SRI BALAJI UNIVERSITY PUNE (SBUP)

BIMM

SEMESTER-I-BATCH -2020-22

QUANTITATIVE TECHNIQUES
ASSIGNMENT – 1(UNIT-1)

(a)  Name of Student: - Manish Chauhan

(b)  Reg. No: - 09-1128
(c)  Specialization: - Marketing
(d)  Batch: - 2020-2022
(e)  Institute: - Balaji Institute of Modern Management
(f)  Semester: - Semester 2
(g)  Subject Name: - Quantitative Techniques
(h)  Assignment No: - 1
(i)  Submission Date: -03/03/2021
(j)  Total no. of pages written: - 08
Q.1 - A manufacturer manufactures a product, of which the principal ingredient is a
chemical X. At the moment, the manufacturer spends Rs. 1,000 per year on supply of X,
but there is a possibility that the price may soon increase to four times its present figure
because of a worldwide shortage of the chemical. There is another chemical Y, which
the manufacturer could use in conjunction with a third chemical Z, in order to give the
same effect as chemical X. Chemicals Y and Z would together cost the manufacturer Rs.
3,000 per year, but their prices are unlikely to rise. What action should the
manufacturer take? Apply the maximin and minimax criteria for decision-making and
give two sets of solutions. If the coefficient of optimism is 0.4, then find the course of
action that minimizes the cost.

Ans. –

STATES OF COURSE OF ACTION

NATURE
(S1) Use Chemical X (S2) Use Chemical Y&Z
(E1) Price of X doesn’t -1000 -3000
increase
(E2) Price of X increases -4000 -3000
Minimum in alternatives -4000 -3000
(column minimum)

From the above table, we can apply the Maximin and Minimax criteria.

1) Maximin – So, the minimum value in the columns is -4000 & -3000 for chemical X
and Chemical Y & Z respectively.
And in these two minimum values, the maximum value is -3000 which is
correspondent to chemical Y&Z.
Hence, the manufacturer should adopt strategy S2.

STATES OF COURSE OF ACTION

NATURE
(S1) Use Chemical X (S2) Use Chemical Y&Z
(E1) Price of X doesn’t -1000 – (-1000) = 0 -1000 – (-3000) = 2000
increase
(E2) Price of X increases -3000 – (-4000) = 1000 -3000 – (-3000) = 0
Maximum in alternatives 1000 2000
(column maximum)

2) Minimax Criterion (opportunity loss) - So, the maximum value in the columns are
1000 & 2000 for chemical X and Chemical Y & Z respectively.
And in these two maximum values, the minimum value is 1000 which is
correspondent to chemical X.
Hence, the manufacturer should adopt strategy S1.
 Hurwicz Criterion-

The Coefficient of optimism(α) is 0.4 so the coefficient if pessimism is 1 – 0.4 = 0.6

Therefore, according to the criteria, select the course of action that optimizes the payoff
value.

H = α * (Minimum Payoff) + (1- α) * (Maximum Payoff)

Chemical X (S1) = 0.4 * 1000 + 0.6 * 4000 = 2800

Chemical Y&Z (S2) = 0.4 * 3000 + 0.6 * 3000 = 3000

Course of action S1 has the least cost (i.e., maximum profit), so the manufacturer should
adopt S1 strategy.

Q.2 - The manager of a flower shop promises its customers delivery within four hours
on all flower orders. All flowers are purchased on the previous day and delivered to
Parker by 8.00 am the next morning. The daily demand for roses is as follows.

Dozens of roses: 70 80 90 100

Probability: 0.1 0.2 0.4 0.3

The manager purchases roses for Rs. 10 per dozen and sells them for Rs.30. All unsold
roses are donated to a local hospital. How many dozens of roses should Parker order
each evening to maximize its profits? What is the optimum expected profit?

Ans. – Since the daily demand is given i.e., 70, 80, 90, 100

Hence, the quantity purchased per day is considered as “course of action” and the daily
demand is considered as “state of nature”.

CP = Rs. 10 per dozen

SP = Rs. 30 per dozen
Conditional Profit Table (Payoff Table)

DEMAND Probability QUANTITY (Q) TO BE Expected Payoff

(D) PURCHASED (conditional
Profit)
(A) (B) (C) (D)
(1) 70 80 90 100 70 80 90 100
(1) * (A) (1) * (B) (1) * (C) (1) * (D)
70 0.1 1400 1300 1200 1100 140 130 120 110
80 0.2 1400 1600 1500 1400 280 320 300 280
90 0.4 1400 1600 1800 1700 560 640 720 680
100 0.3 1400 1600 1800 2000 420 480 540 600
Expected Profit 1400 1570 1680 1670
When D >= Q, then P = (SP-CP) *Q = (30 – 10) * Q = 20Q
When D < Q, then P = 30D – 10Q

Since the highest expected profit of Rs. 1680 corresponds to the course of action 90, the
flower shop should purchase 90 dozen roses every day.

Q.3 A TV dealer finds that the cost of holding a TV in stock for a week is Rs. 50.
Customers who cannot obtain new TV sets immediately tend to go to other dealers and
he estimates that for every customer who cannot get immediate delivery he loses an
average of Rs. 200. For one particular model of TV the probabilities of demand of 0, 1,
2, 3, 4 and 5 TV sets in a week are 0.05, 0.10, 0.20, 0.30, 0.20 and 0.15, respectively. (a)
How many televisions per week should the dealer order? Assume that there is no time
lag between ordering and delivery. (b) Compute EVPI. (c) The dealer is thinking of
spending on a small market survey to obtain additional information regarding the
demand levels. How much should he be willing to spend on such a survey.

Ans. Cost of holding a TV in stock = Rs. 50 and Cost of not satisfying the customer demand
is Rs. 200.

D = Demand within a week and Q = Quantity of TV to be ordered.

Cost function,
When Q  D, 50Q
When Q < D, 50Q + 200(D-Q) = 50Q + 200D – 200Q = 200D – 150Q

(i)

State of Nature (demand) Probability Cost (Rs) Due to Course of Action (purchase)
(D) (Q)

(1) (2) (3) (4) (5) (6) (7)

0 1 2 3 4 5
0 0.05 0 50 100 150 200 250
1 0.10 200 50 100 150 200 250
2 0.20 400 250 100 150 200 250
3 0.30 600 450 300 150 200 250
4 0.20 800 650 500 350 200 250
5 0.15 1000 850 700 550 400 250

Now, getting the expected cost by multiplying the corresponding the upper row values to the
probability of that corresponding row.
State of Nature Probabilit Expected Cost (Rs) Due to Course of Action
(demand) y

(1) (1) x (2) (1) x (3) (1) x (4) (1) x (5) (1) x (6) (1) x (7)
0 1 2 3 4 5
0 0.05 0 2.5 5 7.5 10 12.5
1 0.10 20 5 10 15 20 25
2 0.20 80 50 20 30 40 50
3 0.30 180 135 90 45 60 75
4 0.20 160 130 100 70 40 50
5 0.15 150 127.5 105 82.5 60 37.5
Expected Cost 590 450 330 250 230 250

The dealer should order 4 TVs per week as the expected cost is Rs. 230

(ii)

State of Nature (demand) Probability Cost (Rs) Due to Course of Action (purchase)
(D) (Q)

(1) (2) (3) (4) (5) (6) (7)

0 1 2 3 4 5
0 0.05 0 50 100 150 200 250
1 0.10 200 50 100 150 200 250
2 0.20 400 250 100 150 200 250
3 0.30 600 450 300 150 200 250
4 0.20 800 650 500 350 200 250
5 0.15 1000 850 700 550 400 250

ECPI = Probability * Minimum value in the row

Minimum values = 0, 50, 100, 150, 200, 250

ECPI=(0∗0.05)+(50∗0.10)+(100∗0.20)+(150∗0.30)+(200∗0.20)+(250∗0.15) ¿ 147.5

EVPI = EC – ECPI
= 230 – 147.5
= 82.5

(iii) The dealer should not spend more than Rs. 82.5 for the market survey.
Q.4 A large steel manufacturing company has three options with regard to production:
(i) produce commercially (ii) build pilot plant (iii) stop producing steel. The
management has estimated that their pilot plant, if built, has 0.8 chance of high yield
and 0.2 chance of low yield. If the pilot plant does show a height yield, management
assigns a probability of 0.75 that the commercial plant will also have a high yield. If the
pilot plant shows a low yield, there is only a 0.1 chance that the commercial plant will
show a high yield. Finally, management’s best assessment of the yield on a commercial-
size plant without building a pilot plant first has a 0.6 chance of high yield. A pilot plant
will cost Rs.3,00,000. The profits earned under high and low yield conditions are
Rs.1,20,00,000 and – Rs.12,00,000 respectively. Find the optimum decision for the
company.

Ans.

NODE ALTERNATIVE EMV DECISION

 1 STOP =0
Commercial
COMMERCIAL = 1,20,00,000 * 0.75 + (-12,00,000 * Plant
PLANT 0.25)
= 87,00,000

2
STOP =0
Commercial
COMMERCIAL = 1,20,00,000 * 0.10 + (-12,00,000 * Plant
PLANT 0.90)
= 1,20,000

3
STOP =0

PRODUCE = 1,20,00,000 * 0.60 + (-12,00,000 *

COMMERCIALLY 0.40) Produce
= 67,20,000 Commercially
BUILD PILOT
PLANT = 87,00,000 * 0.80 + (1,20,000 * 0.20)
– 3,00,000
= 66,36,000

Q.5 A company has developed a new product in its R&D laboratory. The company has
the option of setting up production facility to market this product straight away. If the
product is successful, then over the three years expected product life, the returns will be
Rs. 120 lakhs with a probability of 0.70. If the market does not respond favourable, then
the returns will be only Rs. 15 lakhs with probability of 0.30. The company is
considering whether it should test market this product building a small pilot plant. The
chance that the test market will yield favourable response is 0.80. If the test market
gives favourable response, then the chance of successful total market improves to 0.85.
If the test market gives poor response, then the chance of success in the total market is
only 0.30. As before, the returns from a successful market will be Rs. 120 lakhs and
from an unsuccessful market only Rs. 15 lakhs. The installation cost to produce for the
total market is Rs. 40 lakhs and the cost of the test marketing pilot plant is Rs. 5 lakhs.
Using decision-tree analysis, draw a decision-tree diagram, carry out necessary analysis
to determine the optimal decisions.

Ans.
NODE ALTERNATIVE EMV DECISION

1 DO NOT SETUP =0
Setup Facility
SETUP FACILITY = 120 * 0.85 + 15 * 0.15 - 40
= 64.25

2 DO NOT SETUP =0
Setup Facility
SETUP FACILITY = 120 * 0.30 + 15 * 0.70 - 40
= 6.50

SETUP FACILITY = 120 * 0.70 + 15 * 0.30 – 40

3 = 48.5

TEST MARKET Setup Facility

= 64.25 * 0.80 + 6.50 * 0.20 – 5
= 47.7