THE UNIVERSITY OF DODOMA

COLLEGE OF BUSINESS STUDIES AND LAW

MS 211: OPERATION RESEARCH FOR BUSINESS
DECISIOS
LECTURE THREE: SAMPLE QUESTIONS

Question 1
Machange buys grapes to sell at his outlet at Msasani fruits
market. He purchases grapes in the morning of each day and
makes sure that he sells the entire supply by the end of the
day because Msasani people would not buy yesterday’s
supply. In the past 300 days, Machange has experienced the
following sales pattern of grapes at the outlet.

Quantities Number of days

Sold (kg) demanded
20 30
30 90
40 120
50 60
Total 300

Machange buys grapes at Tshs 250 per kg and sales them at

Tshs 500 per kg. In case demand is not met, he incurs a loss
of Tshs 150 per kg of grapes to cover loss of goodwill and
future sales.

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Required:
a) Generate the pay off table of profit.
b) Decide on the quantity that should be stocked every day
so as to maximize expected profit.
c) Determine the expected lost opportunity from the
optimal supply level if Machange decides to stock 20 kg
each day.
d) Determine the value of the perfect information.

Question 2
a) Outline the procedure required to undertake a decision
using Expected Opportunity Loss approach.
b) ABC Company trades in a perishable product. The
Marketing Department of ABC has produced the
following sales forecasts, covering the next three months.

Units 200 300 400 500

Demanded
Probability 0.10 0.40 0.30 0.20
The Company makes Tshs 9,000 for a unit of the product
sold. If that unit is not sold, the Company loses Tshs 4,000.
Also, if the Company cannot meet demand, it will lose Tshs
1,000 per unit for the demand not met, to cover loss of
good-will and future sales.

Required:
(i) Set up a pay off matrix for this problem.
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(ii) Use the EOL decision approach to decide on the number
of units that ABC Company should supply so as to cover
this three months period.

Question 3
Suppose a decision-maker, faced with four different
alternatives and four states of nature develops the following
pay off table (Tshs).

Decisio States of Nature

ns S1 S2 S3 S4
D1 14,00 9,000 10,00 5,000
0 0
D2 11,00 10,00 8,000 7,000
0 0
D3 9,000 10,00 10,00 11,00
0 0 0
D4 8,000 10,00 11,00 13,00
0 0 0

Suppose the decision-maker obtains information that enables

the following probability estimates:
P(S1) = 0.5; P(S2) = 0.2; P(S3) = 0.2; P(S4) = 0.1.

Required:
a) Determine the optimal decision under the EMV criterion.
b) Determine the value of perfect information (EVPI).

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Question 4
XYZ Company Ltd. is contemplating on four different
methods it can use to process red beans at its plant at
Morogoro. These beans are sold at Tshs 1,000/= per kg after
being processed. The possible markets for the processed
beans are Dar es Salaam, Mwanza, Dodoma and Arusha. The
variable costs of processing 200,000kg of the red beans using
the four methods and then transporting them to the potential
markets are provided in the table below:

Variable costs of Processing 200,000 kg of red beans (Tshs.

‘000’)
Decisio States of Nature
ns Dar Mwa Dodo Arush
nza ma a
Method 140, 90,00 100,0 50,00
1 000 0 00 0
Method 110, 100,0 80,00 75,00
2 000 00 0 0
Method 90,0 95,00 100,0 115,0
3 00 0 00 00
Method 80,0 100,0 110,0 125,0
4 00 00 00 00

Required:
a) Which method would you recommend to XYZ Company
Ltd. using Maximin approach?

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b) Which method would you recommend to XYZ Company
Ltd. using Maximax approach?
c) Suppose that you wished to use EMV decision approach
to reach the optimal decision, which method would you
have recommended?
d) In connection to part (c) above, suppose all the 200,000
kg of red beans are sold, what should be the expected
contribution?

Question 5
Solartronics is considering marketing a do it yourself solar
hot water heating unit. The board of directors must decide
whether or not to commit $1 million to develop a kit that
“even a child can assemble.” Based on results of the survey
reported by the head of marketing, they decided to pursue
further development. If the results of the development effort
are favourable (p = 0.80), they will market the product. They
must then decide on whether to market at a high level,
medium level or low level. If they market at a high level and
demand is high (p = 0.60), they will earn $8 million. If the
demand is low (p = 0.40), a loss of $1.5 will be sustained. If
they market at a medium level and demand is high, they will
earn $5 million. I demand is low they will earn $1 million. If
marketed at low level and demand is high, they will earn $1
million. However, if the demand is low, a loss of $0.5
million will be sustained.

Required:

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Conduct a decision tree analysis of this situation (Hint:
before drawing the decision tree, explain sequentially the
decision situations and the outcomes).

Question 7
Karibu Textile Mills at Mbagala is currently facing a
problem on its packaging machine at the plant. Regarding
the specific problem, there are 48 hours of manufacturing
time to go before a scheduled shutdown for repairs. One of
the machine’s major parts has developed visible defects,
which have not yet had any effect on production. However, it
may suddenly fail at anytime in the next 48 hours of
production operations and, therefore, force an emergency
shutdown.
Based on these conditions, the production foreman can take
one of the two alternatives. He can shutdown the plant now
and repair the machine on a planned basis, which will take
four hours since servicemen are available. Alternatively, he
can continue with production operations but run the risk of a
sudden breakdown, which will require eight hours due to the
need to call in the mechanics, make repairs and restart the
machine. In both cases, production time is evaluated to be
worth Tshs 100,000. Any lost time can be calculated by this
hourly rate.
Experience with this packaging machine indicates that there
are 8 chances in 10 in making it through the 48 hours of
normal operation without a breakdown. On the other hand,
there is a 0.99 probability of the machine holding up during
the 48 hours after a shutdown for repairs now.
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Required:
a) Draw a decision tree for this statistical decision problem.
b) Advise the foreman on the decision to take so as to
maximise expected returns to the plant on the optimal use
of machine time.