Valuation of costs in production planning with linear programming

Abstract

The objective of the paper is to show how costs may be valued in Production Planning when Linear Programming is used and the objective is to maximize profits. In order to do this the concept of “decision relevant” cost is introduced. A basic principle for the valuation of decision relevant cost is presented, based on opportunity costs. It is shown, that, by using the valuation principle described it is possible to rewrite the objective function in a way that valuation of cost becomes much easier than in the objective function usually used without affecting the production program that maximizes profit.