DECISION MAKING ASSIGNMENT

Q1. A TV dealer finds that the cost of TV in stock for a week is Rs. 30 and the cost of a unit
shortage is Rs. 70. For one particular model of TV the probability distribution of weekly sales is
as follows.

Weekly Sales 0 1 2 3 4 5 6
Probability 0.10 0.10 0.20 0.25 0.15 0.15 0.05
How many units per week should the dealer order? Also find EVPI & EOL.

Q2. Under an employment promotion programme, it is proposed to allow sale of newspapers

on the buses during off-peak hours. The vendor can purchase the newspapers at a special
concessional rate of 25 paise per copy against the selling price of 40 paise. Any unsold copies are,
however, a dead loss. The vendor has estimated the following probability distribution for the
number of copies download:

No of Copies 15 16 17 18 19 20
Probability 0.04 0.19 0.33 0.26 0.11 0.07
a. How many copies should he order so that his expected profit will be maximum?
b. Compute EPPI.
c. The vendor 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?

Q3. A toy manufacturer is considering a project of manufacturing Tippi-Toes, a dancing doll with
three different movement designs. The dolls are sold at an average price of Rs 10. The first
movement design uses gears and levels will require the lowest tooling and setup cost of Rs.
1,00,000 and Rs. 5 per unit of variable cost. Second design with spring action will have fixed cost
of Rs. 1,60,000 and variable cost of Rs. 4 per unit. The third design will weights and pulleys will
have a fixed cost of Rs. 3,00,000 and variable cost of Rs. 3 per unit. One of the following demand
events can occur for Tippi-Toes with the associated probabilities:

Type of Demand Units Required Probability

Light 25,000 0.10
Moderate 1,00,000 0.70
Heavy 1,50,000 0.20
a. Construct payoff table for the above project.
b. Which is the optimum design?
 c. How much the decision-maker could afford to pay to obtain perfectly correct information
about demand?

Q4. A company is faced with the problem of determining the optimum number of a certain
magazine to order. The magazine cost Rs. 5 and sells at Rs 10 per copy. If the company orders
more copies than it can sell. The unsold copies can be returned under the prior wholesale contract
for a refund under the following formula: upto first 500 copies, refund is Rs 3 for each unsold
copies; between 501 to 1,000 copies, refund is Rs 2 for each copy and for over 1,000 copies, it is
Re 1 per copy. The sale record of past 100 weeks is given:

No. of Copies sold/week 4,000 5,000 6,000 7,000 8,000

No. of Weeks 10 25 35 20 10
a. What is the optimum decision?
b. Compute the expected maximum profit.

Q5. Wings Corner wants to decide how many men’s shirts to order for the Diwali season. For a
particular type of shirt, Wings must order in lots of 50 shirts. If it orders 50 shirts, cost is Rs. 60
per shirt; if it orders 100 shirts, cost is Rs 55 per shirts, and if it orders 150 or more shirts, the cost
is Rs 50 per shirts. Wings’ selling price is Rs. 95, but any leftover at the end of the season will be
sold at 50 percent discount. It is assumed that demand will be either 50, 100, 150, 200 or 250 shirts
and that the Corner will not suffer any loss of goodwill if it runs out-of-stock. It must place the
entire order for the season at the beginning, with no opportunity for reordering. Wings has
estimated the probability of demand as follows:

Demand 50 100 150 200 250

Probability 0.15 0.25 0.25 0.20 0.15
a. Use a payoff table to determine the order quantity that will maximize the expected
contribution.
b. Calculate the expected value of perfect information.

Q6. The daily demand of cars for hiring in a city is as follows:

Demand 12 13 14 15 16
Probability 0.20 0.10 0.30 0.30 0.10
The parking charges per car are Rs. 100 per day if a car is not hired. For hiring a car, a company
gets Rs. 250 rent per car per day. If a car is hired, the company does not have to pay parking
charges. The company wants to enter into business in the city. Construct a payoff table and
determine how many cars the company should have, based on EMV criterion.

Q7. A newspaper agent’s experience shows that the daily demand of the newspapers in his area
has the following probability distribution:

Daily Demand 300 400 500 600 700

Probability 0.10 0.30 0.40 0.10 0.10
He sells the newspapers for Rs 2 each, while he buys each at Re. 1. Unsold copies are traded as
scrap and each such copy fetches 10 paisa. Assuming that he stocks the newspapers in multiple of
100 only, how many should he stock so that his expected profit is maximum?

Q8. A large restaurant purchases cakes daily from a local bakery. The cakes cost Rs. 10 each and
sell at Rs 15 each. If the cakes are not sold on the same day, they are sold in another outlet for Rs.
8 each. The relative frequency distribution for the restaurant sales is given below:

Daily Sales (dozens) 30 31 32 33 34 35 36

Relative frequency 0.01 0.09 0.16 0.25 0.30 0.11 0.08
You are required to state:

a. Optimum quantity which the buyer wants to purchase to maximize the expected profit.
b. How much the buyer could afford to pay for perfectly correct information for sales?

Q9. A distributer of certain product incurs holding cost of Rs. 100 per unit per week and shortage
cost of Rs. 300 per unit. The data on the sales of the product are given below.

Weekly Sales (units) 0 1 2 3 4 5 6 7 8

No of Weeks 0 0 5 10 15 15 5 0 0
How many units should the distributor buy every week? Also find EVPI.

Q10. The probability of demand for lorries for hiring on any day in a given district is as follows:

No. of lorries demanded 0 1 2 3 4

Probability 0.1 0.2 0.3 0.2 0.2
Lorries have a fixed cost of Rs. 90 each day to keep the daily hire charges (net of variable cost of
running) as Rs. 200. If the lorry-hire company owns 4 lorries, what is the daily expectation? If the
company is about to go into business and currently has no lorries, how many lorries should it buy?