Chapter 3 – Linear Programming
Applications in Marketing, Finance, and
Operations Management
Introduction
Linear programming (LP) is one of the most successful quantitative approaches to decision
making. It has applications in production scheduling, media selection, marketing research,
financial planning, capital budgeting, transportation, product mix, staffing, and blending.
This chapter emphasizes modeling, computer solutions, and interpretation of results,
covering applications in marketing, finance, and operations management.
4-1 Marketing Applications
Media Selection Application
Example: Relax-and-Enjoy Lake Development Corporation. The company sought to allocate
a $30,000 budget across five media (daytime TV, evening TV, website ads, Sunday
newspaper, and radio) to maximize exposure quality units.
Constraints included:
• At least 10 TV commercials.
• No more than $18,000 on TV.
• At least 50,000 potential customers reached.
• Media availabilities.
The optimal solution distributed ads across daytime TV, websites, newspapers, and radio,
achieving 2370 exposure quality units and reaching 61,500 customers.
Marketing Research Application
Example: Market Survey, Inc. (MSI). The client required 1000 interviews, with constraints:
• ≥400 households with children.
• ≥400 households without children.
• Evening interviews ≥ daytime interviews.
• ≥40% of child-household interviews in evening.
• ≥60% of non-child interviews in evening.
The LP model minimized interview costs. The optimal solution was 480 daytime and 520
evening interviews, costing $20,320. Dual values indicated cost impacts of relaxing
constraints; surplus showed excess interviews in some categories.
4-2 Financial Applications
Portfolio Selection Application
Example: Welte Mutual Funds, Inc. Investing $100,000 across oil, steel, and government
bonds.
Constraints:
• ≤$50,000 in any one industry.
• Government bonds ≥25% of steel investments.
• Pacific Oil ≤60% of oil investment.
The optimal portfolio invested in all except Midwest Steel, yielding $8,000 annual return
(8%). Reduced cost analysis showed Midwest Steel would only enter the portfolio if its
return increased.
Financial Planning Application
Example: Hewlitt Corp. Early retirement obligations over 8 years. Objective: Minimize the
total funds required to meet obligations using savings (4% return) and three government
bonds. The LP model included 12 variables and 8 constraints. The optimal plan required
$1,728,794 initial investment. Dual values showed that increases in early-year payments
had the highest financial impact.
4-3 Operations Management Applications
Production Scheduling (Make-or-Buy)
Example: Janders Company producing two types of pumps (functional and transfusion).
Constraints: 200 regular manufacturing hours + 50 overtime hours. Decision: manufacture
or purchase components. Optimal solution: manufacture all bases and cores for transfusion
pumps, purchase remaining components. Total cost = $24,443.33. Reduced cost showed
overtime would be considered only if its premium dropped to ≤$5/hr.
Blending Problem Application
Example: Grand Strand Oil Company blending three petroleum components into regular and
premium gasoline.
Constraints: demand, blending limits, and minimum production requirements.
Optimal solution: produce 10,000 gallons of regular and 15,000 gallons of premium
gasoline, with a profit of $7,100. Slack/surplus values revealed under- or over-utilization of
blending components.
Summary
This chapter demonstrated real-world applications of LP in marketing, finance, and
operations management. We formulated models, solved them using computer methods, and
interpreted solutions. Key takeaways:
• LP models help in advertising allocation, survey design, portfolio selection, financial
planning, production scheduling, and blending.
• Solutions reveal not only optimal allocations but also valuable insights via slack, surplus,
reduced costs, and dual values.
• Though examples were simplified, real-world applications often involve many more
variables and constraints.