MANAGEMENT ADVISORY SERVICES Quantitative Methods

Expected Value, Payoff Tables & Value of Perfect Information approach based on the most likely outcome?
i
. Gary’s Pipe and Steel Company expects sales next year to be C. What is the conditional profit (loss) per game of having
P800,000 if the economy is strong, P500,000 if the economy is 25,000 cups of brewed coffee available but only selling
steady, and P350,000 if the economy is weak. Gary believes 16,000 cups of coffee?
there is a 20 percent probability the economy will be strong, a 50
iii
percent probability of a steady economy, and a 30 percent . Liberty, Inc. has been operating the concession stands at the
probability of a weak economy. What is the expected level of university football stadium. The university has had successful
sales for next year? football teams for many years; as a result the stadium is always
full. The university is located in an area that suffers no rain
ii
. The Visitors Club sells brewed coffee at Araneta Gym's LBA's during the football season. From time to time, Liberty has found
season games. The frequency distribution of the demand for itself very short of hotdogs and at other times it has had many
cups of brewed coffee per game is presented below. left. A review of the records of sales of the past five seasons
Unit sales volume Probability revealed the following frequency of hot dogs sold:
10,000 .10 Total Games
20,000 .15 10,000 hot dogs 5 times
30,000 .25 20,000 hot dogs 10 times
40,000 .35 30,000 hot dogs 20 times
50,000 .15 40,000 hot dogs 15 times
The brewed coffee is sold for P1.00 a cup and the cost per cup 50 total
is P0.25. Any unsold brewed coffee is discarded because it will games
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
Exercises & Problems Page 1 of 12
 MANAGEMENT ADVISORY SERVICES Quantitative Methods

Hotdogs self for P5.00 and cost Liberty P3 each. Unsold hotdogs II. A-B-E-F: 25, 18, 18,14
are given to a local orphanage without charge. III. A-C-E-F: 25. 12, 18, 14
A. Construct a payoff table (conditional profits).
B. What are the expected payoff of stocking 30,000 hotdogs and Required:
the expected value of perfect information? A. Calculate the total time for each path, and identify the critical
path.
iv
. Gardenia Company makes corsages that it sells through B. Which of the path(s) in the network can be delayed? What
salespeople on the streets. Each sells for P2 and has variable is(are) the activity(ies) that can be delayed and how many
production costs of P0.80. The salespeople receive a P0.50 hours?
commission on each corsage they sell, and the company must C. How many slack days are there in Path III?
spend P0.05 to get rid of each unsold corsage. The corsages D. What is the maximum number of days that can be applied to
last for only one week and cannot be carried in inventory. crash the critical path?
The manager of the firm had estimated demand per week and
vi
associated probabilities as follows: . The contractor is 2 days behind of completion of one of its multi-
Demand Probability million projects. The daily penalty is P150,000 for any delay of
100,000 0.20 completion time. The company has an opportunity of meeting the
120,000 0.20 completion time if crashing is applied on the different activities.
140,000 0.30 The PERT, which is not shown, indicated that the critical path is
160,000 0.30 B-D-E-G-L. The following activities can be crashed at their
A. What is the optimal weekly production of the corsage? respective costs:
B. What is the value of perfect information? 1 day 2days
Activity A P135,000 P260,000
PERT-CPM Activity B 140,000 285,000
v
. The following are four series of activities with number of days to Activity C 125,000 240,000
complete the different activities. Activity D 145,000 295,000
I. A-B-D-F: 25, 18, 25, 14 Activity E 155,000 280,000
Exercises & Problems Page 2 of 12
 MANAGEMENT ADVISORY SERVICES Quantitative Methods

The manager of the firm wants to know the expected total cost of
Required: making the first 16 units, assuming a learning effect on labor of
1. Which of the foregoing activity(ies) would be crashed? How 90 percent.
much is the net benefit if the activity(ies) are crashed? A. Prepare schedules showing the cumulative average time for
2. Assuming that the daily penalty is P140,000, which activities) all doubling points up through 16 units for a 90 percent
will be crashed? learning rate.
B. Determine the total costs for the first 16 units using a learning
Learning Curves curve of 90 percent.
vii
. Particular manufacturing job is subjected to an estimated 80%
ix
learning curve. The first unit required 100 labor hours to . Learnwright Company currently buys at component for one of its
complete. products at P220 per unit. Leamwright needs 32,000 units of the
component in the coming year. The product will be redesigned,
REQUIRED: so that the component will not be needed beyond the coming
A. What is the cumulative average time per unit after 8 units are year. The production manager believes that Leamwright could
completed? make the component with the following costs for the first batch of
B. What is the total time required to produce 2 units?; 4 units? 1,000 units.
C. How many hours are required to produce the second unit? Materials P130,000
Direct labor and variable overhead 150,000
viii
. Win Company manufactures large grape presses. The firm Total variable cost P280,000
generally experiences a learning effect on new models, at least Making the component involves no incremental fixed costs
through the first 64 or so units. Data on a new press appear because Learnwright could use existing equipment. The
below: production manager expects an 85% learning rate on direct labor
Labor time for first unit 500 hour and variable overhead. Consider a batch to be 1,000 units.
Labor rate P500 per hour A. Determine whether Leamwright should make or buy the
Variable overhead P10 per labor hour component.
Materials P5,000 per press B. Assuming that the demand is a maximum of 16,000 units.
Exercises & Problems Page 3 of 12
 MANAGEMENT ADVISORY SERVICES
Should Leamwright make or buy the component?
Inventory Model
x
. I.M. Boring Company has projected sales of P72,000 pipes this
year, an ordering cost of P6 per order, and carrying costs of
P2.40 per pipe.
A. What is the economic ordering quantity?
B. How many orders will be placed during the year?
C. What will the average inventory be?
xi
. U.R. Terrific Company is trying to improve its inventory control
system and has installed an on-line computer at its retail stores.
It anticipates sales of 126,000 units per year, an ordering cost of
P4 per order, and carrying costs of P1.08 per unit.
A. What is the economic ordering quantity?
B. What will be the average inventory be?
C. What is the total cost of inventory expected to be?
D. Assume a safety of stock of 30 units of inventory will be
required as safety stock. What will be the new average
inventory be? What will the new total carrying cost be?
xii
. Bayan Company uses 4,500 units of Part S-10 each year. The
cost of placing one order of Part S-10 is estimated to be about
P20. Other costs associated with carrying Part S-10 in inventory
are:
Annual Cost per
Exercises & Problems
Quantitative Methods
Part
Insurance P0.20
Property taxes 0.09
Interest on funds invested 0.15
Other 0.06
Total cost P0.50
A. Compute the economic order quantity (EOQ) for Part S-10.
B. Assume that the company has been able to reduce the cost
of placing an order to only P8. Also assume that when the
waste and inefficiency caused by inventories is considered,
the cost to carry a part in inventory jumps to P1.25 per unit.
Under these conditions, what would be the EOQ?
xiii
. Flux Company uses 9,000 units of Part K each year. To get
better control over its inventories, the company is anxious to
determine the economic order quantity for this part.
A. The company has determined that the cost to place an order
for the part is P30, and it has determined that the cost to carry
one part in inventory for one year is P1.50. Compute the EOQ
for the part.
B. Assume that the cost to place an order increases from P30 to
P40 per order. What will be the effect on the EOQ? Show
computations.
C. Assume that the cost to carry a part in inventory increases
from P1.50 to P2.50 per part. (Ordering costs remain
unchanged at P30 per order.) What will be the effect on the
Page 4 of 12
 MANAGEMENT ADVISORY SERVICES Quantitative Methods

EOQ? Show computations. A. Assume that no safety stock is to be carried. What is the
reorder point?
xiv
. A company annually consumes 50,000 units of Part X. The B. Assume that a full safety stock is to be carried.
carrying cost of this part is P3.00 per year and the ordering costs 1. What would be the size of the safety stock in units?
are P200. The company uses an order quantity of 5,000 units. 2. What would be the reorder point?
xvi
Based on the information, compute: . Ibon Company uses a small casting in one of its finished
A. Average number of inventory units. products. The castings are purchased from a foundry located in
B. Number of orders per year. another Asian country. In total, Ibon Company purchases 54,000
C. Using 360 days a year, the frequency of making an order. castings per year at a cost of P8 per casting.
D. The annual inventory costs, broken down into ordering and The castings are used evenly throughout the year in the
carrying costs. production process on a 360-day-per-year basis. The company
E. The economic order quantity. Compute the amount of annual estimates that it costs P90 to place a single purchase order and
inventory costs if the company uses the economic order about P3 to carry one casting in inventory for a year. The high
quantity. carrying costs result from the need to keep the castings in
carefully controlled temperature and humidity conditions, and
xv
. Delma Company distributes medical supplies throughout the from the high cot of insurance.
country. Selected information relating to a quick-developing X- Delivery from the foundry generally takes 6 days, but it can take
ray film carried by the company is given below: as much as 10 days. The days of delivery time and the
Economic order quantity (EOQ) 700 units, percentage of their occurrence are shown in the following
Maximum weekly usage 60 units tabulation:
Lead time 4 weeks Delivery Time (days) Percentage of Occurrence
Average weekly usage 50 units 6 75
Management is trying to determine the proper safety stock to 7 10
carry on this inventory item and to determine the proper reorder 8 5
point. 9 5
Exercises & Problems Page 5 of 12
MANAGEMENT ADVISORY SERVICES Quantitative Methods

10 5 To minimize delays in loading and unloading trucks, an adequate

100
A. Compute the economic order quantity (EOQ).
B. Assume that the company is willing to assume a 15% risk of
being out of stock. What would be the safety stock? The
reorder point?
C. Assume that the company is willing to assume only a 5% risk
of being out of stock. What would be the safety stock? The
reorder point?
D. Assume a 5% stock-out risk as stated in (3) above. What
would be the total cost of ordering and carrying inventory for
one year?
E. Refer to the original data. Assume that using process
reengineering the company reduces its cost of placing a
purchase order to only P6. Also, the company estimates that
when the waste and inefficiency caused by inventories are
considered, the true cost of carrying a unit in stock is P7.20
per year.
Required:
A. Compute the new EOQ.
B. How frequently would the company be placing an order, as
compared to the old purchasing policy?
Multiple Choice
3. A company is designing a new regional distribution warehouse.
Exercises & Problems
number of loading docks must be built. The most relevant
technique to assist in determining the proper number of docks is
A. linear programming C. queuing theory
B. PERT/CPM analysis D. correlation and regression
analysis
14. Clay Co. operates three shipping terminals, referred to as X,
Y, and Z. Of the total cargo shipped, terminals X, Y, and Z
handle approximately 60%, 30%, and 10%, respectively, with
error rates of 3%, 4%, and 6%, respectively. Clay's internal
auditor randomly selects one shipping document, ascertaining
that this document contains an error. The probability that the
error occurred in terminal X is
A. 60% C. 23%
B. 50% D. 3%
4. Bye Co. is considering the sale of banners at the state university
football championship game. Bye could purchase these banners
for P.60 each. Unsold banners would be unreturnable 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’s prediction proves to be incorrect and only 300
banners were sold, the cost of this prediction error would be
A. P120 C. P170
B. P130 D. P280
Page 6 of 12
 MANAGEMENT ADVISORY SERVICES Quantitative Methods

50 10%
5. A wine maker must decide whether to harvest grapes now or in 55 5%
four weeks. Harvesting now will yield 100,000 bottles of wine The number of units of safety stock that will result in the lowest
netting P2 per bottle. If the wine maker waits and the weather cost is
turns cold (probability 0.2), the yield will be cut in half but net P3 A. 20 C. 50
per bottle. If the weather does not turn cold, the yield will depend B. 40 D. 55
on rain. With rain (probability 0.5), a full yield netting P4 per
bottle will result. Without rain (probability 0.5), there will still be a 9. The following data refer to various annual costs relating to the
full 100,000-bottle yield, but the net will be only P3 per bottle. inventory of a single-product company:
The optimal expected value is Unit Transportation-in on purchases P0.20
A. P200,000 C. P350,000 Storage per unit 0.12
B. P310,000 D. P400,000 Insurance per unit 0.10
Annual interest foregone from alternate investment of funds
8. The Polly Company wishes to determine the amount of safety P800
stock that it should maintain for Product D that will result in the Annual number of units required 10,000
lowest cost. The following information is available: What is the annual interest cost per unit?
Stockout cost P80 per occurrence A. P0.22 C. P0.42
Carrying cost of safety stock P2 per unit B. P0.30 D. P0.50
Number of purchase orders 5 per year
The options available to Polly are as follows: 10. Happy Holidays produces three products: X, Y, and Z. Two
Units of safety stock Probability of Running out of safety machines are used to produce the products. The contribution
stock margin, sales demand, and time on each machine (in minutes) is
10 50% as follows:
20 40% Demand CM Time on Time on
30 30% M1 M2
40 20% X 100 P10 5 10
Exercises & Problems Page 7 of 12
MANAGEMENT ADVISORY SERVICES Quantitative Methods

Y 80 18 10 5 13. Havenot has estimated the first batch of product will take 40
Z 100 25 15 5 hours to complete. A 90% learning curve is expected. If labor is
There are 2,400 minutes available on each machine during the paid P15 per hour, the target labor cost for four batches of
week. How many units should be produced and sold to maximize product is
the weekly contribution? A. P600 C. P1,944
A. B. C. D. B. P2,160 D. P2,400
X 100 20 100 100
Y 80 80 40 80 14. Hanip Co. used 30 hour to produce the first batch of units.
Z 100 100 100 73 The second batch took an additional 18 hours. How many total
hours will the first four batches require?
11. Ridgefield, Inc. is considering a three-phase research project. A. 76.8 hours C. 120.0 hours
The time estimates for completion of phase 1 of the project are B. 96.2 hours D. 48.0 hours
Optimistic 4 months
Most likely 8 months 15. Moss Company recently completed and sold an order of 50
Pessimistic 18 months units that had the following costs:
Using the program evaluation and review technique (PERT), the Direct materials P 1,500
expected time for completion of phase 1 should be Direct labor (1,000 hours @ P8.50) 8,500
A. 8 months C. 10 months Variable overhead (1,000 hours @ P4.00)* 4,000
B. 9 months D. 18 months Fixed overhead** 1,400
Total P15,400
12. Wind Company expects an 85% learning curve. The first * Applied on the basis of direct labor hours
batch of a new product required 500 hours. The first four batches **Applied at the rate of 10 percent of variable cost
should take an average of The company has now been requested to prepare a bid for 150
A. 361.25 hours C. 500.0 hours units of the same product.
B. 425.0 hours D. 322.4 hours If an 80 percent learning curve is applicable, Moss Company's
total cost on this order would be estimated at
Exercises & Problems Page 8 of 12
MANAGEMENT ADVISORY SERVICES Quantitative Methods

A. P26,400 C. P37,950
B. P31790 D. P37,500

Solution

Exercises & Problems Page 9 of 12

i
.515,000 (800,000 X 20% + 500,000 X 50% + 350,000 X 30%)

2(4, 500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90

0.50 1.25 1.50 1.50 2.50  3 3 
2(54,000)6
 7.20 
ii
.(A) 33,000 10,000 x 0.10 + 20,000 x 0.15 + 30,000 x 025 + 40,000 x 0.35 + 50,000 x 0.15
(B) 40,000
(C) 9,750 (16,000 x 1) – (25,000 x 0.25)

2(4, 500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90

0.50 1.25 1.50 1.50 2.50  3 3 
2(54,000)6
 7.20 
iii
.(A)
Probability 10% 20% 40% 30% Exp. Value
Sup/Dem 10,000 20,000 30,000 40,000
10,000 20,000 20,000 20,000 20,000 20,000
20,000 (10,000) 40,000 40,000 40,000 35,000
30,000 (40,000) 10,000 60,000 60,000 40,000
40,000 (70,000) (20,000) 30,000 80,000 25,000
(B) 58,000 Value at certainty
40,000 Highest expected value
18,000 Value of perfect information.

2(4, 500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90

0.50 1.25 1.50 1.50 2.50  3 3 
2(54,000)6
 7.20 
iv
.Payoff Table
Probability 0.20 0.20 0.30 0.30 Expected
Sup/Dem 100,000 120,000 140,000 160,000 Value
100,000 70,000 70,000 70,000 70,000 70,000
120,000 53,000 84,000 84,000 84,000 77,800
140,000 36,000 67,000 98,000 98,000 79,400
160,000 19,000 50,000 81,000 112,000 71,700
(B) 14,400 Value of perfect information = (93,800 – 79,400)

2(4, 500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90

0.50 1.25 1.50 1.50 2.50  3 3 
2(54,000)6
 7.20 
v
.(A) A-B-D-F = 82, A-B-E-F = 75, A-C-E-F = 69, Critical path A-B-D-F
(B) Paths E can be delayed for a max. of 7 days and C & E for a max. of 13 days
(C) Slack days = 82 – 69 = 13.
(D) maximum crash days = 7 (82 – 75)

2(4, 500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90

0.50 1.25 1.50 1.50 2.50  3 3 
2(54,000)6
 7.20 
vi
.(1) E – 2 days (280,000)
(2) B – 1 day (140,000), or E for 2 days = P280,000

2(4, 500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90

0.50 1.25 1.50 1.50 2.50  3 3 
2(54,000)6
 7.20 
vii
.
1 2 4 8 16
Cum. ave. time 100 80 64 51.2 40.96
 2(4, 500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90
0.50 1.25 1.50 1.50 2.50  3 3 
2(54,000)6
 7.20 
viii
.(A) 5,248.8 (500 X 0.9 X 0.9 X 0.9 X 0.9 = 328.05 X 16)
(B) 2,756,888 (5,248.8 x 510) + (5,000 x 16)

2(4, 500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90

0.50 1.25 1.50 1.50 2.50  3 3 
2(54,000)6
 7.20 
ix
.(A) Make
DL & VOH 1,252,815 (150,000 x 85% x 85% x 85% x 85% = 78,300.94 x 16)
Materials 2,080,000 (130,000 x 16)
Total 3,332,815
Unit Cost 208.30

(B) Make
DL & VOH 2,129,785 (150,000x 85% x 85% x 85% x 85% x 85%= 78,300.94 x 32)
Materials 4,160,000 (130,000 x 32)
Total 6,289,785
Unit cost 196,56

2(4, 500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90

0.50 1.25 1.50 1.50 2.50  3 3 
2(54,000)6
 7.20 
x
.(A) 600
(B) 120
(C) 300

2(4, 500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90

0.50 1.25 1.50 1.50 2.50  3 3 
2(54,000)6
 7.20 
xi
.(A) 1,000
(B) 500
(C) 504
(D) 530
534.24 (530 X 1.008)

2(4, 500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90

0.50 1.25 1.50 1.50 2.50  3 3 
2(54,000)6
 7.20 
2(4,500)20
xii
.(A) 600 0.50
2(4,500)(8)
(B) 240 1.25

2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200 2(54,000)90 2(54,000)6

1.50 1.50 2.50  3 3  7.20 
2(4,500)20 2(4,500)(8) 2(9,000)(30)
xiii 0.50 1.25 .(A) 600 1.50
2(9,000)(40)
(B) 692.83 1.50
 2(9,000)(30)
(C) 464.76 2.50

2(50,000)200 2(54,000)90 2(54,000)6

 3 3  7.20 
2(4,500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30)
xiv 0.50 1.25 1.50 1.50 2.50 .(A) 2,500 (5,000  2)
(B) 10 (50,000  5,000)
(C) Every 36 days (360  10)
(D) 9,500 Ordering cost = 2,000 (200 x 10), Carrying Cost = 7,500 (2,500 x 3)
2(50,000)200
(E) EOQ = 2,582 3
7,746 Ordering cost = 3,873 (19.36 x 200), Carrying Cost = (3,873) 1291 x 3

2(54,000)90 2(54,000)6
3  7.20 
2(4,500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200
xv 0.50 1.25 1.50 1.50 2.50  3 .(A) 200
(50 X 4)
(B1) 40 (10 X 4)
(B2) 240 (60 X 4) or (50 x 4) + 40

2(54,000)90 2(54,000)6
3  7.20 
2(4,500)20 2(4,500)(8) 2(9,000)(30) 2(9,000)(40) 2(9,000)(30) 2(50,000)200
xvi 0.50 1.25 1.50 1.50 2.50  3 .(A)
2(54,000)90
1,800 3
(B) 150 (54,000  360) x 1
1,050 (54,000  360) x 7
(C) 450 (54,000  360) x 3
1,350 (54,000  360) x 9
(D) 2,700 Ordering cost (54,000  1,800) x 90
4,050 Carrying cost [(1,800  2) + 450] x 3
6,750 Total Cost of ordering& carrying
2(54,000)6
(E1) 300 7.20
(E2) every 2 days (54,000  300) = 180 times a year.