Applying Linear Programming in Business Decision Making: A Case of Profit Maximization of a Commercial Housing Development

Abstract

The current research shows how to utilize the linear programming to perform a profit maximization on two economic cases and analyze the sensitivities of the obtained solutions to identify the key factors influencing the solution, which then can be used as the basis to decide the most profitable business. The case of the current study is identifying the most profitable project of two housing developments in Indonesia. The linear programming of the simplex method is applied to address the problem. The findings indicate that the linear programming solution and its sensitivity analysis effectively and efficiently inform and assist businessmen in identifying the most profitable project under the given constraints. In this case, the linear programming with its sensitivity analysis asserts that selecting a business activity based merely on the amount of its apparent profit may lead to an improper business decision. An example from the current study shows that although the second project yields a higher profit, the solution of the linear programming suggests that the first project is more relevance to its market demand and it needs less capital than that the second project. The higher profit obtained of the second project tends to be relative or fictitious since both projects result in the same return on investment (ROI). Moreover, the sensitivity analysis indicates that the optimization solution of the first project is more stable to change than that of the second project.

Keywords: Profit Optimization, Return on Investment, Market Demand, Sensitivity Analysis, Simplex Method

DOI: 10.7176/EJBM/11-19-06

Publication date:July 31st 2019