# Sensitivity Analysis

Pages: 5 (1326 words) Published: March 19, 2008
SENSITIVITY ANALYSIS

The solution obtained by simplex or graphical method of LP is based on deterministic assumptions i.e. we assume complete certainty in the data and the relationships of a problem  namely prices are fixed, resources known, time needed to produce a unit exactly etc. However in the real world, conditions are seldom static i.e. they are dynamic. How can such discrepancy be handled? For example if a firm realizes that profit per unit is not Rs 5 as estimated but instead closer to Rs 5.5, how will the final solution mix and total profit change? If additional resources, such as 10 labor hours or 3 hours of machine time, should become available, will this change the problem's answer? Such analyses are used to examine the effects of changes in these three areas: 1.Contribution rates for each variable  C FACTOR

2.Technological coefficients  A FACTOR
3.Available Resources  B FACTOR
This task is alternatively called sensitivity analysis. It is also called as post optimality analysis.

Sensitivity analysis often involves a series of what if? questions. What if the profit of product 1 increases by 10%? What if less money is available in advertising budget constraints? What if new technology will allow a product to be wired in one-third the time it used to take? So we can see that sensitivity analysis can be used to deal not only with errors in estimating input parameters to the LP model but also with management's experiments with possible future changes in the firm that may affect profits.

There are two approaches to determining how sensitive an optimal solution is to changes. The first is simply a trial and error approach, however we prefer the second approach of post optimality method i.e. after an LP problem has been solved, and we attempt to determine a range of changes in problem parameters that will not affect the optimal solution or change the variables in the solution. This is done without resolving the whole problem again. This is illustrated by the following example.

Consider an example of ABC Sound Company that makes CD players (called X1's) and stereo players (called X2's). Its LP Formulation is:

MAXIMIZE PROFIT = \$50X1 + \$120X2
Subject to : 2X1 + 4X2 Sensitivity Analysis Solution
VariableStatusValue
CD PlayersNON Basic0.
Stereo PlayersBasic20.
slack 1NON Basic0.
slack 2Basic40.
Optimal Value (Z) 2,400.

4) RANGE:

Sensitivity Analysis Solution

VariableValueReduced CostOriginal ValueLower BoundUpper Bound CD Players0.10.50.-Infinity60.
Stereo Players20.0.120.100.Infinity
ConstraintDual ValueSlack/SurplusOriginal ValLower BoundUpper Bound Electrician Hrs 30.0.80.0.240.
Audio Tech Hours 0.40.60.20.Infinity

ANALYSES OF EFFECT OF CHANGE IN C-FACTOR:

1) For Non-Basic Objective Function co-efficient:

Our objective is to find out how sensitive problem's optimal solution is to changes in the C-Factors not in the basis. The answer lies in Cj-Zj row of Iterations table. Since this is a maximization problem, the basis will not change unless the Cj-Zj value of one of the non basic variables becomes...