 car.
− − 

Illustration – 6:
A bank has decided to open a single server drive-in banking facility at its main branch office.
It is estimated that 20 customers arrive each hour on an average. The time required to serve a
customer is 3 minutes on an average. Assume that arrivals follow a Poisson distribution and the
service rate follows an exponential probability distribution.

The bank manager is interested in knowing the following:

(a) What will be the average waiting time of a customer to get the service?

(b) The proportion of time that the system will be idle.

(c) The space required to accommodate all the arrivals, on an average, the space taken by
each car is 10 feet that is waiting for service.

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Solution:  = 20 Customers per hour,  = 60/25 = 2.4 customers per hour.

(a) Average waiting time of a customer to get the service:


Wq =
 ( − )
 
= =
(−) 

= 0.208 hour or 12.5 mins.

(b) The proportion of time that the system will be idle:


P0 = 1 =


20
=1-

= 0.166 hours or 10 mins.
(c) Average number of customers waiting in the queue:


Lq =
(−)

202 400
= =
24(24-20) 96

= 4.66 customers.
10 feet is required for 1 customer. Hence, for 4.66 customers, the space required is 10 x 4.66 = 46.6
feet.

Illustration – 7:

In a Bank, customers arrive to deposit cash to a single counter server every 15 minutes. The
bank staff on an average takes 10 minutes to serve a customer. The manager of the bank noticed
that on an average at least one customer was waiting at the counter. To eliminate the customer
waiting time, the manager provided an automatic currency counting machine to the staff. This
decreased the service time to 5 minutes on an average to every customer. Determine whether this
rate of service will satisfy the manager's interest.

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Solution:

60 60
Case 1:  = = 4 customers per hour,  = = 60 = 6 customers per hour.
15 10

Average number of customers in the system:


Ls =
−

4 4
= = = 2 customers.
6-4 2

60
Case 2: 1 = 4,  = = 12customers per hour.
10
Average number of customers in the system:


Ls =
 − 

4 1
= =
= 0.5, say, 1 customers.
8 2
Average number of customers in the queue:

Lq =
(−)

42 16
= =
12(12-4) 96

= 0.01 customers.
Since no customers are standing in the queue the manager’s interest is satisfied.
Illustration – 8:
12 counters are available in a computerized railway reservation system. The arrival rate during
peak hours is 90 customers per hour. It takes 5 minutes to serve a customer on an average.
Assume that the arrivals joining in a queue will not be jockeying (that is move to another queue).
How many counters have to be opened if the customers need not to wait for more than 15
minutes?

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Solution:

The problem is to be solved as one system comprising of 'n' number of single server queuing
model.

Arrival rate,  =90 customers per hour

60
Service rate,  = =  per hour
5
15
Average waiting time, Wq = = 0.25 hours
60

that is =0.25 …………………………….(i)
(−)

Let, number of counters be x,

Considering the single server queuing system, the number of counters required to serve 90 arrivals per

hour,  =  substituting  =  in equation (i),

x x
90
x
0.25=
90
12 12-
x

90
0.25 =
12 (12x-90)

0.25 x 12(12x-90) = 90
3(12x – 90) = 90
36x – 270 =90
36x = 360
360
x= = 10 counts
36
Hence, 10 counts are required so that an average arrival will wait less than 15 minutes.

Illustration – 9:

In a single pump petrol station, vehicles arrive at the rate of 20 customers per hour and petrol
filling takes 2 minutes on an average. Assume the arrival rate is Poisson probability distribution
and service rate is exponentially distributed, determine
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 (a) What is the probability that no vehicles are in the petrol station?

(b) What is the probability that 1 customer is filling and no one is waiting in the queue?

(c) What is the probability that 1 customer is filling and 2 customers are waiting in the queue?

(d) What is the probability that more than 2 customers are waiting?

Solution:

l = 20 vehicles per hour, m = 60/2 = 30 vehicles per hour.

(a) Probability that no vehicles are in the petrol station:

 
P0 = 1- =1-
 

=   
(b) Probability that 1 customer is filling and no one is waiting in the queue:

 n
 n

Pn = P0 = 1-
  
1
20 20
P1 = 1-
30 30

= 0.6667 x 0.3333
= 0.2222 or 22.22%
(c) Probability that 1 customer is filling and 2 customers are waiting in the queue,
that is there are 3 customers in the system:
3
20 20
P3 = 1-
30 30

= 0.2963 x 0.3333
= 0.09875 or 9.87%
(d) Probability that more than 3 customers are in the system:
4
20 20
P4 = 1-
30 30

= 0.1975 x 0.333
= 0.6583 or 65.83%
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11.9 CHECK YOUR PROGRESS

1. Write True or False against each statement:

(a) Parallel channel means, a number of channels providing identical services.

(b) Queuing theory is concerned with the decision making process.

(c) Customer decide not to joins the queue is Reneging.

(d) The line that form in front of service facilities is called a queue.

(e) Random arrival mean when there is how service point.

2. Fill in the blanks:

(a) The arrival time for any customer is ______.

(b) The most common queue discipline is ______.

(c) If there is queue then______has to wait for same lines.

(d) Cost associated with service or the facility are known as _____.

(e) Waiting time is a time which customer spends in the ______.

Answer to Check Your Progress:

1. (a) True (b) True (c) False

(d) True (e) False

2. (a) unpredictable (b) First come first serve (FCFS)

(c) customer (d) service cost (e) queue

11.10 SUMMARY
As we have discussed queuers or waiting lines are very familiar in day to day life. In
general quite often we face the problem of long queues for a bus, a movie ticket, railway
reservation, ATM machine and various other situation. The queuing model are those where a
facility perform aservice. A queuing problem arises when the current services rate of a facility
fall short of the current flow rate of customer. Thus if the service facility capable of servicing
customers arrive there will be no pitfalls. Thus the queuing theory is related with the decision
making process of the business unit which relates with the queue question and makes decision
relative to the number of service facilities which are operating.

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11.11 KEYWORDS
Balking : A customer may not like to join the queue seeing it very
long and he may not like to wait.

Reneging : He may leave the queue due to impatience after joining

in collusion several customers may collaborate and only
one ofthem may stand in queue.

Jockeying : If there are number of queues then one may leave one
queue to join another.

Queue length : Number of customers waiting in the queue.

Queuing system : System consisting arrival of customers, waiting in

queue, picked up for service according to a certain
discipline, being serviced and departure of customers.

Service station : Point where service is provided

Customer : Person or unit arriving at a station for service.

Customer may be a machine or person.

Waiting time : Time a customer spends in the queue before being

serviced.

11.12 QUESTIONS FOR SELF-STUDY

1. What is the queuing theory?

2. Define arrival rate and service rate.

3. Explain the characteristics of MM1 queuing model.

4. Briefly explain Service Mechanism and Queue Discipline.

5. What is system of steady-state?

Exercise Problems:

1. A Bank operates a single facility ATM machine. Customers arrive at the rate of 10
customers per hour according to Poisson probability distribution. The time taken for an
ATM transaction is exponential which means 3 minutes on an average. Find the
following:

(a) Average waiting time of a customer before service.

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 (b)Average number of customers in the system.

(c) Probability that the ATM is idle.

2. At an average 12 cars per hour arrive at a single-server, drive-in teller. The average
service time for each customer is 4 minutes, and the arrivals and services are Poisson and
exponentially distributed respectively. Answer the following questions:

(a) What is the proportion that the teller is idle?

(b)What is the time spent by a customer to complete his transaction?

(c) What is the probability that an arriving car need not wait to take-up service?

3. At a single facility security check at an airport, passengers arrive at the check- point on
an average of 8 passengers per minute and follows a Poisson probability distribution. The
checking time for a customer entering security check area takes 10 passengers per minute
and follows an exponential probability distribution. Determine the following:

(a) On an average, how many passengers are waiting in queue to enter the check- point?

(b)On an average, what is the time taken by a customer leaving the check- point?

4. In a college computer lab, computers are interconnected to one laser printer. The printer
receives data files for printing from these 25 computers interconnected to it. The printer
prints the files received from these 25 computers at the rate of 5 data files per minute.
The average time required to print a data file is 6 minutes. Assuming the arrivals are
Poisson distributed and service times are exponentially distributed, determine

(a) What is the probability that the printer is busy?

(b)On an average, how much time must a computer operator wait to take a print-out?

(c) On an average, what is the expected number of operators that will be waiting to take
a print-out?

5. Skyline pizza is a famous restaurant operating a number of outlets. The restaurant uses a
toll-free telephone number to book pizzas at any of its outlets. It was found that an
average of 15 calls are received per hour and the average time to handle each call is 2.5
minutes. Determine the following:

(a)What is the average waiting time of an incoming caller?

(b)What is the probability that a caller gets connected immediately?

- 257 -
 (c)If the restaurant manager feels that average waiting time of a caller is more than 5
minutes, will lead to customer loss and the restaurant will have to go in for a second
toll free facility, what should be the new arrival rate in order to justify another facility?

6. From historical data, a two-wheeler service station observe that bikes arrive only for
water wash is at the rate of 7 per hour per 8 hour shift. The manager has a record that it
takes 5 minutes for water service and another 2 minutes for greasing and general check.
Assuming that one bike is washed at a time, find the following:

(a) Average number of bikes in line.

(b)Average time a bike waits before it is washed.

(c) Average time a bike spends in the system.

(d)Utilization rate of the bike wash.

(e) Probability that no bikes are in the system.

7. In a department at store, an automated coffee vending machine is installed. Customers

arrive at a rate of 3 per minute and it takes average time of 10 seconds to dispense a cup
of coffee:

(a) Determine the number of customers in the queue.

(b)Determine the waiting time of a customer.

(c) Find the probability that there are exactly 10 customers in the system.

8. In a toll gate, vehicles arrive at a rate of 120 per hour. An average time for a vehicle to
get a pass is 25 seconds. The arrivals follow a Poisson distribution and service times
follow an exponential distribution. (a) Find the average number of vehicles waiting and
the idle time of the check-post. (b) If the idle time of the check post is less than 10%, the
check-post authorities will install a second gate. Suggest whether a second gate is
necessary?

9. A hospital has an X-ray lab where patients (both in-patient and out-patient) arrive at a
rate of 5 per minute. Due to variation in requirement, the time taken for one patient is 3
minutes and follows an exponential distribution.

(a) What is the probability that the system is busy? And

(b) What is the probability that nobody is in the system?

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 10. In the production shop of a company breakdown of the machine is found to be Poisson
with an average rate of 3 machines per hour. Breakdown time at one machine costs
₹ 40 per hour to the company. There are two choices before the company for hiring the
repairmen, one of the repairmen is slow but cheap, the other is fast but expensive. The
slow-cheap repairman demands ₹ 20 per hour and will repair the breakdown machine
exponentially at the rate of 4 per hour. The fast expensive repairman demands ₹ 30 per
hour and will repair exponentially on an average rate of ₹6 per hour. Which repairman
should be hired?

11.13 REFERENCES
1. T.L. Satty, Elements of Queuing, New York McGraw Hill Theory.
2. A.M. Lee, Applied Queuing theory.
3. Cooper, R.B., Introduction to Queuing theory, New York MacMillan Co.
4. Morse, Philip M.Ques, Inventories & maintenance, New York John Wiley & Sons.
5. Panieo, J.A., Queuing Theory: A Study of Waiting Line of Business, Economics,
Science, Englewood, No. 3, Prentice-Hall.
6. Bhat, U.N. “The Value of Queuing Theory – A Rejoinder Interface, Vol. 8, No. 3 pp. 27-
78.
7. Byrd. J., The value of queuing & Interfaces, Vol. 8, No. 3, pp. 22-26.
8. Render, B & Stain R.M., Cases & readings in quantitative analysis, Boston: Allyn &
Bacon, 1982.
9. Graff G, “Simple Queuing theory saves Unnecessary Equipment”, Industrial
Engineering, Vol. 3.
10. Paul R.I., Stevens R.E., Staffing service activities with waiting the models decision,
Science, Vol. 2
11. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT – 12 SEQUENCING PROBLEM

Structure:

12.0 Objectives

12.1 Introduction

12.2 Important Basic Terms

12.3 Principal Assumptions

12.4 Processing n-jobs through Two Machines

12.5 Processing n-jobs through Three Machines

12.6 Problems with n-Jobs and m Machines

12.7 Check Your Progress

12.8 Summary

12.9 Keywords

12.10 Questions for Self-Study

12.11 References

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12.0 OBJECTIVES
After studying this unit, you will be able to;

• State the principal assumptions for solving sequencing problems.

• Describe the method of processing n-jobs through two machines and three machines.
• Find the sequence of jobs to complete the jobs so as to minimise the total elapsed time
under different cases.

12.1 INTRODUCTION
When a number of jobs are given to be done and they require processing on two or more
machines, the main concern of a manager is to find the order or sequence to perform these jobs.
We shall consider the sequencing problems in respect of the jobs to be performed in a factory
and study the method of their solution. Such sequencing problems can be broadly divided in
two groups. In the first one, there are n jobs to be done, each of which requires processing on
some or all of the k different machines. We can determine the effectiveness of each of the
sequences that the technologically feasible (that is to say, those satisfying the restrictions on
the order in which each job must be processed through the machines) and choose a sequence
which optimizes the effectiveness. To illustrate, the timings of processing of each of the n jobs
on each of the k machines, in a certain given order, may be given and the time for performing
the jobs may be the measure of effectiveness. We shall select the sequences for which the total
time taken in processing all the jobs on the machines would be the minimum.

In this unit we will look into solution of a sequencing problem. In this unit the solutions of
following cases will be discussed:

a) n jobs and two machines A and B, all jobs processed in the order AB.

b) n jobs and three machines A, B and C all jobs processed in the order ABC

c) Problems with n jobs and m machines.

12.2 IMPORTANT BASIC TERMS

The following are the terminologies and notations used in this unit.

Number of Machines: It means the service facilities through which a job must pass before it
is completed.

Processing order: It refers to the order in which various machines are required for completing
the job.
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Processing time: It means the time required by each job on each machine.

Idle time on a machine: This is the time for which a machine remains idle during the total
elapsed time. The notation xij is used to denote the idle time of a machine j between the end of
the (i-1)th job and the start of the ith job.

Total elapsed time: This is the time between starting the first job and completing the last job
which also includes the idle time, if exists.

No Passing rule: It means passing is not allowed, i.e., maintaining the same order of jobs over
each machine. If each of N-jobs is to be processed through 2 machines M1 and M2 in the order
M1 M2 then this rule will mean that each job will go to machine M1 first and then to M2 (i.e.)
if a job is finished on M1, it goes directly to Machine M2 if it is empty, otherwise it starts a
waiting line or joins the end of the waiting line, if one already exists. Jobs which form a waiting
line are processed on machine M2 if it already exists.

12.3 PRINCIPAL ASSUMPTIONS

1) No machine can process more than one operation at a time.
2) Each operation once started must be performed till completion.
3) Each operation must be completed before any other operation which must precede is
started.
4) Time intervals for processing are independent of the order in which operations are
performed.
5) There is only one of each type of machine.
6) A job is processed as soon as possible subject to the ordering requirements.
7) All jobs are known and are ready to start processing, before the period under consideration
begins.
8) The time required to transfer jobs between machines is negligible.

12.4 PROCESSING n - JOBS THROUGH TWO MACHINES

The simplest possible sequencing problem is that of n job two machine sequencing
problem in which we want to determine the sequence in which n-job should be processed
through two machines so as to minimize the total elapsed time T. The problem can be described
as:

a) Only two machines A and B are involved;

b) Each job is processed in the order AB.

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 c) The exact or expected processing times A1,A2,A3, --- , An ; B1,B2,B3, --- , Bn are known
and are provided in the following table.

Job(s)
Machine
1 2 3 -- - i -- - n

A A1 A2 A3 -- - Ai -- - An

B B1 B2 B3 -- - Bi -- - Bn

The problem is to find the sequence (or order) of jobs so as to minimize the total elapsed
time T. The solution of the above problem is also known as Johnson’s procedure which involves
the following steps:

Step-1: Select the smallest processing time occurring in the list A1,A2,A3, --- , An ;
B1,B2,B3, --- , Bn if there is a tie, either of the smallest processing times can be
selected.

Step-2: If the least processing time is Ar , select the rth job first. If it is Bs, do the sth job
last as the given order is AB

Step-3: There are now (n-1) jobs left to be ordered. Repeat steps I and II for the
remaining set of processing times obtained by deleting the processing time for
both the machines corresponding to the job already assigned.

Step-4: Continue in the same manner till the entire jobs have been ordered. The resulting
ordering will minimize the total elapsed time T and is called the optimal
sequence.

Step-5: After finding the optimal sequence as stated above find the total elapsed time
and idle times on machines A and B as under:

Total elapsed The time between starting the first job in the optimal
time = sequence on machine A and completing the last job in
the optimal machine B.

Idle time on (Time when the last job in the optimal sequence on
machine A = sequences is completed on machine B)- (Time when

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 the last job in the optimal sequences is completed on
machine A)

Idle time on (Time when the first job in the optimal sequences is
∑𝑛 th
= completed on machine A)+ 𝑘 = 2 [(time when k
machine B
job starts on machine B) – (time (k – 1)st job finished
on machine B)]

The Johnson’s procedure can be illustrated as follows:

Illustration–1:

There are five jobs each of which must go through the two machines A and B in the order in
the order AB. Processing times are given below.

Job 1 2 3 4 5

Machine A 5 1 9 3 10

Machine B 2 6 7 8 4

Determine a sequence for five jobs that will minimise the total elapsed time

Solution:

The smallest processing time in the given problem is 1 on Machine A. So, perform job 2 in
the beginning as shown below.

The reduced list of processing time becomes

Job 1 3 4 5

m/c A 5 9 3 10

m/c B 2 7 8 4

Again, the smallest processing time in the reduced list is 2 for job 1 on the machine B. So,
place the job 1 last.

2 1

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Continuing in the same manner the next reduced list is obtained

Job 3 4 5

m/c A 9 3 10

m/c B 7 8 4

Leading to the sequence,

2 4 1

and the list

Job 3 5

m/c A 9 10

m/c B 7 4

Give rise to sequence,

2 4 5 1

Finally, the optimal sequence n is obtained,

2 4 3 5 1

Flow of jobs through machine A and B using the optional sequence (viz)

2 – 4 – 3 – 5 – 1.

Computation of the total elapsed time and Machine idle time.

Machine A Machine B Idle time

Job
In Out In Out A B
2 0 1 1 7 0 1
4 1 4 7 15 0 0
3 4 13 15 22 0 0
5 13 23 23 27 0 1
1 23 28 28 0 30-28 1
30
=2 3

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Illustration-2:

There are nine jobs, each of which must go through two machines P and Q in the order PQ, the
processing times (in hours) are given below:

Job(s)
Machine
A B C D E F G H I

P 2 5 4 9 6 8 7 5 4

Q 6 8 7 4 3 9 3 8 11

Find the sequence that minimizes the total elapsed time T. Also calculate the total idle time for
the machines in this period.

Solution:

The minimum processing time on two machines is 2 which correspond to task A on machine
P. This shows that task A will be preceding first. After assigning task A, we are left with 8
tasks on two machines

Machine B C D E F G H I

P 5 4 9 6 8 7 5 4

Q 8 7 4 3 9 3 8 11

Minimum processing time in this reduced problem is 3 which correspond to jobs E and G (both
on machine Q). Now since the corresponding processing time of task E on machine P is less
than the corresponding processing time of task G on machine Q therefore task E will be
processed in the last and task G next to last. The situation will be dealt as

A G E

The problem now reduces to following 6 tasks on two machines with processing time as
follows:

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 Machine B C D F H I

P 5 4 9 8 5 4

Q 8 7 4 9 8 11

Here since the minimum processing time is 4 which occurs for tasks C and I on machine P and
task D on machine Q. Therefore, the task C which has less processing time on P will be
processed first and then task I and task D will be placed at the last i.e., 7th sequence cell.

The sequence will appear as follows:

A C I D G E

The problem now reduces to the following 3 tasks on two machines

Machine B F H

P 5 8 5

Q 8 9 8

In this reduced table the minimum processing time is 5 which occurs for tasks B and H both
on machine P. Now since the corresponding time of tasks B and H on machine Q are same i.e.
8. Tasks B or H may be placed arbitrarily in the 4th and 5th sequence cells. The remaining task
F can then be placed in the 6th sequence cell. Thus the optimal sequences are represented as

A C I B H F D G E

or

A C I H B F D G E

Further, it is also possible to calculate the minimum elapsed time corresponding to the optimal
sequencing A → C → I → B → H → F → D → G → E.

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 Job Machine P Machine Q Ideal Time
Sequence Time In Time Out Time In Time Out A B
A 0 2 2 8 - 2
C 2 6 8 15 - -
I 6 10 15 26 - -
B 10 15 26 34 - -
H 15 20 34 42 - -
F 20 28 42 51 - -
D 28 37 51 55 - -
G 37 44 55 58 - -
E 44 50 58 61 61-50 -
11 2

Hence the total elapsed time for this proposed sequence staring from job A to completion of
job G is 61 hours .During this time machine P remains idle for 11 hours (from 50 hours to 61
hours)and the machine Q remains idle for 2 hours only (from 0 hour to 2 hour ).

12.5 PROCESSING n-JOBS THROUGH THREE MACHINES

Consider n jobs (1, 2 … n) processing on three machine A, B, C in the order ABC. The optimal
sequence can be obtained by converting the problem into two machine problems. From the so
converted two machine problem we get the optimum sequence using Johnson’s algorithm.

The following steps are used to convert the given problem into two machine problems.

Step 1 Find the minimum processing time for the jobs on first and last machine and the
maximum processing time for the second machine.

i.e., find min (Ai, Ci) i = 1, 2…n

and max (Bi)

Step 2 Check the following inequality

min Ai ≥ max Bi

or

min Ci ≥ max Bi

Step 3 If none of the inequality in step 2 are satisfied this method cannot be applied.

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Step 4 If at least one of the inequality in step 2 is satisfied we define two machines G and H
such that the processing time on G & H are given by

Gi = Ai + Bi i = 1, 2…n

Hi = Bi + Ci i = 1, 2…n

Step 5 For the converted machines G & H, we obtain the optimum sequence. Using two
Machine algorithm.

Illustration – 3:

There are five jobs (namely 1,2,3,4 and 5), each of which must go through machines A, B and
C in the order ABC. Processing Time (in hours) are given below:

Jobs 1 2 3 4 5

Machine A 5 7 6 9 5

Machine B 2 1 4 5 3

Machine C 3 7 5 6 7

Find the sequence that minimum the total elapsed time required to complete the jobs.

Solution:

Here Min Ai = 5 and Ci =3; Max Bi = 5 since the condition of Min. Ai ≥ Max. Bi is satisfied
the given problem can be converted into five jobs and two machines problem.

Jobs Gi = Ai + Bi Hi = Bi + Ci
1 7 5
2 8 8
3 10 9
4 14 11
5 8 10

The Optimal Sequence will be

2 5 4 3 1

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Total elapsed Time will be

Machine A Machine B Machine C Idle Time

Jobs
In Out In Out In Out A B C

2 0 7 7 8 8 15 - 7 8

5 7 12 12 15 15 22 - 4 -

4 12 21 21 26 26 32 - 6 4

3 21 27 27 31 32 37 - 1 -

1 27 32 32 34 37 40 40-32=8 1 -

40-34=6 -

8 25 12

Min. total elapsed time is 40 hours.

Idle time for Machine A is 8 hrs. (32-40)

Idle time for Machine B is 25 hours (0-7, 8-12, 15-21, 26-27, 31-32 and 34-40)

Idle time for Machine C is 12 hours (0-8, 22-26.)

Illustration – 4:

A Machine operator has to perform three operations turning, threading and knurling on a
number of different jobs. The time required to perform these operations (in minutes) for each
job is known. Determine the order in which the jobs should be processed in order to minimize
the total time required to turn out all the jobs. Also find the minimum elapsed time.

Job 1 2 3 4 5 6
Turning 3 12 5 2 9 11
Threading 8 6 4 6 3 1
Knurling 13 14 9 12 8 13

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Solution:

Let us consider the three machines as A, B and C

A = Turning, B = Threading, C = Knurling

Step 1 min (A1 C1) = (2,8)

max (B1) = 8

Step 2

min C1= 8 ≥ max B1 = 8 is satisfied

We define two machine G & H

Such that Gi = Ai + Bi

Hi = Bi + Ci

Job 1 2 3 4 5 6

G 11 18 9 8 12 12

H 21 20 13 18 11 14

We adopt the Johnson’s algorithm steps to get the optimum sequence.

4 3 1 6 2 5

To find min total elapsed time and idle time for Machines A, B and C

Machine A Machine B Machine C Idle time

Job
In Out In Out In Out A B C
4 0 2 2 8 8 20 - 2 8
3 2 7 8 12 20 29 - - -
1 7 10 12 20 29 42 - - -
6 10 21 21 22 42 55 - 1 -
2 21 33 33 39 55 69 - 11 -
5 33 42 42 45 69 77 77-42 3 -
=35 77-45 -
35 49 8

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Total elapsed time = 77 minutes

Idle time for machine A = 35 minutes;

Idle time for machine B = 49 minutes;

Idle time for machine C = 8 minutes.

12.6 PROBLEMS WITH n JOBS AND m MACHINES

Consider n jobs (1, 2…n) processing through k machines M1 M2 … Mk in the same order. The
iterative procedure of obtaining an optimal sequence is as follows.

Step 1 Find Min Mi and Min Mik and Max. of each of Mi2, Mi3 ...Mik1 for I = 1, 2…n

Step 2 Check whether

min Mi1 ≥ max Mij, for j = 2,3…k – 1

or

min Mik ≥ max Mij, for j = 2,3…k – 1.

Step 3 If the inequality in step 2 are not satisfied the method fails, otherwise, go to next step.

Step 4 In addition to step 2 if Mi2 + Mi3 + … Mik-1 = C, where C is a positive fixed constant for
all i = 1, 2 … n.

Then determine the optimal sequence for n jobs and the two machines are Mi and M1 in the
order Mi M2 by using the optimum sequence algorithm.

Step 5 If the condition Mi2 + Mi3 + … Mi4.1 ≠ C for all i = 1,2 …n, we define two machines G
and H such that

Gi = Mi1 + mi2 + …. + Mi1-1

Hi = Mi2 + Mi3 + …. + Mi1 i = 1,2,3,4.

Determine the optimal sequence of performance of all jobs on G and H using the optimum
sequence algorithm for two machines.

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Illustration – 5:

Four jobs 1, 2, 3 and 4 are to be processed on each of the five machines A, B, C, D, and
E in the order A B C D E. Find the total minimum elapsed time if no passing of jobs is
permitted. Also find the idle time for each machine.

Jobs
Machines
1 2 3 4
A 7 6 5 8
B 5 6 4 3
C 2 4 5 3
D 3 5 6 2
E 9 10 8 6
Solution:

Since the problem is to be sequenced on five machines, we convert the problem into two
machine problems by adopting the following steps.

Step 1 Find min (Ai, Ei) = (5, 6)

i = 1,2,3,4

max (Bi, Ci, Di) = (6,5,6)

Step 2 The inequality

min Ei = 6 ≥ max (Bi, Ci, Di)

is satisfied. Therefore, we can convert the problem into two machine problems.

Step 3 Since Bi + Ci + Di ≠ C where C is a fixed constant, we define two machine G and H

such that

Gi = Ai + Bi + Ci + Di

Hi = Bi + Ci + Di + Ei i = 1,2,3,4.

Job 1 2 3 4
G 17 21 20 16
H 19 25 23 14

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 Machine A Machine B Machine C Machine D Machine E
Job
In Out In Out In Out In Out In Out

1 0 7 7 12 12 14 14 17 17 26

3 7 12 12 16 14 19 19 25 26 34

2 12 18 18 24 24 28 28 33 34 44

4 18 26 26 29 29 32 33 35 44 50

Idle time

A B C D E

- 7 12 14 17

- - - 2 -

- 2 5 3 -

- 2 1 - -

50-26 21 18 15 -

=24 32 36 34 17

Total elapsed time = 50 hrs.

Idle time for m/c A = 24 hrs.; Idle time for m/c B = 32 hrs.; Idle time for m/c
E = 17 hrs.

Illustration – 6:

When passing is not allowed. Solve the following problem giving an optimal solution.

Job Machine
G M1 M2 M3 M4
A 24 7 7 29
B 16 9 5 15
C 22 8 6 14
D 21 6 8 32

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Solution:

The given problem is having four jobs on four machines. The optimum sequence can be
obtained by converting it into 2 machine problems. The following steps are adopted to find the
optimum sequence.

Step 1 min (Mi1, Mi2) = (16, 14)

max (Mi2, Mi3) = (9, 8)

Step 2 Both the inequalities

min Mi1 = 16 ≥ max (Mi2, Mi3) =(9,8)

and min (Mi4) = 14 ≥ max (Mi2, Mi3) = (9,8) are satisfied.

Step 3 In addition to this inequality also we have Mi2 + Mi3 = 14 for i = 2,3. We have two
Machines M1 and M4 in the order M1 M4

Job A B C D

M1 24 16 22 21

M4 29 15 14 32

D A B C

Machine M1 Machine M2 Machine M3 Machine M4

Job
In Out In Out In Out In Out

D 0 21 21 27 27 35 35 67

A 21 45 45 52 52 59 67 96

B 45 61 61 70 70 75 96 111

C 61 83 83 91 91 97 111 125

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 Idle time

M1 M2 M3 M4

- 21 27 35

- 18 17 -

- 9 11 -

42 13 16 -

- 34 28 -

42 95 99 35
Total elapsed time = 125 hrs.

Idle time for m/c M1 = 43 hrs; Idle time for m/c M2 = 95 hrs; Idle time for m/c M3 = 99
hrs; Idle time for m/c M4 = 35 hrs.

Jobs 1 2 3 4 5 6 7 8 9

Machine A 4 9 5 10 6 12 8 3 8

Machine B 6 4 8 9 4 6 2 6 4

Machine C 10 12 9 11 14 15 10 14 12

12.7 CHECK YOUR PROGRESS

State true or false for the following statement

1. Idle time is included between the first job and last job.

2. Machine can be processed more than one operations at a time.

3. Operations once started need not require to perform till the end.

4. Sequence the job will minimise total elapsed time.

Answers to Check Your Progress:

1. True 2. False 3. False 4. True

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12.8 SUMMARY
As we have discussed, sequencing problems are concerned with an appropriate order
(sequence) for a series of jobs to be done a finite number of service facilities (like machine) in
some well defined technological order so as to optimise some efficiency measure such as total
elapsed time or overall cost, etc. In simple, sequencing problems deals the selection of an
optimum order for the number of jobs to perform with a finite number of facilities. It is required
to know what time of date each jobs is due as well as when it will start. It is also interested in
figuring out the order of jobs that will minimises the total elapsed time for processing all the
jobs from the beginning of the job the end of the last job.

12.9 KEY WORDS

Sequencing Problems : It is the problems of finding an optimal sequence
of completing a certain number of jobs so as to
minimise the total elapsed time between
completion of first and last jobs.
Idle Time : It is the time for which machine requires for
completing the job.
Processing Order : It is the time interval between stating the first
job and completing the last job including the idle
time (if any) in a particular order by the given
set of machines.

12.10 QUESTIONS FOR SELF-STUDY

1. What is no passing rule in a sequencing algorithm?
2. Explain the principal assumptions made while dealing with sequencing problem.
3. Describe the method of processing n jobs through two machines.
4. What is sequencing problem.
5. Explain the method of processing m jobs through three machines A, B and C in the order
ABC.

Exercise Problems:

1. Six jobs go first over machine I and then over machine II. The order of completion of
jobs no significance. The following gives the machine times in hours for six jobs and the
two machines.

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 Job 1 2 3 4 5 6

5 9 4 7 8 6
Machine I

7 4 8 3 9 5
Machine II

Find the sequence of jobs that minimizes the total elapsed time to compete the jobs.

2. We have seven jobs each of which has to go through the machine M1 and M2 in the order
M1 M2. Processing time (in hours) are given as

Job 1 2 3 4 5 6 7

3 12 15 6 10 11 9
Machine M1

8 10 10 6 12 1 3
Machine M2

Determine a sequence of these jobs that will minimize the total elapsed time.

3. Find the sequence that minimize the total elapsed time required to complete the following
tasks

Tasks A B C D E F G

3 8 7 4 9 8 7
Time on I m/c

4 3 2 5 1 4 3
Time on II m/c

6 7 5 11 5 6 12
Time on III m/c

4. Find the sequence for the following eight jobs that will minimize the total elapsed time
for the competition of all jobs. Each job is processed in the same order.
Jobs
Time for
machines 1 2 3 4 5 6 7 8

4 6 7 4 5 3 6 2
A

8 10 7 8 11 8 9 13
B

5 6 2 3 4 9 15 11
C

The entries give the time in hours on the machine.

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 5. Solve the following sequencing problem, when passing is not allowed.
Machine
Item
A B C D E

9 7 5 4 11
I

8 8 6 7 12
II

7 6 7 8 10
III

10 5 5 4 8
IV

12.11 REFERENCES
1. T.L. Satty, Elements of Queuing, New York McGraw Hill Theory.
2. A.M. Lee, Applied Queuing theory.
3. Cooper, R.B., Introduction to Queuing theory, New York MacMillan Co.
4. Morse, Philip M.Ques, Inventories & maintenance, New York John Wiley & Sons.
5. Panieo, J.A., Queuing Theory: A Study of Waiting Line of Business, Economics,
Science, Englewood, No. 3, Prentice-Hall.
6. Bhat, U.N. “The Value of Queuing Theory – A Rejoinder Interface, Vol. 8, No. 3 pp. 27-
78.
7. Byrd. J., The value of queuing & Interfaces, Vol. 8, No. 3, pp. 22-26.
8. Render, B & Stain R.M., Cases & readings in quantitative analysis, Boston: Allyn &
Bacon, 1982.
9. Graff G, “Simple Queuing theory saves Unnecessary Equipment”, Industrial
Engineering, Vol. 3.
10. Paul R.I., Stevens R.E., Staffing service activities with waiting the models decision,
Science, Vol. 2.
11. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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Karnataka State Open University
Mukthagangothri, Mysuru – 570 006
[email protected] III SEMESTER M.COM
QUANTITATIVE TECHNIQUE
COURSE CODE:MCOHC3.2

Department of Studies and Research in Commerce

BLOCK
4

Page No.

UNIT – 13: INVENTORY MODEL 280-313

UNIT – 14: SIMULATION 314-342

UNIT – 15: PROBABILITY 343-372

UNIT – 16: DECISION THEORY 373-391

 BLOCK – IV
INTRODUCTION
The last block of quantitative technique covers inventory model, need for inventory control,
advantages of material controls, essential factors of material control, ABC analysis, technique
of inventory control, minimum stock level, maximum stock level, ordering level or Re order
level, average stock, danger level and problems. Followed by simulation introduction,
advantages and disadvantages of simulation, Monte Carlo simulation, simulation of demand
problems, entry problems continued by probability, basic rules be followed in probability,
random variables, important terms and concepts, probability distribution, theoretical
distributions. Finally, decision theory its introduction, types of decision making, decision
making situation under certainty and uncertainty, different optimal decision criteria and
decision trees are focused.

This block comprises four units as presented below:

Unit – 13: Inventory Model

Unit – 14: Simulation

Unit – 15: Probability

Unit – 16: Decision Theory

 BLOCK - IV

UNIT – 13 INVENTORY CONTROL

Structure:

13.0 Objectives

13.1 Introduction

13.2 Need of Inventory Control

13.3 Advantages of Material Control

13.4 Essential Factors of Material Control

13.5 Process of Inventory Control

13.6 Minimum Stock Level

13.7 Maximum Stock Level

13.8 Ordering Level or Re-order Level

13.9 Average Stock level

13.10 Danger Level

13.11 Illustrations

13.12 Check Your Progress

13.13 Summary

13.14 Keywords

13.15 Questions for Self-Study

13.16 References

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13.0 OBJECTIVES
After studying this unit, you will be able to;

• State the need of inventory control.

• Discuss various factors which determine the level of inventory control.
• Explain the process of inventory control.
• Determine minimum stock level, maximum stock level, re-order point and Economic
Order Quantity (EOQ).

13.1 INTRODUCTION
In this unit we are going to discuss about the inventory control and how to minimised the
total cost of inventory. The inventory control system offers comprehensive report capabilities
to keep you on top of inventory status. It can facilitate in bringing about the creating of new or
improved purchasing policies, save policies, pricing modelling and even enhanced customer
service.

The inventory means a physical stocks of good which is kept in hand for smooth and
efficient running of future affairs of an organisation at the minimum costs of funds blocked in
inventories. In a manufacturing organisation, inventory control plays a significant role because
the total investment in inventories of various kinds is quite substations. In this chapter we are
going to discuss the meaning of inventory, need to control inventory, advantage of material
control, essential factor, of material control, the ABC analysis techniques, process of inventory
control.

Inventory can be defined as the stock of goods, commodities or other resources that are
stored at any given period for future production. In real, inventory control is a process itself,
with the help of which, the demand of items, scheduling, purchase receiving, inspection,
storage and despatch are arranged in such a manner that at minimum cost and in minimum
time, the goods can be despatched to production department. Inventory control makes use of
available capital in a most effective way and ensures adequate supply of goods for production.

13.2 NEED OF INVENTORY CONTROL

The main objectives of Inventory Control are as follows:

1. For effective cost accounting system: Cost accounting system is useful only when there
is a tight control over cost and inventory cost is a major part of total production cost.

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2. To check waste and wastage: Inventory control not just only ensures uninterrupted material
supply to production department but also ensures the control from purchasing to supply of
finished goods to custome₹ So in this way it checks waste and wastage whether it is about
time, money or material.

3. To check embezzlement and theft: Inventory control is to maintain necessary records

for protecting theft and embezzlement.

4. For the success of business: Customer’s satisfaction is very much important for the
success of business and customer’s satisfaction is directly related to the goods supplied to
them. If the goods supplied to customers are low in cost with good quality at right time, it
ensures the success of business. Inventory Control helps inachieving this goal.

5. For the life of the business: In absence of Inventory Control there are many risks of
losses.

6. To check national wastage: Inventory control checks the wastage of nation’s resources
such as raw minerals, ores, etc.

13.3 ADVANTAGES OF MATERIAL CONTROL

They are as follows:

1. It helps to minimise loss by obsolescence, deterioration damage etc.

2. It helps to protect against thefts, wastages, etc.

3. It helps managers in decision making.

4. To minimise capital investment in inventory.

5. To minimise cost of material purchasing.

6. To increase the storing capacity.

7. To maintain reasonable stocks of materials.

8. To facilitates regular and timely supply to customers.

9. To ensures smooth production operations.

10. To check national wastage.

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13.4 ESSENTIAL FACTORS OF MATERIAL CONTROL
For the success of material control following factors should be kept in mind.

1. Proper Co-ordination: There should be a proper co-ordination between all the

departments who uses materials, such as purchase department, store department
inspection department, accounts department, production department and sales
department, so that there is neither a scarcity of material nor excess of material.

2. Centralisation of Purchasing: The important requirement of a successful inventory

control system is the appointment of intelligent and experienced personnel in purchase
department, these personnel should be expert in their field and negotiating the deals.

3. Proper Scheduling: All the requisitions made by production department should be

scheduled, so material could be issued them by time and production should not be
stopped.

4. Proper Classification: Classification and identification of inventories by allotting

proper code number to each item and group should be done, to facilitate prompt
recordings, locating and dealing.

5. Use of Standard Forms: Standards forms should be used so that any information can be
send to all department within no time.

6. Internal Check System: Audit should be done by an independent party to check

effectiveness of inventory control system.

7. Proper Storing System: Adequate and well organised warehouse facilities with well-
equipped proper handling facilities must be there. Such facilities will reduce the wastage
due to leakage, wear and tear, sustained dust and mishandling of materials. Store location
should be in between the purchase department and production department, so that cost of
internal transportation can be minimised.

8. Proper Store Accounting: An efficient inventory control necessitates maintenance of

proper inventory records. Any typical information regarding any particular item of
inventory may be taken from such records.

9. Proper Issuing System: There should be a well organised issuing system of material so
that production process do not suffer.

10. Perpetual Inventory System: Daily stock position should be taken in this system.

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11. Fixing of Various Stock Levels: Minimum stock level, maximum stock level, reorder
point, safety level etc, should be pre-determined to ensure the continuity of smooth
production.

12. Determination of Economic Order Quantity: Economic order quantity should be

determined to minimised the cost of inventory.

13. Regular Reporting System: The information regarding the stock position, materials
quantity etc., should be available to management regularly.

13.5 PROCESS OF INVENTORY CONTROL

For the convenience to understand the topic, the inventory control system may be divided into
three parts:

(i) Process of Purchasing of Materials.

(ii) Process of Issue of Materials.

(iii) Inventory Storing Procedure.

13.5.1 PROCESS OF PURCHASING OF MATERIALS

The steps under this process are as follows:

1. Establishment of Purchase Department: A different department should be established

for purchase of materials. This department not only ensure the availability of raw material
but also, machines, stationary etc. are purchased by this department.

Purchase of materials should be centralised. All purchase should be under a single

department. Control centralised purchase is generally possible only in these industries,
which are located at a single place only and nature of production is of same type. But if
an industry has different production centre at different places, then it becomes compulsory
to follow decentralised purchase system. Thus it is compulsory to have a complete
knowledge about he nature of production, capacity of locality etc.

2. Preparation of Purchasing Budge: First of all the production target of the company
should be determined, on the basis of which the budget for purchasing of material is
prepared.

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Following points should be kept in mind while preparing purchase budget:

(i) System to receive the materials.

(ii) The quantity and quality of the material according to the production
requirements.

(iii) Source of supply.

(iv) Present balance of materials and predictions to receive the materials ordered.

(v) Available cash for debto₹

(vi) On which date the indent is made by concerned department.

(vii) The conditions regarding the value of the material and rebate or discount on it.

3. Preparation of Purchase Requisition Slip: The initiations of purchase begins with the
formal request from the various sections or departments to the purchase department to
order goods. The request is made in a prescribed form to the purchase department by the
departments needing the goods, authorising the purchase department for procuring the
goods as per the specifications given in the slip by the date mentioned on it.

Specimen of a PRS

No. Pr ............................. Date: .............................

Cost Centre .............................

Katech Corporation Ltd

Purchase Requisition Slip

Pealse purchase for………………….department

Item No. Code No. Description Quantity Required Remarks

Required by ........................ Checked by ........................ Approved by........................

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 For use of department issuing this For use of Purchased department
requisition

Item No. Quantity in Consumption per Quantity Purchase Supplier Delivery

stock day/month required order no. Date

Store keeper ........................

The requisitions are generally prepared in triplicate the original copy is sent to the
purchase department, the second copy is retained by the store or the department initiating the
purchase requisition and third are is sent to the costing department.

4. Obtaining the Tender: After the decision for purchase tenders are invited from the
prospective suppliers on studying the terms of supply and the quantity and quality of the
goods. Vendor is selected out of the tenderers for the comparative study of tendere₹
Following type of table may be used:

Type of Specimen of Tenderer Table

Katech Corporation Ltd.

Schedule of Quotations

Material ............................ Date ................................. S.No ................................

Name of Quantity Rate/Unit Terms Time of Mode of Remarks

the party offered delivery delivery

Store keeper ........................ Date ........................

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5. Sending Purchase Order: After comparing the difference tenderers, the best vendor is
decided and the order of required material quotation is placed to him.

Purchase order is prepared in prescribed form by the purchase department and sent to the
vendor authorising him to supply a specified quantity and quality of the materials at the
stipulated terms at the time and place mentioned therein. Generally purchase order has
the following information:

(i) Name of the purchaser, serial no. and date of order.

(ii) Name of vendor and address.

(iii) Full details of materials quantity etc.

(iv) Value, rebate and terms of payment etc.

(v) Time and place of delivery.

(vi) Directions regarding packing and despatching.

(vii) Signature of purchaser.

(viii) Method of follow-up.

Specimen of a Purchase Order

Katech Corporation Ltd.

Cable ........................ S.l No. ........................

To, Telephone ........................

M/s ........................ Date .......................

........................ Reg. No. ........................

........................ Our Ref. ........................

Please supply the following items in accordance with the terms and conditions mentioned
herein ........................

Item No. Description Quantity Price Unit Amount Remarks

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Terms and conditions:

Delivery at ........................ Sales Tax ........................

Discount ........................ Freight ........................

Excise Duty ........................ Terms of Payment .................

For Katech Corporation Ltd.

(Signature)

Acknowledgement

Kindly acknowledge the receipt of this order:

Received on ........................

Date of Delivery ........................

Challan ........................ Date ........................

Invoice No. ........................ Date ........................

Specimen of Goods Received Note

Katech Corporation Ltd.

Goods Received Note

From

M/s (Supplier) ........................ No. VRN ........................

........................ Date ........................

........................

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 Goods Quantity No. of Order Delivery Demanded Remarks Inspection
by
Packets No. Note No.
department
etc.

Description Code Qty. Reason

rejected

Carrier Received by Store A A/c & Inspector’s signature

ledger ref.

6. Receiving and Inspection of Materials: When goods arrive they are taken delivery of
and parcels or packet unpacked and the contents of the packages are checked by the
receiving clerk with the order placed by the purchasing department to the vendor. After
proper checking goods should be delivered to the laboratory or inspection department.
Goods received note is prepared here.

7. Returning the Materials: On checking if any discrepancy is found as regards to quality

and quantity. It should immediately be referred to the purchasing department so that the
discrepancy may be adjusted or steps may be taken to return the defective or damaged
goods in exchange of proper quality material on credit note.

8. Payment of Purchased Material: After required inspection etc. final report is sent to
purchase officer, who sent it to payment officer after placing required entries in the
report. After checking the ledger, payment officer authorises accounts clerk for payment.

13.5.2 PROCESS OF ISSUE OF MATERIALS

To control the issue of materials following procedure is followed:

1. Issue of Materials: When a foreman of any production department needs materials from
store, he prepares three copies of goods requisition slip. If the material is costly and
important then factory manager also sign these copies. One copy of requisition slip is
kept by foreman itself and other two copies are given to stores. According to the
requisition slip the store-keeper issues the materials to foreman. Foreman signs the two
copy of store’s requisition slips to verify that he has received the materials. then
storekeeper makes the required entries in the bin card. After signing both the copies of

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 requisition slip storekeeper sent one copy to accountant of store. After recording the issue
of materials, store accountant sent this copy to costing department.

Sigma Corporation Ltd.

Material Requisition Slip

To .......................... No ..........................

.......................... Date ..........................

Deliver following material to .......................... Fore order No. ..........................

and Job No. ..........................

Quantity Unit Description Code No. Office use only Remarks

Rate Issued by

Amount ……….

Authorized by Store Ledger Issued by Received by Cost office Ref.

………. ………. No………
No……….. ………
Price by ………

Sigma Corporation Ltd.

Materials Requisition Slip

Job No. ....................... Material Requisition Slip No. .......................

Department ....................... Date .......................

Please send the following materials.

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 Quantity Unit Description Code No. Office use only Remarks

Rate Issued by

Amount ……….

Authorized by Store Ledger Issued by Received Cost office Ref.

………. by ………. No………
No……….. ………
Price by ………

Foreman .................... Bin No. ....................

Store Ledger Folio .................... Returned ....................

Storekeeper .................... Cost Clerk ....................

* Both these entries are to be done by cost clerk.

2. Inter Departmental Transfer of Materials: (For details see ‘Inventory Storing

Procedure’)

ABC Co. Ltd.

Materials Transfer Slips

Issuing Department .................... Serial No. ....................

Receiving Department .................... Date ....................

Please receive the following materials.

Quantity Code or Symbol Description of Materials Rate* Amount*

.................... .................... ....................

Foreman Transfer Foreman Transferee Cost Clerk

* To be filled by Cost Clerk.

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3. To Prepare Material Abstract: (For details see Inventory Storing System).

Sigma Corporation Ltd.

Material Abstract

Week ending on ....................

Quantity Code or Description Rate* Amount Reason for

Symbol of Materials Transfer

4. Periodical Checking of Materials: To control the issue of materials this is very much
necessary that bin cards, store control records and store ledgers are checked regularly and
if any discrepancy is found, proper corrective actions should be taken.

5. Physical Stock Checking of Materials: Physical stock checking in stores should be

done to prevent materials loss, material damage and theft. This checking can be done
weekly, monthly etc. Physical stock checking means the verification of actual quantity
in stores. This checking should be done surprisingly or at random basis. If any
discrepancy is found and corrective actions should be taken to reduce or eliminate them
the possible reasons may be wear and tear of materials, absorption of moisture,
evaporation, waste, breakage, theft or wrong recordings. This is assumed to be the best
method of inventory control.

13.5.3 INVENTORY STORING PROCEDURE

Inventory storing procedure is an important part of inventory control management or

materials management. Following procedure is followed in inventory storing:

1. Receipt of Material in Store: The storekeeper receives the material along with the goods
received note from the receiving section. The material are then classified according to
the nature of the material. The material should be arranged in bins especially meant for
the materials. A bin card is attached with each bin or rack displaying the identification
mark or code, minimum, maximum and ordering levels of materials and receipts, issues

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 and balance of materials in hand, so that the exact position may be known at any time
whenever desired.

Specimen of Bin Card

ABC Co. Ltd.

BIN CARD

Description ......................... Maximum Level .........................

Material code ......................... Minimum Level .........................

Location code ......................... Danger Level .........................

Bin No. ......................... Ordering Level .........................

Store Ledger Folio No. ......................... Re-order Quantity .........................

Receipts Issues Balance Audit

Date G.R.N. Qty. Date Rege. Qty. Qty. Date Initial

No.

2. Issue of Material from Store: The store undertakes the responsibility of issuing the
material to the using departments. In order to prevent malpractices, the materials must be
issued only against the properly authorised requisition slips. These requisition must be
properly checked and scrutinised to avoid over issue of materials. All requisition received
must be posted immediately or daily on the bin cards and on the stock control cards.
Generally three copies of requisition slips are prepared — first two copies are given to
the stores and third copy kept with the demanding department. Store in charge keeps one
copy of requisition slip for himself and other copy he sent to accounts department.

3. Return of Material to Store: If a department uses less material to its demand then it
return the material to stores. Goods return slips are sent along with the materials. The
same specifications and details of materials are given in goods return slips as they were

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 mentioned in requisition slips. Three copies of goods return slips are prepared. First two
copies are sent to stores department and third copy is kept by the goods returning
department itself. Store keeper sent one copy to accounts department. The colour of both
requisition slip and return slips are kept different to identify them easily.

4. Transfer of Material: The transfer of materials from one department to another

department is generally not appreciated, because it creates problems in material control
process. But sometime when there is emergency, the transfer of material from one
department to other department is allowed. The department transferring the materials
makes four copies of material transfer slips. First copy is sent to the needy department
along with material. Second and third copies are sent to stores department and accounts
department for their information.

5. Material Abstract: In big industries where the large quality of materials are received,
issued and transferred daily, “material abstract” is prepared weekly or fortnightly to
control the inventory. A physical verification of quantity in stores and other departments
is done by material abstract.

It any discrepancy is found in physical verification of quantity in store or other

department. It is brought into the notice of top management this type of check plays a
very important role in inventory control. Thus material abstract is a summary of materials
received, issued and transferred, for a given time period.

13.6 MINIMUM STOCK LEVEL

The minimum stock level represents the lowest quantitative balance of materials in
hand which must be maintained in hand at all times so that the assembly time may not be
stopped on accounts of non-availability of materials.

The minimum stock level may be calculated by the use of the following formula: Minimum
Stock Level = Re-ordered level – (Average rate of consumption × Lead time)

Factors Affecting Minimum Stock Level

These are as follows:

1. Lead Time: This is the time lag required to obtain the delivery of fresh supplies. If this
time is more than the minimum inventory level will be high.

2. Inland or Importable Inventory: If the material is to be import then the lead time will
be more implying minimum inventory level is to be kept high.

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3. Availability of Inventory: If the material is not easily available then the minimum stock
level to be kept high.

4. Possibility of Interruption in Production: If the production process is smooth then it

is easy to determine the minimum stock level, but, if production is not smooth due to
some reasons such as strike, power, etc. Then it is not easy to find out exact level of
minimum stock.

5. Nature of the Material: Materials that are regularly stored must maintain a minimum
level. If on customer’s order a special item of material is to be purchased, no minimum
level is required to be fixed for that.

6. The Maximum Time Required from the Date of Order to the Date of Actual
Delivery: It is known as the Lead Time. The longer the lead time the lower is the
minimum level, provided the reorder point remains constant.

7. Rate of Consumption of the Material: The minimum rate, the maximum rate and the
normal rate of consumption are to be taken into consideration.

13.7 MAXIMUM STOCK LEVEL

Maximum stock level represents the maximum quantity of inventory which can be kept in
store at any time. This quantity is fixed keeping in view of disadvantages of over- stocking.

Computation of Maximum Stock Level: The following formula is used:

Maximum Level = Re- order level + Re-order quantity – Minimum consumption × Minimum
Re-order period

Or

= Re-order level + Re-order Quantity – (Average rate of usage × Lead Time)

Factors Affecting the Maximum Stock Level

These are as follows:

1. Rate of consumption of the material.

2. The lead time.

3. The maximum requirement of the material at any point of time.

4. Nature of the Material: The materials which deteriorate quickly are stored as
minimum as possible.

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5. Storage space available for the material.

6. Price Economy: Seasonal materials are cheap during the harvesting reasons. So
maximum purchase is made during that season and as a result the maximum level is
high.

7. Cost of storage and insurance.

8. Cost of the material and the finance available: When the material is costly the
maximum level is likely to be relatively low. If the price is likely to go up maximum
level should be high.

9. Inventory Turnover: In case of slow moving materials the maximum level is low
and in case of quick moving material it is high.

10. Nature of Supply: If the supply is uncertain the maximum level should be as high as
possible.

11. Economic Order Quantity (EOQ): Maximum level largely depends in economic
order quantity, because unless otherwise contra indicated the economic order
quantity decides the quantity ordered and hence decides the maximum level.

13.9 ORDERING LEVEL OR RE-ORDER LEVEL

This is the fixed point between the maximum stock level and minimum stock levels at which
time the order for next supply of materials from vendor is to be done.

This is mainly depends upon two factors:

1. Rate of Maximum usage.

2. Maximum Re-order period or Maximum Delivery Time.

Formula for computation of Ordering Level or Re-order Level:

Ordering level or Re-order level

= Maximum usage per day × Maximum Re-order period or Maximum Delivery Time

Or

= Maximum Level + (Normal usage of Average rate of consumption × Average Re-order

period or Average Delivery Time)

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Assumptions of Re-order point

1. The time of delivery remains fixed.

2. Load time remains fixed.

3. The average rate of consumption of materials does not changes.

13.9 AVERAGE STOCK LEVEL

Average stock level is the average quantity of stock for a given time of period. Computation
of Average Stock Level. The formula is as follows:

1
Average stock level = [Minimum Level + Maximum level]
2
1
or Average stock level = Minimum level + [Re-order Quantity]
2

2(Minimum level) + Re- order quantity

or Average stock level =
2
13.10 DANGER LEVEL
In addition to the minimum, the maximum and recording levels there is another level
called Danger Level. This level is below the minimum level and when the actual stock reaches
this level immediate measure is to be taken to replenish stock. When the normal lead time is
not available, the purchase quantity cannot be accurately determined. So, it is fixed in such a
way that the actual stock does not fall below danger level by the actual lead time. This means,
that the minimum level contains a cushion to cover contingencies.

Some concerns fix danger level below the re-ordering level but above the minimum
level. If action for purchase is taken as soon as the stock reaches the re-ordering level, the
danger level bears no importance except that, when the stock reaches the danger level (but not
yet the minimum level) a reference may be made to the purchase department to ensure that
delivery is received before the actual stock reaches the minimum level.

When the danger level is fixed below the minimum, it being reaches by the actual stock,
the defect in the system is identified and corrective measure becomes necessary. When the
danger level is fixed above the minimum, it being reached by the actual stock, preventive
measure is to be taken so that the stock may not go below the minimum level.

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 It is the point or level of stock which the material stock should never be allowed to
reduce. It is generally a level below the minimum level. As soon as the stock of material reaches
this point, urgent action is needed for replenishment of stock.

Determination of Danger Level. This done as follows:

Danger Level = Two days of normal consumption

Re-order Quantity: The quantity which is ordered at re-order point is called re-order quantity.
This is determined on the basis of minimum stock level and maximum stock level. This is
normally used in notation of economic order quantity.

13.11 ILLUSTRATIONS
Illustrations - 1

Calculate (i) Re-order Level; (ii) Minimum Level; and (iii) Maximum Level for each
Component A and from the following information:

Normal Usage 50 Units per week each

Minimum Usage 25 Units per week each

Maximum Usage 75 Units per week each

Re-order Quantity A: 300 Units; B: 500 Units

Re-order Period A: 4 to 6 weeks; B: 2 to 4 weeks

Solution:

(i) Re-order Level = Maximum Usage × Maximum Re-order Period

For Component A = 75 × 6 = 450 Units

For Component B = 75 × 4 = 300 Units

(ii) Minimum Level = Re-order Level – (Normal Usage × Average Re-order Period)

For Component A = 450 – (50 × 5) = 200 Units

For Component B = 300 – (50 × 3) = 150 Units

Note: Average Re-order Period for Component A = 4 + 6 = 5

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 Average Re-order Period for Component B = 4 + 6 = 5

(iii) Maximum Level = (Re-order Level + Re-order Quantity – (Minimum Usage ×

Minimum Re-order Period)

For Component A = (450 + 300) – (25 × 4)

= 650 Units

For Component B = (300 + 500) – (25 × 2)

= 750 Units

Illustration - 2:

From the following particulars, calculate: (a) Re-order Level (b) Minimum Level, (c)
Maximum Level, (d) Average Level:

Normal Usage 100 units per day

Minimum Usage 60 units per day

Maximum Usage 130 units per day

Economic Order Quantity 5,000 units

Re-order Period 25 to 30 days

Solution:

(a) Re-order Level = Maximum Usage × Maximum Re-order Period

= 130 × 30 = 3,900 units

(b) Minimum Level = Re-order Level – (Normal Usage × Average Re-order Period)

= 3,900 – (100 × 27.5) = 1.150 units

Note: Average Re-order Period = 25 + 30

= 27.5 days

(c) Maximum Level = (Re-order Level + Re-order Quantity Or EOQ)

= (Minimum Usage × Minimum Re-order Period)

= (3,900 + 5,000) – 60 × 25)

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 = 7,400 Units.

(d) Average Level = Minimum Level + Maximum Level 2 = 27.5

= 1,150 + 7,400

= 4, 275 Units

Illustration - 3:

A manufacturer buys costing equipment from outside suppliers ₹ 30 per unit. Total annual
needs are 800 units. The following data is available:

Annual Return on Investment 10%

Rent, Insurance etc. per unit per year Re. 1

Cost of Placing an order ₹ 100

Determine Economic Order Quantity.

Solution:

EOQ = CH

Where, EOQ = Economic Order Quantity

R = Annual Requirement of Inventory

Cp = Cost of placing an order

CH = Annual holding Or Carrying cost per unit per year.

Given : R = 800 units, Cp = ₹ 100, CH = ₹ 4

EOQ = =40,000 = 200 Equipments

= 10 % of ₹ 30 + Re 1 = ₹ 3 + Re. 1 = ₹ 4.

- 300 -
Illustration 4:

Fair Deal Limited uses ₹ 1,00,000 materials per year. The administration cost per purchase in
₹ 100 and the carrying cost is 20% of the average inventory. The company has a purchase
policy on the basis of economic order quantity but has been offered a discount of 0.5% in the
case of purchase five times per year. Advise the company whether it should accept new offer
or not?

Solution:

Given: R (in ₹ )= 1,00,000, Cp = ₹ 100, P = Re. 1.00,

CH = 1.00 × 20% = Re. 0.20

E.O.Q. (in ₹) =
CH

2 1,00,000 100
=
0.20

10,00,00,000
=

= ₹ 10,000

Total Inventory Cost in case of each order is placed of ₹ 10,000:”

(i) Cost of Materials ₹ 1,00,000

R 1,00,000
(ii) Ordering Cost = X Cp = X 100 ₹ 1,000
qo 10,000

qo 10,000
(iii) Carrying Cost = X CH = X 0.2 ₹ 1,000
2 2
Total Cost ₹ 1,02,000

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Total Cost in case of each order is placed or ₹ 19,900 i.e., ₹ 20,000 – 0.5% discount:

(i) Cost of Materials (19,900 X 5) ₹ 99,500.00

R
(ii) Ordering Cost = X Cp
qo

99,500
= X 100 500.00
19,900
qo
(iii) Carrying Cost = X CH
2
= 19,900 x 0.199 1,980.05

Total Inventory Cost 1,01,980.05

[Note: Here P = Re. 1, 0.5% or Re. 1 = Re. 1 = Re. 0.95, CH = 0.95 × 20% = Re. 0.199]

On the basis of above analysis the offer should be accepted as it will save ₹ 1,02,000 –
1,01,980.05 = ₹ 19.95.

Illustration 5:

A pharmaceutical factory consumes annually 6,000 kgms. of a chemical costing ₹ 5 per kgm.
Placing each order costs ₹ 25 and the carrying cost is 6% per year per kgm. of average
inventory. Find the Economic Order Quantity and the total inventory cost.

The factory works for days in a year. If the procurement time is 15 days and safety stock 200
kgms., find the re-order point and maximum and average inventories levels.

If the supplier offers a discount of 5% on the cost price for a single order of annual requirement,
should the factory accept it?

Solution:

Given: R = 6,000 kgms.; P = ₹ 5 per kgm. Cp = ₹ 25;

CH = 6% per kgm. per year of average inventory;

No. of working days in a year = 300;

Procurement time= 15 days;

Safety Stock = 200 kgms.

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 E.O.Q. (in ₹) = CH

2 60,000 25

= 0.30o

3,00,000
=
0.30

= 10,00,000 =1,000kgms.

5x6
CH = 6% of Average inventory i.e., = Re.30
100
R x CH qo x CH
T.I.C = (RxP) + +
qo 2

6,000 1,000
= (6,000x5) + x 25 + x .30
1,000 2

=30,000+150+140= ₹ 30,000

Re- order Point = R x Procurement time +Safety Stock

No. of Working days

= 6,000 x 15 + 200

300 1

= 300+200+=500 kgms.

Maximum Stock Level = (Re-order Point + Re-order Quantity or EOQ) -

(Minimum Usage × Minimum Re-order Period)

= (500 + 1,000) – (20 × 15)

= 1,500 – 300 = 1,200 kgms.

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or Maximum Stock Level = q0 + Safety Stock

= 1,000 + 200 = 1,200 kgms.

Minimum Stock Level = Re-order Level – (Normal usage × Average Re-order period)

= 500 – (20* × 15)

= 500 – 300 = 200 kgms.

R
* Normal Usage =
No. of Working days

6,000
=
300
= 20 kgms.

Minimum Stock Level + Maximum Stock Level

Average Stock Level =
2

200 + 1,200 1,400

= = =700kgms.
2 2
q0
Or Average Stock Level= + Safety Stock
2

1,000 + 200
= = 700 kgms.
2
TIC if a single order of 6,000 kgms is placed:

Given: P = ₹ 5 – 5% of ₹ 5 i.e., 5 – 0.25 = ₹ 4.75

6
CH = 6% of Average Inventory i.e., 4.75 × =Re.285;
100
Cp = ₹ 25; R = 6,000 kgms; qo = 6,000 kgms.

Cp = ₹ 25; R = 6,000 kgms; q = 6,000 kgms.

R q0
TIC = (RxP) + x Cp + x CH
q0 2

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 6,000 6,000
= (6,000 x 4.75) + x 25 + x 0.25
6,000 2

= 28,500 + 25 + 855 = 29,380.

The company should accept the offer of 5% discount in purchase price by placing a single
order of 6,000 kgms. because the total inventory cost in this case is less by ₹ 30,300 – ₹ 29,380
= ₹ 920 as compared to total inventory cost without discount offer.

Illustration 6:

A trading company expects to sell 15,000 mixers during the coming year. The cost per mixer
is ₹ 200. The cost of storing a mixer for 1 year is ₹ 5 and the ordering cost is ₹ 540 per order.
Find the Economic Order Quantity. Would it be profitable to the company to accept a discount
offer of 30% on a single order per year. The storing cost continuing to be ₹ 5 per mixer per
year.

Solution:

E.O.Q. (in ₹) = 2 R CP

CH

Given R = 15,000 units, C = 540, CH = ₹ 5

2x15,000x540
EOQ = 5

= 32,40,000

=1,800 units

Total Inventory Coat qo = 1,800 units:

R q0
TIC = (RxP) + x Cp + x CH
q0 2

15,000 1,800
= (15,000 x 200) + x540 + x5
1,800 2

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 = 30,00,000 + 4,500 + 4,500

= 30,09,000.

TIC if a single order is placed at 30% discount in price:

R q0
TIC = (RxP) + x Cp + x CH
q0 2

15,000 15,000
= (15,000 x 140) + x540 + x5
15,000 2
= 21,00,000 + 540 + 37,500

= 21,38,040.

The company should accept the offer of 30% discount as it will save ₹ 30,09,000 – ₹21,38,040
= ₹ 8,70,960.

Illustration 7:

A manufacturer requires 1,000 units of a raw material, per month. The ordering cost is ₹ 15 per
order. The carrying cost in addition to ₹ 2 per unit, is estimated to be 15% of average inventory
per unit per year. The purchase price of the raw material is ₹ 10 per unit. Find the Economic
Lot Size and the total cost.

The manufacturer is offered as 5% discount in purchase price for order for 2,000 units or more
but less than 5,000 units. A further 2% discount is available for order of 5,000 or more units.
Which of the three ways of purchase he should adopt?

Solution:

Given: R = 1,000 units per month or 12,000 units per annum;

Cp = ₹ 15 per order;

P = (i) ₹ 10 per unit in case of order for less than 2,000 units.

(ii) ₹ 10 – 5% of ₹ 10 i.e., ₹ 9.50 in case of order for 2,000 or more units but less than 5,000
units.

(iii) ₹ 10 – 7% of ₹ 10 i.e., ₹ 9.30 in case of order for 5,000 or more units.

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 CH = (i) ₹ 2 + 15% of ₹ 2 of Average inventory i.e., ₹ 2 + 1.50 = ₹ 3.50 per unit per
annum in case of order for less than 2,000 units.

(ii) ₹ 2 + 15% of ₹ 9.50 = ₹ 2 + 1.425 = ₹ 3.425 per unit per annum in case of order for
2,000 units or more but less than 5,000 units.

(iii)₹ 2 + 15% of ₹ 9.70 = ₹ 2 + 1.395 = ₹ 3.395 per unit per annum in case of order for
5,000 or more units.

Alternative I: In case of order for less than 2,000 units:

2 x R x CP
CH
E.O.Q. (qo) =

2x12,000x15
= 3.50

3.60.000
= 3.50

= 1,02,857

= 320.7 or 321 units.

R q0
TIC = (RxP) + x Cp + x CH
q0 2

12,000 321
= (12,000 x 10) + x15 + x 3.50
321 2

= 1,20,000 + 561 + 562

= ₹ 1,21,123 (nearest to Rupees)

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Alternative II: In case of order for 2,000 or more units but less than 5,000 units:

2 R CP
EOQ (qo) = CH

2x12,000x15
= 3.425
3.60.000
= 3.425
= 1,05,109.45

= 324 units.

As the Economic Lot size (324 units) is less than minimum ordering quantity (2,000 units),
the company should order at least 2,000 units to get 5% discount in purchase price

Thus, T.I.C. if q0 = 2000 units:

R q0
TIC = (RxP) + x Cp + x CH
q0 2

12,000 2000
= (12,000 x 9.50) + x15 + x 3.425
2000 2

= 1,14,000 + 90 + 3.425 = ₹1,17,515

Alternative III: In case of orders of 5,000 or more units:

2 R CP
CH
Economic Lot Size. (qo) =

2x12,000x15
= 3.395

3,60,000
= 3.395

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 = 1,06,038.29

= 325.6 units.

= 326 units (Approx)

As the Economic Lot Size (326 units) is less than the minimum ordering quantity 5,000 units,
the company should order at least 5,000 units to get 7% discount in purchase price.

Thus T.I.C. if q0 = 5,000 units:

R q0
TIC = (RxP) + x Cp + x CH
q0 2

12,000 5,000
= (12,000 x 9.30) + x15 + x 3.395
5,000 2

= 1,11,600 + 36 + 8,487.50 = ₹1,20,123.50

On the basis of above analysis we find that the T.I.C. is minimum (₹. 1,17,515) in second
alternative. Hence the company should adopt this alternative.

13.12 CHECK YOUR PROGRESS

Write True or False against each statement:

1. Inventory can be defined as the state of goods.

2. ABC analysis ensure the close control over the items of A, B and C categories.

3. Head line represent the maximum quantity of inventory.

4. Material control help to minimise loose by obsolescence.

Answers to Check Your Progress

1. True.

2. True.

3. False.

4. True.

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13.13 SUMMARY
Inventory control, also called stock control, is the process of ensuring the right amount
of supply is available in an organization. With the appropriate internal and production controls,
the practice ensures the company can meet customer demand and delivers financial elasticity.
Successful inventory control requires data from purchases, reorders, shipping, warehousing,
storage, receiving, customer satisfaction, loss prevention and turnover. Inventory control
enables the maximum amount of profit from the least amount of investment in stock without
affecting customer satisfaction. Inventory control practices and policies should apply to more
than just finished and raw goods.

Properly managing inventory can make or break a business, and having insight into your
stock at any given moment is critical to success. Regardless of the type of inventory control
process you choose, decision-makers know they need the right tools in place so they can
manage their inventory effectively. NetSuite offers a suite of native tools for tracking inventory
in multiple locations, determining reorder points and managing safety stock and cycle counts.
Find the right balance between demand and supply across your entire organization with the
demand planning and distribution requirements planning features.

13.14 KEYWORDS
Lead Time : Time between ordering and receiving
the good.

Inventory Control System : It is a technique to maintain inventory at

a desired level.

Maximum Level : Level of inventory beyond which

inventory is not allowed.

Minimum Level : Level of inventory beyond which

inventory is allowed.

Opportunity Cost : The next best alternative cost.

Reorder Level : The stock level which is sufficient for

the lead time consumption.

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13.15 QUESTIONS FOR SELF STUDY
1. What do you understand by inventory control?

2. Discuss the objectives of inventory control.

3. Discuss the various factors which determine the level of inventory control.

4. What is an ABC analysis? What are the steps in ABC analysis?

5. Explain the process of inventory control with example.

6. In manufacturing a commodity two components X and Y are used as follows:

Normalusage100units per week each

Minimum usage 50 units per week each

Maximum usage150 units per week each

Ordering Quantities X : 600 units; Y : 1,000 units

Delivery Period X : 4 to 6 weeks

Y : 2 to 4 weeks

7. From the following information determine the Re-order point, Minimum Stock Level
and Maximum Stock Level:

(a) Minimum consumption 500 units per day

(b)Maximum consumption 875 units per day

(c) Normal consumption 625 units per day

(d)Re-order Quantity 8,800 units

(e) Minimum period for receiving goods 7 days

(f) Maximum period for receiving goods 15 days

(g)Normal period for receiving goods 10 days

8. A manufacturer’s requirement for raw materials is 12,800 kgms. per annum. The
purchase price of it is ₹ 50 per kgm. Ordering cost is ₹ 100 per order and carrying cost
is 8% of average inventory. The manufacturer can procure its annual requirement of raw
material higher in one single lot or by ordering of 400, 800, 1600 or 3,200 kgms. quantity.
Find which of these order quantities is the Economic Order Quantity using tabular
method.

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 9. The annual requirement of a product in a firm is 1,000 units. The purchase price per unit
is ₹ 50; ordering cost is ₹ 150 per order and the carrying cost per unit of average of
inventory is 15%. The firm can procure its annual requirement either in one single lot or
in various alternative losts of 100, 200, 250 or 500 units. Determine the Economic Order
Quantity by Graphical method and with the help of the three curves, show at EOQ level
ordering and carrying costs are equal and total cost is minimum.

10. Calculate Economic Order Quantity from the following information by using Tabular
method, Graphical method and mathematical method:

Annual usage 10,000 units

Buying cost per order ₹ 10

Cost per unit ₹ 50

Cost of carrying inventory 10% of Average Inventory

11. A company requires annually 12,000 lbs. of a chemical which costs ₹ 250 per lb. Placing
each order costs the company ₹ 22.50, and the carrying cost is 15% of the cost of average
inventory per annum.

(i) Find Economic Order Quantity and total expenses on the chemical.

(ii) If in addition, the company decides to maintain a stock of 300 lbs. find the
maximum as well as average inventory.

12. Calculate the Economic Order Quantity from the following information. Also state what
will be the number of orders during the whole year:

Requirement of material per annum 1,250 units

Cost of material per unit ₹ 200

Cost of placing per order ₹ 100

Holding cost per unit per annum 8% of average inventory.

13. A manufacturer’s requirement for a raw material is 2,000 units per year. The ordering
costs are ₹ 10 per order while carrying costs are 16 paise per year per unit of a average
inventory. The purchase price of raw material is Re. 1 per unit.

(a) Find the Economic Order quantity and the total inventory cost.

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 (b) If a discount of 5% is available for orders of 1,000 units, should the manufacturer
accept this offer?

(The carrying cost per unit per annum remains unchanged.)

14. A business unit expects to sell 60,500 units of a commodity during the coming year. The
ordering cost per order is ₹ 840 and the cost per unit of the commodity is ₹200. The
carrying cost per unit per annum is 0.5% of the average inventory. Find out Economic
Order Quantity. Would it be profitable to the business unit to accepts a discount offer of
1% on a single order per year. In this case the storing cost per unit per year will increase
to 0.75% of the average inventory.

15. A manufacturer requires 2,500 units of a raw material per month. The ordering cost is ₹
20 per order. The carrying cost in addition to ₹ 3 per unit is estimated to be 10% of
average inventory per unit per year. The purchase price of the raw material is ₹ 4 per
unit. Find the Economic Lot Size and the Total Inventory Cost.

The manufacturer is offered a discount in purchase price for order of 1,000 units or more
but less than 2,000 units. A further discount is available for orders of 2,000 or more units.
Which of the three ways of purchase he should adopt?

13.16 REFERENCES
1. Gupta M.P. & Sharma J.K. Operation Research for Management, National Publishing
House.

2. Mustafi C.K., Operation Research Methods & Practice, Wiley Eastern Ltd.

3. Peterson & E.A. Silver, Decision System for Inventory Management Production
Planning, Wiley New York.

4. Stan M.K.D.W. Miller, Inventory Control Theory & Practices, Prentice Hall of India.

5. Tana H.A., Operation Research Introduction, Macmillan Publishing Company.

6. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT – 14 SIMULATIONS
Structure:

14.0 Objectives

14.1 Introduction

14.2 Advantages and Disadvantages of Simulation

14.3 Monte Carlo Simulation

14.4 Simulation of Demand Forecasting Problem

14.5 Simulation of Queuing Problems

14.6 Simulation of Inventory Problems

14.7 Check Your Progress

14.8 Summary

14.9 Keywords

14.10 Questions for Self-Study

14.11 References

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14.0 OBJECTIVES
After studying this unit, you will be able to;

• Explain the advantages and disadvantages of simulation.

• Describe the procedure for Monte Carlo Simulation.
• Solve the simulation problems relating to demand forecasting.
• Simulate the queuing problems and inventory problems.

14.1 INTRODUCTION
In the previous units, we have discussed inventory model. In this unit let us look into
the mathematical technique that is, simulation technique which considered as a valuable tool
because of wide area of applications. All the models were used with mathematical techniques
to have analytical solutions. In certain cases, it might not be possible to formulate the entire
problem or solve it through mathematical models. In such cases, simulation proves to be the
most suitable method, which offers a near-optimal solution. Simulation is a reflection of a real
system, representing the characteristics and behaviour within a given set of conditions.

In simulation, the problem must be defined first. Secondly, the variables of the model
are introduced with logical relationship among them. Then a suitable model is constructed.
After developing a desired model, each alternative is evaluated by generating a series of values
of the random variable, and the behaviour of the system is observed. Lastly, the results are
examined and the best alternative is selected.

Simulation technique is considered as a valuable tool because of its wide area of

application. It can be used to solve and analyze large and complex real world problems.
Simulation provides solutions to various problems in functional areas like production,
marketing, finance, human resource, etc., and is useful in policy decisions through corporate
planning models. Simulation experiments generate large amounts of data and information using
a small sample data, which considerably reduces the amount of cost and time involved in the
exercise.

For example, if a study has to be carried out to determine the arrival rate of customers
at a ticket booking counter, the data can be generated within a short span of time can be used
with the help of a computer.

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 Problem Definition

Introduction of Variables

Construction of Simulation Model

Testing of variables with values

Examination of results
Not Acceptable Not Acceptable
Acceptable

Figure 14.1: Simulation Process

14.2 ADVANTAGES AND DISADVANTAGES OF SIMULATION

ADVANTAGES:

• Simulation is best suited to analyze complex and large practical problems when it is not
possible to solve them through a mathematical method.
• Simulation is flexible, hence changes in the system variables can be made to select the
best solution among the various alternatives.
• In simulation, the experiments are carried out with the model without disturbing the
system.
• Policy decisions can be made much faster by knowing the options well in advance and
by reducing the risk of experimenting in the real system.

DISADVANTAGES:

• Simulation does not generate optimal solutions.

• It may take a long time to develop a good simulation model.
• In certain cases simulation models can be very expensive.
• The decision-maker must provide all information (depending on the model) about the
constraints and conditions for examination, as simulation does not give the answers by
itself.

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14.3 MONTE CARLO SIMULATION
In simulation, we have deterministic models and probabilistic models. Deterministic
simulation models have the alternatives clearly known in advance and the choice is made by
considering the various well-defined alternatives. Probabilistic simulation model is stochastic
in nature and all decisions are made under uncertainty. One of the probabilistic simulation
models is the Monte Carlo method. In this method, the decision variables are represented by a
probabilistic distribution and random samples are drawn from probability distribution using
random numbers The simulation experiment is conducted until the required number of
simulations are generated. Finally, the best course of action is selected for implementation. The
significance of Monte Carlo Simulation is that decision variables may not explicitly follow any
standard probability distribution such as Normal, Poisson, Exponential, etc. The distribution
can be obtained by direct observation or from past records.

Procedure for Monte Carlo Simulation:

Step 1: Establish a probability distribution for the variables to be analyzed.

Step 2: Find the cumulative probability distribution for each variable.

Step 3: Set Random Number intervals for variables and generate random numbers.

Step 4: Simulate the experiment by selecting random numbers from random numbers tables
until the required number of simulations are generated.

Step 5: Examine the results and validate the model.

14.4 SIMULATION OF DEMAND FORECASTING PROBLEM

Illustration 1:

An ice-cream parlor's record of previous month’s sale of a particular variety of ice cream as
follows:

Simulation of Demand Problem

Demand (No. of Ice- No. of

creams) days
4 5
5 10
6 6
7 8
8 1
Simulate the demand for first 10 days of the month

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Solution:

Find the probability distribution of demand by expressing the frequencies in terms of

proportion. Divide each value by 30. The demand per day has the following distribution.

Probability Distribution of Demand

Demand Probability

4 0.17

5 0.33

6 0.20

7 0.27

8 0.03

Find the cumulative probability and assign a set of random number intervals to various
demand levels. The probability figures are in two digits, hence we use two digit random
numbers taken from a random number table. The random numbers are selected from the table
from any row or column, but in a consecutive manner and random intervals are set using the
cumulative probability distribution.

Cumulative Probability Distribution

Demand Probability Cumulative Random Number

Probability Interval

4 0.17 0.17 00-16

5 0.33 0.50 17-49

6 0.20 0.70 50-69

7 0.27 0.97 70-96

8 0.03 1.00 97-99

To simulate the demand for ten days, select ten random numbers from random number tables.
The random numbers selected are,

17, 46, 85, 09, 50, 58, 04, 77, 69 and 74

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The first random number selected, 7 lies between the random number intervals 17-49
corresponding to a demand of 5 ice-creams per day. Hence, the demand for day one is 5.
Similarly, the demand for the remaining days is simulated.

Demand Simulation

Day 1 2 3 4 5 6 7 8 9 10

Random 17 46 85 09 50 58 04 77 69 74
Number

Demand 5 5 7 4 6 6 4 7 6 7

Illustration 2:

A dealer sells a particular model of washing machine for which the probability distribution of
daily demand.

Probability Distribution of Daily Demand

Demand/day - 0 1 2 3 4 5

Demand - 0.05 0.25 0.20 0.25 0.10 0.15

Find the average demand of washing machines per day.

Solution:

Assign sets of two-digit random numbers to demand levels as shown in below Table.

Random Numbers Assigned to Demand

Demand Probability Cumulative Random Number

Probability Intervals
0 0.05 0.05 00-04
1 0.25 0.30 05-29
2 0.20 0.50 30-49
3 0.25 0.75 50-74
4 0.10 0.85 75-84
5 0.15 1.00 85-99

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Ten random numbers that have been selected from random number tables are 68, 47, 92, 76,
86, 46, 16, 28, 35, 54. To find the demand for ten days see the below table.

Ten Random Numbers Selected

Trial Random Demand / day

No Number
1 68 3
2 47 2
3 92 5
4 76 4
5 86 5
6 46 2
7 16 1
8 28 1
9 35 2
10 54 3
Total Demand 28
Average demand =28/10 =2.8 washing machines per day.

The expected demand /day can be computed as,

n
Expected demand per day =  Pi Xi ………………………………………(1)
i=0
where, Pi = probability and Xi = demand

= (0.05 × 0) + (0.25 × 1) + (0.20 × 2) + (0.25 × 3) + (0.1 × 4) + (0.15 × 5)

= 2.55 washing machines.

The average demand of 2.8 washing machines using ten-day simulation differs significantly
when compared to the expected daily demand. If the simulation is repeated number of times,
the answer would get closer to the expected daily demand.

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Illustration 3:

A farmer has 10 acres of agricultural land and is cultivating tomatoes on the entire land. Due
to fluctuation in water availability, the yield per acre differs. The probability distribution yields
are given below:

a. The farmer is interested to know the yield for the next 12 months if the same water
availability exists. Simulate the average yield using the following random numbers 50,
28, 68, 36, 90, 62, 27, 50, 18, 36, 61 and 21.

Simulation Problem

Yield of tomatoes per Probability

acre (kg)

200 0.15

220 0.25

240 0.35

260 0.13

280 0.12

b. Due to fluctuating market price, the price per kg of tomatoes varies from ₹ 5.00 to ₹ 10.00
per kg. The probability of price variations is shown in table below. Simulate the price for
next 12 months to determine the revenue per acre. Also find the average revenue per acre.
Use the following random numbers 53, 74, 05, 71, 06, 49, 11, 13, 62, 69, 85 and 69.

Simulation Problem

Price per kg Probability

(₹)

5.50 0.05

6.50 0.15

7.50 0.30

8.00 0.25

10.00 0.15

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Solution:

Table for Random Number Interval for Yield

Yield of tomatoes Probability Cumulative Random Number

per acre Probability Interval

200 0.15 0.15 00 – 14

220 0.25 0.40 15 – 39

240 0.35 0.75 40 – 74

260 0.13 0.88 75 – 87

280 0.12 1.00 88 – 99

Table for Random Number Interval for Price

Price Per Probability Cumulative Random Number

Kg Probability Interval

5.00 0.05 0.05 00 – 04

6.50 0.15 0.20 05 – 19

7.50 0.30 0.50 20 – 49

8.00 0.25 0.75 50 – 74

10.00 0.25 1.00 75 – 99

Simulation for 12 months period

Month (1) Yield(2) Price (3) Revenue / Acre

(4) = 2 × 3 (₹)

1 240 8.00 1960

2 220 8.00 1760

3 240 6.50 1560

4 220 8.00 1760

5 250 6.50 1820

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 6 240 7.50 1800

7 220 6.50 1430

8 240 6.50 1560

9 220 8.00 1760

10 220 8.00 1760

11 240 10.00 2400

12 220 8.00 1760

Average revenue per acre = 21330 / 12

= ₹. 1777.50

Illustration-4:

J.M Bakers has to supply only 200 pizzas every day to their outlet situated in city bazaar. The
production of pizzas varies due to the availability of raw materials and labor for which the
probability distribution of production by observation made is as follows:

Simulation Problem

Production per day

196 197 198 199 200 201 202 203 204

Probability 0.06 0.09 0.10 0.16 0.20 0.21 0.08 0.07 0.03

Simulate and find the average number of pizzas produced more than the requirement and the
average number of shortage of pizzas supplied to the outlet.

Solution:

Assign two-digit random numbers to the demand levels as shown in below table.

Random Numbers Assigned to the Demand Levels

Demand Probability Cumulative No of Pizzas

Probability shortage

196 0.06 0.06 00-05

197 0.09 0.15 06-14

198 0.10 0.25 15-24

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 199 0.16 0.41 25-40

200 0.20 0.61 41-60

201 0.21 0.82 61-81

202 0.08 0.90 82-89

203 0.07 0.97 90-96

204 0.03 1.00 97-99

Selecting 15 random numbers from random numbers table and simulate the production per day.

Simulation of Production Per Day

Trial Random Production Per No of Pizzas over No of pizzas

Number Number day produced shortage

1 26 199 - 1

2 45 200 - -

3 74 201 1 -

4 77 201 1 -

5 74 201 1 -

6 51 200 - -

7 92 203 3 -

8 43 200 - -

9 37 199 - 1

10 29 199 - 1

11 65 201 1 -

12 39 199 - 1

13 45 200 - -

14 95 203 3 -

15 93 203 3 -

Total 12 4

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 The average number of pizzas produced more than requirement

= 12/15

= 0.8 per day

The average number of shortage of pizzas supplied

= 4/15

= 0.26 per day

14.5 SIMULATION OF QUEUING PROBLEMS

Illustration - 5:

Mr. Srinivasan, owner of Citizens restaurant is thinking of introducing separate coffee shop
facility in his restaurant. The manager plans for one service counter for the coffee shop
customers A market study has projected the inter-arrival times at the restaurant as given in the
below table. The counter can service the customers at the following rate:

Simulation of Queuing Problem

Inter–arrival times Service times

Time between two Probability Service time Probability

consecutive (minutes)
arrivals (minutes)

2 0.15 2 0.10

3 0.25 3 0.25

4 0.20 4 0.30

5 0.25 5 0.2

6 0.15 6 0.15

Mr. Srinivasan will implement the plan if the average waiting time of a customers in the system
is less than 5 minutes.

Before implementing the plan, Mr. Srinivasan would like to know the following:

i. Mean waiting time of customers, before service.

ii. Average service time.

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 iii. Average idle time of service.

iv. The time spent by the customer in the system.

Simulate the operation of the facility for customer arriving sample of 20 cars when the
restaurant starts at 7.00 pm every day and find whether Mr. Srinivasan will go for the plan.

Solution:

Allot the random numbers to various inter-arrival service times as shown in below table.

Random Numbers Allocated to Various Inter-Arrival Service Times

Waiting Time
Sl.No Random Number Inter Arrival Arrival Service Random Service Service
(Arrival) Number Time
Time (Min) Time at Starts at Ends at Customer Service
(service) (Min)
(Min)

1 87 6 7.06 7.06 36 4 7.10 - 6

2 37 3 7.09 7.10 16 3 7.13 1 -

3 92 6 7.15 7.15 81 5 7.20 - 2

4 52 4 7.19 7.20 08 2 7.22 1 -

5 41 4 7.23 7.23 51 4 7.27 - 1

6 05 2 7.25 7.27 34 3 7.30 2 -

7 56 4 7.29 7.30 88 6 7.36 1 -

8 70 5 7.34 7.36 88 6 7.42 2 -

9 70 5 7.39 7.42 15 3 7.45 3 -

10 07 2 7.41 7.45 53 4 7.49 4 -

11 86 6 7.47 7.49 01 2 7.51 2 -

12 74 5 7.52 7.52 54 4 7.56 - 1

13 31 3 7.55 7.56 03 2 7.58 1 -

14 71 5 8.00 8.00 54 4 8.04 1 2

15 57 4 8.04 8.04 56 4 8.08 - -

16 85 6 8.10 8.10 05 2 8.12 - 2

17 39 3 8.13 8.13 01 2 8.15 - 1

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18 41 4 8.17 8.17 45 4 8.21 - 2

19 18 3 8.20 8.21 11 3 8.24 1 -

20 38 3 8.23 8.24 76 5 8.29 1 -

Total 83 72 20 17

i. Mean waiting time of customer before service = 20/20 = 1 minute

ii. Average service idle time = 17/20 = 0.85 minutes

iii. Time spent by the customer in the system = 3.6 + 1 = 4.6 minutes.

Illustration - 6:

Dr. Strong, a dentist schedules all his patients for 30 minute appointments. Some of the patients
take more or less than 30 minutes depending on the type of dental work to be done. The
following table shows the summary of the various categories of work, their probabilities and
the time actually needed to complete the work.

Simulation Problem

Category Time required Probability of

(minutes) category

Filling 45 0.40

Crown 60 0.15

Cleaning 15 0.15

Extraction 45 0.10

Check-up 15 0.20

Simulate the dentist’s clinic for four hours and determine the average waiting time for the
patients as well as the idleness of the doctor. Assume that all the patients show up at the clinic
exactly at their scheduled arrival time, starting at 8.00 am. Use the following random numbers
for handling the above problem: 40, 82,11,34,25,66,17,79.

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Solution:

Assign the random number intervals to the various categories of work as shown in below table.

Random Number Intervals Assigned to the Various Categories

Category of Probability Cumulative Random

work probability Number Interval

Filling 0.40 0.40 00-39

Crown 0.15 0.55 40-54

Cleaning 0.15 0.70 55-69

Extraction 0.10 0.80 70-79

Check-up 0.20 1.00 80-99

Assuming the dentist clinic starts at 8.00 am, the arrival pattern and the service category are
shown in below table.

Arrival Pattern of the Patients

Patient Scheduled Random Service Service

Number Arrival Number category Time

1 8.00 40 Crown 60

2 8.30 82 Check-up 15

3 9.00 11 Filling 45

4 9.30 34 Filling 45

5 10.00 25 Filling 45

6 10.30 66 Cleaning 15

7 11.00 17 Filling 45

8 11.30 79 Extraction 45

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 The arrival, departure patterns and patients’ waiting time are tabulated.

Time Event (Patient Patient Number Waiting

Number) (Time to go) (Patient Number)

8.00 1 arrives 1 (60) -

8.30 2 arrives 1 (30) 2

9.00 1 departure, 3 arrives 2 (15) 3

9.15 2 depart 3 (45) -

9.30 4 arrive 3 (30) 4

10.00 3 depart, 5 arrive 4 (45) 5

10.30 6 arrive 4 (15) 5,6

10.45 4 depart 5 (45) 6

11.00 7 arrive 5 (30) 6,7

11.30 5 depart, 8 arrive 6 (15) 7,8

11.45 6 depart 7 (45) 8

12.00 End 7 (30) 8

The dentist was not idle during the simulation period. The waiting times for the patients are
shown below.

Patient's Waiting Time

Patient Arrival Service Waiting time

Time Starts (minutes)

1 8.00 8.00 0

2 8.30 9.00 30

3 9.00 9.15 15

4 9.30 10.00 30

5 10.00 10.45 45

6 10.30 11.30 60

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 7 11.00 11.45 45

8 11.30 12.30 60

Total 285

The average waiting time of patients = 285/8

= 35.625 minutes.

14.6 SIMULATION OF INVENTORY PROBLEMS

Illustration – 7:

A dealer of electrical appliances has a certain product for which the probability distribution of
demand per day and the probability distribution of the lead-time, developed by past records are
as shown in below table.

Probability distribution of lead demand

Demand 2 3 4 5 6 7 8 9 10
(Units)

Probability 0.05 0.07 0.09 0.15 0.20 0.21 0.10 0.07 0.06

Probability distribution of lead time

Lead Time 1 2 3 4
(Days)

Probability 0.20 0.30 0.35 0.15

The various costs involved are,

Ordering Cost = ₹ 50 per order

Holding Cost = ₹1 per unit per day

Shortage Cost = ₹ 20 per unit per day

The dealer is interested in having an inventory policy with two parameters, the reorder point
and the order quantity, i.e., at what level of existing inventory should an order be placed and
the number of units to be ordered. Evaluate a simulation plan for 35 days, which calls for a
reorder quantity of 35 units and a re-order level of 20 units, with a beginning inventory balance
of 45 units.

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Solution:

Assigning of random number intervals for the demand distribution and lead- time distribution
is shown in below tables.

Random Numbers Assigned for Demand Per Day

Demand per Probability Cumulative Random Number

day probability Interval

2 0.05 0.05 00-04

3 0.07 0.12 05-11

4 0.09 0.21 12-20

5 0.15 0.36 21-35

6 0.20 0.56 36-55

7 0.21 0.77 56-76

8 0.10 0.87 77-86

9 0.07 0.94 87-93

10 0.06 1.00 94-99

Random Numbers Assigned for Lead-time

Lead Time Probability Cumulative Random Number

(Days) probability Interval

1 0.20 0.20 00-19

2 0.30 0.50 20-49

3 0.35 0.85 50-84

4 0.15 1.00 85-99

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 Simulation Work-sheet for Inventory Problem (Case – 1)

Reorder Quantity = 35 units, Reorder Level = 20 units, Beginning Inventory = 45 units

Random Random Lead Inventor Short-

Number Qty. Ordering Holding
Day Number Demand Time y at end age
Received Cost Cost
(Demand) (Lead Time) (Days) of day Cost

0 - - - - 45 - - - -

1 58 7 - - 38 - - 38 -

2 45 6 - - 32 - - 32 -

3 43 6 - - 26 - - 26 -

4 36 6 73 3 20 - 50 20 -

5 46 6 - - 14 - - 14 -

6 46 6 - - 8 - - 8 -

7 70 7 - - 1 35 - 36 -

8 32 5 - - 31 - - 31 -

9 12 4 - - 27 - - 27 -

10 40 6 - - 21 - - 21 -

11 51 6 21 2 15 - 50 15 -

12 59 7 - - 8 - - 8 -

13 54 6 - - 37 35 - 37 -

14 16 4 - - 33 - - 33 -

15 68 7 - - 26 - - 26 -

16 45 6 45 2 20 - 50 20 -

17 96 10 - - 10 - - 10 -

18 33 5 - - 40 35 - 40 -

19 83 8 - - 32 - - 32 -

20 77 8 - - 24 - - 24 -

21 05 3 - - 21 - - 21 -

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 22 15 4 76 3 17 - 50 17 -

23 40 6 - - 11 - - 11 -

24 43 6 - - 5 - - 5 -

25 34 5 - - 35 35 - 35 -

26 44 6 - - 29 - - 29 -

27 89 9 96 4 20 - 50 20 -

28 20 4 - - 16 - - 16 -

29 69 7 - - 9 - - 9 -

30 31 5 - - 4 - - 4 -

31 97 10 - - 29 35 - 29 -

32 05 3 - - 26 - - 26 -

33 59 7 94 4 19 - 50 19 -

34 02 2 - - 17 - - 17 -

35 35 5 - - 12 - - 12 -

Total 300 768 -

Simulation Work-sheet for Inventory Problem (Case – II)

Reorder Quantity = 30 units, Reorder Level = 20 units, Beginning Inventory = 45 units

Random Random Lead Inventory at

Number Number Time end of day
Day Demand Qty. Ordering Holding Shortage
(Demand) (Lead Time) (Days)
Received Cost Cost Cost

0 - - - - 45 - - - -

1 58 7 - - 38 - - 38 -

2 45 6 - - 32 - - 32 -

3 43 6 - - 26 - - 26 -

4 36 6 73 3 20 - 50 20 -

5 46 6 - - 14 - - 14 -

6 46 6 - - 8 - - 8 -

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7 70 7 - - 31 30 - 31 -

8 32 5 - - 29 - - 29 -

9 12 4 - - 25 - - 25 -

10 40 6 - - 19 - 50 19 -

11 51 6 21 2 13 - - 13 -

12 59 7 - - 38 - - 38 -

13 54 6 - - 32 30 - 32 -

14 16 4 - - 21 - - 21 -

15 68 7 - - 21 - - 21 -

16 45 6 45 2 15 - 50 15 -

17 96 10 - - 5 - - 5 -

18 33 5 - - 30 - - 30 -

19 83 8 - - 22 - - 22 -

20 77 8 - - 14 - 50 14 -

21 05 3 - - 11 - - 11 -

22 15 4 76 3 7 - - 7 -

23 40 6 - - 31 30 - 31 -

24 43 6 - - 14 - - 14 -

25 34 5 - - 20 - 50 20 -

26 44 6 - - 14 - - 14 -

27 89 9 96 4 5 - - 5 -

28 20 4 - - 1 - - 1 -

29 69 7 - - 24 30 - 24 -

30 31 5 - - 19 - 50 19 -

31 97 10 - - 9 - - 9 -

32 05 3 - - 6 - - 6 -

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 33 59 7 94 4 0 - - - 20

34 02 2 - - 28 30 - 28 -

35 35 5 - - 23 - - 23 -

Total 300 683 20

The simulation of 35 days with an inventory policy of reordering quantity of 35 units at the
time of inventory level at the end of day is 20 units, as worked out in Table 14.27. The table
explains the demand inventory level, quantity received, ordering cost, holding cost and
shortage cost for each day.

Completing a 35-day period, the costs are

Total ordering cost = (6 x50) = ₹ 300.00 Total holding cost = ₹. 768.00

Since the demand for each day is satisfied, there is no shortage cost.

Therefore, Total cost = 300 + 768

= ₹ 1068.00

For a different set of parameters, with a re-order quantity of 30 units and the same re- order
level of 20 units, if the 35-day simulation is performed, we get the total of various costs as
shown in Table 10.28.

Total ordering cost = 6 x 50 = ₹ 300.00

Total holding cost = ₹. 683.0

Total shortage cost = ₹ 20.00

Therefore,

Total cost = 300 + 683 + 20

= ₹ 1003.00

If we analyse the combination of both the parameters, Case II has lesser total cost than Case I.
But at the same time, it does not satisfy the demand on 33rd day, that might cause customer
dissatisfaction which may lead to some cost.

If this type of problems, the approach with various combinations of two parameter values is
simulated a large number of times to find the total cost of each experiment, compare the total
cost and select the optimum alternative, i.e., that one which incurs the lowest cost.

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14.7 CHECK YOUR PROGRESS
1. Write True or False against each statement

(a) Simulations models are built for management problems and require management
input.

(b)All simulation models are very expensive.

(c) Simulation is best suited to analyse complex & large practical problem

(d)Simulation-generate optimal solution.

(e) Simulation model can not be very expensive.

2. Fill in the blank

(a) Simulation is one of the most widely used analysis book.

(b)Simulation allows, for the of real-world complications.

(c) System in similar to business gaming.

(d)Monte Carlo method used number.

(e) Simulation experiments generate large amount of and information.

Answers to Check Your Progress

1. (a) True (b) False (c) True (d) False (e) False

2. (a) Quantitative (b) Inclusion (c) Simulation (d) Random (e) Data

14.8 SUMMARY
By going through this unit, it is very true and clear that simulation is a reflection of a real
system representing the characteristics and behaviour within a given set of conditions. The
most important point in simulation is that simulation technique is considered as a valuable tool
because of its wide area of application. The most important approach to solving simulation is
the Monte Carlo Simulation which can be solved with the help of probabilistic and
deterministic model. The deterministic simulation mode, have the alternatives clearly known
in advance where as the probabilistic model is stochastic in nature and all decisions are made
under uncertainty.

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14.9 KEY WORDS
Simulation : A management science analysis that brings into play
construction and mathematical model that represents a real-
world situation.

Random number : A number whose digits are selected completely at random.

Flow chart : A graphical means of representing the logic of a simulation

model.

14.10 QUESTIONS FOR SELF STUDY

1. What is simulation? Give a few areas of its application.

2. With the help of a flow chart, briefly explain the simulation process.

3. What are the advantages and limitations of simulation?

4. What is Monte Carlo simulation?

5. Explain the procedure of simulation using random numbers.

6. Explain how simulation is useful in solving queuing and inventory problems.

Exercise Problem

1. A sweet stall observed that the demand for item Mysorpak per week in one kilogram
pack is as follows:

Demand /
week 5 10 15 20 25 30
(per kilo pack)

Frequency 4 22 16 42 10 6

Generate the demand for the next 10 weeks, and also find the average demand.

2. At a service station, cars arrive for water-wash daily. The probability of number of
cars that arrive are given in the table below. Simulate the number of cars that
will arrive for the next 10 days. Use the following random numbers: 87, 01, 74, 11,
46, 82, 59, 94, 25 and 34.

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 Cars arrival 5 6 7 8 9 10
per day

Probability 0.2 0.15 0.3 0.25 0.05 0.05

3. A private bank has installed an ATM in the city bazaar area. It was found that the time
between an arrival and completion of transaction varies from one minute to seven
minutes. The arrival and service distribution times are given below. Simulate the
ATM operations for the next 30 arrivals.

Probability
Time
(minutes) Arrival Service

1-2 0.10 0.05

2-3 0.15 0.15

3-4 0.30 0.30

4-5 0.25 0.20

5-6 0.10 0.15

6-7 0.10 0.15

Use Monte-Carlo simulation technique and determine:

a. Waiting time of the customers.

b. Idle time of the ATM.

The materials manager of a firm wishes to determine the expected mean demand for a
particular item in stock during the re-order lead time. This information is needed to determine
how far in advance to re-order, before the stock level is reduced to zero. However, both the
lead time, and the demand per day for the item are random variables, described by the
probability distribution.

Lead time Probability Demand / day Probability

(days) (units)

1 0.45 1 0.15

2 0.30 2 0.25

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 3 0.25 3 0.40

4 4 0.20

Manually simulate the problem for 30 re-orders, to estimate the demand during lead time.

4. A company has the capacity to produce around 300 bikes per day. Daily production
varies from 295 to 304 depending upon getting the clearance from the final inspection
department. The probability distribution of bikes passed through final inspection per
day is given below:

Production per day Probability

295 0.03

296 0.04

297 0.10

298 0.20

299 0.25

300 0.15

301 0.09

302 0.07

303 0.05

304 0.02

The finished bikes are transported in a long trailer lorry sufficient to accommodate 300 mopeds.
Simulate the process for 10 days and find:

a. The average number of bikes waiting in the factory yard.

b. The average empty space in the lorry.

5. In a single pump petrol station, it was observed that the inter-arrival times and service
times are as given in the table. Using the random numbers given, simulate the queue
behaviour for a period of 30 minutes and estimate the probability of the pump being
idle and the mean time spent by a customer waiting to fill petrol.

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 Inter-arrival time Service time

Minutes Probability Minutes Probability

1 0.10 2 0.10

3 0.17 4 0.23

5 0.35 6 0.35

7 0.23 8 0.22

9 0.15 10 0.10

Use the following random numbers: 93, 14, 72, 10, 21, 81, 87, 90, 38, 10, 29, 17, 11,

68, 10, 51, 40, 30, 52 & 71.

6. A one-man TV service station receives TV sets for repair. TV sets are repaired on a
‘first come, first served’ basis. The observations of the study made over a 100 day
period are given below.

No. of TV sets requiring Service

service
Frequency of request

1 15

2 15

3 20

4 25

5 25

No. of TV sets Servicing done

serviced
Frequency of service

1 10

2 30

3 20

4 15

5 25

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Simulate a 10 day period of arrival and service pattern.

7. ABC company stocks certain products. The following data is available:

a.

No of units 0 1 2 3

Probability 0.1 0.2 0.4 0.3

b. The variation of lead time has the following distribution

Lead time (weeks): 1 2 3

Probabilities: 0.30 0.40 0.30

The company wants to know (a) how much to order? and (b) when to order ? Assume that the
inventory in hand at the start of the experiment is 20 units and 15 units are ordered closed as
soon as inventory level falls to 10 units. No back orders are allowed. Simulate the situation for
25 weeks.

8. A box contains 100 balls of which 20 percent are white, 30 percent are black and the
remaining are red. Simulate the process for drawing balls at random from the box,
identify and note the colour and then replace. Use the following 10 random numbers to
simulate: 52, 60, 02, 3379, 79, 30, 36, 58 and 43.

9. Rahul, the captain of the cricket team, has the following observations on the number of
runs scored against type of ball. The bowling probability of a bowler for the type of
balls bowled are given below.

Type of bowling Probability of hitting a boundary

Over pitched 0.1

Short-Pitched 0.3

Outside off stump 0.2

Outside leg stump 0.15

Bouncer 0.20

Attempted Yorker 0.05

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The number of runs scored off each type of ball is shown in the table given below:

Type of bowling Probability of hitting a boundary

Over pitched 1

Short-Pitched 4

Outside off stump 3

Out side leg stump 2

Bouncer 2

Attempted Yorker 0

Simulate the game for 3 overs (6 balls per over) and calculate the batting average of Rahul.

14.11 REFERENCES
1. Ernshoff, J.R. & Sisson, R.L. Computer Simulations Models, New York Macmillan
Company.

2. Gordon G., System Simulation, Englewood cliffs N.J. Prentice Hall.

3. Chung, K.H. “Computer Simulation of Queuing System” Production & Inventory

Management Vol. 10.

4. Shannon, R. I. Systems Simulation. The act & Science. Englewood Cliffs, N.J. Prentice
Hall.

5. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT - 15 PROBABILITY
Structure:
15.0 Objectives

15.1 Introduction

15.2 Meaning of Probability

15.3 Basic Rules

15.4 Important Terms and Concepts

15.5 Illustrations

15.6 Random Variables

15.7 Theoretical Distributions or Probability Distributions

15.8 Check Your Progress

15.9 Summary

15.10 Keywords

15.11 Questions for Self-Study

15.12 References

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15.0 OBJECTIVES
After studying this unit, you will be able to;

• Define probability.
• Explain the fundamental principles of permutation and combination.

15.1 INTRODUCTION
The probability, theoretical probability distribution and probability distribution of
random variable in the three important interrelated trades which we are going to discuss in this
unit. As we know that probability associated with the occurrence of various events are
determined by specifying the condition of a random experiments. The concept of probability
originated from the analysis of the games of chance in the 17th century. Now the subject has
been developed to the extent that it is very difficult to imagine a discipline, be it from social or
natural sciences, that can do without it. The theory of probability is a study of Statistical or
Random Experiments. It is the backbone of Statistical Inference and Decision Theory that are
essential tools of the analysis of most of the modern business and economic problems. Often,
in our day-to-day life, we hear sentences like 'it may rain today', 'Mr X has fifty- fifty chances
of passing the examination', 'India may win the forthcoming cricket match against Sri Lanka',
'the chances of making profits by investing in shares of company A are very bright', etc. Each
of the above sentences involves an element of uncertainty.

15.2 MEANING OF PROBABILITY

It is numerical expression of happening of an uncertain event. Probability can be
defined as a measure of a chance of some event or activity.
They are expressed as fractions or decimals or percentage. Probability is between ‘Zero’ to
‘One’. Probability of ‘Zero’ means the event can never happen. Probability of ‘One’ means an
event will surely happen.

15.3 BASIC RULES

Number of outcomes favourable to an event

1. Probability of an Event = Total outcomes in the Sample Space

2. Complement of an Event:
P(AI) = 1 – P(A) OR P(A) = 1 – P(AI)

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3. ADDITIONAL THEOREM
a. Mutually Exclusive event
P(A ∪ B) = P(A) + P(B)
P(A ∪ B ∪ C) = P(A) + P(B) + P(C)

b. Non-Mutually Exclusive event

P(A ∪ B) = P(A) + P(B) − P(A ∩ B)
P(A ∪ B ∪ C) = P(A) + P(B) + P(C) − P(A ∩ B) − P(B ∩ C) − P(A ∩ C)
+ P(A ∩ B ∩ C)
4. MULTIPLICATION THEOREM
a. Independent Event
P(A ∩ B) = P(A) × P(B)

b. Dependent Event
P(A ∩ B) = 0

5. COMBINATIONS
𝒏 𝒏!
𝑪𝒓 =
(𝒏 − 𝒓)! 𝒏!

6. CONDITIONAL PROBABILITY
If ‘A’ & ‘B’ are two dependent events, then the probability of the occurrence of ‘A’, given
that ‘B’ has also occurred is given by,
P(A ∩ B) P(A ∩ B)
P(A/B) = or P(B/A) =
P(B) P(A)

∴ P(A ∩ B) = P(A/B) × P(B)

7. BAYE’S THEOREM
Let ‘B’ be any arbitrary event, which can only occur, in conjunction with one of the ‘n’
mutually exclusive event, then the probability of occurrence of AI given that B has
occurred.

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 P(Ai ∩ B)
P(Ai/B) =
P(B)
Where i= 1, 2, 3, 4, …………, n.

P(Ai) × P(B/Ai)
P(Ai/B) =
P(A1) × P(B/A1) + P(A2) × P(B/A2) + … … … + P(An) × P(B/An)

15.4 IMPORTANT TERMS AND CONCEPTS

1. RANDOM EXPERIMENT: It is an experiment where outcomes are uncertain in nature.
Eg: Tossing a coin, Rolling a die and playing a card, etc.
2. SAMPLE SPACE: It is a set of all possible outcomes from random experiment. It is
denoted by ‘S’. “The probability of Sample Space always equal to 1”.
Eg: write the sample space for the following
a) Tossing a coin: S = {H,T}
b) Tossing two coin simultaneously: S = {HH, HT, TH, TT}
c) Tossing three coin simultaneously: S = {HHH, HHT, HTH, THH, TTH, TTT, HTT,
THT}
d) When a die thrown: S = {1,2,3,4,5,6}
e) When dice are thrown:
S = {(1,1), (1,2), (1,3), (1,4), (1,5), (1,6)
(2,1), (2,2), (2,3), (2,4), (2,5), (2,6)
(3,1), (3,2), (3,3), (3,4), (3,5), (3,6)
(4,1), (4,2), (4,3), (4,4), (4,5), (4,6)
(5,1), (5,2), (5,3), (5,4), (5,5), (5,6)
(6,1), (6,2), (6,3), (6,4), (6,5), (6,6)}
d) Drawing a marbles which consists of 4red, 6Green, 2White, 5Blue:
S={4R,6G,2W,5B}
3. EVENT: It is a subset of sample space. It refers to the set of all expected outcomes from
the sample space or from the random experiment. It is denoted by ‘Capital Alphabet’.
Eg: a) Write an event of getting head when a coin is tossed.
Solution:
S = {H,T}
Let, event ‘A’ denote getting head
A = {H}

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b) A two coins are tossed simultaneously write a event of getting
(i) All heads, (ii) One head, (iii) At least one head, (iv) No head.
Solution:
S = {HH, HT, TH, TT}
(i) Let event ‘A’ denote getting all heads
A = {HH}
(ii) Let event ‘B’ denote getting one head
B = { HT, TH}
(iii) Let event ‘C’ denote getting at least one head
C = { HH, HT, TH}
(iv) Let event ‘D’ denote getting no heads.
D = {TT}
c) A dice is thrown, write a event of getting:
(i) An odd number
(ii) An even number
(iii) The number exactly divisible by ‘3’
(iv) The number more than ‘4’
Solution:
S = {1,2,3,4,5,6}
(i) Let event ‘A’ denote getting an odd number
A = {1,3,5}
(ii) Let event ‘B’ denote getting an even number
B = {2,4,6}
(iii) Let event ‘C’ denote getting a number exactly
C = {3,6}
(iv) Let event ‘D’ denote getting number more than ‘4’
D = {5,6}
d) When dice are thrown, write an event of getting;
(i)Same no. on both the dice, (ii)The no.3, (iii)The sum of 6, (iv)The sum exactly
divisible by 4.
Solution:
S= {(1,1) (1,2) (1,3) (1,4) (1,5) (1,6)
(2,1) (2,2) (2,3) (2,4) (2,5) (2,6)
(3,1) (3,2) (3,3) (3,4) (3,5) (3,6)
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 (4,1) (4,2) (4,3) (4,4) (4,5) (4,6)
(5,1) (5,2) (5,3) (5,4) (5,5) (5,6)
(6,1) (6,2) (6,3) (6,4) (6,5) (6,6)}
(i) Let event ‘A’ denote getting same number on both the dice.
A = {(1,1) (2,2) (3,3) (4,4) (5,5) (6,6)}
(ii) Let event ‘B’ denote number ‘3’
B = {(1,3) (2,3) (3,1) (3,2) (3,3) (3,4) (3,5) (3,6) (4,3) (5,3) (6,3)}
(iii) Let event ‘C’ denote sum of 6
C = {(1,5) (2,4) (3,3) (4,2) (5,1)}
(iv) Let event ‘D’ denote sum exactly divisible by ‘4’
D = {(1,3) (2,2) (2,6) (3,1) (3,5) (4,4) (5,3) (6,2) (6,6)}

4. MUTUALLY EXCLUSIVE EVENT: The two events are said to be mutually exclusive
event, when happening of an one event prevents the happening of an another event
Eg: a) When a coin is tossed, occurrence of head prevents the occurrence of tail and
vice versa.
b) When a die is thrown
S = {1,2,3,4,5,6} A={2,4,6} B{1,3,5}
Happening of an event ‘A’ prevents the happening of an event ‘B’ and vice versa.
5. NON-MUTUALLY EXCLUSIVE EVENT: The two events are said to be non-mutually
exclusive event, when happening of an one event does not prevents the happening of an
another event
Eg: When a die is thrown
S = {1,2,3,4,5,6} A={2,4,6} B{1,3,5} C={3,6}
Happening of an event ‘A’ or ‘B’ does not prevent the happening of an event ‘C’ and vice
versa.
6. DEPENDENT EVENT: The two events are said to be dependent event, when happening
of an one event is depending on the happening or non-happening of an another event
7. INDEPENDENT EVENT: The two events are said to be independent event, when
happening of an one event does not effect of happening or non-happening of an another
event
8. COMPLEMENT OF AN EVENT: If ‘A’ is any event, then the non-happening of that
event is said to be complement of that event. It is represented by AI or A.

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 15.5 ILLUSTRATIONS
Illustration - 1:

A pair coin is tossed, find the probability of head in the toss of a pair coin.

Solution:

Random experiment: Tossing a coin

S = { H,T}

Let event ‘A’ denote getting a head

A = {H}

Number of events favourable to event ‘A’

∴P(A) =
Total number of events in sample space
1
∴ P(A) = or 0.5 or 50%
2

Illustrations - 2:

A pair of coins are tossed simultaneously, what is the probability of getting;

a. One head
b. At least one head
c. Two heads
d. No heads

Solution:

Event:- Two coins tossed simultaneously

S = {HH, HT, TH, TT}

a. P (Getting one head)

Let ‘A’ denote getting one head
A = {HT, TH}

Number of events favourable to event ‘A’

∴P(A) =
Total number of events in sample space
2
∴ P(A) = or 0.5 or 50%
4

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 b. P (Getting at least one head)

Let event ‘B’ denote getting at least one head

B = {HH, HT, TH}

3
∴ P(B) = or 0.75 or 75%
4

c. P (Getting two heads)

Let event ‘C’ denote getting two heads

C = {H, H}

1
∴ P(C) = or 0.25 or 25%
4

d. P (getting no heads)
Let event ‘D’ denote getting no heads
D = {T,T}
1
∴ P(D) = or 0.25 or 25%
4

Illustration -3:

A die is rolled, what is the probability of getting,

a. An even number
b. An odd number
c. Multiple of 3
d. A number greater than 4

Solution:

Event: A die is thrown

S = {1,2,3,4,5,6}

a. P (Getting an even number)

Let event ‘A’ denote probability of getting an even number
A = {2,4,6}

Number of events favourable to event ‘A’

∴P(A) =
Total number of events in sample space

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 3
∴ P(A) = or 0.5 or 50%
6

b. P (getting an odd number)

Let event ‘B’ denote probability of getting an odd number
B = {1,3,5}

3
∴ P(B) = or 0.5 or 50%
6

c. P (getting multiple of 3)
Let event ‘C’ denote probability of getting multiple of ‘3’
C = {3,6}

2
∴ P(C) = or 0.33
6

d. P (getting a number greater than 4)

Let event ‘D’ denote getting a number more than 4
D = {5,6}

2
∴ P(D) = or 0.33
6

Illustration – 4:

A pair of dice are thrown, what is the probability of getting;

a. A sum of 7
b. Same number on both the dice
c. Getting number 3
d. Sum exactly divisible by 4
e. A sum of 7 or same number on both the dice.
f. Sum of 7 or number 3.

Solution:

S = {(1,1) (1,2) (1,3) (1,4) (1,5) (1,6)

(2,1) (2,2) (2,3) (2,4) (2,5) (2,6)

(3,1) (3,2) (3,3) (3,4) (3,5) (3,6)

(4,1) (4,2) (4,3) (4,4) (4,5) (4,6)

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 (5,1) (5,2) (5,3) (5,4) (5,5) (5,6)

(6,1) (6,2) (6,3) (6,4) (6,5) (6,6)}

a. P (getting sum of 7)
Let event ‘A’ denote sum of 7
A = {(1,6) (2,5) (3,4) (4,3) (5,2) (6,1)}
6 1
∴ P(A) = 36 = 0.1667 or 6

b. P (getting same number on dice)

Let event B denote same number
B = {(1,1) (2,2) (3,3) (4,4) (5,5) (6,6)}
6 1
∴ P(A) = 36 = 6 or 0.1667

c. P (Getting number 3)
Let ‘C’ denote number 3
C = {(1,3) (2,3) (3,1) (3,2) (3,3) (3,4) (3,5) (3,6) (4,3) (5,3) (6,3)}
11
∴ P(C) = 36 = 0.3055

d. P (Getting sum exactly divisible by 4)

Let event ‘D’ denote sum exactly divisible by ‘4’
D = {(1,3) (2,2) (2,6) (3,1) (3,5) (4,4) (5,3) (6,2) (6,6)}
9 1
∴ P(D) = 36 = 4 = 0.25

e. P (Sum of 7 or same number on both the side)

P (A∪B) = P (A) + P (B)
* Because mutually exclusive events as occurrence of one event avoids the occurrence
of event ‘B’ and there is no repetition
P (A∪B) = P (A) + P (B)
6 6 12
= 36 + 36 = 36 = 0.333

f. P (Sum of 7 or number 3)
P (A∪C) = P (A) + P (C) – P (A∩C)*
* Because non-mutually exclusive events as occurrence of one event doesn’t avoid the
other and some events are repeated in both event ‘A’ and ‘C’.
i.e. (3,4) and (4,3)
P (A∪C) = P (A) + P (C) – P (A∩C)*

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 6 11 2
= + −
36 36 36
15
= = 0.4167
36

Illustration – 5:

The following is an extract from a life table:

Age (yours) No of Survivors

0 100000
10 79348
20 77181
40 66490
60 41406
80 9726
Find the probability that

a. A person aged 20 lives till he is 80.

b. A new born baby survives upto the age of 20 yea₹
c. A person aged 60 lies for 20 more yea₹

Solution:

a. P (the person aged 20 lives till he is 80)

m
P (A) =
n
9726
=77181

= 0.126
77181
b. P (New born baby survives upto the age of 20 years) =
100000

= 0.77181
9726
c. P (Person aged 60 lives for 20 more years) = 41406

= 0.235

Illustration – 6:

The probability of ‘A’ hitting a target is ¼ the probability of ‘B’ hitting is 1/5. If both fire once,
what is the probability that the target is hit.

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Solution:
1 1 3
P(A) = 4 P (A1) = 1 – P(A) = 1 - 4 = 4

1 1 4
P(A) = 5 P (B1) = 1 – P(B) = 1 - 5 = 5

P (the target is hitted)

P (A∪B) = P (A) + P (B) – P (A∩B)

1 1 1 1
= 4 + 5 – 4 X5

= 0.40.

P(the target hitted) = 1 – P (Target is not hitted)

= 1 P (A1) x P (B1)
3 4
=1-4x5

= 0.40.

P(A1) = 1 – P(A)
1
=1-4

3
=4

P(B1) = 1 – P(B)
1
=1-5

4
=5

Illustration – 7:

The probabilities of three persons A,B & C solving a problem are 1/2, 2/3 and 3/4. If all the
three independently try to solve what is the probability that the problem is solved.

Solution:
1 1
P (A) = 2 , P(A1) = 2

2 1
P (B) = 3, P(B1) = 3

3 1
P (C) = 4, P(C1) = 4

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P (Problem solved) = 1- P (Problem not solved)

= 1 - P (A1) x P (B1) x P (C1)

1 1 3
=1-2x3x4

= 0.9583

Illustration – 8:

A bag contains 6 white and 7 black balls find the probability of getting

a. A black ball
b. A white ball

Solution:

S = {6W, 7B}

a. P (Getting a black ball)

Let event ‘A’ denote getting a black ball
A= {7B}
7
P(A) = 13

b. P (Getting a white ball)

Let event ‘B’ denote getting a white ball
B = {6W}
6
P(B) = 13

Illustration – 9:

A puzzle was given to 4 students A,B,C&D whose chances of solving it are 1/2, 1/3, 1/4 and
1/5 respectively. Find the chances that the problem will be solved.

Solution:-

P(Problem will be solved) = 1 – P(Problem will not solved)

= 1 - P (A1) x P (B1) x P (C1) x P (D1)

1 2 3 4
=1-2x3x4x5

1
=1-5

4
= 5 = 0.8

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Illustration – 10:

In a shooting competition, probability that Mr. X will hit the target is 1/4. What is the
probability that Mr. X will not hit the target.

Solution:

P (Hitting the target) = P(A) = 1/4

P (Not hit the target) = 1 – P (hit the target)

= 1 – P(A)
1
=1- 4

=¾
Illustration – 11:
Speaker ‘A’ tells the truth 3/4 times, speaker ‘B’ in 4 out of 5 cases. What is the probability
they will contradict each other in stating the same fact.

Solution:
3 1
P (A) = 4 , P(A1) = 4

4 1
P(B) = 5 , P(B1) = 5

If ‘A’ tells the truth, ‘B’ will lie ∴ P (A∩B1) or

If ‘B’ tells the truth, ‘A’ will lie ∴ P (A1∩B).

P (A∪B1) U P (A1∩B) = P (A) x P (B1) + P (A1) x P(B)

3 1 1 4
=4x5 + x5
4

3 4
= 20 + 20

7
= 20 = or 0.35.

Illustration – 12:

The probabilities of 3 drivers driving home safely after consuming liquor are 3/4, 3/5 and 4/5
respectively. One day the 3 drivers start home after consuming liquor in a party. Find the
probability that are the 3 drive home safety.

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Solution:
3 3 4
P (A) = 4 , P(B) = 5 , P(C) = 5

P (A the three drive home safety) = P (A∩B∩C)

= P (A) x P (B) x P (C)
3 3 4
=4x5x5

9
= 25 = 0.36

Illustration -13:

A group of children has three boys and one girl. Another group has 2 boys and 2 girls. The
third group has one boy and 3 girls.

One child is selected from each of these 3 groups. Find the probability that

a. All the three selected children are girls

b. At least one of the 3 selected children is a boy.
c. Show the chances that the 3 selected consist of one girl and 2 boys is 13/32.

Solution:

a. P(All are girls)= P (G1 ∩ G2 ∩ G3)

1 2 3
= (4 x 4 x 4 )
6
= 64

= 0.09375
b. P(At least one boy) = 1 – P (No boys)
= 1-P(All girls)
= 1 – 0.09375
= 0.90625
c. P (G1 ∩ B2 ∩ B3) ∪ P (B1 ∩ G2 ∩ B3) ∪ P (B1 ∩ B2 ∩ G3)
= P(G1) x P(B2) x P(B3) + P(B1) x P(G2) x P(B3) + P(B1) x P(B2) x P(G3)
1 2 1 3 2 1 3 2 3
= (4 x 4 x 4 ) + (4 x 4 x 4 ) + (4 x 4 x 4 )
2 6 18
= 64 + 64 + 64
26
= 64
13
= 32

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Illustration-14:

What is the probability that there will be 53 Sundays in a randomly selected

a. Non Leap year.

b. Leap year.

Solution:

a. P(Non-leap year):
Total number of days = 365
(-)52 weeks (52 x 7) = 364
1 Extra

S = {S,M,T,W,T,F, Sat)
1
∴ P(A) =
7

b. P(Leap year):
Total number of days = 366
(-)52 weeks (52 x 7) = 364

2 Extra

S = {(Sun,M) (M,T) (T,W) (W,T) (T, F) (F,S) (S,Sun)

2
∴ P(B) = 7

Illustration - 15:

A dealer in new and old cars has collected the following historical data on car-sales.

Type of car Cash Credit

Total
purchased Purchase Purchase

New (N) 12 30 42

Old (O) 20 38 58

Total 32 68 100

a) Would the numbers in the table be classified as objective or subjective probability?

b) What is the marginal probability of an individual paying cash for car?
c) Determine the joint probability of a purchase being new car and on credit.
d) Determine the conditional probability that a used car purchaser will pay cash.

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 e) Are the events new car purchase and payment by cash statistically independent?

Solution:

a. The numbers classified in the table are objective.

b. Marginal probability of an individual paying cash for car
32
P(A) = = 0.32
100

c. Joint probability of a purchase being new car and on credit

30
P(B) = = 0.30
100

d. Conditional probability that a used car purchaser will pay cash.

P(A) = P (Paying Cash) = 32/100
P(B) = P (Used Car Purchase) = 58/100
P(A∩B) = 20/100
20
P(A/B) = 58

or
P (A∩B)
P(A/B) = P(B)

20
100
= 58
100
20
P(A/B) =
58
e. Are the new car purchases and payment of cash independent?
P (A ∩ B) = P(A) x P(B)
12 32 42
= x
100 100 100

P (A ∩ B) ≠ P(A) x P(B)

∴ New car Purchase and payment of cash is dependent.

Illustration - 16:

A market survey was conducted in 4 cities pertaining to preference for brand ‘A’. The responses
are shown below.

Delhi Calcutta Madras Bombay Total

Yes 45 55 60 50 210

No 35 45 35 45 160

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 No Responses 5 5 5 5 20

Total 85 105 100 100 390

a. What is the probability that a consumer at random preferred ‘A’.

b. What is the probability that a consumer prefer brand ‘A’ and he is from Madras?
c. What is the probability that a consumer prefers Brand ‘A’ given that he comes from
Madras?
d. Given that a consumer prefers brand ‘A’ what is the probability that he was from
Bombay.

Solution:

a. Probability that a consumer at Random preferred Brand ‘A’.

210
P(A) =
390

b. P (a consumer prefers Brand ‘A’ and he is from Madras)

A = Consumer preferred Brand A
B = He is from Madras.
60
P (A ∩ B) = 390

c. P (A consumer prefers ‘A’ given that he comes from Madras)

A = Consumer prefers Brand ‘A’
B = Given that he is from Madras.
60
P(A∩B) 390 60
P (A/B) = = 100 = 100
P (B)
390

d. P (He was from Bombay given that consumer prefers Brand ‘A’)
A = Consumer prefers Brand ‘A’
B = He was from Bombay.
50
P(B∩A) 390 50
P (B/A) = = 210 = 210
P (A)
390

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Illustration 17:

In a college, there are 5 lectures. Among them 3 are Doctorates. If a committee consisting 3
lecturers is formed, what is the probability that at least 2 of them are doctorates?

Solution:

P(At least 2 of them are doctorates)=(2 Doctors and 1 non doctors)or(3 Doctors and O non
doctors)
3
C2 x 2C1 3
C3 x 2C0
= +
5 5
C3 C3
3x2 1x1
= +
10 10

6 1
= 10 + 10

7
= 10

Illustration – 18:

There are 20 persons. 5 of them are graduates. 3 persons are randomly selected from these 20
persons. Find he probability that atleast one of the selected person is graduate?

Solution:

P (Atleast one graduate)

P (x ≥ 1) = 1 – P (No graduate)

5
C0 x 15C3
=1-
20
C3

1 x 455
=1– 1140

1140−455
= 1140

685
= 1140

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Illustration – 19:
A bag contains 6 white and 7 black balls. Two balls are drawn at random. Find the probability
that they are of
a. Same color
b. Different colors
Solution:
S = 6W, 7B = 13
a. P (getting same color)
= (Both are White) or (Both are Black)
6 7
C2 C2
= +
13 13
C2 C2
15 21
= +
78 78

36
= 78
b. P (Getting different color)

= (1 White and 1 Black)

6
C1 x 7C1
=
13
C2

42
=
78

Illustration- 20:

A bag has 5 red, 2 blue and 3 yellow marbles. 3 marbles are drawn at random. Find the
probability that they are of

a. Same color
b. Different color

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Solution:

S = 5R, 2B, 3Y = 10

a. P (getting same color)

= (All are red) or (All are yellow)
5 3
C1 C3
= +
10 10
C3 C3
10 1
= 120 + 120
11
= 120

b. P (getting different color) = (1R & 1B & 1Y)

5
C1 x 2C1 x 3C1
=
10
C3

30 1
= 120 = 4 = 0.25

Illustration – 21:

A bag contains 4 Red and 6 blue balls. Two balls are drawn at random from the bag. Find the
probability that both of them are Red, if

a. The balls are drawn together

b. The balls are drawn one after the other, without replacement.
c. The balls are drawn one after the other, with replacement.

Solution:

S = {4R, 6B}

a. Balls are drawn together

4
C2
6
P (getting Red) = = = 0.1333
45
10
C2
b. Without Replacement
4 3 12
P (getting Red one after the other) =10 x 9 = 90 = 0.1333

c. With replacement:
4 4 16
P (Getting Red) = 10 x 10 = 100 = 0.16

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15.6 RANDOM VARIABLES
Meaning:
Random variable is a function which assigns a real number to every sample point in the sample
space. The set of such real values is a range of random variables.

Mean (Expected Value) = E(x) = ∑ 𝑥. 𝑃(𝑥)

Variance = Var(x) = E(x)2 – [E(x)]2
Standard Deviation = 𝜎 = √Var(x)

𝜎 = √Variance

Illustration - 22:

From the following information, calculate Mean and S.D.

X P (X)
8 0.20
14 0.30
18 0.20
20 0.15
26 0.15
Solution:

X P (X) X.P X2 X2, P

8 0.20 1.6 64 12.8
14 0.30 4.20 196 58.8
18 0.20 3.60 324 64.8
20 0.15 3.00 400 60.0
26 0.15 3.90 676 101.40
16.30 297.80
∑𝐗 P ∑ X2 P

Mean:

∑(X) = ∑ X P

= 16.30

∑(X)2 = ∑ X 2 P

= 297.80

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Variance:

Var(x) = ∑(𝑥)2 - ∑(𝑥)2

= 297.80 – (16.30)2

Var(x) = 32.11
Standard Deviation

S.D = √𝑉𝑎𝑟 (𝑥)

= √32.11
𝜎 = 5.66
Illustration – 23:
A person enters into a game of tossing a coin. If head appears he gains ₹ 10, if tail appears he
losses ₹ 5.

What can he expect by entering into the game?

Solution:

Let ‘x’ denoted return

X P(X) X.p
10 0.5 5
-5 0.5 -2.5
1.00 2.5
∑(𝑥) = ∑ 𝑥 P

= 2.5

Illustration-24:

A random variable of ‘x’ has the following probability distribution.

X : -1 0 1 2

P(X) : 1/3 1/6 1/6 1/3

Compute the expectation of x.

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Solution:

X P(X) X.P
-1 0.333 -0.333
0 0.167 0
1 0.167 0.167
2 0.333 0.666
1.00 0.50
∑(𝑥) = ∑ 𝑥 P

= 0.50

Illustration-25:

A person by paying ₹ 5 enters into a game of shooting a target. With one shot, if he hits the
target, he gets ₹ 25. Otherwise, he gets nothing. If his probability of hitting the target is 1/7,
find his expectation.

Solution:

Net return = (25-5)

X P(X) X.P
20 1/7 2.85
-5 6/7 -4.29
∑ 𝑥 P(x) -1.44

∑(𝑥) = ∑ 𝑥 P(x)

= -1.44

15.7 THEORETICAL DISTRIBUTION OR PROBABILITY DISTRIBUTIONS

The empathetical or observed or experimental frequency distributions in which the
actual data were collected classifies and tabulated in the form of a frequency distribution.
The random variables we consider their theoretical equivalent. These equivalent
distributions are originated according to certain theoretically designed distributions are called
as theoretical distributions.
Types of theoretical distribution
1. Bernoulli distribution
2. Binomial distribution
3. Poisson distribution

- 366 -
 4. Normal distribution
5. Chi square distribution
6. ‘t’ distribution

15.7.1 BERNOULLI DISTRIBUTION

The distribution which has the following probability mass function is called Bernoulli
distribution.
P.M.F: 𝑃(𝑥) = 𝑝 𝑥 × 𝑞1−𝑥
Where x = 0, 1.
Properties:
1. Bernoulli distribution has only one parameter. i.e. ‘p’
2. The P.M.F. of this distribution is 𝑃(𝑥) = 𝑝 𝑥 × 𝑞1−𝑥
3. In Bernoulli distribution, ‘p’ stands for success and ‘q’ stands for failure.
4. Mean = E(x) = p, Variance = Var(x) = pq, Standard Deviation = 𝜎 = √𝑉𝑎𝑟 (𝑥) =

√𝑝𝑞
5. This distribution is applicable only when there are two outcomes. Here, ‘1’ stands for
success and ‘0’ stands for failure.
15.7.2 BINOMIAL DISTRIBUTION
The distribution which has the following probability mass function is called binomial
distribution.
𝑛
P.M.F: 𝑃(𝑥) = 𝐶𝑥 × 𝑝 𝑥 × 𝑞1−𝑥
Where x = 0,1,2,……….n.
Properties:
1. Binomial distribution has two parameter. i.e. ‘n’ & ‘p’
𝑛
2. The P.M.F. of this distribution is 𝑃(𝑥) = 𝐶𝑥 × 𝑝 𝑥 × 𝑞1−𝑥
3. In binomial distribution, ‘p’ stands for success and ‘q’ stands for failure and q=1-p.
4. Mean = E(x) = np, Variance = Var(x) = npq, Standard Deviation = 𝜎 = √𝑉𝑎𝑟 (𝑥) =

√𝑛𝑝𝑞
5. In this distribution, the mean is always greater than variance (Mean > Variance).
15.7.3 POISSON DISTRIBUTION
It is used to describe the average number of events occurring in a given interval of time.
The distribution which has the following probability mass function is called poisson
distribution.

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 e- x  x
P.M.F: P(x) =
x!

Where x = 0, 1, 2,……….n
Properties:
1. The Poisson distribution has only one parameter. i.e. ( = mean)
e- x  x
2. The P.M.F. of this distribution is P(x) =
x!
3. In possion distribution, ‘n’ is very large and ‘p’ is very small, this distribution gives a
very close approximation to binomial distribution.
4. Mean = E(x) = , Variance = Var(x) = , Standard Deviation = 𝜎 = √𝑉𝑎𝑟 (𝑥) =
√
5. In this distribution, the mean is equal to variance (Mean = Variance).
15.7.4 NORMAL DISTRIBUTION
It is a continuous frequency distribution. It is a symmetrical distribution. The normal
distribution of a variable when represented graphically takes a form of bell shaped curve. The
probability distribution which has the following standard normal variate is called normal
distribution.
𝑥− 𝜇
𝑍=
𝜎
Properties:
1. The distribution has 2 parameter namely 𝜇 & 𝜎.
2. The curve is bell shaped.
50% 50%

-∞ -3 -2 -1 0 +1 +2 +3 +∞
3. For practical application, the normal distribution is converted into standard normal
variate
𝑥− 𝜇
𝑍=
𝜎

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 4. The area under the standard normal curve is,
The area value of 0 to – ∞ is 0.5
The area value of 0 to ∞ is 0.5

15.8 CHECK YOUR PROGRESS

1. Fill in the blank

(a) The theory of probability is a study of ______ or ______ experiments.

(b)______ is a arrangement of a given number of objects in ______ a definite order.

(c) Counting techniques are often helpful in ______ of total number of outcomes.

(d)Modern approach was introduced by ______ mathematical.

(e) Bayes' Theorem is also called ______.

2. Write True or False against each of the statement:

(a) It is not possible to predetermine the outcome association with a particular

experimentation.

(b)The total number of permutations of n distinct objects is n!

(c) Each element of the set is called sample point.

(d)A compound event is simultaneous occurrence of only two events.

(e) The assignment of probabilities on basis of statistical and classical events is objective.

Answer to Check Your Progress:

1. (a) Statistical, Random (b) Permutation (c) enumeration

(d) Russian (e) Inverse Probability
2. (a) True (b) True (c) True (d) False (e) True

15.9 SUMMARY
This unit provides an explanation of probability for processes with a finite number of
possible outcomes. It explains the meaning of probability, as well as how to calculate
probability. It also examines the relationship between complementary events. When two events
are complementary, one occurs if and only if the other does not. Probability helps people
understand which choices are safe and which choices are risky. Of course, this task is much
easier when we have fluent knowledge of probability. Through the concept of probability
explained in this unit, we can analyze the likelihood of future events, and prepare accordingly.

- 369 -
 Further, a probability distribution is a mathematical function that describes the
probability of different possible values of a variable. Probability distributions are often depicted
using graphs or probability tables. Common probability distributions include the binomial
distribution, Poisson distribution, and uniform distribution. Certain types of probability
distributions are used in hypothesis testing, including the standard normal distribution, the F
distribution, and Student’s t distribution. Probability distributions are used to describe the
populations of real-life variables, like coin tosses or the weight of chicken eggs. They’re also
used in hypothesis testing to determine p values.

15.10 KEYWORDS
Event : A subset of the outcomes of a process. For instance, the
set of outcomes {2, 4, 6} when rolling a die is an event
that one might call "rolling an even number".

Complement of an Event : The set of outcomes in the sample space that are not in
the event E.

Experiment : An activity with an observable result

Outcomes : The possible results of an event. For example, when a die

is rolled, the possible outcomes are 1, 2, 3, 4, 5, and 6.

Mutually Exclusive Events : Events that have no outcomes in common

Probability : A measure of the likeliness that an event will happen.

Favourable outcomes
Probability =
Possible outcomes
Sample Space : The set of all possible outcomes of an experiment

Union of Two Events : The event that occurs if either or both events occur.

15.11 QUESTIONS FOR SELF-STUDY

1. Define the term 'probability' by (a) The Classical Approach, (b) The Statistical Approach.
What are the main limitations of these approaches?

2. Discuss the axiomatic approach to probability. In what way it is an improvement over

classical and statistical approaches?

3. Distinguish between objective probability and subjective probability. Give one example
of each concept.

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4. State and prove theorem of addition of probabilities for two events when

(a) they are not independent, (b) they are independent.

5. Explain the meaning of conditional probability. State and prove the multiplication rule
of probability of two events when (a) they are not independent, (b) they are independent.

6. Explain the concept of independence and mutually exclusiveness of two events A and B.
If A and B are independent events, then prove that A and B are also independent.

For two events A and B it is given that P(A) = 0.4, P(B) = p, P(A ∪ B) = 0.6

(i) Find the value of p so that A and B are independent.

(ii) Find the value of p so that A and B are mutually exclusive.

7. Explain the meaning of a statistical experiment and corresponding sample space. Write
down the sample space of an experiment of simultaneous toss of two coins and a die.

8. State and prove Bayes' theorem on inverse probability.

9. What is the probability of getting exactly two heads in three throws of an unbiased coin?

10. What is the probability of getting a sum of 2 or 8 or 12 in single throw of two unbiased
dice?

11. Two cards are drawn at random from a pack of 52 cards. What is the probability that
the first is a king and second is a queen?

12. What is the probability of successive drawing of an ace, a king, a queen and a jack from
a pack of 52 well shuffled cards? The drawn cards are not replaced.

13. 5 unbiased coins with faces marked as 2 and 3 are tossed. Find the probability of getting
a sum of 12.

14. If 15 chocolates are distributed at random among 5 children, what is the probability that
a particular child receives 8 chocolates?

15. A and B stand in a ring with 10 other persons. If arrangement of 12 persons is at random,
find the chance that there are exactly three persons between A and B.

16. Two different digits are chosen at random from the set 1, 2, 3, 4, 5, 6, 7, 8. Find the
probability that sum of two digits exceeds 13.

17. From each of the four married couples one of the partner is selected at random. What
is the probability that they are of the same sex?

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 18. A bag contains 5 red and 4 green balls. Two draws of three balls each are done with
replacement of balls in the first draw. Find the probability that all the three balls are red
in the first draw and green in the second draw.
19. Two die are thrown two times. What is the probability of getting a sum 10 in the first
and 11 in the second throw?
20. 4 cards are drawn successively one after the other without replacement. What is the
probability of getting cards of the same denominations?
21. A bag contains 4 white and 2 black balls. Two balls are drawn one after another without
replacement. What is the probability that first ball is white and second is black or first
is black and second is white?
22. A bag contains 4 white and 3 red balls. Another bag contains 3 white and 5 red balls.
One ball is drawn at random from each bag. What is the probability that (a) both balls
are white, (b) both are red, (c) one of them is white and the other is red?
23. What is the probability of a player getting all the four aces, when playing cards are
uniformly distributed among the four players?
24. A bag contains 10 white and 6 red balls. Two balls are drawn one after another with
replacement. Find the probability that both balls are red.
25. Three persons A, B and C successively draw one card from a pack of 52 cards with
replacement of the card drawn earlier. The first to obtain a card of spade wins. What
are their respective chances of winning?
26. A bag contains 6 red and 4 green balls. A ball is drawn at random and replaced and a
second ball is drawn at random. Find the probability that the two balls drawn are of
different colours.

15.12 REFERENCES
1. Feller W., An introduction to probability theory and its applications, Volume 1, John
Willy & Sons.
2. Csiszar, I divergence geometry of probability distributions and minimization problems,
The Annals of probability, Vol 3, No 1, pp. 146-158.
3. Sheldon M. Ross, A first course in probability, Prentice Hall.
4. Morris H. Degroot, Mark J, Schervish, "Probability and Statistics," Addison-Wesley,
2001
5. William Mendenhall, Robert, J. Beaver, Barbara, M. Beaver, Introduction to Probability
and Statistics.
6. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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UNIT – 16 DECISION THEORY
Structure:

16.0 Objectives

16.1 Introduction

16.2 Important Terms

16.2 Types of Decision-Making Situations

16.3 Decision Making under Certainty

16.4 Decision Making Under Uncertainty

16.4.1 Different Optimal Decision Criteria

16.5 Decision Making Under Risk

16.6 Decision Trees

16.7 Check Your Progress

16.8 Summary

16.9 Keywords

16.10 Question for Self-Study

16.11 References

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16.0 OBJECTIVES
After studying this unit, you will be able to;
• Explain the different types of decision-making situations.
• Highlight the optimum decision making criteria under uncertainty.
• State the different decision problems under risk.
• Illustrate some problem to find optimal solutions under different decision-making
situations.
• Draw an appropriate decision tree under different approaches.

16.1 INTRODUCTION
Decision theory deals with methods for determining the optimal course of action when a
number of alternatives are available and their consequences cannot be forecast with certainty.

It is difficult to imagine a situation which does 10th involve such decision problems, but we
shall restrict ourselves primarily to problems occurring in business, with consequences that can
be described in dollars of profit or revenue, cost or loss. For these problems, it may be reasonable
to consider as the best alternative that which results in the highest profit or revenue, or lowest
cost or loss, on the average, in the long run. This criterion of optimality is not without
shortcomings, but it should serve as a useful guide to action in repetitive situations where the
consequences are not critical. (Another criterion of optimality, the maximization of expected
“utility,” provides a more personal and subjective guide to action for a consistent decision-
maker.)

The simplest decision problems can be resolved by listing the possible monetary
consequences and the associated probabilities for each alternative, calculating the expected
monetary values of all alternatives, and selecting the alternative with the highest expected
monetary value. The determination of the optimal alternative becomes a little more complicated
when thealternatives involve sequences of decisions.

In another class of problems, it is possible to acquire often at a certain cost additional

information about an uncertain variable. This additional information is rarely entirely accurate.
Its value hence, also the maximum amount one would be willing to pay to acquire it should
depend on the difference between the best one expects to do with the help of this information
and the best one expects to do without it.

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16.2 IMPORTANT TERMS
The problem under decision theory may be represented by a model in terms of the following
elements.

i. The decision maker: The decision maker is charged with responsibility of making the
decision. That is, he has to elect one from a set of possible courses of action.

ii. The Acts: The acts are the alternative courses of action of strategies that are available to
the decision maker. The decision involves a selection among two or more alternative
courses of action. The problem is to choose the best of these alternatives to achieve an
objective.

iii. Event: Events are the occurrences which affect the achievement of the objectives. They
are also called states of nature or outcomes. The events constitute a mutually exclusive
and exhaustive set if outcomes, which describe the possible behaviour of the environment
in which the decision is made. The decision maker has no control over which event will
take place and can only attach a subjective probability of occurrence of each.

iv. Pay off table: A pay off table represents the economics of a problem, that is revenue and
costs associated with any action with a particular outcome. It is an ordered statement of
profit or costs resulting under the given situation. The pay off can be interpreted as the
outcome in quantitative form if the decision maker adopts a particular strategy under a
particular state of nature.

v. Opportunity loss table: An opportunity loss is the loss incurred because of failure to
take the best possible action. Opportunity losses are calculated separately for each state
of nature that might occur. Given the occurrence of a specific state of nature we can
determine the best possible act. For a given state of nature, the opportunity loss of an act
is the difference between the pay off of that act, and the pay off for best act that could
have been selected.

16.3 TYPES OF DECISION MAKING SITUATIONS

In any decision problem, the decision maker is concerned with choosing from among
the available alternative courses of action, the one that yields the best result. If the
consequences of each choice are known with certainty, the decision maker can easily make
decisions. But in most of real-life problems, the decision maker has to deal with situations
where uncertainty of the outcomes prevail.

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 The decision making problems can be discussed under the following heads on the basis
of their environments:

1. Decision making under certainty.

2. Decision making under uncertainty.
3. Decision making under risk.
4. Decision making under conflict.

16.4 DECISION MAKING UNDER CERTAINTY

In this case the decision maker knows with certainty the consequences of every
alternative or decision choice. The decision maker presumes that only one state of nature, is
relevant for his purpose. He identifies this state of nature, takes it for granted and presumes
complete knowledge as to its occurrence.

16.4.1 DIFFERENT OPTIMAL DECISION CRITERIA

The following choices are available before the decision maker in situations of
uncertainty.

a) Maximax Criterion
b) Minimax Criterion
c) Maximin Criterion
d) Laplace Criterion (criterion of equally likelihood)
e) Hurwicz Alpha Criterion (Criterion of Realism)
a. THE MAXIMAX DECISION CRITERION (CRITERION OF OPTIMISM)

The term ‘Maximax’ is an abbreviation of the phrase maximum of the maximums and
an adventurous and aggressive decision maker may choose to take the action that would result
in the maximum payoff possible. Suppose for each action there are three possible payoffs
corresponding to three states of nature as given in the following decision matrix:

States of Decisions
nature A1 A2 A3
S1 220 180 100
S2 160 190 180
S3 140 170 200

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 Maximum under each decision are (220, 190, 200). The maximum of these three
maximums is 220. Consequently according to the maximax criteria the decision to be adopted
is A1.

b. THE MINIMAX DECISION CRITERION:

Minimax is just the opposite of maximax. Application of the minimax criteria requires
a table of losses instead of gains. The losses are the costs to be incurred or the damages to be
suffered for each of the alternative actions and states of nature. The minimax rule minimizes
the maximum possible loss for each course of action. The term 'minimax' is an abbreviation of
the phrase minimum of the maximum. Under each of the various actions there is a maximum
loss and the action that is associated with the minimum of the various maximum losses is the
action to be taken according to the minimax criterion. Suppose the loss table is

States of Decisions
nature A1 A2 A3
S1 0 4 10
S2 3 0 6
S3 18 14 0

It shows that the maximum losses incurred by the various decisions

A1 A2 A3
18 14 10

and the minimum among three maximums is 10 which is under action A3. Thus according to
minimax criterion, the decision-maker should take action A3.

c. THE MAXIMIN DECISION CRITERION (CRITERION OF PESSIMISM)

The maximin criterion of decision making stands for choice between alternative courses
of action assuming pessimistic view of nature. Taking each act in turn, we note the worst
possible results in terms of payoff and select the act which maximises the minimum pay off.
Suppose the payoff table is

States of Decisions
nature A1 A2 A3
S1 -80 -60 -20
S2 -30 -10 -2
S3 30 15 7
S4 75 80 25
Minimum under each decision are respectively -80,-60 and -20.

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The action A3 is to be taken according to this criterion because it's the maximum among
minimums.

d. LAPLACE CRITERION

As the decision maker has no information about the probability of occurrence of various
events, the decision maker makes a simple assumption that each probability is equally likely.
The expected pay off is worked out on the basis of these probabilities. The act having maximum
expected pay off is selected.

16.5 DECISION MAKING UNDER UNCERTAINTY

When the decision maker faces multiple states of nature but he has no means to arrive
at probability values to the likelihood of occurrence of these states of nature, the problem is a
decision problem under uncertainty. Such situations arise when a new product is introduced in
the market or a new plant is set up. In business, there are many problems of this ‘nature’. Here
the choice of decision largely depends on the personality of the decision maker.

16.6 DECISION MAKING UNDER RISK

In this situation the decision maker has to face several states of nature, But he has some
knowledge or experience which will enable him to assign probability to the occurrence of each
state of nature. The objective is to optimise the expected profit, or to minimise the opportunity
loss.

For decision problems under risk, the most popular methods used are EMV (Expected
monetary value) criterion, EOL (Expected Opportunity Loss), criterion or EVPI (Expected
Value of Perfect Information).

A. EXPECTED MONETARY VALUE (EMV)

When the probabilities can be assigned to the various states of nature, it is possible to
calculate the statistical expectation of gain for each course of action.

The conditional value of each event in the pay off table is multiplied by its probability
and the product is summed up. The resulting number is the EMV for the act. The decision
maker then selects from the available alternative actions, the action that leads to the maximum
expected gain (that is the action with highest EMV). Consider the following example. Let the
states of nature be $ and S, and the alternative strategies be A, and A, Let the pay off table be
as shown below.

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 A1 A2
S1 30 20
S2 35 30

Let the probabilities for the states of nature S1 and S2, be respectively 0.6 and 0.4. Then,

EMV for A1 = (30x0.6)+(35x0.4)=18+14=32

EMV for A2 = (20x0.6)+(30x0.4)=12+12=24

∴EMV for A1 is greater.

∴The decision maker will choose the strategy A1

B. EXPECTED OPPORTUNITY LOSS (EOL)

The difference between the greater pay off and the actual pay off is known as
opportunity loss. Under this criterion the strategy which has minimum Expected Opportunity
Loss (EOL) is chosen. The calculation of EOL is similar to that of EMV.

Consider the following Example: Given below is an opportunity loss table. A1 and A2
are the strategies and S1 and S2 are the states of nature.

A1 A2
S1 0 10
S2 2 -5

Let the probabilities for two states be 0.6 and 0.4.

EOL for A1 = (0x0.6)+(2×0.4)=0.8

EOL for A2 (10x0.6)+(-5x0.4)=6-2=4

EOL for A1 is least. Therefore, the strategy A1 may be chosen.

C. EXPECTED VALUE OF PERFECT INFORMATION (EVPI)

The expected value with perfect information is the average (expected) return in the long
run, if we have perfect information before a decision is to be made.

In order to calculate EVPI, we choose the best alternative with the probability of their
state of nature. The expected value of perfect information (EVPI) is the expected outcome with
perfect information minus the outcome with max EMV.

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 ∴ EVPI Expected value with perfect information maximum EMV.

Consider the following example.

Illustration – 1:

Calculate the maximum expected pay off.

Act
Events
A1 A2 A3
E1 20 12 25
E2 25 15 30
E3 30 20 22
Solution:

We associate equal probability for each event say 1/3. Expected pay off are
1 1 1 75
A1 20 x 3 + 25 x 3 + 30 x 3 = = 25
3

1 1 1 47
A2 12 x 3 + 15 x 3 + 20 x 3 = = 15.67
3

1 1 1 77
A2 25 x 3 + 30 x 3 + 22 x 3 = = 25.67
3

Since A3 has maximum expected payoff, A3, is the optimal Act.

e. HARWICZ ALPHA CRITERION

This method is a combination of maximin criterion and maximax criterion. In this

method, the decision maker's degree of optimism is represented by  the coefficient of
optimism.  varies between 0 and 1. When  = 0, there is total pessimism and when =1, there
is total optimism.

We find D1, D2, D3 etc. connected with all strategies where Di = Mi+(1-)mi, where
Mi is the maximum payoff of ‘i’ the strategy and mi, is the minimum payoff of ‘i’th strategy.
The strategy with highest of D1, D2,….. is chosen. The decision maker will specify the value
of  depending upon his level of optimism.

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Illustration – 2:

Calculate the optimum pay off using Harwicz Alpha criteria.

Act
Events
A1 A2 A3
E1 20 12 25
E2 25 15 30
E3 30 20 22
Solution:

Let  = 6

For A1 max. pay off =30

Min. payoff = 20

∴ D1 = (0.6x30) + (1-0.6) 20 = 26

Similarly D2 – (0.6x30) + (1-0.6) 12 = 16.8

D3 – (0.6x30) + (1-0.6) 22 = 26.8

Since D3 is max, select the act A3.

Illustration – 3:

A1 A2, A3 are the acts and S1, S2, S3 are the states of nature. Also known that P(S1) =0.5,
P(S2) = 0.4 and P(S3) = 0.1

Solution:

Pay off table is as given below:

States of Pay off table

nature A1 A2 A3
S1 30 25 22
S2 20 35 20
S3 40 30 35

EMV for A1 = (0.5x30)+(0.4x20)+(0.1x40) = 15+8+4 =27

EMV for A2 = (0.5x25)+(0.4x35)+(0.1x30) = 12.5+14+3 =29.5

EMV for A3 = (0.5x22)+(0.4x20)+(0.1x35) = 11+8+3.5 =22.5

The highest EMV is for the strategy A2 and it is 29.5.

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Now find EVPI, work out expected value for maximum pay off under all states of nature.

Max. profit Probability Expected value

of each state (= Prob. X profit)

S1 30 0.5 15

S2 35 0.4 14

S3 40 0.1 4

∴ Expected pay off with perfect information = 33

∴ Thus, the Expected Value of Perfect Information (EVPI) is,

EVPI = Expected Value with Perfect Information-Maximum EMV

=33-29.5

=3.5

Illustration – 4:

You are given the following pay-offs of three acts A1, A2, and A3, and the states of nature S1,
S2, and S3.

Status of A1 A2 A3
Nature

S1 25 -10 -125

S2 400 440 400

S3 650 740 750

The probabilities of the states of nature are respectively, 0.1, 0.7 and 0.2. Calculate and
tabulate the EMV and conclude which of the acts can be chosen as the best.

Solution:

Act A1 Act A2 Act A2

Prob. X Pay off Prob. X Pay off Prob. X Pay off

0.1 x 25 = 2.5 0.1 x -10 = -1 0.1 x -125 = -12.5

0.7 x 400 = 280 0.7 x 440 = 308 0.7 x 400 = 280

0.2 x 650 = 130 0.2 x 740 = 148 0.2 x 750 = 150

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∴EMV for A1 = 412.5, EMV for A2 = 455, EMV for A3 = 417.5

Since EMV is maximum for A2, choose the Act A2.

Illsutration-5:

A management is faced with the problem of choosing one of the products for manufacturing.
The probability matrix after market research for the two products was as follows,

Status of Nature

Act Good Fair Poor

Product A 0.75 0.15 0.10

Product B 0.60 0.30 0.10

The profit that the management can make for different levels of market acceptability of the
products are as follows,

Status of Nature
Profit (in ₹) if market is

Acts Good Fair Poor

Product A 35,000 15,000 5,000

Product B 50,000 20,000 Loss of 3,000

Calculate expected value of the choice of alternatives and advise the management.

Solution:

Let us put the above information in a pay off matrix with probabilities associated with the states
of nature.

Product A Product B
State of Nature
Profit x Probability Profit x Probability

Good 35000 x 0.75 = 26250 50000 x 0.60 = 30000

Fair 1500 x 0.15 = 2250 20000 x 0.30 = 6000

Poor 5000 x 0.10 = 500 -3000 x 0.10 = -300

EMV 29000 35700

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 Since the expected pay off (EMV) of product B is greater, product B should be preferred
by the management.

Illustration – 6:

Given below is a pay off table.

Event (Status of Nature)

Action E1 E2 E3 E4

A1 50 300 -150 50

A2 400 0 100 0

A3 -50 200 0 100

A4 0 300 300 0

Suppose that the probabilities of the events in this table are P(E1) = 0.15; P(E2)= 0.45;
P(E3)= 0.25; P (E4) = 0.15.

Calculate the expected pay off. Prepare opportunity loss table (Regret table) and
calculate expected loss of each action.

Solution:

Hint: Rewrite the question with E1, E2, E3, E4 as rows and A1, A2, A3, A4 as columns.

Acts
Events
A1 A2 A3 A4
E1 50 400 -50 0
E2 300 0 200 300
E3 -150 100 0 300
E4 50 0 100 0

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A. Calculation of Expected Pay off (EMV)

Act A1 Act A2 Act A3 Act A4

Pay off X Prob. Pay off X Prob. Pay off X Prob. Pay off X Prob.

50 x 0.15 = 7.5 400 x 0.15 =60 -50 x 0.15 =75 0 x 0.15 = 0

300 x 0.45 =135 0 x 0.45 = 0 200 x 0.45 = 90 300 x 0.45 =135

-150 x 0.25 = 37.5 100 x 0.25 = 25 0 x 0.25 = 300 x 0.25 = 75

50 x 0.15 = 7.5 0 x 0.15 = 0 100 x 0.15 =15 0 x 0.15 =0

EMV=112.5 EMV = 85 EMV = 112.5 EMV = 210

A1 A2 A3 A4

E1 400 – 50 = 350 400 – 400 = 0 400 + 50 = 450 400 – 0 =400

E2 300 - 300 = 0 300 – 0 = 300 300 -200 = 100 300 - 300 = 0

E3 300 + 150 = 450 300 – 100 = 200 300 – 0 = 300 300 – 300 = 0

E4 100 – 50 = 50 100 – 0 = 100 100 – 100 = 0 100 – 0 = 100

B. Calculation Expected Loss (EOL)

A1 A2 A3 A4
Loss X Prob. Loss X Prob. Loss X Prob. Loss X Prob.

350 x 0.15 = 52.5 0 x 0.15 = 0 450 x 0.15 = 67.5 400 x 0.15 = 60

0 x 0.45 = 0 300 x 0.45 = 135 100 x 0.45 = 45 0 x 0.45 = 0

450 x 0.25 = 112.5 200 x 0.25 = 50 300 x 0.25 = 75 0 x 0.25 = 0

50 x 0.15 = 7.5 100 x 0.15 =15 0 x 0.15 = 0 100 x 0.15 = 15

EOL = 172.5 EOL = 200 EOL = 187.5 EOL = 75

16.7 DECISION TREES

Decision tree is one of the devices of representing a diagrammatic presentation of
sequential and multi dimensional aspects of a particular decision problem for systematic
analysis and evaluation. Under this method, the decision problem, alternative courses of action,
states of nature and the likely outcomes of alternatives are diagrammatically of graphically
depicted as if they are branches and sub branches of horizontal tree.

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 The decision tree consists of nodes and branches. The nodes are two types, decision
nodes and chance node. Courses of action (or strategies) originate from the decision nodes as
the main branches. At the terminal of each main branch there is a chance node. From these
chance nodes, chance events emanate in the form of sub branches. The respective pay offs and
the probabilities associated with alternative courses and the chances events are shown along
the sub branches. At the terminal of the sub branches are shown the expected values of the
outcome.

E1 O11
E2 O12
A1
E1 O11
A2
E2 O12
A3
E1 O11
E2 O12

Figure 16.1 Decision tree

Here A1, A2, A3, A4 are strategies E1, E2, E3, are events O11, O12, O21, O22, O31, O32 are
outcomes.

A decision tree is highly useful to a decision maker in multistage situations which

involve a series of decisions each dependent on the preceding one. Working backward, from
future to the present, we are able to eliminate unprofitable branches and determine optimum
decisions. The decision tree analysis allows one to understand, simply by inspection, various
assumptions and alternatives in a graphic form which is much more easier to understand than
the abstract analytical form.

The advantages of the decision tree structure is that complex managerial problems and
decisions of a chain-like nature can be systematically and explicitly defined and evaluated.

Illustration – 7:

A firm owner is seriously considering of drilling a farm well in the past, only 70% of wells
drilled were successful at 200 feet of depth in the Area. Moreover, on finding no water at 200
ft., some persons drilled it further upto 250 feet but only 20% struck water at 250ft. The
prevailing cost of drilling is ₹ 50 per foot. The farm owner has estimated that in case he does

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not get his own wells he will have to pay ₹ 15,000 over the next 10 years, in PV term, to buy
water from the neighbour. The following decisions can be optimal.

(i) Do not drill any well

(ii) drill up to 200ft and
(iii) if no water is found at 200 ft. drill further up to 250ft.

Draw an appropriate decision tree and determine the farm owner's strategy under
E.M.V. approach.

Solution:

15000 + (250 x 50) = 27500

D1 D2 250 x 50 = 12500

15,000+10,000=25,000

200x50=10,000

Figure 16.2 Decision Tree

At D2 point
Decision : (a) drill upto 250feet (b) Do not drill
Event : (a) No water (b) Water
Probabilities are 0.2, 0.8
EMV for drill upto 250 feet.
= (12500x0.2) + (27500x0.8) = 24500
EMV for do not drill = 25000 (from the tree)

EMV is smaller for the act drill up to 250 feet. So it is optimal act.

At D2 point

The decisions are drill upto 200 feet and do not drill. Events are same as those of D2 point.

Probabilities are0.7,0.3

EMV for drill upto 200 feet

=(10000x0.7) + (24500x0.3) = 14350

EMV for do not drill = 15,000 from the tree.

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The optimal decision is drill upto 200 feet (as the EMV is small).

Therefore, Combining D1 and D2 the optimal strategy is to drill the well upto 200 feet and if
no water is struck, then further drill it upto 250 feet.

Illustration – 8:
A firm is planning to develop and market a new drug. The cost of extensive research to develop
the drug has been estimated at ₹ 100000. The manager of the Research programme has found
that there is a 60% chance that the drug will be developed successfully. The market potential
has been assessed as follows:

Market condition Probability Present value of profit (₹)

Large Market potential 0.1 50,000
Moderate Market potential 0.6 25,000
Low Market Potential 0.3 10,000

The present value figures do not include the cost of research. While the firm is considering this
proposal, a second proposal almost similar comes up for consideration. The second one also
requires an investment of ₹1,00,000 but the present value of all profits is 12,000. The return on
investment in the second proposal is certain.

The present value figures do not include the cost of research. While the firm is considering this
proposal, a second proposal almost similar comes up for consideration. The second one also
requires an investment of ₹1,00,000 but the present value of all profits is 12,000. The return on
investment in the second proposal is certain.

(i) Draw a decision tree indicating all events and choices of the firm.
(ii) What decision the firm should take regarding the investment of ₹1,00,000? PV of Profit
₹ 25,000
Solution:

Develop and Developed Successfully

Medium Market
D1 D2 ₹ 25,000
Market New Drug

₹ 10,000
Stop
Stop Do not enter Market

Figure 16.3 Decision Tree

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At Point D2

Decisions are (1) Enter market (2) Do not enter market.

(a) Enter Market

EMV = Expected P V
= (5000 x 0.1) + (25000 x 0.6) + (1000 x 0.3)
= 5000 + 15000 + 3000 = 23000
(b) Do not enter Market
EMV = Expected PV = 0 x 1 = 0
Decision: enter the market since EMV is more.
At D1
Decisions are (1) Develop new drug (2) Accept proposal II
1. Develop new drug:
EMV = Expected PV = (23000 x 0.6) + (0 x 0.4) = (13800 + 0) = 13800
2. Accept proposal II
EMV = Expected PV = 12000 x 1 = 12000

Using EMV criterion, the optimal decision at D1 is to develop and market the new drug.

16.8 CHECK YOUR PROGRESS

Fill in the blanks with suitable answers:

1. The differences between maximum pay off and actual payoff is called as ______.
2. ______ is an act of choosing best among alternative course of action.
3. Decision making situations includes,
a) Decision making under certainty.
b) Decision making under uncertainty
c) Decision making under risk
d) All the above.

4. To calculate EVPI, best alternative with ______ of their states of nature will be chosen.

Answers to Check Your Progress:

1. Opportunity loss
2. Decision making
3. d. all the above
4. Probability

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16.9 SUMMARY
Let us conclude by summarizing that decision theory, as it has grown up in recent years,
is a formalization of the problems involved in making optimal choices. In a certain sense—a
very abstract sense, to be sure—it incorporates operations research, theoretical economics, and
wide areas of statistics, among others. The formal structure of a decision problem in any area
can be put into four parts: (1) the choice of an objective function defining the relative
desirability of different outcomes, (2) specification of the policy alternatives which are
available to the agent, or decision maker, (3) specification of the model, that is, empirical
relations that link the objective function, or the variables that enter into it, with the policy
alternatives and possibly other variables, and (4) computational methods for choosing among
the policy alternatives that one which performs best as measured by the objective function. In
the last part, the objective function is maximized subject to the constraints imposed by the
model. It is for this reason that decision theory is mathematically, to a great extent, a branch of
the theory of constrained maxima.

Very simply, the decision problem is how to select the best of the available alternatives.
The elements of the problem are the possible alternatives (actions, acts), the possible events
(states, outcomes of a random process), the probabilities of these events, the consequences
associated with each possible alternative-event combination, and the criterion (decision rule)
according to which the best alternative is selected.

16.10 KEYWORDS
Pay-off : A decisive fact or factor resolving a situation or
bringing about a definitive conclusion.

Certainty : It is the acceptance of a fact without doubt.

Pessimistic criterion : It is a technique used to make decisions under

uncertainty.

Decision Tree : It is a type of flowchart that shows a clear

pathway to a decision.

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16.11 QUESTION FOR SELF - STUDY
1. what do you understand by ‘Decision theory’?
2. Indicate the difference between decision under risk and decision under uncertainty?
3. Describe some methods which are useful for decision making under uncertainty?
4. explain the terms (i) Expected monetary value (ii) Expected value of perfect information.
5.What are EMV and EOL criteria?
6. What are pay off table and regret table?
7. Write notes on “Bayesian decision theory”.
8. Write noted in decision tree.
9. Write noted on Action space.
10. Explain (a) Maximum (b) Minimax (c) Maximin decision criteria.
11. From the pay off table shown below, decide which is the optimal act.
Strategies
Events A1 A2 A3
S1 20 40 60
S2 15 -10 -15
S3 35 25 -20
P(S1) = 0.4 P(S2) = 0.5 P(S3)
EMV for A1 = 19, for A2 = 13.5, for A3 = 13.5 so A1]

16.12 REFERENCES
1. Feller W., An introduction to probability theory and its applications, Volume 1, John
Willy & Sons.
2. Csiszar, I divergence geometry of probability distributions and minimization problems,
The Annals of probability, Vol 3, No 1, pp. 146-158.
3. Sheldon M. Ross, A first course in probability, Prentice Hall.
4. Morris H. Degroot, Mark J, Schervish, "Probability and Statistics," Addison-Wesley,
2001
5. William Mendenhall, Robert, J. Beaver, Barbara, M. Beaver, Introduction to Probability
and Statistics.
6. Kalavathy S., Operations Research, Vikas Publishing House Pvt Ltd, 2002.

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 Higher Education to Everyone Everywhere
ಉನ್ನತ ಶಿಕ್ಷಣ ಎಲ್ಲರಿಗೂ ಎಲ್ಲೆಡೆ

Prasaranga
Karnataka State Open University
MUKTHAGANGOTHRI, MYSURU
https://ksoumysuru.ac.in/

ISBN:

Commerce