CPAR | COPA REVIEW SCHOOL OF THE PHILIPPINES ‘Manite MAWAGEMENT ADVISORY SERVICES MAS 8611 QUANTITATIVE METHODS QUANTITATIVE METHODS (Operations Research) ~ various applications of mathemancs in ‘business or any complex system. OPERATIONS RESEARCH ~ specticall, the discipline of applying quanttatve methods onented to planning NETWORK MODELS NETWORK MODELS involve project scheduling techniques that are designed to ald the planning ‘and contol af large-scale projects having many interelated activites. USES OF NETWORK ANALYSIS: 1. Planning 4. Forecasting fiture progress 2 Measuring progress to schedule 5. Predicting and controling costs 3. Evaluating changes to schedule SAMPLE APPLICATIONS 4. Building consiruction 4. Feasibility studies 2 Book pubishing '5. Research and developments projets 3) New product planning 6. Auditing PROJECT SCHEDULING TECHNIQUES 4. Gant or bar charts 2. Program Evaluation and Review Technique (PERT) 3. Ciieal Path Method (CPM) + Gant of Bar Charts - a type of bar chart that ilustrates the scheduled start and finish Of ‘elements ofa project overtime. nem Evaluation And Review Technique - doveloped to aid managers in controling large- complex problems Per Dogem 2 probabiistic ciagram ofthe iterelationship of complex sores of activites ‘fee form network showing each actvly asa line between events Efents— arte memento te representing the tetris fan atl, bey consume ities ~ tasks to be aconmplshed; thay consume resources, (including time) and have & ‘uration ver timo ‘Types of Activity 1, Series ~ en activity cannot be performad unless enother activity is undertaken. 2. Parallel can be performed simultaneously. |> Critical Path —tongest path through the network Expacted time (ta) ~ the average time an actviy} would require if it were repeated a large numberof imes. Gotetie tte where: ‘b optimist time {e-= most kal time 1G = pessimistic timeMAS 8611 QUANTITATIVE METHODS Page 20f 11 ‘Sack time ~ the emount of tme that can be added to an acvty without increasing the total ime required onthe erica path, the length of tme an actly Cane delayes without arcing a delay forthe ene project ‘+ Critical Path Method (CPM) — ke PERT, itis @ network technique, but unike PERT, it uses. deterministic me and cost estimales; ts advantages include cost estimates plus the concept of crash eos and ones Crash time - time to complete an activity assuming that all available resources were ‘devoted to the task (overtime, extra crow, etc) EXERCISES 1 NETWORK ANALYSIS. 1. The Gantt Chart below shows thatthe projects Activity oo o> LeGeNo: F NISHED. + NPROCESS OR NOT FINISHED YET. 2 Compt & Onsenecute Ahead of schecule © Behind schedule 2, PERT NETWORK. fil audits have a clcal path bel audors coliom: recogrize it as such Wout the id of network avalsie. In the aucieng of Haas, the tellomrg ates and estiriated times have oeen icentied Obiars schadie of tables tad contmations Process confneations Investssie debi balances Voucn satectediabites “Test acouals and amortizabon “Test pensia pian Peconci invest expense to debt Venfy det estction compliance Review subsequent payments Ratiw Requires: The PERT Neon, identiying the crtcal path and incleding sac tnos 2. New York Buiding Corporation uses tne erfcal path method to moniter construiin jobs. ‘The compary ss Curly 2 weeks behind sowduls ch Job #141, which = sxject to a 10,500 per week. cxspetion penaty. Path -B-C-F-G-1 has a corsa eamgleton tina of 20 waeks, sn cries! path AD-E-F-Gl1s has a noimel commeton tine Of 22 Weeks, The 1, Tolovang actiaties can be washed.| | ‘QUANTITATIVE METHODS. Page 30f11 Cost to Crash Cost io Crash Actviios 1 Wiook 2 Weeks BC P €,000 15,000 DE 10,000 19.600 eF 8,800 19,800 New York Building desires to reduce the normal completion time of Job # 181 and, at the same time, repor the highest possible incor forthe year New York Building should crash 2 Activity BC 1 week and actly EF 1week —¢, Activity EF 2 wacks i. Activty DE { week and actly BC t week. 6. Aclnly OE 1 waek and activity EF 1 ‘week. 18,800 LEARNING CURVES LEARNING CURVES describe tne efficiencies arising from experience, because with experience ‘comes increased produciiy, Ths productvty increases wih producton size, but at 8 ecreasing rate as diagrammed below: Productivity Experience ‘The time required to perform a given task becomes progressively shorter, but this is appicable only tothe early stages of production or any new task ‘The cuve's expressed as 2 percentage of reduced time (usualy between 80% and 80%) to complete a task of each doubling of eumuatve praduction. Hence, the te required is, ‘educed by 20% to 40% each time cumulative production is doubled, ‘Assumptions: 1. The cumulative averege time per unt is reduced by a certain percentage each ime production doubles. 2. Incremental unit me (time to produce the last unit) is reduced when production soubles. EXERCISES IN LEARNING CURVES. 1. The Natulo Company uses labor standatds in the manufacture of its products. Based upon past experience, the company consiers the effects of an 80% leaming curve when ‘developing standards for crect labor costs ‘The company is planning the production of an automatic electrical timing device requiting the assombly of purchasad components, Production is rn on lots of five (8) units each. A steady ‘state production phase with no further increases in labor productivity 's expected after the ‘ight it.The fst production lot of 5 units required 90 hours of dect labor ime ata standard fate of PS per hour REQuRED: a. Whats the cumulative average tine per lot ater four units are completed” What isthe total time required to produce 2 lots? How many hours are required to produce the second lot? ‘Wat is the standard amount the company should establish forthe totat direct labor cost required forthe producton of the fst eight lots? 2. Which of the following unfavorable varianoss would be directly affected by the relative positon of a production process on a leaming curve? ‘a. Material mix Labor rate B. Materials price 4. Labor efficiencyMAS 8641 QUANTITATIVE METHODS: Pogo 4 of 11 3, The average labor cost per unit forthe fist batch produced by a new process is P120. -The cumulative average labor cost afte the second batch is P72 per product. Using a batch size (of 100 and assuming the fearing curve rartionae, the ictal labor cost of four batches wal De a. P4320 fe P17,280 b. P2se2 6. 28,800 4. A constuction company has just completed a bridge over the Visayan area. This the fist ‘bridge the company ever built and it required 100 weeks to complete. Now having hired bridge construction crew with Some experience, the company would fike to continue bung Dbndges, Because of te Investment in hoavy machinery needed continuously by this crew. the company bolioves it would havo to bring the average construcion time to less than one year (52 weeks) per bridge to eam a sufficient return on investment. The average Construction time wil foo: an 80% leaming curve. To bring the average construction ime {over al bndges constructed) below one year per briage, the crew would have to build ‘approximately ‘2. Zaddivnnal bridges, «7 addtional bridges. ', Sadaisonal bridges AL B additonal bndges. PROBABILITY ANALYSIS. PROBABILITY is important to management decision-making because of the unpredictbity of future ‘events. Decision-making under conditions of risk ~ occurs whan the probabilty distibution of the possible future states of nature is known, Decisiommaking under conditions of uncertainty ~ occurs when the probability distribution of possibe future states of nature is nct known and must be subjectively determined. “The probability ofan event varies from Oto 1 (or 00 100%) ‘a. O probabiity - the event cannot occur 'b.Probabilty of 1 (or 100%) ~ the event is certain to occur BASIC TERMS USED WITH PROBABILITY 1; Two events are mutually exctusive if they cannot occur simultaneously. 2. The joint probability oftwe events s the probatity that both wil occur 3. The conditional probability of two events is the probability that one wil occur given that the other has already occurred. 4. Two events are independent I the occurence of one has no efiect on the probabity ofthe other Expected value “The expected value of an action is found by mutiplying the probebity of each outcome by its pay-off and summing the products. ExERCIES IN PROBABILITY ‘The owner of Masarap Donut Shop must decide between the rental of two types of donut- ‘making machines. Machine A, an inexpensive economy model, rents for P1,000 per month, but the variable production costs P0.025 per donut. Mactine B rents for P3,000 per month, ‘but the variable production cost ss only P0.01 per donut. Monthly demand varies betwaen +100,000 and 180,000 donuts according to te following probabil.MAS 8611 QUANTITATIVE METHODS Page 5 of 11 Demand Probabitty 100,000 12% 120,000 1% 450.000 4% 170,000 29% 190,000 6% REQUIRED: A cost comparison study ofthe two machines. ITEMS 2 and 3 ARE BASED ON THE FOLLOWING: ‘A computer store sets four computer models designated as P104, X106, A104, and $104 ‘The store manager has made random number assignments to represent customer choices based on past sales data, The assignments are shown below. Made! Random Numbers Pio4 o-t x104 2-6 A104 7-8 ‘S104 ° ‘The probability that a customer will select mode! X104 is 2 10% 50% b. 20% 30% In running @ simulation of the computer demand, the folowing numbers are drawn in ‘Sequence: 2, 1, and 9. The simulation indicates that the third customer vill purchase: ‘2. Model P104 ‘e. Model A104 1B. Model X104 3. Modal S108 ‘The probes chown in the table represent the estimate of sales fora new product: ‘Sales (units) ‘Probability 0-00 10% 401-200, 40% 201-300 30% 301-400 20% is the best estimate of the expected sales ofthe new product? ‘company uses two major material inputs in is production. To prepare ts manufacturing ‘budget. the company has to project the cost changes of these material inpus. The ‘cost changes are Independent of one another” The purchasing department provides the ng Probab associated with projected ost changes ‘Cost Change ‘Material + torial 2 23% increase 03 os 5% increase o5 04 10% increase oz 04 probability (hat there willbe & 8% Increase in the cost of both Material T and Material 2 is 2 15% 80% b. 40% 20% et pracy occurence fo pees eves = od: nul obit ‘frm will produce either product A or 8. The total casts (TC) for both products can be mated by the equations Product TC = P300,000 + (P23 x dates Volume) ProduatB: TC = P100.000 + (P29 x Gales Volume) firm believes there is a 20% chance for the sale volume of each product to equi 10,000 units and an 80% chance they vail both equal 20,000 units. The seling price ict A is P42. and the seling price of product B Js P40. The expected profit reducing product B equals, | P.98.000 & 342,400 gabMAS 8611 ‘QUANTITATIVE METHODS Page bof 11 b. P 42,000 4. 198,000 ITEMS 7 to 9 ARE BASED ON THE FOLLOWING INFORMATION: The local chapter of JPIA is planning to conduct a fund raising project by selling roses on Valentine's Day The roses, wich can be purchased ftom a nearby supplier at P5 each, will be sold to the students for P18 each. Any unsold roses at the end ofthe day wil be discarded, ‘The estimated numbers of roses that can be sold on such day, as well as their probabiities, as follows: Unis of Roses Probability ‘600 020 800 0.30 1,000 40 1200 onc 7. ‘What is the estimated sales of roses (in units) using an expacted value approac:’? 2.880 e800 B. 1.000 4. 400 {8 What is the estimated unit sales of roses on Valentine's Day using a deterministic approach ‘based on the mos ikely autoome? ‘a. 880 900 1,000 d. 400 ‘8. What ic the conditional proft of purchasing ,000 units of roses but ealing only 800 units? ‘a. 7,000 e. P2,100 b. P8000 6. P2800 7. 8 Unis ofhoses Probably —Werghted Unis «00 0.20 20 00 030 20 1,000 040 «00 e200 0.10 129 Estimated sales, expected value approach aunts 8. 8 Ina deterministic approach, it's assumed that 2 value 1s known with certainty. Per the ‘requirement, the vaiue is based on the most likely outcome. Thus estimated sales is 1,000, tunis, the estimate with the highest probability (40%, 9. A Sales 800 units x PS) 12,000 Less cos (1,000 « 5) #000 Conditional orofit 2z909 DECISION TREE ‘Arbor Company needs 2 component part forthe production of 2 new product. The component pert 's available from local suppliers, bur the company can make it with the use of @ special equipment ‘which ft can rent for P18,000 per month. Each new product requires one component part. Thus, production reqvirement for the partis the same as the demand for the nev product, which could be high (5,000 untts per month), with probability of 60%, oF low (2,600 units per month). ‘The contribution margin per unit of the new produc Is PIS ithe compavy will make the part, and 12 if the partis purchased from local suppliers.i | MAS 8611 QUANTITATIVE METHODS Page 7of 1 ‘The company’s management accountant prepared the following decision tree to help management select the better alternative: Des Danant Py (Corot) 500 Peam00 som zeros) —— 240 oot 10 00 wi som am eam ‘Should the company make, or buy the part? LINEAR PROGRAMMING LINEAR PROGRAMMING ~ a technique used to optimiza an objective function (maximize revenue © preft function, or minimize cost tuncton), subject to canstvaints (such 88 scarce resources, minimum/maximum levels of production, performance, etc.) 1n business, linear programming is used for planning resource allocations (lo make optimum use of limited resources). Conditions caling forthe use of linear programming include! 41. specification ofa cost or revenue objective formula 2. thelmited resources must 29 subject o allematve uses. 3 thesltemative uses of he lite resources must be specified. [EXERCISES IN LINEAR PROGRAMMING 1, Galaxy Candy Company manufactures two popular candy bars, the Eclipse bar and the ‘Nove bar. Both candy bars go through a mixing operation where the various ingredients ae Combined, and the Coating Department where the bars from the Mixing Department are. Coated wih chocolate. The Eclipse bar is coated with both white and dark chocolate to Produce swirled effect. A materia ’shortage of an ingredient in the Nova bar limits [Production to 300 batches per day. Procuction and sales data are presented inthe folowing ‘able. Both candy bars are produced in batches of 200 bars. | eng cong sate capac hore oe teat pany Ivo er bach of poet: core 1s 20 Management believes that Galaxy can sei al! of ts dally production of both the Eclipse and | Nova bars. Other data follow. Selling pce per baton P00 P700 Variable cost per balch 200 450 Monthly fixed costs (alocated evenly between Doth products) 760,000 780,000 | Nova 15 10 REQUIRED: ‘a. Formulate the objective function and all of the constraints in order to maximize ‘contribution margin. ‘6. How many batches of each type of candy bar (Eclipse and Nova) should be producod fo maximize the total contnbutlon margin? ‘©. Calculate the contribution maigin 2t the optimal eoftion. Kapayapaan, nc. manufactures Product C and Product A which are processed a8 follows: Type 0 Machine | Type 8 Machine Product C Shows hours Product A ‘hours S hoursMAS 8611 QUANTITATIVE METHODS Page 8 of 11 “The contribution margin is P12 for Product C and P7 for Product A. The avaliable tne daily {for procassing the Wo products is 120 hours for Machine Type D and 60 hours for Machine ‘ype B. How woul the restiton (constraint) for Machine Type B be expressed? 3. 4C+5A & 6C+9A=120 b. 4C-+5A<80 d. 120 +7A 3. Lecdegaria Corporation produces @ product in 100 gallon batches. The basic ingredients ‘sed are matenal X costing P40 per gallon and MaterislY costing P20 per gallon. No more than 7 gallor of ¥ can be used, ae at least 15 gallons of X must be used ‘How would the objective function (minimiztion of product cost) be expressed? ‘a. 20Y + 40x co. Y+i8x b. A0Y + 20x 4 40y +150% 4, The Katangalan Company plans to expand its sales force by opening several new branch coffees. Katangalan wil consider opening only two types of branches: 20-person branches (Type A) and *0-persen branches (Type 8). Expected inival cash outays are 1,200,000 for 2 Type A branch and P&70,000 for @ Type B branch, Expected annual cash inflow. net of Income taxes, id 82,000 for a Type A branch and P98,000 for a Type 8 branch ‘Katangalan wil fie no more than 200 employees for the new branch offices and wil open no more than 20 branch offices, Linear programming wil be used to help decide how many branch offices should be opened. Katangalan had 10,400,000 n capital available forthe ‘ew branch offices, In @ sytem of equations for 2 linear programming model, which ofthe following equations ‘would not represent constraint? a Avs 20 & P92.000A + P98,0008 < P128,000 B. 208 + 108 < 200 44. P1:300,000A + P670,0008 < 10.4 5. The Kelakian Company makes toys A and 8, each of whieh needs ton processes: cuting and ‘wrapping. The eontibuion margin is P6 for Product A and P5 for Product 8. The table below shows te maximum number of uns (constrain) of each product at may be processed in V0 ‘departments. Maximum Gopactis (hi Frosuet Uns) CUTTING WRAPPING Product A 60 80 Product B 60 30 CConsidenng the constraint n processing, which combination of Products ¥ and Z maximizes the total contnbuton marcia? ‘2. dO unite ofA ane 20unitsefB8 duns of Aan 49 units of B B. GOunisofAard vunitsof@ =e Durits of A ana 60 unas of B © 80unis ofA and unis of 8 %. In. system of equation for a tinear programming modei, what can be done to equalize an Inequality such a8 6X + 4Y < 307 '8. Nothing 6 90d padding ad 2 Slack variable 4 muttoly each element by 7. Afi must decide the mix of production of Product X and Product ¥.. There are only two resources used inthe twe products, resources A and B. Data related to the two products ‘are gwen inthe folowing tabie Product Product ¥ Rosourse A 3 T Resource B 2 1 Unit Profit PB 8 What isthe appropriate cbective luncton to maximize prot? a. axt7Y 2 oXxt0Y b. ax+¥ 6. K+ eyMAS 8611 QUANTITATIVE METHODS Page 90f 11 WINDING UP: ‘QUANTITATIVE METHODS 1. Hennepin Co, used 30 hours to produce the first batch of units. The second batch took an additonal 18 hours, How many total hours wil the fst four batches require? 2. 76.8 hours. 120.0 hours. , 96.2 hours. ¢. 61.4 hours. 2. Lake Corporation manufactures specialty components for the electronics industry in a highly labor intensive environment. Are Electronics has asked Lake to bid on a component that Lake made for Arc last month. The previous order was for 80 units and required 120 hours of direct labor to manufacture. Arc would now like 240 aditional components. Lake experiences an 80% learning curve on all of its jobs. The number of direct labor hours needed for Lake to ‘Complete the 240 acitional components Is 2. 360.0 b1872 30724. 256.0 3. More Company plans to begin production ofa new product on July 1. An 60% learning curve is applicable to Morre's manufacturing operations. If is expected to take 1,000 direct labor hours tw produce the fist unt, how many direct labor hours should it take to produce the thid and fourth unis? 2.640 960 1,600 4. 2,560 “4. Ridgefield, Inc. is considering a three-phase research project. The time estimates for completion of phase 1 of the project are Optimistic 4 months, Most key 8 months Pessimistic 18 months Using the program evaluation and review technique (PERT), the expected time for completion of phase 1 should be 2. Smonths —b. months. 10 months 4. 18 months 5. The Sigma Company wants more information on the demand for ts products. The folowing ata are relevant Units demanded Probability of unit demand cost of units demanded a ‘0 0.00 1 ous 1.00 2 020 2.00 3 00 3.00 4 0.9 4.00 5 0.05 5.00 ‘What s the total expected value of the total cost of units demanded? a. P20 B.PRIS <<. PS.00 P74. 66. Sempaguta Company is planning to market a new product. The marketing research staff prepared the following payofT probablity dstibution giving the relate ikelihood of monthly sales volume levels and the corresponding ince (loss) for the naw product; Monthly sales volume Probabilty Tnoomefloss) 2,500 0.30 (25,000) 5,000 02 + 7,500 10,000 050 37500 15,000 010 50,000 25,000 030 75,000 ‘The expected value ofthe monthly income from the new product: a PI8,750 ——b. P22,500, P30,250 4. P32,750MAS 8611 QUANTITATIVE METHODS Page 10 0f 11 7. Dough Distributors has decided to Increase its daily muffin purchases by 100 boxes. A box of mutins costs P2 and sels for P3 through regular stores. Any boxes not sold through regular stores are soi through Dough’ thrift store for Pi. Dough assigns the following probabiltes to seling additional boxes: ‘Additional sales Probability oo 06 100 04 What is the expected value of Dough’s decision to buy 100 adaltional boxes of muffins? 2 P28 PAO c. PSD 1. PES ‘QUESTIONS & AND 9 ARE BASED ON THE FOLLOWING INFORMATION: ‘Superior Craft i evaluating the launching of a new product. Ifthe product becomes successful, the present value of future cash flows (exchiding investment) is estimated at P2,000,000. I the Droduct is not successful, the present value ofthis flow is estimated at P400,000. The required investment is P1,000,000, ‘8 What are the probabllties that would have to be assigned to the events “success” and “not success” to make Superior C'aft indifferent between the two actions “invest” and "do not invest"? a be. « 3 Probability of success 37.5% 40% 455% 5% Probability of not success Q5% 60% 545% 50% ‘8. If Superior Craft thinks the probabilty of “success” is 60%, how much higher would be the ‘expected value ofthe ack “invest” over the expected value of the act "do not invest”? ‘a, P360,000 ——b. P00,000, ‘© P600,000 . Pi,000,000, 10. Geeks A, B, and C process 50%, 20%, and 30% of the sales orders, respectively. The percentage of errors made in processing @ sales order by Clerks A, 8, and C are 2%, 5%, and 10%, respectively. A sales order is audited and found to be in error. What is the probability that this invoice was processed by Clerk C? a. 0.30 b. 0.60 «00 4. 0.03 11. Bye Go, is considering the sale of banners at the state university football championship game. Bye could purchase these ban vers for P.60 each. Unsold banners would be unretumable and worthless after the game. Bye would have to rent a booth at the stadium for P250. Bye estimates sales of 500 banners at P2.00 each. If Bye’ prediction proves to be incorrect and ‘only 300 banners were sold, the cost ofthis prediction error would be. 2. P20 5. P30 © Pt70 4. F280 12, Pili Enterprises, distributor of CDs is developing its budgeted cost of goods sold for next year. Philp has developed the folowing range of sales estimates and associated probabilves for that year: Probability P 60,000, 0.25 P 85,000, 040 100,000 035 Phil's cost of goods sold averages 80% of sales. What is the expected value of Philip's budgeted cost of goods sold next year? 2. PAS,000 ‘84,000 8,000 <4. P67,200 413, During the year, Brownout Company experiented the flowing power outages: NNomiher of Power Outages Per Herth Number of Hone 0 1 2 2 4 3 2 RMAS 8811 ‘QUANTITATIVE METHODS. Page 11 of 1 Each power outage resi in out of pocket costs of P400. For PSOO per month, the company can leave an auxiliary generetor to provide power during outages, Ifthe company leases an auxiliary _generator next year, the estimated savings (or addtional expenditures) would be .(P3,600) . PL,600 (1,200) 4. P1900 414. The Motion Company has decided to introduce @ new product. The company estimates that ‘here is a 30 percent probability that the product will contribute P700,000 to profits, 830 Percent probebilty that it will contribute 200,000, and a 40 percent probabilty that the ‘centibution wil be a negative P400,000, The expected contribution of the new product is, 2. 500,000 . P166,667 ». 110,000 <6. 380,000 ANSWERS: TA A] ize 2D. 38 ms a8 148 SA L © ~The End —