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MANAGEMENT ADVISORY SERVICES

Quantitative Methods

Expected Value, Payoff Tables & Value of Perfect Information
1
. Gary’s Pipe and Steel Company expects sales next year to be P800,000 if the economy is
strong, P500,000 if the economy is steady, and P350,000 if the economy is weak. Gary
believes there is a 20 percent probability the economy will be strong, a 50 percent probability
of a steady economy, and a 30 percent probability of a weak economy. What is the expected
level of sales for next year?

Hotdogs self for P5.00 and cost Liberty P3 each. Unsold hotdogs are given to a local
orphanage without charge.
A. Construct a payoff table (conditional profits).
B. What are the expected payoff of stocking 30,000 hotdogs and the expected value of
perfect information?
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The Visitors Club sells brewed coffee at Araneta Gym's LBA's season games. The frequency
distribution of the demand for cups of brewed coffee per game is presented below.
Unit sales volume
Probability
10,000
.10
20,000
.15
30,000
.25
40,000
.35
50,000
.15
The brewed coffee is sold for P1.00 a cup and the cost per cup is P0.25. Any unsold brewed
coffee is discarded because it will spoil before the next home game.
A. What is the estimated demand for brewed coffee at the next Araneta Gym's LBA's season
game using an expected value approach?
B. What is the estimated demand for brewed coffee at the next Araneta Gym's LBA's season
game using a deterministic approach based on the most likely outcome?
C. What is the conditional profit (loss) per game of having 25,000 cups of brewed coffee
available but only selling 16,000 cups of coffee?
Liberty, Inc. has been operating the concession stands at the university football stadium. The
university has had successful football teams for many years; as a result the stadium is always
full. The university is located in an area that suffers no rain during the football season. From
time to time, Liberty has found itself very short of hotdogs and at other times it has had many
left. A review of the records of sales of the past five seasons revealed the following frequency
of hot dogs sold:
Total Games
10,000 hot dogs
5 times
20,000 hot dogs
10 times
30,000 hot dogs
20 times
40,000 hot dogs
15 times
50 total games

Exercises & Problems

Gardenia Company makes corsages that it sells through salespeople on the streets. Each
sells for P2 and has variable production costs of P0.80. The salespeople receive a P0.50
commission on each corsage they sell, and the company must spend P0.05 to get rid of each
unsold corsage. The corsages last for only one week and cannot be carried in inventory.
The manager of the firm had estimated demand per week and associated probabilities as
follows:
Demand
Probability
100,000
0.20
120,000
0.20
140,000
0.30
160,000
0.30
A. What is the optimal weekly production of the corsage?
B. What is the value of perfect information?

PERT-CPM
5
. The following are four series of activities with number of days to complete the different
activities.
I. A-B-D-F: 25, 18, 25, 14
II. A-B-E-F: 25, 18, 18,14
III. A-C-E-F: 25. 12, 18, 14
Required:
A. Calculate the total time for each path, and identify the critical path.
B. Which of the path(s) in the network can be delayed? What is(are) the activity(ies) that can
be delayed and how many hours?
C. How many slack days are there in Path III?
D. What is the maximum number of days that can be applied to crash the critical path?
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The contractor is 2 days behind of completion of one of its multi-million projects. The daily
penalty is P150,000 for any delay of completion time. The company has an opportunity of
meeting the completion time if crashing is applied on the different activities.
The PERT, which is not shown, indicated that the critical path is B-D-E-G-L. The following
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MANAGEMENT ADVISORY SERVICES activities can be crashed at their respective costs: 1 day Activity A P135. REQUIRED: A. Should Leamwright make or buy the component? 2days P260. What is the cumulative average time per unit after 8 units are completed? B. What will be the new average inventory be? What will the new total carrying cost be? 12 .000 Activity D 145. The firm generally experiences a learning effect on new models.06 Total cost P0. B. What will be the average inventory be? C. Leamwright needs 32. an ordering cost of P6 per order. Which of the foregoing activity(ies) would be crashed? How much is the net benefit if the activity(ies) are crashed? 2.000 295. manager believes that Leamwright could make the component with the following costs for the first batch of 1.R. A. Compute the economic order quantity (EOQ) for Part S-10. Learnwright Company currently buys at component for one of its products at P220 per unit. The production manager expects an 85% learning rate on direct labor and variable overhead.000 units per year. which activities) will be crashed? Learning Curves 7 . assuming a learning effect on labor of 90 percent. The production Exercises & Problems Inventory Model 10 . The product will be redesigned.000 units.000. B. Data on a new press appear below: Labor time for first unit 500 hour Labor rate P500 per hour Variable overhead P10 per labor hour Materials P5.000 Activity E 155.000 pipes this year.000 units.000 Quantitative Methods Required: 1. and carrying costs of P2. The cost of placing one order of Part S-10 is estimated to be about P20. What is the economic ordering quantity? B.15 Other 0. Consider a batch to be 1.000 per press The manager of the firm wants to know the expected total cost of making the first 16 units.000 Activity B 140. What is the economic ordering quantity? B. How many hours are required to produce the second unit? 8 . Determine the total costs for the first 16 units using a learning curve of 90 percent.000 Win Company manufactures large grape presses. Assume a safety of stock of 30 units of inventory will be required as safety stock. A. Prepare schedules showing the cumulative average time for all doubling points up through 16 units for a 90 percent learning rate. Assuming that the demand is a maximum of 16.008 per unit.000 Activity C 125.09 Interest on funds invested 0. Assuming that the daily penalty is P140. What is the total time required to produce 2 units?. The first unit required 100 labor hours to complete. Bayan Company uses 4.40 per pipe.M. A.50 A.000 units. Boring Company has projected sales of P72.000 Total variable cost P280.20 Property taxes 0. I. and carrying costs of P1.000 280. at least through the first 64 or so units. 4 units? C.000 units of the component in the coming year. Materials P130. It anticipates sales of 126. A.000 240. Other costs associated with carrying Part S-10 in inventory are: Annual Cost per Part Insurance P0.000 285. Terrific Company is trying to improve its inventory control system and has installed an online computer at its retail stores.500 units of Part S-10 each year. so that the component will not be needed beyond the coming year. What is the total cost of inventory expected to be? D. Particular manufacturing job is subjected to an estimated 80% learning curve.000 Making the component involves no incremental fixed costs because Learnwright could use existing equipment. an ordering cost of P4 per order. What will the average inventory be? 11 . Page 2 of 7 .000 Direct labor and variable overhead 150. U. 9 . How many orders will be placed during the year? C. Determine whether Leamwright should make or buy the component.

A company annually consumes 50. Required: A. Delivery from the foundry generally takes 6 days. what would be the EOQ? 13 . Compute the amount of annual inventory costs if the company uses the economic order quantity. The castings are used evenly throughout the year in the production process on a 360-day-peryear basis. What would be the safety stock? The reorder point? D. Flux Company uses 9. Maximum weekly usage 60 units Lead time 4 weeks Average weekly usage 50 units Management is trying to determine the proper safety stock to carry on this inventory item and to determine the proper reorder point. D. In total.000 units. Based on the information. What is the reorder point? B. Also. A.000 units of Part X. To get better control over its inventories. Assume that using process reengineering the company reduces its cost of placing a purchase order to only P6. What would be the reorder point? 16 . Selected information relating to a quick-developing X-ray film carried by the company is given below: Economic order quantity (EOQ) 700 units. the true cost of carrying a unit in stock is P7. Assume that the company has been able to reduce the cost of placing an order to only P8. The company estimates that it costs P90 to place a single purchase order and about P3 to carry one casting in inventory for a year. Refer to the original data.50. Assume that the cost to place an order increases from P30 to P40 per order. Compute the new EOQ. and it has determined that the cost to carry one part in inventory for one year is P1.) What will be the effect on the EOQ? Show computations. B.20 per year.00 per year and the ordering costs are P200. What would be the safety stock? The reorder point? C. Assume a 5% stock-out risk as stated in (3) above.000 castings per year at a cost of P8 per casting. Assume that the company is willing to assume a 15% risk of being out of stock. What would be the total cost of ordering and carrying inventory for one year? E. broken down into ordering and carrying costs. The company has determined that the cost to place an order for the part is P30. 15 . B. Using 360 days a year. The carrying cost of this part is P3. but it can take as much as 10 days. as compared to the old purchasing policy? Multiple Choice Page 3 of 7 . The company uses an order quantity of 5.MANAGEMENT ADVISORY SERVICES B. 1. Compute the EOQ for the part.000 units of Part K each year. Assume that no safety stock is to be carried. What would be the size of the safety stock in units? Exercises & Problems Quantitative Methods 2. The economic order quantity. (Ordering costs remain unchanged at P30 per order. Compute the economic order quantity (EOQ). Also assume that when the waste and inefficiency caused by inventories is considered. Ibon Company purchases 54. the cost to carry a part in inventory jumps to P1. Assume that the cost to carry a part in inventory increases from P1.50 per part. and from the high cot of insurance. The days of delivery time and the percentage of their occurrence are shown in the following tabulation: Delivery Time (days) Percentage of Occurrence 6 75 7 10 8 5 9 5 10 5 100 A. Delma Company distributes medical supplies throughout the country. The castings are purchased from a foundry located in another Asian country. Number of orders per year. the company estimates that when the waste and inefficiency caused by inventories are considered. the frequency of making an order.50 to P2. The high carrying costs result from the need to keep the castings in carefully controlled temperature and humidity conditions. A. the company is anxious to determine the economic order quantity for this part. How frequently would the company be placing an order. The annual inventory costs. compute: A. 14 . Ibon Company uses a small casting in one of its finished products. B. Assume that a full safety stock is to be carried. C. Under these conditions. What will be the effect on the EOQ? Show computations. Average number of inventory units. B. Assume that the company is willing to assume only a 5% risk of being out of stock.25 per unit. E. C.

With rain (probability 0. there will still be a full 100. Bye could purchase these banners for P. Clay Co. is considering a three-phase research project. Of the total cargo shipped. Clay's internal auditor randomly selects one shipping document. 3% 4.10 Annual interest foregone from alternate investment of funds P800 Annual number of units required 10. Harvesting now will yield 100. If the weather does not turn cold. The following information is available: Stockout cost P80 per occurrence Carrying cost of safety stock P2 per unit Number of purchase orders 5 per year The options available to Polly are as follows: Exercises & Problems Quantitative Methods Units of safety stock Probability of Running out of safety stock 10 50% 20 40% 30 30% 40 20% 50 10% 55 5% The number of units of safety stock that will result in the lowest cost is A.2). respectively. P170 B. with error rates of 3%. Ridgefield.000 8. and 10%. A company is designing a new regional distribution warehouse. The following data refer to various annual costs relating to the inventory of a single-product company: Unit Transportation-in on purchases P0.50 10. the cost of this prediction error would be A. 4%. X 100 20 100 100 Y 80 80 40 80 Z 100 100 100 73 11. Two machines are used to produce the products. PERT/CPM analysis D.60 each. The contribution margin. P400.5). A wine maker must decide whether to harvest grapes now or in four weeks.000-bottle yield. but the net will be only P3 per bottle. 40 D.000 What is the annual interest cost per unit? A. To minimize delays in loading and unloading trucks. C. P310. 20 C. respectively. Unsold banners would be unreturnable and worthless after the game. operates three shipping terminals. a full yield netting P4 per bottle will result.000 C. the yield will be cut in half but net P3 per bottle. P0. Bye Co. correlation and regression analysis 14.000 B. 55 9. Bye would have to rent a booth at the stadium for P250. P0. P120 C. 23% B. P0. and Z. terminals X. P0. The time estimates for Page 4 of 7 . Bye estimates sales of 500 banners at P2. The probability that the error occurred in terminal X is A. 30%. If the wine maker waits and the weather turns cold (probability 0.MANAGEMENT ADVISORY SERVICES 3. and Z. How many units should be produced and sold to maximize the weekly contribution? A. the yield will depend on rain. D. Inc. 60% C. Y. P200.22 C. Y. The most relevant technique to assist in determining the proper number of docks is A. sales demand. Happy Holidays produces three products: X. referred to as X. queuing theory B. an adequate number of loading docks must be built.42 B.400 minutes available on each machine during the week. B. Without rain (probability 0.20 Storage per unit 0. and time on each machine (in minutes) is as follows: Demand CM Time on M1 Time on M2 X 100 P10 5 10 Y 80 18 10 5 Z 100 25 15 5 There are 2.12 Insurance per unit 0. P130 D.000 D. 50% D. linear programming C.5). The Polly Company wishes to determine the amount of safety stock that it should maintain for Product D that will result in the lowest cost.00 each. is considering the sale of banners at the state university football championship game. The optimal expected value is A. P350. Y. and Z handle approximately 60%. and 6%. ascertaining that this document contains an error. 50 B. If Bye’s prediction proves to be incorrect and only 300 banners were sold.30 D.000 bottles of wine netting P2 per bottle. P280 5.

160 D.000 Fixed overhead** 1. the target labor cost for four batches of product is A.4 hours 13. 48. Wind Company expects an 85% learning curve.400 14.400 Total P15.400 * Applied on the basis of direct labor hours **Applied at the rate of 10 percent of variable cost The company has now been requested to prepare a bid for 150 units of the same product. 8 months C. 18 months Quantitative Methods Solution 12.25 hours C. 120. 10 months B. Moss Company recently completed and sold an order of 50 units that had the following costs: Direct materials P 1.00)* 4. If labor is paid P15 per hour. A 90% learning curve is expected.500 Variable overhead (1. 322. 76. 9 months D.950 B.0 hours D. P31.MANAGEMENT ADVISORY SERVICES completion of phase 1 of the project are Optimistic 4 months Most likely 8 months Pessimistic 18 months Using the program evaluation and review technique (PERT). P37. P2.0 hours B. P26. 96.2 hours D. The second batch took an additional 18 hours.000 hours @ P4.500 Exercises & Problems Page 5 of 7 . Hanip Co. 425. the expected time for completion of phase 1 should be A.0 hours B. The first four batches should take an average of A.50) 8.000 hours @ P8. Moss Company's total cost on this order would be estimated at A.944 B. How many total hours will the first four batches require? A. 500. 361. If an 80 percent learning curve is applicable.8 hours C. P37.790 D. used 30 hour to produce the first batch of units. P600 C. The first batch of a new product required 500 hours.400 C.0 hours 15. P1. Havenot has estimated the first batch of product will take 40 hours to complete. P2.500 Direct labor (1.

300.9 X 0.000 (800.00019.30Expected ValueSup/Dem100.000 x 0.00080. of 7 days and C & E for a max.36Incremental time6096153.000 X 30%) .00070.000 6.000112.00079. or E for 2 days = P280. time160256409.94 x 32) (130.000). time100806451.000)30.000 x 0.00020.00025.000(70.00030.750 3 515.9 = 328.000 x 0.000 7 .888 (5.00071.10 + 20.240.00084.800 – 79.05 X 16) (B) 2.000) (2) B – 1 day (140.248.000 Value at certainty 40.000(B) 58.000120. (A) (B) 40.35 + 50. A-B-E-F = 75.000 (C) 9.00040.1 .000 10.000(10.080.000 84. ave.94 x 16) (130.00077.700(B) 14.000 70.00070.289.756. 33.000)(20. (1) E – 2 days (280.00020.6655.785 196.00060.000 x 1) – (25.00067.00040.76 .000 x 0.96Cum.00020.000 35. (A) 5.000140.00040.200.00070.815 2. (A) (B) 500 (C) 504 1.00070. 4 .000 x 0.000 X 50% + 350.00020.129.00060.00040.000 x 16) 9 .00040.000100.000x 85% x 85% x 85% x 85% x 85%= 78.000(40. of 13 days Slack days = 82 – 69 = 13.000 Highest expected value 18.00050.56 10 . 5 . 2 .252.15 + 30.400 Value of perfect information = (93.000)40.248.00084.800140.8 x 510) + (5.200.9 X 0.000 X 20% + 500.00010.000 3.6245.00020.30 (B) Make DL & VOH Materials Total Unit cost 2.000 x 16) (150.25) (A) Probability10%20%40%30%Exp.785 4. (B) (C) (D) 6 . (A) (B) 120 (C) 300 600 11 .000 x 025 + 40. A-C-E-F = 69.400) (A) A-B-D-F = 82.00053.815 208.00036. 8 124816Cum. maximum crash days = 7 (82 – 75) (A) DL & VOH Materials Total Unit Cost Make 1.000 x 85% x 85% x 85% x 85% = 78.000120. ValueSup/Dem10.160.15 (16.332.000160.000)10.00020.000 98.000 x 32) .00081.000 Value of perfect information.300.00030.300.400160.9 X 0.000 (150.00098. Critical path A-B-D-F Paths E can be delayed for a max.00020.8 (500 X 0. Payoff Table Probability0.

500)20 600 2.700 4.76 14 . .25 16 .500 x 3) 2(50.000 (200 x 10).008) 12 .500 (2.000 (54. (B) (C) (D) (E1) 2(9.000)(30) 600 1.000)(30) 2.000 (54. (B1) (B2) 0.873 (19.50 2(9.000  5.000  300) = 180 times a year.873) 1291 x 3 (A) 40 240 (A) 200 (50 X 4) (10 X 4) (60 X 4) or (50 x 4) + 40 1.500 7.50 2(4.(D) 530 534.800) x 90 Carrying cost [(1. Carrying Cost = (3.24 (530 X 1.582 15 2(4.000)200 3 Ordering cost = 3.000  1.500)(8) (E) EOQ = 2.000)90 3  360) x 1  360) x 7  360) x 3  360) x 9 (54. (A) (B) 240 13 .000) (360  10) Ordering cost = 2.83 (C) 464.20 (54. (A) (B) 692. (B) (C) (D) 1. Carrying Cost = 7.36 x 200).50 (A) 10 Every 36 days 9.500 (5.000)6 7.800 150 1.000  2) (50.750 300 (E2) every 2 days 2(54.050 6.800  2) + 450] x 3 Total Cost of ordering& carrying 2(54.350 2.050 450 1.000)(40) 1.50 2(9.000 Ordering cost (54.746 .000 (54.