Interpretation of Sensitivity Report for Anderson Electronic problem

1. What is the impact on profit of a change in the supply of non-electronic

components?
The slack values in the answer report indicate that of the potential supply of 4,500 units of non-
electronic components, only 3,940 units are used, leaving 560 unused. This implies that
additional non-electronic components are of no value to Anderson in terms of contribution to
profit; that is, the shadow price is zero.

2. What is the impact on profit if we could increase the supply of electronic

components by 400 units (to a total of 5, 100 units)?
We first look at the allowable increase column for electronic components to verify whether the
current shadow price is valid for an increase of 400 units in this resource. Because the allowable
increase column shows a value of 2,800, the shadow price is valid.
Next, we look at the shadow price for electronic components, which is $2 per unit. That is,
each additional unit of electronic components (up to 2,800 additional units) will allow
Anderson to increase its profit by $2. The impact of 400 units will therefore be a net increase
in profit of $800. The new profit will be $70,200 (= $69,400 + $800).

3. In the previous question, what would happen if we could increase the supply of
electronic components by 4000 units (to a total of 8700 units)?
From the sensitivity report we see that the shadow price of $2 per unit is valid only up to 2,800
additional units. This means that the first 2,800 units will cause the total profit to increase by
$5,600 (= $2 x 2,800). However, the impact of the last 1,200 units (assuming that we are forced
to accept all or nothing of the 4,000 units) cannot be analysed by using the current report. The
problem would have to be resolved using Solver to measure its impact.
The fact that the potential additional supply (4,000) of electronic components is beyond the
allowable increase value (2,800) does not mean that Anderson’s management cannot
implement this change. It just means that the total impact of the change cannot be evaluated
from the current sensitivity report.

This reference material was prepared by Dr. Yamini S. for the course Quantitative Methods II at IIM
Tiruchirappalli
4. Refer to the question about getting an additional 400 units of electronic
components? What would happen to the supplier of these 400 units wanted $8 per
unit rather than the current cost of $7 per unit?
We know that the shadow price of $2 for electronic components represents the increase in total
profit from each additional unit of this resource. This value is net after the cost of this additional
unit has been taken into account. That is, it is actually beneficial for Anderson to pay a premium
of up to $2 per additional unit of electronic components. In the current situation, getting 400
additional units of electronic components would cost Anderson $8 per unit. This represents a
premium of $1 per unit over the current rate of $7 per unit. However, it would still be beneficial
to get these units because each additional unit would increase the total profit by $1 (= shadow
price of $2 less the premium of $1). The total profit would therefore increase by $400, to a new
value of $69,800. This adjusted value of $1 represents the actual increase in profit and can be
referred to as the adjusted shadow price.

5. Assume that we have an opportunity to get 250 additional hours of assembly time.
However this time will cost us time and a half (i.e. $15 per hour rather than current
$10 per hour). Should we take it?
From the sensitivity report, the shadow price of $24 per hour of assembly time is valid for an
increase of up to 466.67 hours. This shadow price, however, assumes that the additional time
costs only $10 per hour. The $5 per hour premium paid on the additional time therefore results
in an increase of only $19 (= $24 - $5) per each additional hour of assembly time obtained. The
net impact on profit of the additional 250 hours of assembly time is an increase of $4,750 (=
250 x $19). Anderson should definitely accept this opportunity.

6. If we force the production of MP3 players, what would be the impact on total
profit?
MP3 players are currently not being recommended for production because they are not
profitable enough. You may recall from our discussion that the reduced cost shows the
difference between the marginal contribution of a product to the objective function (profit
contribution is $29 per MP3 player, in Anderson's case) and the marginal worth of resources it
would consume if produced. As an exercise, see if you can verify that this value is $30 per
MP3 player. The reduced cost for MP3 player is therefore -$1 (= $29 - $30), as shown in the

This reference material was prepared by Dr. Yamini S. for the course Quantitative Methods II at IIM
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sensitivity report. This implies that the net impact of producing one MP3 player will be to
decrease total profit by $1 (to $69,399).

7. How profitable must MP3 players become before Anderson would consider
producing them?
We know that each MP3 player produced will cause Anderson's profit to decrease by $1. This
implies that if Anderson can find a way of increasing the profit contribution of MP3 players by
$1, MP3 players would then become an attractive product. This can be achieved either by
increasing the selling price of MP3 players by $1 (to $71 per unit) or by reducing their cost
price by $1, or a combination of the two.
This is an alternate interpretation of reduced cost. That is, the magnitude of the reduced cost is
the minimum amount by which the OFC of a variable should change in order for it to affect the
optimal solution. For MP3 players, if their OFC increases by more than $1 per unit, MP3
players will then have a nonzero value in the new optimal solution.
This information is also seen from the $1 in the Allowable Increase column for the OFC for
MP3 players. Not surprisingly, the Allowable Decrease column shows a value of infinity
(shown as IE+30 in Excel) for the OFC of MP3 players. This is logical because if MP3 players
are not attractive at a unit profit of $29, they are clearly not going to be attractive at unit profit
values lower than $29.

8. Assume that there is some uncertainty in the price for Blu-Ray DVD players. For
what range of prices will the current production be optimal? If Blu-Ray DVD
players sold for $106, what would be Anderson’s new total profit?
Blu-Ray DVD players currently sell for $110, yielding a profit of $54 per unit. The allowable
ranges for the OFC of Blu-Ray DVD players shows that this value can increase by up to $10
(to $64; selling price of $120) or decrease by up to $5 (to $49; selling price of $105) for the
current production plan to remain optimal.
If Blu-Ray DVD players actually sold for $106, the profit per unit would drop to $50. The
current values of the decision variables would remain optimal. However, the new total profit
would decrease by $4,240 (= $4 per Blu-Ray DVD player for 1,060 players), to $65,160.

This reference material was prepared by Dr. Yamini S. for the course Quantitative Methods II at IIM
Tiruchirappalli
9. Is the optimal solution identified for Anderson Home electronics (380 satellite
radio tuners and 1060 Blu-Ray DVD players, for a total profit of $69,400) unique?
Are there alternate production mixes that will also yield a profit of $69,400?
In most cases, when the Allowable Increase or Allowable Decrease value for the OFC of a
variable is zero in the Variable Cells table, this indicates the presence of alternate optimal
solutions. In Anderson's problem, we see from the sensitivity report that this is not the case.

10. Consider a situation in which Anderson Home electronics realizes that its
available number of electronic components is actually only 4,200 and, at the same
time, also finds that it has an opportunity to obtain an additional 200 hours of
assembly time. What is the impact of these simultaneous changes on the optimal
solution?
We compute the ratio of each proposed change in a parameter's value to the maximum
allowable change in its value, as given in the Sensitivity Report. The sum of these ratios must
not exceed 1 (or 100%) in order for the information given in the current Sensitivity Report to
be valid. If the sum of the ratios does exceed l, the current information may still be valid; we
just cannot guarantee its validity. However, if the ratio does not exceed 1, the information is
definitely valid.
To verify this rule for the proposed change in Anderson's problem, consider each change in
turn. First, there is a decrease of 500 units (i.e., from 4,700 to 4,200) in the number of electronic
components. From the Sensitivity Report, we see that the allowable decrease in this RHS value
is 950. The ratio is therefore,
500/950 = 0.5263
Next, there is an increase of 200 hours (from 2,500 to 2,700) in the assembly time available.
From the Sensitivity Report, we see that the allowable increase for this RHS value is 466.67.
This ratio is, therefore,
200/466.67 = 0.4285
Sum of ratios = 0.5263 + 0.4285 = 0.9548 < 1
Because this sum does not exceed 1, the information provided in the Sensitivity Report is valid
for analysing the impact of these changes. First, the decrease of 500 units in electronic
component availability reduces the size of the feasible region and will therefore cause profit to
decrease. The magnitude of this decrease is $1,000 (= 500 units of electronic components, at a
shadow price of $2 per unit).
This reference material was prepared by Dr. Yamini S. for the course Quantitative Methods II at IIM
Tiruchirappalli
In contrast, the additional 200 hours of assembly time will result in a larger feasible region and
a net increase in profit of $4,800 (= 200 hours of assembly time, at a shadow price of $24 per
hour). The net impact of these simultaneous changes is therefore an increase in profit of $3,800
(= $4,800 - $1,000).

11. What is the impact on the optimal solution if Anderson decides to drop the selling
price of Blu-Ray DVD players by $3 per unit but, at the same time, increase the
selling price of satellite radio tuners by $8 per unit?
Once again, we calculate the appropriate ratios to verify the 100% rule. For the current solution
to remain optimal, the allowable decrease in the OFC for Blu-Ray DVD players is $5, while
the allowable increase in the OFC for satellite radio tuners is $40.
Sum of ratios = ($3/$5) + ($8/$40) = 0.80 < 1
Because the sum of ratios does not exceed 1, the current production plan is still optimal. The
$3 decrease in profit per Blu-Ray DVD player causes total profit to decrease by $3,180 (= $3
x 1,060). However, the $8 increase in the unit profit of each satellite radio tuner results in an
increase of $3,040 (= $8 x 380) in total profit. The net impact is, therefore, a decrease in profit
of only $140, to a new value of $69,260.

12. Suppose Anderson Home electronics wants to introduce a new product, the Digital
Home Theatre Speaker System (DHTSS), to take advantage of the hot market for
that product. The design department estimates that each DHTSS will require five
units of electronic components, four units of non-electronic components, and four
hours of assembly time. The marketing department estimates that it can sell each
DHTSS for $175, a slightly higher selling price than any of the other four products
being considered by Anderson. The question is whether the DHTSS will be a
profitable product for Anderson to produce? What is the minimum price at which
Anderson would need to sell each DHTSS in order to make it a viable product?
The question now is whether the DHTSS will be a profitable product for Anderson to produce.
Even though the new product would have higher selling price per unit, is it worthwhile from
an overall profit perspective to divert resources from Anderson’s existing product to make this
new product? Alternatively, we could pose the question as this: What is the minimum price at
which Anderson would need to sell each DHTSS in order to make it a viable product?
The answer to this question involves a procedure called pricing out.
This reference material was prepared by Dr. Yamini S. for the course Quantitative Methods II at IIM
Tiruchirappalli
Check the validity of the 100 % rule
Clearly, the loss of these resources is going to reduce the profit that Anderson could have made
from its existing products. Using the shadow price of these resources, we can calculate the
exact impact of the loss of these resources. However we must first use the 100 % rule to check
whether the shadow prices are valid by calculating the ratio of the reduction of these resource’s
availability to the allowable decrease for that resource. The resulting calculation is as follows:
Sum of ratios = (5 / 950) + (4 / 560) + (4 / 1325) = 0.015 < 1
Required profit contribution of each DHTSS
Because the total ration is less than 1, the shadow prices are valid to calculate the impact on
profit of using these resources to produce a DHTSS, rather than the existing products. We can
determine this impact as
= 5 x shadow price of electronics component constraint +
4 x shadow price of non-electronics component constraint +
4 x shadow price of assembly time constraint
= 5 x $2 +4 x $0 +4 x $24
= $106
Hence, in order for the DHTSS to be a viable product, the profit contribution of each DHTSS
has to be atleast make up this shortfall in profit. That is, the OFC for DHTSS must be atleast
$106 in order for the optimal solution to have a non-zero value for DHTSS.
Finding the minimum selling price for each DHTSS
The actual cost of the resources to make one unit of DHTSS can be calculated as
= 5 x unit price of electronics component constraint +
4 x unit price of non-electronics component constraint +
4 x unit price of assembly time constraint
= 5 x $7 +4 x $5 +4 x $210
= $95
The minimum selling price for DHTSS units is then calculated as the sum of the cost of making
a DHTSS unit and marginal worth of resources diverted from existing products. It works out
to $201 (=$106 + $95). Because Anderson’s marketing department estimates that it can sell
each DHTSS unit for only $175, this product will not be profitable for Anderson to produce.
Therefore the reduced cost will be -$26 (=$201 - $175), indicating that each DHTSS unit
produced will cause Anderson’s profit to decrease by $26.

This reference material was prepared by Dr. Yamini S. for the course Quantitative Methods II at IIM
Tiruchirappalli
Interpretation of Sensitivity Report for Burn-off Diet problem

1. What is the impact on cost if Burn-Off insists on using 1 ounce of ingredient B to

make the drink?
The reduced cost indicates that each ounce of ingredient B used to make the drink will cause
the total cost per daily dosage to increase by $0.069 (~$0.07). The new cost will be $13.06 +
$0.07 = $13.13.
Alternatively, if Burn-Off can find a way of reducing ingredient B’s cost per ounce by at least
$0.069 (to approximately $0.13 or less per ounce), then it becomes cost-effective to use this
ingredient to make the diet drink.

2. There is some uncertainty in the cost of ingredient C. How sensitive is the current
optimal solution to this cost?
The current cost of ingredient C is $0.60 per ounce. The range for the cost coefficient of this
ingredient shows an allowable increase of $1.50 and an allowable decrease of $0.073 in order
for the current corner point solution to remain optimal. The cost per ounce of ingredient C
could therefore fluctuate between $0.527 (= $0.60 - $0.073) and $2.10 (= $0.60 + $1.50)
without affecting the current optimal mix.
The total cost will, however, change, depending on the actual unit cost of ingredient C. For
example, if the cost of ingredient C increases to $1.00 per ounce, the new total cost will be
= $13.06 + ($0.40 extra per ounce x 4.125 ounces of C)
= $13.06 + $1.65
= $14.71

3. What do the shadow prices for chemical X and chemical Z imply in this problem?
The shadow price for chemical X is $0.088. Because the constraint for chemical X is a ≥
constraint, an increase by 1 unit in the RHS (from 280 to 281) makes the problem solution even
more restrictive. That is, the feasible region becomes smaller. The optimal objective function
value could, therefore, worsen. The shadow price indicates that for each additional unit of
chemical X required to be present in the drink, the overall cost will increase by $0.088. This
value is valid for an increase of up to 41 units and a decrease by 11 units in the requirement for
chemical X.

This reference material was prepared by Dr. Yamini S. for the course Quantitative Methods II at IIM
Tiruchirappalli
In contrast, the constraint for chemical Z is a ≤ constraint. An increase in the RHS of the
constraint (from 1,050 to 1,051) will cause the feasible region to become bigger. Hence, the
optimal objective function value could possibly improve. The negative value of the shadow
price for this constraint indicates that each unit increase in the maximum limit allowed for
chemical Z will cause the total cost to decrease by $0.024. This value is valid for an increase
of up to 47.143 units. Likewise, the total cost will increase by $0.024 for each unit decrease in
the maximum limit allowed for chemical Z. This is valid for a decrease of up to 346 units in
the maximum limit for chemical Z.

4. Burn-of can decease the minimum requirement for chemical X by 5 units (from
280 to 275), provided that the maximum limit allowed for chemical Z is reduced
to 1,000 units (i.e., reduced by 50 units). Is this trade-off cost effective for Burn-
off to implement
Because we are dealing with simultaneous changes in RHS values, we first verify whether the
100% rule is satisfied. To do so, we take the ratio of each proposed change to its maximum
allowable change. The calculation is
Sum of ratios = (5/11) + (50/346) = 0.599 < 1
Because the sum does not exceed 1, we can use the shadow price information in the Sensitivity
Report. The reduction of 5 units in the requirement for chemical X will cause the feasible region
to increase in size. The total cost will therefore improve (i.e., go down) by $0.44 (= 5 units, at
a shadow price of $0.088 per unit).
In contrast, the reduction of 50 units in the maximum allowable limit for chemical Z makes the
feasible region shrink in size. The total cost will therefore be adversely affected (i.e., go up) by
$1.20 (= 50 units, at a shadow price of $0.024 per unit).
The net impact of this trade-off is therefore an increase in total cost of $0.76 (= $1.20 - $0.44).
The new cost will be $13.82. Clearly, this trade-off is not cost-effective from Burn-Off’s
perspective and should be rejected.

This reference material was prepared by Dr. Yamini S. for the course Quantitative Methods II at IIM
Tiruchirappalli