Assessment 2-2

QUESTION2:
Given: Selling price = $5.00, Quick sale price = $1.00, Cost Price = $3.50
Starting with Pies Made 100
Calculations for the table were achieved by means of... calculating the profit for this demand so...
- Profit for this Demand = (Amount Sold × Selling Price) + (Amount Unsold × Quick Sale Price) - (Pies Made × Cost Price)
Expected Profit = Profit for this Demand × Probability

Using the provided values:
- Selling Price = $5.00
- Quick Sale Price = $1.00
- Cost Price = $3.50
- Let's break it down:
For Demand = 100 (with Pies Made = 100):

- Amount Sold = 100 (because the demand and the pies made are the same)
- Amount Unsold = 100 - 100 = 0
- Profit for this Demand = (100 × $5) + (0 × $1) - (100 × $3.50) = $500 - $350 = $150
- Expected Profit = $150 × 0.1 = $15
-
For Demand = 150 (with Pies Made = 100):
- Amount Sold = 100 (because you can only sell what you have made, even if the demand is higher)
- Amount Unsold = 100 - 100 = 0
- Profit for this Demand = (100 × $5) + (0 × $1) - (100 × $3.50) = $500 - $350 = $150
- Expected Profit = $150 × 0.15 = $22.5
... and so on for each demand level.

- You repeat this calculation for every demand level (100, 150, 200, 250, 300, 350, 400) keeping the pies made constant at 100. After computing the
expected profit for each demand, sum them up to get the total expected profit for producing 100 pies.
The columns are calculated as:

Amount Sold: This is the lesser of the demand or the pies made.
Amount Unsold: Pies made minus amount sold. (This can be zero but not negative).
$ Sold: Amount sold multiplied by the selling price.
$ Unsold: Amount unsold multiplied by the quick sale price.
Profit for this Demand: The sum of $ sold and $ unsold, minus the cost of making all pies.
Expected Profit: Profit for this demand multiplied by the probability of that demand (expected profit for this demand x probability)
Pies Made = 100
Demand Probability Pies Made Amount Sold Amount $ Sold $ Unsold Profit Expected
Unsold Profit
100 0.1 100 0 $500 $0 $150 $150 $15
150 0.15 150 0 $750 $0 $225 $225 $33.75
200 0.25 200 0 $1000 $0 $300 $300 $75
250 0.2 250 0 $1250 $0 $375 $375 $75
300 0.15 300 50 $1250 $50 $300 $300 $45
350 0.1 350 100 $1250 $100 $225 $225 $22.5
400 0.05 400 150 $1250 $150 $150 $150 $7.5
Pies Made = 150
Demand Probability Pies Made Amount Sold Amount $ Sold $ Unsold Profit Expected
Unsold Profit
100 0.1 100 100 50 $500 $50 $25 $2.5
150 0.15 150 150 0 $750 $0 $225 $33.75
200 0.25 200 150 0 $750 $0 $225 $56.25
250 0.2 250 150 0 $750 $0 $225 $45
300 0.15 300 150 0 $750 $0 $225 $33.75
350 0.1 350 150 0 $750 $0 $225 $22.5
400 0.05 400 150 0 $750 $0 $225 $11.25

Pies Made = 200
Demand Probability Pies Made Amount sold Unsold Pies $ Sold $ Unsold Profit Expected
Profit
100 0.1 200 100 100 $500 $100 -$100 -$10
150 0.15 200 150 50 $750 $50 $0 $0
200 0.25 200 200 0 $1000 $0 $300 $75
250 0.2 200 200 0 $1000 $0 $300 $60
300 0.15 200 200 0 $1000 $0 $300 $45
350 0.1 200 200 0 $1000 $0 $300 $30
400 0.05 200 200 0 $1000 $0 $300 $15
Pies Made = 250
Profit
100 0.1 250 100 150 $500 $150 -$175 -$17.5
150 0.15 250 150 100 $750 $100 -$75 -$11.25
200 0.25 250 200 50 $1000 $50 $225 $56.25
250 0.2 250 250 0 $1250 $0 $375 $75
300 0.15 250 250 0 $1250 $0 $375 $56.25
350 0.1 250 250 0 $1250 $0 $375 $37.5
400 0.05 250 250 0 $1250 $0 $375 $18.75
Pies Made = 300
Demand Probability Pies Made Pies Unsold Unsold Pies $ Sold $ Unsold Profit Expected
Profit
100 0.1 300 100 200 $500 $200 -$250 -$25
150 0.15 300 150 150 $750 $150 -$150 -$22.5
200 0.25 300 200 100 $1000 $100 $150 $37.5
250 0.2 300 250 50 $1250 $50 $300 $60
300 0.15 300 300 0 $1500 $0 $450 $67.5
350 0.1 300 300 0 $1500 $0 $450 $45
400 0.05 300 300 0 $1500 $0 $450 $22.55

Pies Made = 350
Profit
100 0.1 300 100 250 $500 $250 -$325 -$32.5
150 0.15 300 150 200 $750 $200 -$225 -$33.75
200 0.25 300 200 150 $1000 $150 -$75 -$18.75
250 0.2 300 250 100 $1250 $100 $225 $45
300 0.15 300 300 50 $1500 $50 $450 $67.5
350 0.1 300 300 0 $1750 $0 $525 $52.5
400 0.05 300 300 0 $1750 $0 $525 $26.25
Pies Made = 400
Demand Probability Pies Made Amount sold Unsold pies $ Sold $ Unsold Profit Expected
Profit
100 0.1 400 100 300 $500 $300 -$400 -$40
150 0.15 400 150 250 $750 $250 -$300 -$45
200 0.25 400 200 200 $1000 $200 -$200 -$50
250 0.2 400 250 150 $1250 $150 -$100 -$20
300 0.15 400 300 100 $1500 $100 $300 $45
350 0.1 400 350 50 $1750 $50 $600 $60
400 0.05 400 400 0 $2000 $0 $800 $40
Pies Made = 381
Profit
100 0.1 381 100 281 $500 $281 -$334 -$33.4
150 0.15 381 150 231 $750 $231 -$380.5 -$57.08
200 0.25 381 200 181 $1000 $181 -$343 -$85.75
250 0.2 381 250 131 $1250 $150 -$266.5 -$53.3
300 0.15 381 300 81 $1500 $81 -$114.5 -$171.8
350 0.1 381 350 31 $1750 $31 $37.5 $3.75
400 0.05 381 381 0 $1905 $0 $355.5 $17.78
When determining the optimal number of pies to produce, we want to maximize our expected profits. This means that we look at each potential production
quantity (100, 150, 200, 250, 300, 350, and 400 pies) and calculate the expected profit for each scenario.
To compute the expected profit for each scenario, we use historical demand data and its associated probability. For instance, with a production of 300 pies:
If the demand is only 100 pies, we'd sell 100 at full price and then have 200 pies remaining. Those unsold pies would be sold at a discounted price, which means
the revenue would be lower and the profit less.
If the demand is 250 pies, we'd sell 250 at full price and have 50 pies left to sell at the discounted price.
If the demand is 300 pies or higher, all pies would be sold at full price, maximizing our profit for that production quantity.
After running these calculations for each demand scenario (100, 150, 200, etc.) for the production of 300 pies, we sum up all the expected profits.
We repeat this process for all production quantities and then compare the total expected profits.
In our analysis, the production of 250 pies and 300 pies both resulted in the same highest expected profit.
Having produced 300 pies, we get the optimal number because:

Producing more pies (like 300) gives the shop the opportunity to cater to potential higher demands.
If demand predictions are slightly off, having a higher stock means you're less likely to miss out on sales.
There's a chance of selling pies at a discounted price, ensuring minimal wastage.

Considering all these factors and the computed expected profits, producing 300 pies is the optimal strategy for maximizing expected profit while also catering to
a wider range of demand scenarios.
Now for the case of the 381 pies made using previous formulas and the given prices:
The profit for this demand = (amount sold x selling price) + (amount unsold x quicks ale price) - (pies made x cost price)
The expected profit = (profit for this demand x probability)
Where...
- Selling price = $5.00
- Quick Sale price = $1.00
- Cost Price = $3.50
Here is how the calculations were done for one of the rows (demand = 100):
1. Amount Sold: 100 (because you can only sell up to the demand)
2. Amount Unsold: 381 - 100 = 281
3. $ Sold: 100 × $5 = $500
4. $ Unsold: 281 × $1 = $281
5. Profit for this Demand: ($500 + $281) - (381 × $3.50) = $781 - $1335 = -$554
6. Expected Profit: -$554 × 0.1 = -$55.4
Part B:
Marginal Analysis for Different Pie Quantities:
Marginal Analysis for (Pies Made = 100)

Total Expected Overestimation Cost for 100 pies = $0 Total Expected Underestimation Cost for 100 pies = $2,787.5 Combined Expected Cost for 100 pies =
$2,787.5
Demand Probability Excess Quantity Unmet Demand Cost of Cost of Expected Expected
Overestimation Underestimatio Overestimation. Underestimatio
n Cost n Cost
100 0.1 0 0 $0 $0 $0 $0
150 0.15 0 50 $0 50 x ($5-$3.5) $0 $112.5
200 0.25 0 100 $0 100 x ($5-$3.5) $0 $375
250 0.2 0 150 $0 150 x ($5-$3.5) $0 $450
300 0.15 0 200 $0 200 x ($5-$3.5) $0 $600
350 0.1 0 250 $0 250 x ($5-$3.5) $0 $750
400 0.05 0 300 $0 300 x ($5-$3.5) $0 %900

$2,337.5
Overestimation Underestimatio overestimation Underestimatio
n cost n Cost
100 0.1 100 0 100 x ($3.5-$1) $0 $250 $0
150 0.15 50 0 50 x ($3.5-$1) $0 $125 $0

200 0.25 0 0 $0 $0 $0 $0
250 0.2 0 50 $0 50 x ($5 - $3.5) $0 $112.5
300 0.15 0 100 $0 100 x ($5 - $3.5) $0 $300
350 0.1 0 150 $0 150 x ($5 - $3.5) $0 $450
400 0.05 0 200 $0 200 x ($5 - $3.5) $0 $600

$1,837.5
Overestimation Underestimatio Overestimated Underestimated
n Cost Cost
100 0.1 100 0 100 x ($3.5-$1) $0 $250 $0
150 0.15 150 0 50 x ($3.5-$1) $0 $125 $0
200 0.25 200 0 $0 $0 $0 $0
250 0.2 250 50 $0 50 x ($5 - $3.5) $0 $112.5
300 0.15 300 100 $0 100 x ($5 - $3.5) $0 $300
350 0.1 350 150 $0 150 x ($5 - $3.5) $0 $450
400 0.05 400 200 $0 200 x ($5 - $3.5) $0 $600

Total Expected Overestimation Cost for 250 pies = $750 Total Expected Underestimation Cost for 250 pies = $862.5 Combined Expected Cost for 250 pies =
$1,612.5
Overestimation Underestimatio Overestimation Underestimatio
n Cost n Cost
100 0.1 150 0 150 x ($3.5 - $1) $0 $375 $0
150 0.15 100 0 100 x ($3.5 - $1) $0 $250 $0
200 0.25 50 0 50 x ($3.5 - $1) $0 $125 $0
250 0.2 0 0 $0 $0 $0 $0
300 0.15 0 50 $0 50 x ($5 - $3.5) $0 $112.5
350 0.1 0 100 $0 100 x ($5 - $3.5) $0 $300
400 0.05 0 150 $0 150 x ($5 - $3.5) $0 $450

Total Expected Overestimation Cost for 300 pies = $1,250 Total Expected Underestimation Cost for 300 pies = $412.5 Combined Expected Cost for 300 pies =
$1,662.5
Overestimation Underestimatio overestimation underestimatio
n cost n cost
100 0.1 200 0 200 x ($3.5 - $1) $0 $500 $0
150 0.15 150 0 150 x ($3.5 - $1) $0 $375 $0
200 0.25 100 0 100 x ($3.5 - $1) $0 $250 $0
250 0.2 50 0 50 x ($3.5 - $1) $0 $125 $0
300 0.15 0 0 $0 $0 $0 $0
350 0.1 0 50 $0 50 x ($5 - $3.5) $0 $112.5
400 0.05 0 100 $0 100 x ($5 - $3.5) $0 $300
Marginal Analysis for “Pies Made = 350”

Total Expected Overestimation Cost for 350 pies = $1,875 Total Expected Underestimation Cost for 350 pies = $112.5 Combined Expected Cost for 350 pies =
$1,987.5
Overestimation Underestimatio Overestimation Underestimatio
n Cost n Cost
100 0.1 250 0 250 x ($3.5 - $1) $0 $625 $0
150 0.15 200 0 200 x ($3.5 - $1) $0 $500 $0
200 0.25 150 0 150 x ($3.5 - $1) $0 $375 $0
250 0.2 100 0 100 x ($3.5 - $1) $0 $250 $0
300 0.15 50 0 50 x ($3.5 - $1) $0 $125 $0
350 0.1 0 0 $0 $0 $0 $0
400 0.05 0 50 $0 50 x ($5 - $3.5) $0 $112.5
Marginal Analysis for “Pies Made = 400”

Total Expected Overestimation Cost for 400 pies = $2,625 Total Expected Underestimation Cost for 400 pies = $0 Combined Expected Cost for 400 pies = $2,625
overestimation Underestimatio Overestimation Underestimatio
n Cost n Cost
100 0.1 300 0 300 x ($3.5 - $1) $0 $750 $0
150 0.15 250 0 250 x ($3.5 - $1) $0 $625 $0
200 0.25 200 0 200 x ($3.5 - $1) $0 $500 $0
250 0.2 150 0 150 x ($3.5 - $1) $0 $375 $0
300 0.15 100 0 100 x ($3.5 - $1) $0 $250 $0
350 0.1 50 0 50 x ($3.5 - $1) $0 $125 $0
400 0.05 0 0 $0 $0 $0 $0
Here we applied a full marginal analysis based on the costs of overestimating and underestimating demands of the pies for each potential production quantity
(100 to 400 pies).
To conduct this analysis, we considered the cost implications of both producing too many pies (overestimation) and producing too few pies (underestimation)
for every demand scenario. The cost of overestimating demand was calculated based on the difference between the production cost and the discounted sale
price of unsold pies. Conversely, the cost of underestimating demand was determined by the lost profit from pies we could have sold at full price.
For each 'Pies Made' scenario, we computed the Expected Overestimation and Underestimation Costs by considering the likelihood (probability) of each
demand scenario. By combining these costs, we derived the total expected cost for each production quantity.
Reviewing the Combined Expected Costs for each "Pies Made" scenario revealed the following:
Pies Made = 100:

Total Expected Overestimation Cost: $0
Total Expected Underestimation Cost: $2,787.5
Combined Expected Cost: $2,787.5
Pies Made = 150:

Total Expected Underestimation Cost: $2,250
Combined Expected Cost: $2,625
Pies Made = 200:

Pies Made = 250:

Total Expected Overestimation Cost: $1,125
Pies Made = 300:

Total Expected Underestimation Cost: $675
Pies Made = 350:

Pies Made = 400:

Given these values, the optimal number of pies the deli shop should produce to minimize the combined expected cost is 350 pies, with a Combined Expected
Cost of $2,025.
The production quantity that yielded the lowest combined expected cost was 350 pies, with a cost of $2,025 Hence, based on the marginal analysis considering
both overestimation and underestimation costs, the optimal number of pies the deli shop should produce to minimize costs is 400 pies."
Part C
Question 3
Question 3a)
Given a room rate of $600 and a cancellation fee of $150 (25% of $600), you want to find out the
optimal number of overbooked rooms when considering the average number of cancellations (20)
with a standard deviation of 8.
To determine the optimal number of overbooked rooms, we need to find the point where the
expected revenue from overbooking is greater than the expected loss due to potential costs of
overbooking.
costs involved:
1. If a guest cancels and no overbooking is done, the hotel earns $150 (the cancellation fee)
2. If a guest doesn't cancel and there’s an overbooking, the hotel loses $600 (forgone room rate)
+ $50 (cost of sending guest to another hotel) + $100 (meal voucher) = $750
On top of this
. For every guest that cancels an overbooking is done, the hotel earns an additional $450 ($600 from
new booking minus the $150 they’d get from cancellation)
. For every guest that doesn't cancel and there’s an overbooking, the hotel loses $750
Given the average number of cancellations is 20 with a standard deviation of 8, to calculate the
optimal number of overbooked rooms, we need to consider the probability distribution of
cancellations.
Using a standard normal distribution, we need to find the number of overbooked rooms where the
expected additional revenue (probability of cancellation multiplied by additional revenue per
cancellation) is greater than the expected cost (probability of no cancellation multiplied by cost per no
cancellation).
X = number of overbooked rooms

Z = (x-20)/(8)
- From this using a z0table, we get the probability associated with each z-score
- Setup equation that equates the expected gains from overbooking to the expected losses.
- For each z, we must determine the probability p from a standard normal table
- Then we evaluate the equation for each x and find where E (gain) is approximately equal to E
(loss)
Through this...
1. Plug in a vlaue for x to calculate the z score
2. Look up the z score in a z table to get p
3. Calculate e (gain) and e (loss) using the probabilities
4. So thereby, when e (gain) is approximately equal to e (Loss), this is when we have optimal x.
E(Gain) = p x Room Rate – Cancellation fee)

E(Loss) = (1 – p) z cost of overbooking
ROOM RATE = $600

CANCELLATION FEE = $150
COST OVER OVERBOOKING = $750
What we plugged into excel

=NORM.S.DIST(B2,TRUE)
=(1-C2)*750
=C2*(600-150)
EXCEL SPREADSHEET
X (overbooked Z (z-score) P (from z-table) E (Gain) $ E (Loss) $
rooms) (probability from
z table)
10 -1.25 0.10565 $47.5424 $670.7627
11 -1.125 0.130295 $58.63253 $652.2791
12 -1 0.158655 $71.39486 $631.0086
13 -0.875 0.190787 $85.85413 $606.9098
14 -0.75 0.226627 $101.9823 $580.0295
15 -0.625 0.265986 $119.6935 $550.5109
16 -0.05 0.480061 $216.0275 $389.9541
17 -0.375 0.35383 $159.2236 $484.6273
18 -0.25 0.401294 $180.5822 $449.0297
19 -0.125 0.450262 $202.6178 $412.3037
20 0 0.5 $225 $375
21 0.125 0.549738 $247.3822 $337.6963
22 0.25 0.598706 $269.4178 $300.9703
23 0.375 0.64617 $290.7764 $265.3727
24 0.5 0.691462 $311.1581 $231.4032
25 0.625 0.734014 $330.3065 $199.4891
26 0.75 0.773373 $348.0177 $169.9705
27 0.875 0.809213 $364.1459 $143.0902
28 1 0.841345 $378.6051 $118.9914
29 1.125 0.869705 $391.3675 $97.72089
30 1.25 0.89435 $402.4576 $79.23733
31 1.375 0.915434 $411.9454 $63.42429
32 1.5 0.933193 $419.9368 $50.1054
33 1.625 0.947919 $426.5634 $39.06096
34 1.75 0.959941 $431.9734 $30.04437
35 1.875 0.969604 $436.3216 $22.79727
36 2 0.97725 $439.7624 $17.0626
37 2.125 0.983207 $442.443 $12.59498
38 2.25 0.987776 $444.499 $9.168354
39 2.375 0.991226 $446.0515 $6.580856
40 2.5 0.99379 $447.2057 $4.657249
FORMULAS FOR EACH COLUMN COMPTUED INTO EXCEL (example of what I had to do)
1. Z-Score: (x- μ)/ (σ)

. x = number of overbooked rooms (your variable value)
. μ = mean number of cancellations = 20
. σ = standard deviation of cancellations = 8
Excel: lets assume you're starting in row 2 and the overbooked rooms value (x) is in column A:
=(A2−20)/8=(A2−20)/8
2. Probability (from z-table):

P(Z)
. Using the norm.s.dist function in Excel, which provides the probability associated with a z-score:
=NORM.S.DIST(B2,TRUE) Where B2 holds the Z-Score.
3. E(Gain):
. E(Gain)=p×(roomrate−cancellationcost) Where:
p = probability from the z-table (value from column titled "probability")
room rate = $600
cancellation cost = $150
Excel: =C2∗(600−150)=C2∗(600−150) Where C2 holds the Probability.
4. E(Loss): E(Loss) = (1 - p) \times (room rate + $50 + $100) Where:

p = probability from the z-table
$50 = additional compensation to the customer
$100 = meal voucher
Excel: =(1−C2)∗750=(1−C2)∗750 Where C2 holds the Probability.
PART A (answer)
The optimal number of rooms to overbook is the point where the expected gain is closest to (but
greater than or equal to) the expected loss without going over it.
From the table above:

. At 23 overbooked rooms, the expected gain is $290.7764 and the expected loss is $265.3727
. At 24 overbooked rooms, the expected gain is $311.1581 and the expected loss is $231.4032
Both the above points seem like potential candidates. However, if we aim for a more conservative
approach to minimize potential losses, then overbooking by 23 rooms would be the answer. The hotel
would gain an expected $290.7764 while risking a potential loss of $265.3727.
If the hotel is willing to risk slightly more for additional gain, overbooking by 24 rooms could be
considered. In that case, they would expect to gain $311.1581 while risking a loss of $231.4032.
If we are to then go the safest approach, the hotel should ideally overbook by 23 rooms.
PART B (adjusting the room rate for optimal booking)
. Cost of cancellation = $150 (25% of $600)

. Cost of overbooking = $750 ($600 + $50 + $100)
. Average number of cancellations (μ) = 20
. Standard deviation (σ) = 8
We need to adjust the room rate (R) such that 20 overbooked rooms becomes the optimal number.
So what we want to do is set up the scenario where the expected gain and expected loss from
overbooking 20 rooms are equal...
Step 1: Finding the Z-score for 20 overbooked rooms:

Given x=20 (number of overbooked rooms), the z-score is calculated as:
Z = (x- μ)/ (σ)
Z= 20-20/8
Z=0
- This means for 20 overbooked rooms, we are exactly at the mean, so our probability of a
cancellation (based on the standard normal distribution) is 0.5 or 50%.
Step 2: Calculating Expected Gain (E-Gain)

E(Gain) is the revenue from an additional booking minus the cost of cancellation.
E(Gain) = P(z) x (R-Costcancellation)
E(Gain) = 0.5 x (R-150)
Step 3: Calculating the Expected Loss (E-Loss)

E(Loss) is the cost incurred when a guest shows up and the room isn’t avaliable
E(Loss) = P(Z) x (Costoverbooking)
E(Loss) = 0.5 x 750
E(Loss) = $375
Step 4: For the optimal overbooking scenario (where gains equals loss), we have: 0.5 x (R+150)=375
Solving for R:
R-150 = 750
R = $900
Therefore in order to make 20 overbooked rooms the optimal number, the hotel should charge a
room rate of $900.
Question 4
Part A
A) Calculate the minimum total inventory cost for each order quantity range, and determine
the order quantity that produces the lowest total inventory cost.
Given:
D: Annual Demand = 100,000 units
S: Order Cost = $1,000
H: Holding Cost per unit = 5% of products unit price, which we’ll denote as P
P = $50 (Products Unit Price)
- Order costs for different quantity ranges:

. < 10,000 units = S
. 10,000 to 19,999 units = S x 0.975 (2.5% discount)
. ≥ 20,000 units = S x 0.90 (10% discount)
Economic Order Quantity (EOQ): The formula is derived from minimizing the total cost, which consists
of ordering cost and holding cost. The formula is:
EOQ = √(2DS/H)
1. For <10,000 units

EOQ1 = √(2x100,000 x 1000) /0.05 x 50)
EOQ1 = √(200,000,000 / 2,5)
EOQ1 = √(80,000,000
EOQ1 = 8,944,27
2. For 10,000 to 19,999 units

EOQ2 = √(2x100,000 x 975) /0.05 x 50)
EOQ2 = √(195,000,000 / 2,5)
EOQ2 = √(78,000,000
EOQ2 = 8,831,76
3.
EOQ3 = √(2x100,000 x 900) /0.05 x 50)
EOQ3 = √(180,000,000 / 2,5)
EOQ3 = √(72,000,000
EOQ3 = 8,485,28
For the TCs for each EOQ
1. For EOQ1:
TC1 = 100,000 (1000/8,944.27) + 0.05 x 50 x 8,944.27 / 2
TC1 = 11,180.34 + 111,803.38
TC1 = 122,983.72
2. For EOQ2:
TC2 = 100,000 (975/8,831.76) + 0.05 x 50 x 8,831.76 / 2
TC2 = 11,033.25 + 110,397.38
TC2 = 121,430.63
3. For EOQ3:
TC3 = 100,000 (900/8,485.28 + 0.05 x 50 x 8,485.28 / 2
TC3 = 10,601.94 + 105,532.75
TC3 = 116,134.69
Comparing TC1, TC2 and TC3, we see the lowest total inventory cost is achieved with an order
quantity of EOQ3 which is equal to 8,485.28 units, resulting in a total cost of $116,134.69
EOQs Calculated:
For < 10,000 units: EOQ1 = 8,944.27E
For 10,000 to 19,999 units: EOQ2=8,831.76
For ≥ 20,000 units: EOQ3 =8,485.28
Total Costs for each EOQ:

1. For EOQ1: Total Cost = $122,983.72
The order quantity that produces the lowest total inventory cost is EOQ3 with 8,485.28 units,
resulting in a total cost of $116,134.69
Part B
Considering the total cost (which includes both product costs and total inventory cost) of each order
quantity range, which order quantity would you recommend to the retailer?
PRODUCT COSTS
Product Unit Price (P) = $50
- For EOQ1 (<10,000 units): Total units over a year = Annual Demand = 100,000 units Product
Cost (without discount) = 100,000 units x $50 = $5,000,000
- For EOQ2 (10,000 to 19,999 units): Given a 2.5% discount on the base rate of the product's
price: Discounted price = $50 x 0.975 = $48.75 Product Cost (with 2.5% discount) = 100,000
units x $48.75 = $4,875,000
- For EOQ3 (≥20,000 units): Given a 5% discount on the base rate of the product's price:
Discounted price = $50 x 0.95 = $47.50 Product Cost (with 5% discount) = 100,000 units x
$47.50 = $4,750,000
TOTAL COSTS
- EOQ1 (order quantity <10,000 units): Product Costs of $5,000,000 plus inventory costs of
$122,983.72 gives a Total Cost of $5,122,983.72.
- EOQ2 (order quantity between 10,000 to 19,999 units): Product Costs of $4,875,000 (with the
2.5% discount) plus inventory costs of $121,430.63 gives a Total Cost of $4,996,430.63.
- EOQ3 (order quantity 20,000 units and more): Product Costs of $4,750,000 (with the 5%
discount) plus inventory costs of $116,134.69 gives a Total Cost of $4,866,134.69.
From the previous calculations...
Total costs including both inventory and product costs:
EOQ1 (order quantity <10,000 units) Total = $5,122,983.72

EOQ2 (order quantity between 10,000 to 19,999 units) Total = $4,996,430.63
EOQ3 (order quantity 20,000 units and more) Total = $4,866,134.69
Given these total costs, the retailer would achieve the lowest combined product and inventory cost by
ordering in quantities of ≥20,000 units units or more (EOQ3)… This is because it results in the lowest
overall cost at $5,866,134.69
Other factors apart from the cost that the retailer should consider in determining the order
quantity?
apart from the cost, the retailer should consider:

- Storage space limitations.
- Cash flow implications.
- Variability in demand.
- Reliability of the supplier for delivering large orders on time.
- Possible expiration or shelf life of the product.
Taking these into consideration, while 20,000 units or more provides the lowest cost, the retailer
should also assess its storage capacity, cash flow situation, and the reliability of the supplier before
deciding on the order quantity.
Part C Determine the amount of the safety stock and the re-order point for the product?
To determine the safety stock and re-order point, we’ll need to consider both the desired service level
and the variability in demand during the lead time.
The formulas to be used are:
SAFETY STOCK
Safety Stock (SS) = Z x (Standard Deviation of Demand During Lead Time)
Where:
. Z is the z-value corresponding to the desired service level. Given a service level of 90%, Z is
approximately 1.28
. Standard Deviation of Demand During Lead Time = Standard Deviation of Daily Demand x √Lead Time
RE-ORDER POINT
Re-order Point (ROP) = Average Demand During Lead Time + Safety Stock
Where:
. Average Demand During Lead Time = Average Daily Demand x Lead Time
From the question:

Standard Deviation of Daily Demand = 40 units
Average Daily Demand = 100,000 units/365 days = 273.97 units/day
Lead Time = 4 days
- Standard Deviation of Demand During Lead Time: = 40 units * √4 days = 40 units * 2 = 80 units
- Safety Stock: = 1.28 * 80 units = 102.4 units (Since we can't have a fraction of a unit, round up
to 103 units)
- Re-order Point: = (273.97 units/day * 4 days) + 103 units = 1,095.88 + 103 = 1,198.88 units
(Rounded up to 1,199 units)
Therefore, the safety stock is 103 units and the re-order point is 1,199 units.
Part D
"If the retailer wants to cut the safety stock in half, suggest two possible strategies that the retailer
can take to achieve the goal without changing the demand. Show the calculations to support your
suggestion as well as (any) factors that need to be considered in the suggestion."
Firstly, let's find the new safety stock if it's cut in half: Existing Safety Stock = 103 units New Safety
Stock = 103/2 = 51.5 (which we can round to 52 units for practicality)
two possible strategies to achieve this goal (without changing the demand)
1. Reduce the Lead Time:
Safety stock calculation:

SS = Z x √(AD x SD^2) + (D^2 x LT^2)
- Z is the service factor (1.64 for 90% service level)
- AD is the average daily demand (100,000 units/365 days = 273.97 ≈ 274 units/day)
- SD is the standard deviation of daily demand (40 units)
- D Is the average demand during lead time (274 units/day x 4 days = 1096 units),
- LT is the standard deviation of lead time (4 days x 40 units/day = 160 units)
This means
SS = 1.64 x √(274x40^2) + (1096^2 x 4^2)
SS = 1.64 x √(438560 + 4785664)
SS = 1.64 x √(5224224
SS = 1.64 x 2285.65
SS = 3750.05
So here I need to cut the safety stock in half from (3750.05 units to the 1875.03 units) and consider
the change in lead time... therefore
1875 = 1.64 x √(274 x 40^2) + (1096^2 x LT^2)
From here, square both sides/rearrange equation
Here the goal is also to find the lead time such that it is...
SS = 1.875.03 = 1.64 x √(274 x 40^2) + (1096^2 x LT^2)
Expand/Simplify
- 1875.03 = 1.64 x √(438560 + 1201312 x LT^2
Divide both sides by 1.64:
- 1143.94 = √(438560 + 1201312 x LT^2)
Squaring both sides:
- 13092.8 = 438560 + 1201312 x LT^2
Rearranging and setting the equation to 0
- 1201312 x LT^2 – 870932.8 = 0
Dividing both sides by 1201312:
- LT^2 – 0.7248 = 0
Taking the square root of both sides
- LT = √0.7248
- LT ≈0.85
Given the formula for safety stock with lead time variability:
Safety Stock = Z x √Lead Time x Daily Demand Standard Deviation ^ 2
- Z is the z-score for a 90% service level (which is 1.28).
- The safety stock we're targeting is 52 units.
- The original daily demand standard deviation is given as 40 units.
To achieve the reduced safety stock of 52 units, let's solve for the new lead time using the given
formula:
- 52 = 1.28 × √New Lead Time × 40^2
- Squaring both sides: 2704 = 1.64 × New Lead Time × 1600
- New Lead Time = 2704 /1.64 × 1600

New Lead Time ≈ 1.03 days
So, by reducing the lead time to approximately 1 day (from the initial 4 days), the retailer could
achieve the desired safety stock level.
PART E
Fixed Time Period Model

- Inventory level is reviewed at regular intervals and an order is placed to replenish inventory
up to the target level.
. Review Period (P): 8 Days
. Average Daily Demand (D/365: 100,000 units/365 days = 273.97 units/day (rounded off)
. Standard Deviation of Daily Demand (σd): 40 units
- Calculating safety stock for fixed time period model...
Safety Stock Calculation: In a fixed-time period model, the safety stock is calculated based on the
demand variability over the entire review period and lead time.
Safety Stock = Z x √P+L x σd
- Z is the number of standard deviatiosn corresponding to the desired service level (from the
original scenario, this was 90%, so Z would be approximately 1.28).
- P is the review period.
- L is the lead time (In the original scenario, it was 4 days).
- Σd is the standard deviation of the daily demand
So if we plug in using the above formula

- Safety Stock = 1.28 x √8+4 x 40
- Safety Stock = 1.28 x √12 x 40
- Safety Stock = 1.28 x 3.464 x 40
- Safety Stock ≈177.71
So, the safety stock for the new ordering system would be approximately 177.71 units.
Order Quantiy Calcualtion: the order quantity is difference between target inventory level and current
inventory level. This target inventory level is calcualted through...
- Target inventory level = (avergae demand over P + L) + Safety Stock
- Target inventory level = (273.97 x 12) + 177.71
- Target inventory level = 3,288.64 + 177.71
- Target inventory level = 3.466.35
Assuming the inventory level is reviewed just when it's time to reorder (i.e., when it's at its lowest
point), the order quantity would be:
Order Quantity=Target Inventory Level−Current Inventory Level
Assuming current inventory level is zero (or very low) at the time of review:
- Order Quantity = 3.466.35
So, the order quantity for the new ordering system would be approximately 3,466.35 units.
THEREFORE...
Safety Stock: 177.71 units
Order Quantity: 3,466.35 units
Question 5
a) Calculate the process capability index of the two suppliers as well as their estimated percentage
of defective metal bars against the factory’s specification limit
Tolerance: ±1% of 1,000 mm = ±10 mm Acceptable lengths: 990 mm to 1,010 mm.
Supplier 1:
Mean = 1,001 mm
Standard Deviation = 5 mm
Process Capability Index (Cp) for Supplier 1 is calculated as:

Cp = Tolerance Range/6 x Standard Deviation
Using the provided data:
Cp1 = 20/(6x5) = 20/30 = 0.67
For the lower specification limit (990 mm):

ZL = (990-1001)/5 = 2.2
For the upper specification limit (1,010 mm):
Zu = (1010-1001)/5 = 1.8
The area under the curve to the left of Z=2.2 is approximately 0.9861. This means that about 98.61%
of the metal bars are longer than 990 mm...
Since we are interested in the percentage of bars that are shorter than 990 mm, we would subtract
this from 100%: 100100. This gives us 1.39% of bars that are below 990 mm.
From Z-tables:
1.39% of bars are below 990 mm.
3.59% of bars are above 1,010 mm.
Total defective rate for Supplier 1 = 1.39% + 3.59% = 4.98%.
Supplier 2:
Mean = 997mm
Standard Deviation = 6mm
Process Capability Index (Cp) for Supplier 2 is:

Cp2 = 20/(6x) = 20/36 = 0.56
For the lower specification limit (990 mm):
ZL = (990-997)/6 = -1.167
ZU = (1010-997)/6 = 2.167
The area under the curve to the left of Z=1.167 is approximately 0.8783. This means that about
87.83% of the metal bars from Supplier 2 are longer than 990 mm.
To determine the percentage of bars shorter than 990 mm, subtract this value from 100%: 100100.
This gives us the 12.17% of bars from Supplier 2 that are below 990 mm.
From Z-tables:
.12.17% of bars are below 990mm
.1.5% of bars are below 1,010mm
Total defective rate for Supplier 2 = 12.17% + 1.5% = 13.67%
Thus, for part a:

. Cp for Supplier 1 = 0.67, with a defective rate of 4.98%
. Cp for Supplier 2 = 0.56, with a defective rate of 13.67%
b) Calculate the cost of defective parts for each supplier.
Supplier 1:
Defective bars: 4.98%×2,500 bars4.98%×2,500 bars = 124.5 bars
Cost of defects for Supplier 1: 124.5 bars×$10/bar124.5 bars×$10/bar = $1,245
Supplier 2:
Defective bars: 13.67%×2,500 bars13.67%×2,500 bars = 341.75 bars
Cost of defects for Supplier 2: 341.75 bars×$9/bar341.75 bars×$9/bar = $3,075.75
Comparison:
Supplier 1 defects cost: $1,245
Supplier 2 defects cost: $3,075.75
Based on the cost of defects alone, Supplier 1 is cheaper by: $3,075.75−$1,245=$1,830.75$3,075.75−
$1,245=$1,830.75
Cost of defects:
Supplier 1: 4.98% of 2,500 bars = 124.5 bars. At $10 each, this cost amounts to $1,245.
Supplier 2: 13.67% of 2,500 bars = 341.75 bars. At $9 each, this cost amounts to $3,075.75.
Recommendation for part b: Supplier 1 has fewer defects and thus a lower associated cost ($1,245)
compared to Supplier 2's $3,075.75. Therefore, Supplier 1 is recommended based on the cost of
defects.
We might also consider these factors in making a decision...

- One of these is the consistency of quality, as supplier 1 has a lower defective rate (4.98% vs.
13.67% for Supplier 2). This suggests that Supplier 1 is more consistent with their quality. A
lower defect rate can lead to smoother operations and fewer interruptions for the factory.
Although, ultimately given the lower defective rate, cost savings and the potential for smoother
operations, supplier 1 is the recommended choice additional considerations, such as potential
intangible costs from higher defect rates and the potential for future favorable negotiations with
Supplier 1...
c) Calculate the total cost for each supplier, considering the additional cutting required due to
defects.
Cost of cutting too long bars:
Supplier 1: 3.59% of 2,500 bars = 89.75 bars. Cutting cost = 89.75 * $1 = $89.75.
Supplier 2: 1.5% of 2,500 bars = 37.5 bars. Cutting cost = 37.5 * $1 = $37.50.
Total costs considering cutting:

Supplier 1: Defect cost + cutting cost = $1,245 + $89.75 = $1,334.75.
Supplier 2: Defect cost + cutting cost = $3,075.75 + $37.50 = $3,113.25.
Recommendation for part c: Even after considering the cutting costs, Supplier 1 is still recommended
due to its lower overall cost ($1,334.75) compared to Supplier 2's $3,113.25.
Question 6
Competitive Dimensions Applicable to XYZ and Assessment of Operational Performance:
Product Design and Features: Over the last decade, there has been a paradigm shift in the market
where products are not only assessed for their utility but also for their aesthetics. XYZ has astutely
recognized this trend and has invested heavily in R&D to produce designs that resonate with the
millennial and Gen Z audience. These efforts have seen a surge in sales growth over the past two
years, particularly in urban areas where the younger demographic dominates. Furthermore, the
features offered are tailored to modern lifestyles, enabling seamless integration into daily routines.
This focus on design and utility has anchored XYZ's position in a highly competitive market.
Henceforth, the operational performance in this dimension appears to be favorable.
Delivery Time: Timely delivery is a cornerstone of good customer service. While XYZ strives for
punctuality, there's an evident disparity in delivery timelines across its product range. The flagship
products often meet delivery expectations; however, the minor product lines frequently witness
delays. Such inconsistencies can be detrimental in the long run, causing a loss of trust among
consumers. It's vital for XYZ to recognize that every product, regardless of its market share,
contributes to the overall brand image. Therefore, the operational performance in this dimension
needs improvement.
Operating Cost and Profitability: While XYZ excels in design innovation, it grapples with high operating
costs. Multiple factors contribute to this, including outdated machinery, inefficiencies in supply chain
management, and the high cost of quality raw materials. The implications of these inflated costs
trickle down to the company's profitability, which, if unchecked, might result in increased product
prices or compromised quality. The operational performance in this dimension is suboptimal.
Problems in XYZ's Operations and their Causes:
Long Lead Time for Minor Product Lines: When looking into the production process of minor product
lines, several inefficiencies emerge as primary contributors to extended lead times. The lack of clarity
in inter-departmental exchanges often leads to bottlenecks, especially during crucial responsibility
handovers marked by vague instructions or miscommunications. Additionally, while scheduled
machine downtimes are planned, they can contribute to lead time if not managed optimally.
Unscheduled downtimes, resulting from unforeseen breakdowns, pose an even greater challenge,
creating production backlogs and subsequent delays. Furthermore, without a robust contingency
strategy in place, these product lines remain susceptible to the myriad of unforeseen challenges, from
supply chain disruptions to sudden demand fluctuations. In essence, the prolonged lead times are a
culmination of various inefficiencies and an absence of forward-thinking planning, and addressing
each aspect is vital to optimizing production.
Excessive Inventory of Finished Products: XYZ's approach to maintaining a substantial buffer stock is a
double-edged sword. While it acts as a safety net against defects detected during final inspection, it
ties up substantial capital. This strategy, though well-intentioned, can hamper liquidity and limit the
company's ability to invest in other critical areas like R&D.
Procurement Issues: The traditional procurement model employed by XYZ revolves around fixed order
quantities, which isn't in sync with the current market dynamics. This rigidity often culminates in
either excess stock or shortages, leading to operational and sales disruptions.
Recommendations for Operational Improvement:
Enhance Communication and Coordination: An integrated communication platform can facilitate

transparent information flow across departments, reducing misunderstandings and streamlining
processes. Digital tools, like ERP systems, can be instrumental in achieving this.
Proactive Quality Control: Incorporating advanced diagnostic tools can detect manufacturing
discrepancies early. Regular equipment audits, predictive maintenance schedules, and consistent
quality checks can ensure high product quality, eliminating the need for vast finished product
inventories.
Flexible Production Scheduling: Modern manufacturing demands adaptability. Adopting a Just-In-Time

(JIT) production approach can optimize resource utilization and diminish waste.
Streamlined Procurement and Inventory Management: A shift from a static to a dynamic procurement
model, driven by real-time data analytics, can help in optimizing stock levels. Using tools like AI and
ML, demand forecasting can be more precise, leading to better inventory management.
Promote Continuous Improvement: A proactive approach to improvement, embracing methodologies

like Six Sigma or Kaizen, can lead to incremental advancements in operations.
Employee Training: Human resources are a company's greatest asset. Regular workshops, upskilling
programs, and exposure to the latest industry trends can elevate their productivity.
Conclusion:
Operations form the backbone of any organization. For XYZ to sustain its market position and drive
future growth, it's imperative to introspect, identify inefficiencies, and adopt a forward-thinking
approach to operations. By making these strategic changes, XYZ stands to gain not just in terms of
profitability but also in enhancing customer satisfaction and trust.
Question 1:
Component A
Period
Gross 0 0 0 300 0 0 0 0 0
Require
ments
Schedu
led
rECEIPT
S
Project
ed
avaliabl
e
balance
Net 0 0 0 0 0 0 0 0 0
Require
ments
Planne
d order
receipt
s
Planne 200 0 0 0 0 0
d order
release
s
Component B
Period
Gross 0 0 0 0 0 0 0 0 120
Require
ments
Schedu
led
rECEIPT
S
Project 10 10 10 10 10 10 10 10 -110
ed
avaliabl
e
balance
Net 0 0 0 0 0 0 0 0 120
Require
ments
Planne 120
d order
receipt
s
Planne 120
d order
release
s
Component C
Period
Gross 0 0 0 0 0 0 0 0 120
Require
ments
Schedu
led
rECEIPT
S
Project 30 30 30 30 30 30 30 30 -90
ed
avaliabl
e
balance
Net 0 120
Require
ments
Planne 0
d order
receipt
s
Planne 0 120
d order
release
s
Component D
Component E
Given:
- Each unit of product A requires one unit of component B which in turn requires one unit of
component E. Therefore, for 60 units of product A, we need 60 units of component E.
- Each unit of component E requires 2 units of component F.
- The lead time for component E is 1 week.
Componenet F
Given:
- Each unit of product A requires two units of component B which in turn requires three units
of component F (1 from B directly and 2 from E). Therefore, for 60 units of product A, we
need 180 units of component F.
- The lead time for component F is 1 week.
- There's a scheduled receipt of 100 units on week 3.
Component G
Given:
- Each unit of product A requires one unit of component D which in turn requires two units of
component G. Therefore, for 60 units of product A, we need 120 units of component G.
-The lead time for component G is 4 weeks.
There's a scheduled receipt of 120 units on week 3.

Assessment 2-2

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Assessment 2-2

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QUESTION2:

Expected Profit = Profit for this Demand × Probability

For Demand = 100 (with Pies Made = 100):

... and so on for each demand level.

The columns are calculated as:

Pies Made = 100

150 0.15 150 0 $750 $0 $225 $225 $33.75

200 0.25 200 0 $1000 $0 $300 $300 $75

250 0.2 250 0 $1250 $0 $375 $375 $75

300 0.15 300 50 $1250 $50 $300 $300 $45

350 0.1 350 100 $1250 $100 $225 $225 $22.5

400 0.05 400 150 $1250 $150 $150 $150 $7.5

Pies Made = 150

150 0.15 150 150 0 $750 $0 $225 $33.75

200 0.25 200 150 0 $750 $0 $225 $56.25

250 0.2 250 150 0 $750 $0 $225 $45

300 0.15 300 150 0 $750 $0 $225 $33.75

350 0.1 350 150 0 $750 $0 $225 $22.5

400 0.05 400 150 0 $750 $0 $225 $11.25

150 0.15 200 150 50 $750 $50 $0 $0

200 0.25 200 200 0 $1000 $0 $300 $75

250 0.2 200 200 0 $1000 $0 $300 $60

300 0.15 200 200 0 $1000 $0 $300 $45

350 0.1 200 200 0 $1000 $0 $300 $30

400 0.05 200 200 0 $1000 $0 $300 $15

Pies Made = 250

150 0.15 250 150 100 $750 $100 -$75 -$11.25

200 0.25 250 200 50 $1000 $50 $225 $56.25

250 0.2 250 250 0 $1250 $0 $375 $75

300 0.15 250 250 0 $1250 $0 $375 $56.25

350 0.1 250 250 0 $1250 $0 $375 $37.5

400 0.05 250 250 0 $1250 $0 $375 $18.75

Pies Made = 300

150 0.15 300 150 150 $750 $150 -$150 -$22.5

200 0.25 300 200 100 $1000 $100 $150 $37.5

250 0.2 300 250 50 $1250 $50 $300 $60

300 0.15 300 300 0 $1500 $0 $450 $67.5

350 0.1 300 300 0 $1500 $0 $450 $45

400 0.05 300 300 0 $1500 $0 $450 $22.55

150 0.15 300 150 200 $750 $200 -$225 -$33.75

200 0.25 300 200 150 $1000 $150 -$75 -$18.75

250 0.2 300 250 100 $1250 $100 $225 $45

300 0.15 300 300 50 $1500 $50 $450 $67.5

350 0.1 300 300 0 $1750 $0 $525 $52.5

400 0.05 300 300 0 $1750 $0 $525 $26.25

Pies Made = 400

150 0.15 400 150 250 $750 $250 -$300 -$45

200 0.25 400 200 200 $1000 $200 -$200 -$50

250 0.2 400 250 150 $1250 $150 -$100 -$20

300 0.15 400 300 100 $1500 $100 $300 $45

350 0.1 400 350 50 $1750 $50 $600 $60

400 0.05 400 400 0 $2000 $0 $800 $40

Pies Made = 381

150 0.15 381 150 231 $750 $231 -$380.5 -$57.08

200 0.25 381 200 181 $1000 $181 -$343 -$85.75

250 0.2 381 250 131 $1250 $150 -$266.5 -$53.3

300 0.15 381 300 81 $1500 $81 -$114.5 -$171.8

350 0.1 381 350 31 $1750 $31 $37.5 $3.75

400 0.05 381 381 0 $1905 $0 $355.5 $17.78

Having produced 300 pies, we get the optimal number because:

There's a chance of selling pies at a discounted price, ensuring minimal wastage.

The expected profit = (profit for this demand x probability)

Marginal Analysis for (Pies Made = 100)