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Make-or-Buy Cost Optimization Model

The document describes two optimization problems. The first problem involves maximizing return from allocating funds across treasury bonds, common stock, money market funds, and municipal bonds given constraints on total funds, minimum amounts in stocks and bonds, and individual maximums. The second problem involves minimizing costs associated with producing and purchasing three chemicals given constraints on chemical sales amounts and production reactor time capacities.

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6 views1 page

Make-or-Buy Cost Optimization Model

The document describes two optimization problems. The first problem involves maximizing return from allocating funds across treasury bonds, common stock, money market funds, and municipal bonds given constraints on total funds, minimum amounts in stocks and bonds, and individual maximums. The second problem involves minimizing costs associated with producing and purchasing three chemicals given constraints on chemical sales amounts and production reactor time capacities.

Uploaded by

api-26315128
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd

1.

Portfolio Selection:
Decision variables
TB: $million invested in treasury bonds;
CS: $million invested in common stock;
MM: $million invested in money market funds;
MB: $million invested in municipal bonds.
Objective function
Max return ($million): 0.08TB+0.06CS+0.12MM+0.09MB
Constraints
Available funds: TB+CS+MM+MB < 10
TB and CS: TB + CS > 30%*10
MM and MB: MM+MB < 40%*10
TB max: TB <5
CS max: CS <7
MM max: MM <2
MB max: MB < 4
Nonnegativity: TB, CS, MM, MB > 0

2. Make-or-Buy Problem:
Decision variables
x11: lbs of chemical 1 produced in house
x12: lbs of chemical 1 purchased from outside
x21: lbs of chemical 2 produced in house
x22: lbs of chemical 2 purchased from outside
x31: lbs of chemical 3 produced in house
x32: lbs of chemical 3 purchased from outside
Objective function
Min cost (total cost of producing and purchasing the three chemicals)
Min 2.5x11+2.8x12+1.75x21+2.5x22+2.90x31+3.25x32
Constraints
Sales chemical 1: x11+x21 > 2000 (Note: = is fine for this constraint)
Sales chemical 2: x21+x22 > 3500 (Note: = is fine for this constraint)
Sales chemical 3: x31+x32 > 1800 (Note: = is fine for this constraint)
Reactor 1 time: 0.05x11+0.04x21+0.01x31 < 200
Reactor 2 time: 0.02x11+0.06x21+0.03x31 < 150
Nonegativity: xij > 0, i = 1, 2, 3, j = 1, 2

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