The Planning committee of a bank makes monthly decisions on the amount of funds to

allocate to loans and to government securities. Some of the loans are secured (backed by
collateral such as a home or automobile), and some are unsecured. A list of the various
types of loans and their annual rates of return are shown in the table below:
Type of Loan
Secured
Residential Mortgage
Commercial Mortgage
Automobile
Home Improvement
Unsecured
Line of Credit
Student

Annual Rate of Return

6.6
7.2
9.0
7.8
10.2
6.0

The current rate on government securities is 5.4%.

In making its decision, the planning committee must satisfy certain legal requirements as
well as bank policies. These can be summarized by the following set of conditions:
a. The amount allocated to secured loans must be at least 4 times the amount allocated
to unsecured loans.
b. Auto loans and home loans should be no more than 20% of all secured loans.
c. Student loans should be no more than 30% of unsecured loans.
d. The amount allocated to government securities should be at least 10%, but no more
than 20%, of available funds.
e. The amount allocated to line of credit loans must not exceed 5% of all loans.
The bank has five million dollars available for loans and investments in the next month.
Formulate a linear programming model that will enable the planning committee to
determine the optimal allocation of funds if the objective is to maximize the annual
return, given the preceding list of conditions.

The Pap-Iris Company prints various types of advertising brochures for a wide range of
customers. The raw material for these brochures is a special finish paper, which comes in
50-inch rolls. The 50-inch width rolls cost $500. A roll is 1,000 feet long. Currently
Pap-Iris has three orders. Order number 1 is a brochure, which is 16 inches wide with a
run length of 400,000 feet. Order number 2 is a brochure which is 30 inches wide and
has a run length of 80,000 feet. Order number 3 is a brochure which is 24 inches wide
and has a run length of 120,000 feet. The major question is how to slit the larger raw
material rolls into widths suitable for the brochures. Pap-Iris wants to be as efficient as
possible in its use of paper. Formulate an appropriate LP model.

Baggage handlers at Metropolis Airport are scheduled for work tours under the terms of
an agreement between their union and the agency that manages the airport. This
agreement specifies that employees are entitled to 2 consecutive days off each week and
also those employees are assigned to the same shift all the time. (There are three nonoverlapping work shifts at the airport).
The airlines tend to operate on fixed schedules, and the operations manager at the airport
has determined the following requirements schedule for the day shift:
Day

Monday

Tuesday

Requirement

16

11

Wednesday
17

Thursday
13

Friday

Saturday

Sunday

15

19

14

Formulate a linear programming model to determine how many baggage handlers should
be assigned to the day shift in order to meet these requirements.

An airline predicts the following pilot requirements for the next 5 quarters: 80, 90, 110,
120, 110. Current staff is 90 pilots. The question of major concern is the number of
pilots to hire in each of the next 5 quarters. A pilot must spend the quarter in whish
she/he is hired in training. The airlines training facilities limit the number of pilots in
training to at most 15. Further, the training of pilots requires the service of experienced
pilots at the ratio of 5 to 1, i.e. 5 pilots in training require 1 experienced pilot. An
experienced pilot so assigned cannot be used to satisfy regular requirements. The cost of
hiring and training a pilot is estimated at $20,000 exclusive of the experienced pilot time
required. Experienced pilots cost $25,000 per quarter. Company policy does not include
firing pilots. Formulate a model for determining how many pilots to hire in each period.

Part 1.
Taco Inc. is a small but growing restaurant chain specializing in Mexican fast food. The
management of the company has decided to build a new location in Wilmington, North
Carolina, and wants to establish a construction fund (or sinking fund) to pay for the new
facility. Construction of the restaurant is expected to take six months and cost $800,000.
Taco Incs contract with the construction company requires it to make payments of
$250,000 at the beginning of the third and fifth months, and a final payment of $300,000
at the beginning of the seventh month when the restaurant is completed. The company
can use four investment opportunities to establish the construction fund; these
investments are summarized in the following table:
Investment

A
B
C
D

Available
at
beginning
of month:
1,2,3,4,5,6
1,3,5
1,4
1

Months to
maturity

Yield at
maturity

1
2
3
6

1.80%
3.50%
5.80%
11.00%

The table indicates that investment A will be available at the beginning of each of the
next six months, and funds invested in this manner mature in one month with a yield of
1.8%. Funds can be placed in investment C only at the beginning of months 1 and/or 4,
and mature at the end of three months with a yield of 5.8%., etc.
The management of Taco Inc. needs to determine the investment plan that allows them to
meet the required schedule of payments while placing the least amount of money in the
construction fund.
Part 2.
Taco Inc.: Modifying to account for risk. Suppose that Taco Inc. finds the following risk
ratings for each of the investments. Taco Inc. now requires that the average risk rating for
each month be no greater than 5. Show the changes or additions required to the
formulation.
Investment
A
B
C
D

Risk Rating
1
3
8
6

American Auto Rentals rents one-way to any major U.S. city. They presently have an
imbalance in the number of cars available and the number required in various locations.
There are 12 extra cars in Los Angeles, 6 in Miami, and 5 in New York. There are too
few cars available in Atlanta (3), Boston (8), Chicago (3), and Detroit (8). Using the
following mileage chart, they wish to determine the lowest total mileage arrangement to
remedy their imbalance.
Atlanta
Atlanta

Boston

Boston

11

Chicago

Chicago

10

Detroit

Detroit

Los
Angeles
Miami

23

31

22

16

New York

24

Los
Angeles
0

Miami

14

14

29

New York

29

15