Name/Section: ________________________________ Mansci S43

Solve:
1. The Avenue Seven sells tapes of musical performances. The following data show sales for the past 12
months. The group’s manager wants an accurate method for forecasting future sales.

Month Sales Month Sales

1 293 7 381
2 283 8 431
3 322 9 424
4 355 10 433
5 346 11 470
6 379 12 481

a. Use exponential smoothing, with α = 0.3; what is the forecast for month 13?(Assume forecast for Month
1 is 293 units)
b. Use a three- month moving average forecast. What is the value of the MAD?
b. Use linear trend projection to provide a forecast. What is the value of the MSE?
c. Which forecasting method would you recommend to the manager? Why? (show and explain the basis of
your decision)

2. Mayfair Department Store in NY City maintains a successful catalog sales department in which a clerk takes
orders by telephone. If the clerk is occupied on one line, incoming phone calls to the catalog department
are answered automatically by a recording machine and asked to wait. As soon as the clerk is free, the
party that has waited the longest is transferred and answered first. Calls come in at a rate of about 12 per
hour. The clerk is capable of taking an order in an average of 4 minutes. Calls tend to follow a Poisson
distribution and service times tend to be exponential. The clerk is paid $10 per hour, but because of lost
goodwill and sales, Ashley's loses about $50 per hour of customer time spent waiting for the clerk to take
an order.

a) What is the average time that catalog customers must wait before their calls are transferred to the
order clerk?
b) What is the average number of callers waiting to place an order?
c) Dublhoug's is considering adding a second clerk to take calls. The store would pay that person the same
$10 per hour. Should it hire another clerk? Explain. (Show the quantitative basis of your decision)

3. Acron Distributors is a wholesale organization that supplies retail stores with lawn care and household
products. One building is used to store Neverfail lawn mowers. The building is 25 feet wide by 40 feet deep
by 8 feet high.

Mary Catherine, manager of the warehouse, estimates that about 60% of the warehouse can be used to
store the Neverfail lawn mowers. The remaining 40% is used for walkways and a small office. Each Neverfail
lawn mower comes in a box that is 5 feet by 4 feet by 2 feet high.

The annual demand for these lawn mowers is 12,000 units, and the ordering cost for Acron Distributors is
$30 per order. It is estimated that it costs Acron $2 per lawn mower per year for storage. Acron is thinking
about increasing the size of the warehouse. The company can only do this by making the warehouse
deeper. At the present time, the warehouse is 40 feet deep.

How many feet of depth should be added on to the warehouse to minimize the annual inventory costs? Is it
worthwhile for the company to even consider this addition? Why? Remember that only 60% of the total
area can be used to store Neverfail lawn mowers. Assume all EOQ conditions are met.
Name/Section: ________________________________ Mansci S43

4. The management of Brinkley Corporation is interested in using simulation to estimate the profit per unit for
a new product. Probability distributions for the purchase cost, the labor cost, and the transportation cost
are as follows:

Purchase Labor Cost Transportation

Probability Probability Probability
Cost ($) ($) Cost ($)
10 .25 20 .10 3 .75
11 .45 22 .25 5 .25
12 .30 24 .35
25 .30
Assume these are the only costs and that the selling price for the product will be $45 per unit.
a. What are the worst-case and best-case calculations for the profit per unit. What is the expected profit
scenario?
b. Set up intervals of random numbers (Vlookup tables) that can be used to randomly generate the three cost
components.
c. Management believes the project may not be profitable if the profit per unit is less than $5. Using Monte
Carlo simulation determine the probability that the profit would be less than $5 by doing a minimum of 20
trials.Based on the results of your simulation (assuming that the result of your 20 trials is a good estimate
of the system), what would be your recommendation to management?
(note: Generate different random numbers for each of the costs components in calculating the profit per
unit for each trial.)

5. A group of Doctors from the ASMPH program is considering the construction of a private clinic. If the
medical demand is high (i.e., there is a favorable market for the clinic), the physicians could realize a net
profit of Php 4,000,000. If the market is not favorable, they could lose Php 160,000. Of course, they don’t
have to proceed at all, in which case there is no cost. In the absence of any market data the best the
physicians can guess is that there is a 50-50 chance the clinic will be successful.

a) Construct a decision tree to help analyze this problem. What should the medical professionals do?

The physicians have been approached by a market research firm that offers to perform a study of the
market at a fee of Php 200,000. The market researchers claim that their experience enables them to use
Baye’s theorem to make the following statements of probability:

Probability of a favorable market given a favorable study = 0.82

Probability of an unfavorable market given a favorable study= 0.18
Probability of a favorable market given an unfavorable study = 0.11
Probability of an unfavorable market given an unfavorable study = 0.89
Probability of a favorable study = 0.55
Probability of an unfavorable study = 0.45

b) Develop a new decision tree for the medical professionals to reflect the options now open with the
market study
c) What should the Doctors strategy be? (Use the EMV approach to recommend a strategy.)
d) What is the expected value of sample information? How much might the physicians be willing to pay for
a market study?