ASSIGNMENT – 1

Chapter - 2 Probability Concepts and Applications

WTVX Case Study
Q1. What are the chances of getting 15 days of rain during the next 30 days?

Ans. The chances of getting 15 days of rain during the next 30 days can be calculated by using the binomial
theorem. There are only two possible outcomes (rain or sun) with given probabilities 0.7 and 0.3,
respectively. The formula used is:
Probability of r successes = nCr*pr*q(n-r)
Where, n = the number of trials (the number of days = 30),

r = the number of successes (number of rainy days = 15),

p = probability of success (probability of rain = 0.7), and

q = probability of failure (probability of sun = 0.3).

The probability of getting exactly 15 days of rain in the next 30 days = 30C15*(0.7)15*(0.3)15 = 0.0106 = 1.06%

Q2. What do you think about Joe’s assumptions concerning the weather for the next 30 days?

Ans. Joe’s assumptions concerning the weather for the next 30 days state that what happens on one day
is not in any way dependent on what happened the day before; what this says, for example, is that if it
was dry day yesterday, it will not affect what happens today. But there are perhaps certain conditional
probabilities associated with the weather (for example, given that it rained yesterday, the probability of
rain today is 80% as opposed to 70%). Not being familiar with the field of meteorology, we cannot say
precisely what these are. However, our contention is that these probabilities do exist and that Joe’s
assumptions are fallacious.

Chapter - 3 Decision Analysis

Starting Right Corporation Case Study
Q1. Sue Pansky, a retired elementary school teacher, is considering investing in Starting Right. She is very
conservative and is a risk avoider. What do you recommend?

Ans. This is a decision-making-under-uncertainty case. There are two events: a favorable market (event
1) and an unfavorable market (event 2). There are four alternatives, which include do nothing (alternative
1), invest in corporate bonds (alternative 2), invest in preferred stock (alternative 3), and invest in common
stock (alternative 4). The decision table is presented below. Note that for alternative 2, the return in a
good market is $30,000 (1+0.13)5 = $55,273. The return in a good market is $120,000 (4*$30,000) for
alternative 3, and $240,000 (8*$30,000) for alternative 4.

Payoff Table:

Alternative Event 1 Event 2 Laplace Minimum Maximum Hurwicz

Average Value
Value
Alternative 0 0 0 0 0 0
1
Alternative 55,273 -10,000 22,636.5 -10,000 55,273 -2,819.97
2
Alternative 120,000 -15,000 152,500 -15,000 120,000 -150
3
Alternative 240,000 -30,000 105,000 -30,000 240,000 -300
4

Regret Table:

Alternative Event 1 Event 2 Maximum Regret

Alternative 1 240,000 0 240,000
Alternative 2 184,727 10,000 184,727
Alternative 3 120,000 15,000 120,000
Alternative 4 0 30,000 30,000

Sue Pansky is a risk avoider and should use the maximin decision approach. She should do nothing and
not make an investment in Starting Right Corporation.

Q2. Ray Cahn, who is currently a commodities broker, is also considering an investment, although he
believes that there is only an 11% chance of success. What do you recommend?

Ans. Ray Cahn should use a coefficient of realism of 0.11. The best decision is to do nothing.

Q3. Lila Battle has decided to invest in Starting Right. While she believes that Julia has a good chance of
being successful, Lila is a risk avoider and very conservative. What is your advice to Lila?

Ans. Lila Battle should eliminate alternative 1 of doing nothing and apply the maximin criterion. The result
is to invest in the corporate bonds.

Q4. George Yates believes that there is an equally likely chance for success. What is your
recommendation?
Ans. George Yates should use the equally likely decision criterion. The best decision for George is to invest
in common stock.

Q5. Peter Metarko is extremely optimistic about the market for the new baby food. What is your advice
for Pete?

Ans. Peter Metarko is a risk seeker. He should invest in common stock.

Q6. Julia Day has been told that developing the legal documents for each fundraising alternative is
expensive. Julia would like to offer alternatives for both risk-averse and risk-seeking investors. Can Julia
delete one of the financial alternatives and still offer investment choices for risk seekers and risk avoiders?

Ans. Julia Day can eliminate the preferred stock alternative and still offer alternatives to risk seekers
(common stock) and risk avoiders (doing nothing or investing in corporate bonds).

Blake Electronics Case Study

Q1. Does Steve need additional information from Iverstine and Walker?

Ans.

Probabilities

Prior Probabilities
P (Successful venture) 0.60
P (Unsuccessful venture) 0.40

Probabilities Information from I&W

P (Fav survey | Success) 0.90
P (Unfav survey | Success) 0.10
P (Fav survey | Failure) 0.20
P (Unfav survey | Failure) 0.80

Probabilities from MAI

P (Successful venture | Fav survey) 0.70
P (Unsuccessful venture | Fav survey) 0.30
P (Successful venture | Unfav survey) 0.40
P (Unsuccessful venture | Unfav survey) 0.60
P (Favorable survey) 0.50
P (Unfavorable survey) 0.50
 Posterior probabilities for I&W Fav survey
Outcome Conditional Prob Prior Prob Joint Prob Posterior Prob
P (Fav Survey |
Outcome)
Success 0.90 0.60 0.54 0.87
Failure 0.20 0.40 0.08 0.13
P (Fav Survey) 0.62

Posterior probabilities for I&W Pilot fails

Outcome Conditional Prob Prior Prob Joint Prob Posterior Prob
P (Unfav Survey |
Outcome)
Success 0.10 0.60 0.06 0.16
Failure 0.80 0.40 0.32 0.84
P (Unfav Survey) 0.38

No additional information is needed from Iverstine and Waker. They have provided most suitable
figures.

Q2. What would you recommend?

Ans. Depending on the Analysis, results are, the returns compared to survey is less. So, we recommend to
go without survey and introduce the product which will yield a maximum profit.
 0.7
Successful Venture
$1,400,000
Launch Product
4

0.5
Favourable survey ($600,000)
Unsuccessful Venture
0.3
EMV= $800,000
Do not launch product
($100,000)

Hire Mia
1 0.4
Successful Venture
EMV= $500,000 $1,400,000
Launch Product
5

EMV= $200,000
0.5 ($600,000)
Unfavourable survey Unsuccessful Venture
0.6
EMV= $200,000
Do not launch product
($100,000)
EMV = ($100,000)

Survey
EMV= $500,000 0.87
Successful Venture
$1,200,000
Launch Product EVM= $940,000
6
EVM= $940,000
0.62
Favourable survey Unsuccessful Venture ($800,000)
0.13
EVM= $940,000

Do not launch product

($300,000)
EMV = ($300000)
Hire I&W
2 0.16
EVM= $468,800 Successful Venture
$1,200,000
Launch Product
7
EVM= ($480,000)
0.38
Unfavourable survey ($800,000)
Unsuccessful Venture
EMV= $700,000 EMV = ($300,000) 0.84

Do not launch product

($300,000)
EMV = ($300,000)

Do not launch product EMV= $0

$0
No survey
0.6
Successful Venture
EMV= $700,000 $1,500,000
Launch Product
3
EMV= $700,000 0.4
Unsuccessful Venture
($500,000)

Do nothing $0

EMV= $0
Chapter - 6 Inventory Control Models
Martin-Pullin Bicycle Corporation Case Study
Q1. Develop an inventory plan to help MPBC.

Ans. Inventory plan for Martin-Pullin Bicycle Corporation. The forecasted demand is summarized in the
following table:

Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Total
8 15 31 59 97 60 39 24 16 15 28 47 439

Average demand per month = 439/12 = 36.5833 bicycles.

Standard deviation of monthly demand = 24.5814 bicycles.

Order cost = $65/order

Retail price = $102/unit

Holding cost = ($102.00)*(1%)*12 per year per bicycle = $12.24 per year per bicycle

Service level = 95%, with corresponding Z value of 1.6425

Lead time= 1 month (4 weeks)

Total demand/year= 439 units of bicycles

Lead time = 4 weeks

We can use the Economic order quantity to develop the most basic inventory plan. Though as we are using
yearly plan here but we can see that the month to month demand changes significantly. This means the
developed EOQ for the complete year might not be the best plan to follow however that is the easiest
option to choose.

EOQ :

Q* = sqrt(2*(Total demand * Ordering Cost)/Holding cost)

where the Total demand and the Holding Cost are calculated on the same time unit (monthly, yearly, etc.).

Q* = sqrt((2*439*65)/12.24) = 68

The solution is giving the optimal number of units to order is 68 bicycles.

Q2. Discuss ROPs and total costs.

Ans. For 95% service level Z = 1.645 as obtained from the tables.
So, Reorder Point (ROP) = Average demand during lead time + Z*(standard deviation of the
demand during the lead time)
= 36.5833+1.645*24.5814 = 77.0197= 77
Safety stock (ss) is given by:- ss = z*sd=1.6425(24.581) = 40 bicycles
Inventory cost is calculated as follows:
Total inventory cost= Annual holding cost + Annual ordering cost
=1/2*Q*(holding cost)+ ss(holding cost)+ (total demand/Q*)(ordering cost)
$416.00 +$489.60 + 416.00 =$1321.60

Q3. How can you address demand that is not at the level of the planning horizon?
Ans. Here the demand varies which clearly indicates that the demand is not at the planning horizon. And
as we developed the EOQ inventory level based on yearly demand which would not same as monthly
demand due to variation. To develop more sophisticated inventory plan we can analyze the data more
rigorously. We can calculate the seasonality, or smoothen the data and make analysis based on
smoother data. Or we can also shorten the interval for EOQ.

Chapter - 11 Network Models

Blinder’s Beverage Case Study
Q1. What route do you recommend?
Ans. This is a shortest-route problem.
 Street Map for Binder’s Beverage Case
`

5 10

15 20
20 10
20

20 15 20
20 15
30
25
15

40

Step Connected Unconnected Closest Route Route Total

Nodes Nodes Unconnected Selected Length Distance
Nodes
1 1 2,3,4,5,6,7,8,9,10 2 1-2 20 20
2 1,2 3,4,5,6,7,8,9,10 4 2-4 5 25
3 1,2,4 3,5,6,7,8,9,10 8 4-8 10 35
4 1,2,4,8 3,5,6,7,9,10 9 8-9 10 45
5 1,2,4,8,9 3,5,6,7,10 10 9-10 15 60

Shortest Distance: 1-2-4-8-9-10 = 60

Southwestern University Traffic Problems Case Study

Q1. If there is no expansion, what is the maximum number of cars that may actually travel from the
stadium to the interstate per hour? Why is this number not equal to 33,000, as Dr. Lee suggested?
Ans.
 Roads from Stadium to interstate
This is a maximum flow problem.
Iteration Path Flow Cumulative Flow
1 1->2->5->8 12 12
2 1->3->6->8 6 18
3 1->4->6->7->8 5 23
4 1->3->5->8 4 27
5 1->4->7->6->8 1 28

The capacity without any expansion is 28 (thousand) cars per hour. This would indicate that a serious
problem will exist if there are 33,000 cars per hour leaving the stadium. The problem is not leaving node
1 or going into node 8. At node 2, only the outflow is only 12 whereas the capacity from 1 to 2 is 15.
Also, the capacity from 1 to 3 is only 12, but the capacity leaving 3 is 14. A similar problem exists at node
4. The total capacity from nodes 2, 3, and 4 is only 31. Thus, the problem is a mismatch of the capacity
going into the nodes with the capacity leaving these nodes.

Q2. If the cost for expanding a street were the same for each street, which street(s) would you
recommend expanding to increase the capacity to 33,000? Which streets would you recommend
expanding to get the total capacity of the system to 35,000 per hour?
Ans. To get the capacity to 33, we must add an additional 5 units. We could add 3 units of capacity from
node 1 to node 4. This matches the inflow to the outflow at node 4. Also, expanding the capacity from
node 5 to node 8 by 2 will result in the total capacity being increased by 2. These changes will increase
the total capacity to 33. To increase the capacity to 35, the capacity from node 5 to node 8 should be
increased by an additional 2 units (for a total of 20). Also, the capacity from node 2 to node 5 should be
increased by 2.