Operations Management

Module 4 - Assignment 2
Discussion case questions and problems
Due Date: June 5th, 2016
Prepared by: Group I
Amanda DOrazio
Chantelle Grein
Gabriela Masic
Ivana Stosic
Norman Yuan

Recorder: Chantelle Grein

Prepared for: Laurentian University- COMM 2055 Operations Management

Professor: Sean Romenco

Supplement to Chapter 5 - Problem 7 (page 184)

a) Analyze this problem using a decision tree. What is the alternative?

Low Demand (.20)

Subcontract

High Demand (.80)

Build Small

Expand
Low Demand (.20)

Initial
Decision

Build Medium

Do Nothing

High Demand (.80)

Expand
Build Large
Low Demand (.20)

High Demand (.80)

Solving the tree from right to left:
$42M
Low Demand (.20)

High Demand (.80)

$48M

Low Demand (.20)

$22M

Build Small

Initial
Decision

Build Medium
High Demand (.80)
$50M

Build Large
Low Demand (.20)
($20)M

High Demand (.80)

$72M
Chance node after Build small
Low Demand 0.2($42) $ 8.40
High Demand 0.8($48 $ 38.40
Chance node after Build medium
Low Demand 0.2($22) $ 4.40
High Demand 0.8($50 $ 40.00
Chance node after Build large
Low Demand 0.2(-$20)$ (4.00)
High Demand 0.8($72 $ 57.60
Expected values of chance nodes:
Chance nodes after build small: $ 46.80
Chance nodes after build mediu $ 44.40
Chance nodes after build large: $ 53.60
$46.80

Build Small

Initial
Decision

Build Medium

$44.40

Build Large
$53.60

Therefore; based on the above decision tree the best alternative is to build large as it has the highest
of $53.60.
b) Calculate the EVPI and interpret it

EVPI = Expected payoff under certainty - expected payoff under risk

Expected payoff under certainty = 0.20($42) + 0.80( $ 66.00
EVsmall = 0.20($42) + 0.80(48) $
EVmedium = 0.20($22) + 0.80( $
EvLarge = 0.20(-$20) + 0.80($7 $

46.80
44.40
53.60

EVPI = $66.00 - $53.6 $ 12.40

Therefore; based on the above calucation the Large facility is the best alternative as it has the highes
c) Perform graphical sensitivity to P(high)
Low
A
Alternative B
C

42
22
-20

High
48
50
72

80
70
60

50
A
40
Low
30
20
10
0
-10
-20

A Best

0.2

C Best

0.4

0.6
P(2)

Low

High

Slope

Equation

0.8

A
B
C

42
22
-20

48
50
72

48-42 = +642 + 6P2

50-22 = +222 + 28P2
72-(20) = (20) + 92P2

Alternative A is the best from P2 = 0 till it intersects Alternative C line

42 + 6P2 = -20 + 92P2
62 = 86P2
P2 = 0.72
Therefore; based on the above calculations, alternative A is the best from P2 > 0 up to P2 = 0.72, for
greater than 0.72 up to P2 = 1.0, Alternative C is still the best alternative

Do Nothing

$42M

$43M

$48M
$22M
$46M

$50M
($20)M

$72M

s it has the highest expected NPV

as it has the highest expected NPV.

80
70
60
B
50
40
High
30
20
10
0
-10
-20
1

p to P2 = 0.72, for values of P2

Supplement to Chapter 5 - Problem 13 (page 185)

State of State of
AlternatiNature 1 Nature 2

Slope

Equation
10 -12P2
-2 -10 =-12
8 - 5P2
3 -8 = (5)

10

-2

5-5 = 0

5 -0P2

7-0 = 7

7 - 0P2

10
8

10

2
4

-2

A1 best

A2 best

.286

A 3 best

.60

.714

-2

A4 best

1.0

Alternative Alternative
2,
3,
Alternative 1, Alternative Alternative
Alternative 2
3
4
10-12P=8-5P 8-5P=5+0P5+0P=0+7P
10-8=-5P+12P8-5=0P+5P5-0=0P+7P
2=7P
0.286

P
P
P
P

3=5P
0.600

5=7P
0.714

<0.286 - Alternative 1 is better as it would maximize the NPV

>0.286 up to P =0.6 - Alternative 2 maximizes the NPV
>0.6 up up to P =0.714 - Alternative 3 maximizes the NPV
>0.714 - Alternative 4 maximizes the NPV

Supplement to Chapter 5 - Problem 18 (page 186)

The board of governors of Santa Clara University is contemplating
mandatory testing of its student athletes.
The test is not 100 percent accurate. The conditional
probabilities are as follows: If an athlete uses drugs, then
the test will be positive 94 percent of the time, whereas
if he does not (i.e., he is a nonuser), the test will be
negative 98 percent of the time. Suppose the board suspects
that 4 percent of the athletes use drugs. LO2 & 3
a. Calculate the posterior probabilities (i.e., probability
of correct identification after a drug test).
Consider a random student athlete.
Let B1 = the event that he is a drug user
Let B2 = the event that he is not a drug user
We have:
P(B1) = 0.04
P(B2) =1-0.04 = 0.96
Let A+ = the event that test result is positive
We have:
P(A+ B1) = 0.94
P(A+B2) = 1-0.98 = 0.02
P(B1,A+) =(0.94x0.04)/(0.94x0.04) +0.02x
P(B2,A+) = 10.34

0.66

Also, P(A+) = P( A+ B1) P(B1)+ P(A + B2) P(B2) =

And P(A-) = 1 - P(A+) = 1-0.0
0.943

0.057

Note that 66 percent probability that a drug user will be identified and
34 percent probability that a nonuser will be implicated
Similarly P(A-B1) = 1-0.94 = 0.06 and P( A-B2) = 0.98, and
P(B1 A-) = (0.06(0.04))/(0.06(0.04)+0.98 (0 ###
P(B2 A-) = 1 - 0.0032 =
0.9975

If drug test is negative, the probability that the student athlete testes is a nonuser is very high (0.996

b. If a test costs $50, the cost of not identifying (and

barring) a drug user is $1,000, the cost of falsely
accusing a nonuser is $100, and other costs are zero,
should the university test any athlete? Draw and use
a decision tree.

Yes

Athlete 1
$
84.00

Negative
94.30%

Athlete 2
$
52.50

User
4%
Non- User
96%

[-1000.000]

Test Result
$
54.30

Test
$40.00

No

Positive
5.70%

Athlete 3
$
40.00

$0.00

The University should not test any athlete since the cost of test is $50.00

ser is very high (0.9968)

User
66%

[-50.000]

Non-User
34%

[-150.000]

User
0.25%

[-1050.000]

Non-User
99.75%

[-50.000]

Chapter 3 - Problem 21 (page 101)

Year
2005
2006
2007
2008
2009

Q1
49
42
48
51
51

Q2
24
20
24
25
24

Quarter
Q3
18
20
20
19
15

Q4
37
43
40
43

a) Seasonal relative for each quarter using the centred moving average method
Year
2005

2006

2007

2008

2009

Quarter
1
2
3
4
1
2
3
4
1
2
3
4
1
2
3
4
1
2
3

Sales
49
24
18
37
42
20
20
43
48
24
20
40
51
25
19
43
51
24
15

CMA4

CMA2

32.00
30.25
29.25
29.75
31.25
32.75
33.75
33.75
33.00
33.75
34.00
33.75
34.50
34.50
34.25
33.25

31.13
29.75
29.50
30.50
32.00
33.25
33.75
33.38
33.38
33.88
33.88
34.13
34.50
34.38
33.75

Sales/CMA2

0.58
1.24
1.42
0.66
0.63
1.29
1.42
0.72
0.60
1.18
1.51
0.73
0.55
1.25
1.51

*sales of energy in peta joules for each quarter

Seansonal Relatives
Year
2005
2006
2007
2008
2009
Average

1
1.424
1.422
1.506
1.511
1.466

2
0.656
0.719
0.733

0.527

3
0.578
0.625
0.599
0.551

0.588

4
1.244
1.293
1.181
1.251

1.242

Total

3.823

Adjusted

1.534

0.551

0.616

1.300

4.000

b) Deseasonalized data, fit an appropriate model to the deseasonalised data, extend the m
to forecast the sales of natural gas by SaskEnergy from Q4 2009 to Q3 2010

Year
2005

2006

2007

2008

2009

Quarter
Quarter Order
1
1
2
2
3
3
4
4
1
5
2
6
3
7
4
8
1
9
2
10
3
11
4
12
1
13
2
14
3
15
4
16
1
17
2
18
3
19

Sales
(peta
joules)
49
24
18
37
42
20
20
43
48
24
20
40
51
25
19
43
51
24
15

Seasona
l
relative Deaseasonal
s
ized Sales
1.53
31.95
0.55
43.54
0.62
29.24
1.30
28.47
1.53
27.39
0.55
36.28
0.62
32.49
1.30
33.09
1.53
31.30
0.55
43.54
0.62
32.49
1.30
30.78
1.53
33.26
0.55
45.35
0.62
30.87
1.30
33.09
1.53
33.26
0.55
43.54
0.62
24.37

Dea
50.00
40.00
30.00
20.00
10.00
-

e method

d data, extend the model four quarters, and reseseasonalize these in order

Deaseasonalized Sales

50.00

40.00

30.00

20.00

10.00
-

10

12

14

16

18

20

Chapter 3 - Problem 26 (page 104)

Slope =
Intercept =
x
10
8
11
12
12
9
8
7
10
6
11
8
10

Part B
0.1496

r=

0.2264285714

r2 =

y
1.6
1.3
1.8
2
2.2
1.6
1.5
1.3
1.7
1.2
1.9
1.4
1.7

Forecast
1.7228571429
1.4235714286
1.8725
2.0221428571
2.0221428571
1.5732142857
1.4235714286
1.2739285714
1.7228571429
1.1242857143
1.8725
1.4235714286
1.7228571429

Part A

A correlation coefficient of 0.9595 indicates a very strong relationshop between the number of mower
When there is an increase in the number of mowers sold, then there is also an increase in the amount
would go for a decrease, as due to such a strong correlation, there would be a decrease in both variab
Part B
Linear Regression equation y = 0.226 + 0.1496x
Part C
Prediction:
How many lawn mower sales would there be, given fertilizer sales of 2 tonnes?
y = 0.226 + 0.1496x
2 = 0.226 + 0.1496x
1.774 = 0.1496x
1.774/0.1496 = x
11.86 = x
Rounded = 12

Therefore it can be predicted that 2 tonnes of fertilizer sales will likely result in 12 lawn mover sales a

0.5

Part A
0.9595363934

0.45

0.9207100902

0.4

Error
-0.1228571429
-0.1235714286
-0.0725
-0.0221428571
0.1778571429
0.0267857143
0.0764285714
0.0260714286
-0.0228571429
0.0757142857
0.0275
-0.0235714286
-0.0228571429

0.35
0.3
0.25
Y

0.2
0.15
0.1
0.05
0

ween the number of mowers sold and the amount of fertilizer sold.
an increase in the amount of fertilizer sold. The same
e a decrease in both variables.

10

15
X

Data

Linear (Data)

20

lt in 12 lawn mover sales as well.

15

ta)

20

25

Chapter 3 - Problem 29 (page 106)

Two different forecasting techniques were used to forecast
demand for cases of bottled water in a store. Actual
demand and the two sets of forecasts for seven periods
are as follows: LO7

Period
1
2
3
4
5
6
7

Forecast Demand
Demand
F1
F2
68
66
66
75
68
68
70
72
70
74
71
72
69
72
74
72
70
76
80
71
78

a. Calculate the MAD for each set of forecasts. Which

technique appears to be more accurate?

Period
1
2
3
4
5
6
7

Demand
68
75
70
74
69
72
80

F1

Error
66
2
68
7
72
-2
71
3
72
-3
70
2
71
9

MAD (F1)

28/7

MAD (F2)

22/7

3.14

A-F
Error
2
7
2
3
3
2
9
28

Error Error/Actu
2
al x 100
4
2.94%
49
9.33%
4
2.86%
9
4.05%
9
4.35%
4
2.78%
81
11.25%
160
37.56%

F2 is lower - more accurate

b. Calculate the MSE for each set of forecasts. Which
technique appears to be more accurate?
MSE (F1)

160/7

22.86

MSE (F2)

102/7

14.57

Period
1
2
3
4
5
6
7

F2 is lower - more accurate

c. Calculate the MAPE for each set of forecasts. Which
technique appears to be more accurate?
MAPE (F1) 37.56/7

5.37%

MAPE (F2) 30.28/7

4.33%

F2 is lower - more accurate

d. Do all three measures of forecast errors provide the
same conclusion (i.e., are they consistent) in this case?
Do you expect consistent results for every case?
Explain.

All three measures of forecast errors in this case concluded the same that F2 was the more accurate f
Consistent results would be expected for every case.

e. In practice, either MAD, MSE, or MAPE would be

employed to compute a measure of forecast errors.
What factors might lead a manager to favour one?
There are several factors that manager will consider:
cost and accuracy are the most important factors to be considered
company's policies
past results
easy of calculations
MAPE is easier to understand
MAD is easier to calculate
MSE is more sensitive to large forecast errors

Demand
68
75
70
74
69
72
80

F2
Error
66
2
68
7
70
0
72
2
74
-5
76
-4
78
2

A-F
Error
2
7
0
2
5
4
2
22

Error Error/Actu
2
al x 100
4
2.94%
49
9.33%
0
0.00%
4
2.70%
25
7.25%
16
5.56%
4
2.50%
102
30.28%

as the more accurate forecast.