Professor Guodong Lyu Spring 2023

ISOM 2700 Operations Management

Homework Assignment #5

Due: 23:59 pm, April 19 (Monday), 2023

• Turn in your solutions to Canvas before the deadline (email Stacy imsdeng@ust.hk if that does not
work). When uploading your solutions to Canvas, name it: HW5_LX_YourName.pdf where you
replace YourName by your name, and replace LX by the session you attend.
• Homework assignments are to be done individually, and without the use of anyone else’s solutions.
You may obtain tips/tutorials from the internet, but soliciting help from others online or in person is
not permitted. Cheating will strictly not be tolerated.
• Explain clearly how you derive your solutions. Your solutions will be graded for the clarity of your
arguments, in addition to correctness of the final answer.

Session

SIS ID

Name
 ISOM2700: Homework Assignment #5

Problem 1 [Forecasting: 30 pts]

Harlen Industries has a simple forecasting model: Take the actual demand for the same month last year
and divide that by the number of fractional weeks in that month. This gives the average weekly demand
for that month. This weekly average is used as the weekly forecast for the same month this year. This
technique was used to forecast eight weeks for this year, which are shown below along with the actual
demand that occurred. The following eight weeks show the forecast (based on last year) and the
demand that actually occurred:

Week Forecast Actual

1 140 137
2 140 133
3 140 150
4 140 160
5 140 180
6 150 170
7 150 185
8 150 205

(a) Compute the MAD for week 8. [10 pts]

(b) Compute the tracking signal for week 8. [10 pts]

(c) Based on your answers to a and b, comment on Harlen’s method of forecasting. [10 pts]

Tips: Obtain the MAD and tracking signal table as discussed in class.

Answer

week

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(a) For month 8, the MAD is 23.75.

(b) The tracking signal for month 8 is 7.16.

(c) The tracking signal is too large, so the forecast should be considered poor. In addition, the tracking
signal is positive, meaning that the forecast is lower than the actual demand and the planner may
increase the forecasted demand volume.

Problem 2 [Capacity-based RM: 40 pts]

HK4 is a television station that has 25 thirty-second advertising slots during each evening. It is early
January and the station is selling advertising for Sunday, March 24. They could sell all of the slots right
now for $4,000 each, but, because on this particular Sunday the station is televising the Oscar ceremonies,
there will be an opportunity to sell slots during the week right before March 24 for a price of $10,000. For
now, assume that a slot not sold in advance and not sold during the last week is worthless to HK4. To
help make this decision, the salesforce has created the following probability distribution for last-minute
sales:

Number of slots, Pr(Exactly x

x slots are sold)
8 0.00
9 0.05
10 0.10
11 0.15
12 0.20
13 0.10
14 0.10
15 0.10
16 0.10
17 0.05
18 0.05
19 0.00

(a) How many slots should HK4 sell in advance? [10 pts]

(b) In practice, there are companies willing to place standby advertising messages: if there is an empty
slot available (i.e., this slot was not sold either in advance or during the last week), the standby message
is placed into this slot. Since there is no guarantee that such a slot will be available, standby messages
can be placed at a much lower cost. Now suppose that if a slot is not sold in advance and not sold
during the last week, it will be used for a standby promotional message that costs advertisers $2,500.
Now how many slots should HK4 sell in advance? [10 pts]

(c) Suppose HK4 chooses a booking limit of 10 slots on advanced sales. In this case, what is the
probability there will be slots left over for stand-by messages? [10 pts]

(d) One problem with booking for March 24 in early January is that advertisers will withdraw their
commitment to place the ad (typically this is a result of changes in promotional strategies; for example, a
product may be found to be inferior or an ad may tum out to be ineffective). Because of such
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 ISOM2700: Homework Assignment #5

opportunistic behavior by advertisers, media companies often overbook advertising slots. HK4
estimates that in the past the number of withdrawn ads has a distribution as follows:

S Pr(The number of
withdraws ≤ S)
0 0.00012
1 0.00123
2 0.00623
3 0.02123
4 0.05496
5 0.11569
6 0.20678
7 0.32390
8 0.45565
9 0.58741
10 0.70599
Assume each withdrawn ad slot can still be sold at a standby price of $2,500 although the company
misses an opportunity to sell these slots at $4,000 a piece. Any ad that was accepted by HK4 but cannot
be accommodated because there isn't a free slot costs the company $10,000 in penalties. How many slots
(at most) should be sold? [10 pts]

Answer:

(a)

Cu = 10000 – 4000 = 6000; Co = 4000

Prob(D ≤ Q) = Cu / (Co + Cu) = 0.6

From the table, the optimal protection quantity is 13. Therefore, HK4 should sell 25 – 13 = 12 slots in
advance.

(b)

Cu = 10000 – 4000 = 6000

Co = 4000 – 2500 = 1500

Prob(D ≤ Q) = Cu / (Co + Cu) = 0.8

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 ISOM2700: Homework Assignment #5

From the table, the optimal protection quantity is 15. Therefore, HK4 should sell 25 – 15 = 10 slots in
advance.

(c)

If the booking limit is 10, there are 15 slots for last-minute sales. There will be standby messages if there
are 14 or fewer last-minute sales, which has probability 0.7.

(d)

Cu = 4000 – 2500 = 1500; Co = 10000

Prob(D ≤ Q) = Cu / (Co + Cu) = 0.1304

From the Probability Distribution Function Table,

Prob(D ≤ 5) = F(5) = 0.11569, Prob(D ≤ 6) = F(6) = 0.20678, so the optimal overbooking quantity is 6, that
is, sell up to 25 + 6 = 31 slots.

Problem 3 [Price-based RM: 30pts]

HKUST Center for the Arts is planning a concert by Hong Kong Philharmonic Orchestra. A recent
survey from staffs and students of HKUST reveals the willingness-to-pay for the concert as follows:

WTP (HKD) Demand if

price = WTP
150 1
125 10
100 32
75 72
50 97
25 113

(a) What is the revenue-maximizing price for the concert? [10 pts]

(b) Estimate the parameters (a, b) of a linear demand model, D(p) = a – bp, using the WTP information.
What is the revenue-maximizing price based on the linear demand model? [10 pts]

(c) HKUST Center for the Arts wishes to differentiate the price for staffs and students. The following
table presents the detailed information about willingness-to-pay for staffs and students, respectively.
What is the revenue-maximizing prices for staffs and students based on the WTP information? Is it
worthwhile differentiating prices for staffs and students? [10 pts]

WTP (HKD) Demand if Staff demand Students demand

price = WTP if price = WTP if price = WTP
150 1 1 0
125 10 9 1
100 32 22 10
75 72 30 42
50 97 39 58
25 113 52 61
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 ISOM2700: Homework Assignment #5

Answer

(a)

WTP (HKD) Demand if Revenue

price = WTP
150 1 150
125 10 1,250
100 32 3,200
75 72 5,400
50 97 4,850
25 113 2,825

The revenue-maximizing price is 75 HKD.

(b) Using the formula below:

∑ni=1 xi yi − nx̅y̅
b∗ = n
∑i=1 xi2 − n𝑥̅ 2

a∗ = y̅ − 𝑏 ∗ 𝑥̅

We have:

a* = 140.27

b* = 0.984

Optimal price = 140.27 / (2*0.984) = 71.275 HKD

(c)

WTP (HKD) Staff demand Revenue from Students demand Revenue from
if price = WTP Staff if price = WTP Students
150 1 150 0 0
125 9 1,125 1 125
100 22 2,200 10 1,000
75 30 2,250 42 3,150
50 39 1,950 58 2,900
25 52 1,300 61 1,525

For both staffs and students, the profit-maximizing price is 75 HKD.

As the profit-maximizing price is the same as that without price differentiation, it is not worth-while to
differentiate prices between staffs and students.