Sample Final Questions

1. Division X is growing and is in constant need of trained employees. The demand rate for
trained employees is relatively constant at 5 each month. The division can run a training
program that costs $5,000 per o↵ering, regardless of class size. Students graduate with a
certificate and a $100/week pay raise. This raise is operative even if they go back to their
old job, where they will work until they are reassigned to a higher-skilled position. What
class size is optimal and how many classes should be o↵ered each year? Hints: You need to
trade-o↵ the fixed cost of o↵ering the training program with the variable cost of paying the
trained workers a higher wage. Assume 52 weeks per year.

2. Daily demand for ice cream at I-Scream parlor is normally distributed with a mean of
100 quarts and a standard deviation of 120 quarts. The owner has the ice cream supplied
by a wholesaler who charges $2 per quart. The wholesaler charges a $90 delivery charge
independent of order size. The opportunity cost of capital to I-Scream is estimated to be
25% per year. Assume 360 days in the year.

(a) What is the optimal order size of each order?

(b) Assume that it takes 9 days for an order to be supplied. The owners would like to
ensure no stock-outs in 95% of the lead times. What is the optimal safety stock the
store should have?
(c) Currently the owners do not follow the EOQ and safety stock policy outlined above.
Instead, they order 2000 quarts of ice cream when they have 1000 quarts on hand.
Assume that it takes 9 days for an order to be supplied. What is the average time
spent by a quart of ice cream at the parlor?

3. Located in central France, Laurence Garreaus firm supplies a particular subassembly to the
automobile industry. The subassemblies are made in three di↵erent shapes (for di↵erent
car models). These subassemblies need an electric motor, and Laurence is trying to find
a supplier for these motors. The specifications of the electric motor required for the three
subassemblies are almost identical; however the motors need to be of slightly di↵erent shapes
to fit into the subassembly. Assume that the firm works for 300 days in a year and the daily
requirement of each type of motor is normally distributed with a mean of 200 units and a
standard deviation of 50 units. Laurence intends to hold safety stock to meet a 99% service
level. The annual holding cost of the motor is 25% of the cost of a motor (including the
unit purchase price and the transportation cost). Also, by convention, the French firm pays
for the motors the moment they are shipped. Due to the limitations in shipping schedule,
all engines are ordered and shipped jointly every Monday (no other days are possible).
Laurence has received two quotations. The first is from a firm in Asia. The unit price
per motor is 50 FF (French francs). In addition, the transportation cost per unit is 5 FF.
The transit time from Asia is 25 days. The second quotation is from a company in North
America. This firm o↵ers to price the motors at 60 FF/unit, and a transportation cost of
7.5 FF. It will take only 10 days to deliver the motors.

(a) Evaluate each of the two proposals to determine which is the most economical alterna-
tive. What is your recommendation? (Be specific and show all of your calculations.)

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 (b) Suppose the North American firm o↵ers to redesign the motors in such a way that the
same motor can be used in any of the three subassemblies. Should this new information
have any impact on the decision? (Again, be specific and justify your answer with
calculations.)

4. The Gates, a popular luxury hotel in San Francisco, has a policy of overbooking the room
rentals to make up for customers who would make reservations but fail to show up. The
average lost contribution for a vacant room was $20 per night if a customer reserved a room
but was a “no-show”. About 10% of the guests who did show up (with reservation) but
could not be honored because the hotel was full, could be placated without any extra cost
to Gates. Another 30% were satisfied with being transferred to another hotel at a cost to
the Gates of $3 per reservation. The remaining 60% of the guests were so upset that Gates
could expect a loss of future business with a net present value of approximately $50. The
manager reviewed his records and found the following distribution of no-shows:

Number of No-shows Probability Cumulative Probability

1 0.2 0.2
2 0.2 0.4
3 0.3 0.7
4 0.2 0.9
5 0.1 1.0

(a) What is the expected loss in revenue by not accommodating a customer with a reser-
vation?
(b) What is the optimal level of overbooking that you would recommend to Gates?
(c) As a hotel manager you realize that $50 may be an underestimate of loss of future
business for upset customers. You impute a cost of loss of goodwill of $200. Considering
this, your optimal level of overbooking as computed above would: (choose one):
(i) Decrease
(ii) Increase
(iii) Remain unchanged
(iv) Not enough information to answer this question

5. Answer the following questions.

(a) Canadian Motors has decided to go with the cheapest supplier for each component. As
a result all supplier lead times have increased. This would result in an (choose one):
(i) Increase in cycle stock
(ii) Increase in safety stock
(iii) Increase in cycle and safety stock
(iv) This action has no impact on inventory levels in the system
(b) Due to a successful advertising campaign, customer demand for hard lemonade in-
creased from 4 crates to 8 crates per week (and remained at 8 crates per week during
the next 30 weeks). The demand at the hard lemonade bottling plant showed a much
higher fluctuation. In other words, the variability of demand at the bottling plant was
higher than the variability of demand at the retail store.
i. What is this e↵ect called?

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 ii. Describe the relationship between lead times (for production and delivery) and the
observed e↵ect.
iii. List key action(s) that could be taken in order to avoid this e↵ect.
(c) Assuming that the order-up-to level stays constant, which of the following statements
is true about the order-up-to model?
i. As the lead time increases, the on-hand inventory increases, but the pipeline in-
ventory remains the same.
ii. As the demand uncertainty (measured by ) increases, both on-hand inventory
and pipeline inventory increase.
iii. When the mean demand increases, both on-hand inventory and pipeline inventory
remain the same.
iv. As the demand uncertainty (measured by ) increases, on-hand inventory de-
creases, but the pipeline inventory remains the same.
v. None of the above.

6. Jane Smith has been hired by Wolverine Airlines to redesign their terminal counter opera-
tions, where customers check in (check baggage, receive boarding passes, and change flight
details if necessary). The airline is very sensitive to their customers time spent waiting for
service and being served; many customers dislike waiting in these queues, anxious about
missing their flights, etc. Wolverine currently has three counters, each sta↵ed by a single
employee, and a single FCFS queue for all customers to join. Seeing how Wolverine cur-
rently configures their queues, Jane thinks that they have got it all wrong. Jane redesigns
the queues so that there is a dedicated queue and a dedicated server for each of the customer
classes (economy, business, and first class). No customers cross between servers.
Economy class (E) passengers arrive at a rate of 19 per hour; Business class (B) passengers
arrive at a rate of 13 per hour; First class (F) passengers arrive at a rate of 4 per hour. Each
of the three serving employees takes an average of 3 minutes to check in customers. Assume
arrivals follow a Poisson process and service time is exponentially distributed. Compare the
total time (waiting and service) customers spend in the two system designs.
7. In the economic order quantity model, if the optimal lot size is reduced by a factor of some
number k, the fixed order cost S must be ... (Choose one answer, and explain your answer.)
i. increased by a factor of k.
ii. increased by a factor of k-squared.
iii. reduced by a factor of k-squared.
iv. reduced by a factor of the square root of k.
v. reduced by a factor of k.

8. If a customer order arrives when product is not available, then what happens? (Choose one
answer, and explain your answer.)

i. a sale results.
ii. the retailer allocates product to the customer.
iii. a stockout results.
iv. the order is filled from safety inventory.
v. none of the above