Management Advisory Services

Quantitative Techniques
By: rhad estoque

Quantitative Techniques for Planning and Control

(Decision Making Under Uncertainties)

Management science or operations research - refers to the body of

knowledge which applies quantitative techniques to decision-making and
management problems.

Simulation & Sensitivity analysis

Profit Maximization
Linear Programming
Object function
Constraints
Feasible solution
Shadow Price
Matrix algebra or Simplex Tableau
Differential/ Integral calculus

Project Analysis
PERT-CPM - (Program Evaluation and Review Techniques - Critical Path
Method)
Gantt Chart
Queuing Theory

Risk Management
Measures of Central Tendency - Mean, median, mode
Standard deviation vs. Variance
Statistical quality control charts

Cost Segregation
Correlation analysis - Simple vs. Multiple regression
High-low points method
Learning curves

Probability
Decision tree
Game theory
Maximax
Minimax/ Maximin
Minimax regret
Laplace
Expected value

Forecasting
Historical trend analysis
Markov analysis
Exponential smoothing

Inventory Management
Economic Order Quantity
Monte Carlo Simulation
USES OF QUANTITATIVE TECHNIQUES

Quantitative techniques are applied in management decisions such as

a. determination of breakeven point in the CVP analysis
b. segregation of mixed costs into fixed and variable components
c. production decisions
d. inventory management
e. risk management

Illustrative Problems
1. A beverage stand can sell either soft drinks or coffee on any given
day. If the stand sells soft drinks and the weather is hot, it will
make P2,500; if the weather is cold, the profit will be P1,000. If
the stand sells coffee and the weather is hot, it will make P1,900;
if the weather is cold, the profit will be P2,000. The probability
of cold weather on a given day at this time is 60%.

Compute for:
Expected payoff for Coffee
Expected payoff for Soft drinks
Expected payoff if the vendor has perfect information.

2. Stan Berry is considering selling peanuts at the Keefer High School

football games. The peanuts would cost P.50 per bag and could be sold
for P1.50 per bag. No other costs would be incurred to sell the peanuts.
All unsold bags can be returned to the supplier for P.30 each. Berry
estimated the demand for peanuts at each football game and constructed
the payoff table that follows.
Payoffs at each supply level:
Demand Probability
(bags) of Demand 20 30 40 50
20 0.2 P20 P18 P16 P14
30 0.4 P20 P30 P28 P26
40 0.3 P20 P30 P40 P38
50 0.1 P20 P30 P40 P50

Compute for the maximum that Stan Berry should pay for perfect
information so that he could always stock the correct number of bags
of peanuts.

3. The College Honor Society sells hot pretzels at the home

football games. The pretzels are sold for P1.00 each, and the
cost per pretzel is P0.30. Any unsold pretzels are discarded
because they will be stale before the next home game.

The frequency distribution of the demand for pretzels per game

is presented below.
Unit Sales Volume Probability
2,000 pretzels 0.10
3,000 pretzels 0.15
4,000 pretzels 0.20
5,000 pretzels 0.35
6,000 pretzels 0.20

How many is the estimated demand for pretzels at the next home
football game using an expected value approach?
How many is the estimated demand for pretzels at the next
home football game using a deterministic approach based on the most
likely outcome?
How much is the conditional profit per game of having 4,000
pretzels available but only selling 3,000 pretzels?
How much is the conditional profit per game of having 4,000
pretzels available and selling all 4,000 pretzels?

4. Propeller Inc. plans to manufacture a newly designed

high-technology propeller for airplanes. Propeller forecasts that as
workers gain experience, they will need less time to complete the job.
Based on prior experience, Propeller estimates a 70% cumulative
learning curve and has projected the following costs. If Propeller
manufactures eight propellers, the total manufacturing cost would be
Cumulative number Manufacturing Projections
of units produced Average cost per unit Total costs
1 P20,000 P20,000
2 14,000 28,000

If Propeller manufactures eight propellers, compute the total

manufacturing cost.

How much is the average production cost of the additional 4 units.

5. Moss Point Manufacturing recently completed and sold an order of

50 units that had costs as follows.
Direct materials P1,500
Direct labor (1,000 hours x P8.50) 8,500
Variable overhead (1,000 hours x P4.00)* 4,000
Fixed overhead per batch 1,400
P15,400
*Applied on the basis of direct labor hours.

If Moss Point had experienced a 70% learning curve.

Compute for the total cost of 4 batches using cumulative method.
Compute for the cost of 150 units using incremental method.

6. California Building Corporation uses the critical path method

to monitor construction jobs. The company is currently 2 weeks
behind schedule on Job #181, which is subject to a P10,500 per-week
completion penalty. Path A-B-C-F-G-H-I has a normal completion
time of 20 weeks, and critical path A-D-E-F-G-H-I has a normal
completion time of 22 weeks. The following activities can be
crashed.
Cost to Crash Cost to Crash
Activities 1 week 2 weeks
BC P8,000 P15,000
DE 10,000 19,600
EF 8,800 19,500

California Building desires to reduce the normal completion time

of Job #181 and, at the same time, report the highest possible income
for the year. California Building should crash
a. Activity BC 1 week and activity EF 1 week
b. Activity BC 2 weeks
c. Activity DE 1 week and activity BC 1 week
d. Activity EF 2 weeks
e. Activity DE 1 week and activity EF 1 week

7. The Mix and Match Company has two products Product X and Product
Y, that it manufactures through its production facilities. The
contribution margin for Product X is P15 per unit, whereas Product
Y's contribution is P25. Each product uses Materials A and B. Product
X uses 3 pounds of Material A, and Product Y uses 6 pounds. Product
X requires 6 feet of Material B and Product Y uses 4 feet. The
company can only purchase 600 pounds of Material A and 880 feet of
material B. What is the optimal mix of products to be manufactured?
8. Keago Enterprises manufactures two products, boat wax and car
wax, in two departments, the Mixing Department and the Packaging
Department. The Mixing Department has 800 hours per month available,
and the Packaging Department has 1,200 hours per month
available. Production of the two products cannot exceed 36,000
pounds. Data on the two products follow:
Contribution Hours per 100 Pounds
Margin Mixing Packaging
per 100 pounds) (M) (P)
Boat wax P200 5 3
Car wax 150 2 6

What is the optimal mix of products to be manufactured?

Multiple Choice
Jackson Co. Has the following information for the first quarter of the year:
Machine Hours Cleaning Expense
January 2,100 P 900
February 2,600 1,200
March 1,600 800
April 2,000 1,000

1. Using the high-low points method, compute for the variable cost.
a. P0.40 b. P0.48 c. P2.00 d. P2.50

2. Using the high-low points method, compute for the fixed cost.
a. P160 b. P320 c. P640 d. P1,040

3. What is the expected total cost for May if the management expects 1,400 machine
hours?
a. P560 b. P650 c. P720 d. P760

4. A particular manufacturing job is subject to an estimated 90% learning curve. The first
unit required 50 labor hours to complete. What is the cumulative average time per unit
after four units are completed?
a. 50 hours b. 45 hours c. 40.5 hours d. 40 hours

5. A learning curve of 80% assumes that direct labor costs are reduced by 20% for each
doubling of output. What is the incremental cost of the sixteenth unit produced as an
approximate percentage of the first unit produced?
a. 41% b. 31% c. 51% d. 64%

Philip Co. Is developing its budgeted cost of goods sold for next year. Philip has
developed the following range of sales estimates and associated probabilities for the
year:
Sales estimate Probability
P60,000 25%
85,000 40
100,000 35

6. Philip’s cost of goods sold average 80% of sales. What is the expected value of
Philip’s budgeted cost of goods sold?
a. P85,000 b. P84,000 c. P68,000 d. P67,200

The probabilities shown in the table represent the estimate of sales for a new
product.
Sales Units Probability
0-200 15%
201-400 45%
401-600 25%
601-800 15%
7. What is the probability of selling between 201 and 600 units of the product?
a. 0% b. 11.25% c. 70% d. 25%

8. What is the best estimate of the expected sales of the new product?
a. 480 b. 380 c. 400 d. 800

9. During the past few years, Wilder Company has experienced the following average
number of power outages:
Number per Month Number of Months
0 3
1 2
2 4
3 3

Each power outage results in out-of-pocket costs of P800. For P1,000 per month,
Wilder can lease a generator to provide power outages. If Wilder leases a generator in
the coming year, the estimate savings/(additional cost) for the year will be
a. (P15,200) b. (P1,267) c. P3,200 d. P7,200

10. According to recent focus sessions, Norton Corporation has a "can't miss" consumer
product on its hands. Sales forecasts indicate either excellent or good results, with
Norton's sales manager assigning a probability of .6 to a good results outcome. The
company is now studying various sales compensation plans for the product and has
determined the following contribution margin data.
Contribution Margin
If sales are excellent and
Plan 1 is adopted P300,000
Plan 2 is adopted 370,000
If sales are good and
Plan 1 is adopted 240,000
Plan 2 is adopted 180,000

On the basis of this information, which of the following statements is correct?

A. Plan 2 should be adopted because it is P10,000 more attractive than Plan 1.
B. Plan 1 should be adopted because of the sales manager's higher confidence in good
results.
C. Plan 1 should be adopted because it is P8,000 more attractive than Plan 2.
D. Either Plan should be adopted, the decision being dependent on the probability of
excellent sales results.

11. The sales manager of Serito Doll Company has suggested that an expanded
advertising campaign costing P40,000 would increase the sales and profits of the
company. He has developed the following probability distribution for the effect of the
advertising campaign on company sales.
Sales increase (units) Probability
15,000 0.10
30,000 0.35
45,000 0.10
60,000 0.25
75,000 0.20
The company sells the dolls at P5.20 each. The cost of each doll is P3.20. Serito's
expected incremental profit, if the advertising campaign is adopted, would be
A. P6,500. B. P46,500. C. P53,000. D. P93,000

12. A manufacturing company required 800 direct labor hours to produce the first lot of
four units of a new motor. Management believes that a 90% learning curve will be
experienced over the next four lots of production. How many direct labor hours will be
required to manufacture the next 12 units?
A. 2,016 B. 1,792 C. 1,944 D. 2,160
13. LCB, Inc. is preparing a bid to the Department of the Navy to produce engines for
rescue boats. The company has manufactured these engines for the Navy for the past 3
years, on an exclusive contract, and has experienced the following costs:
Cumulative Cumulative
Units Cumulative Labor
Produced Materials Costs
10 P 60,000 P120,000
20 120,000 192,000
40 240,000 307,200

At LCB, variable overhead is applied on the basis of P1.00 per direct labor dollar. Based
on historical costs, LCB knows that the production of 40 engines will be allocated
P100,000 of fixed overhead costs. The bid request is for an additional 40 units; all
companies submitting bids are allowed to charge a maximum of 25% above full cost for
each order.
LCB's rate of learning on the 3-year engine contract is
A. 75.5%. B. 80.0%. C. 62.5%. D. 79.0%

14. Stock X has the following probability distribution of expected future returns.
Probability Expected Return
.10 -20%
.20 5%
.40 15%
.20 20%
.10 30%
The expected rate of return on Stock X would be
A. 10%. B. 16%. C. 19%. D. 12%.

15. Lake Corporation manufactures specialty components for the electronics industry in
a highly labor intensive environment. Arc 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 additional
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 additional components is
A. 360.0. B. 187.2. C. 307.2. D. 256.0

16. Sales of big-screen televisions have grown steadily during the past five years. A
dealer predicted that the demand for February would be 148 televisions. Actual demand
in February was 158 televisions. If the dealer is using exponential smoothing to forecast
demand and the smoothing constant is alpha = 0.3, the demand forecast for March,
using the exponential smoothing model, will be
A. 153 televisions. B. 148 televisions. C. 151 televisions. D. 158 televisions

17. Sunrise Corporation's actual sales for May were P22,000,000, a result P600,000
greater than projected. Actual sales for June totaled P22,500,000. Using exponential
smoothing with a smoothing factor (alpha) of 0.7, Sunrise's projected sales for July would
be
A. P21,856,000. B. P22,476,000. C. P22,296,000. D. P21,820,000.

18. Langley Corporation is developing a new product that will be manufactured in pairs.
The company recently produced the first two units of this product using 200 hours of
direct labor time. If Langley has a 90% learning curve and uses the cumulative
average-time learning model, the total direct labor time to manufacture the first four units
of this new product is
A. 324 hours. B. 380 hours. C. 400 hours. D. 360 hours

19. The Madison Company has decided to introduce a new product. The company
estimates that there is a 30 percent probability that the product will contribute P700,000
to profits, a 30 percent probability that it will contribute P200,000, and a 40 percent
probability that the contribution will be a negative P400,000. The expected contribution of
the new product is
A. P500,000. B. P166,667. C. P380,000. D. P110,000

20. A manufacturing company has the opportunity to submit a bid for 20 units of a
product on which it has already produced two 10-unit lots. The production manager
believes that the learning experience observed on the first two lots will continue for at
least the next two lots. The direct labor required on the first two lots was as follows.
5,000 direct labor hours for the first lot of 10 units
3,000 additional direct labor hours for the second lot of 10 units
The learning rate experienced by the company on the first two lots of this product using
the Cumulative Average-Time Learning Model is
A. 60.0%. B. 62.5%. C. 80.0%. D. 40.0%.

21. The average labor cost per unit for the first batch produced by a new process is P120.
The cumulative average labor cost after the second batch is P72 per product. Using a
batch size of 100 and assuming the learning curve continues, the total labor cost of four
batches will be
A. P17,280. B. P2,592. C. P10,368. D. P4,320.