Decision Problems

1. A company which produces cheese slices and other cheese related products has to decide
about a production of sliced cheese as to how much to produce per week.
The probability of sales in kgs is as follows:
Demand in kg xi : 200 210 220 230 240 250
Probability pi : 0.1 0.2 0.3 0.2 0.1 0.1
A kg of cheese sells for Rs 100 in the market and has a cost of Rs 75. The company never sells
cheese that is more than a week old in the market. Any unsold cheese is sold to a local restaurant for
Rs 60.
Construct a pay off table and use it to determine the optimal amount of cheese to be produced and
also the expected profit. Compute Expected Value of Perfect Information (EVPI).

2. A Chemical Plant requires inflammable liquid for its plant since it is inflammable and
company does not have permission to store it. If it is used in plant it gives profit of Rs 200 /
100 mg. Unused liquid has to be sold with loss of Rs 100 / 100mg. Demand follows a normal
distribution with mean 5 gm and S.D. 1 gm. What quantity should the plant buy?

3. Kolkata airport authority is trying to solve a difficult problem with the over-crowded airport.
There are three options to consider, Option A: Totally redesigned and rebuild; Option B:
Remodeled with a new runway; and Option C: Do nothing with the airport. The authority
anticipates three levels of demand for revenue generation for each option. The pay-off for
each level of demand and for each option is given below.
Demand for Revenue generation Option A Option B Option C
High 60 30 45
Medium 30 15 20
Low -20 5 10
Find out which option should be selected for maximize revenue generation using (i) Optimistic
Approach, (ii) Conservative Approach, (iii) Humitz Approach, (iv) Equal Likelihood Criterion and
(v) Minmax Regret Approach
i.e., 10. So Option C should be selected.

4. An operation manager of a firm has the following three types of machines for processing of a
product.
Machine A has fixed cost of Rs 2000 and variable cost of Rs 3 per unit
Machine A has fixed cost of Rs 3000 and variable cost of Rs 2 per unit
Machine A has fixed cost of Rs 5000 and variable cost of Rs 1 per unit
The manager knows in advance as to how many units are to be produced. However, he has to decide
about the types of machines to be used for meeting the various levels of demand.

5. A news paper boy has the following probabilities of selling a magazine.

No of Magazine sold 10 11 12 13 14
Probability 0.1 0.15 0.20 0.25 0.30
Cost of a copy is Rs 30 and sale price Rs 50 and the unsold magazines if any, cannot be returned.
How many copies should be ordered?
 6. A news stand vendor receives its supply of a weekly magazine on Monday and cannot
reorder. Each copy costs Rs 20 and sells Rs 40. Unsold copies are returned the following
week for Rs 10. when the news stand runs out of copies and cannot supply it to any customer
wanting it, the vendor estimates its goodwill loss as Rs 5, in future profits, assuming that
customer might take his business elsewhere for a couple of weeks on the average. For
simplicity of calculation, we assume the demand distribution to be in multiples of 5 as
follows:
Demand - Number of copies 20 25 30 35
Probability 0.15 0.3 0.3 0.25
Construct pay off table, Calculate optimal number of copies to order and Expected profit, EPPI and
EVPI.

7. A company has three options for launching a brand of soap. Option A is to launch a Luxury
soap, Option B is to launch a normal soap and Option C is to launch a harbal soap. the
company anticipates three levels of demand, high, medium and low. The pay off for each
level of demand and for each option are given below:
Demand Option A Option B Option C
High 60 30 45
Medium 30 15 20
Low -20 5 10
Find out which option should be selected for maximize revenue generation using Optimistic
Approach, Conservative Approach, Hurwitz Approach, Laplace Criterion or Equal Likelihood
Criterion and Minmax Regret Approach. (same as Q 3 with a different story)

8. A vendor in a small town buys decorative colour bubs every year and sales them during the
Diwali festival. The bulbs cost him Rs 60 per box of 10 bulbs. If the box is sold, he gets Rs
100. Any bulbs, if not sold in the season, fetch him nothing. From the past experience, he
knows the demand pattern, as given in the following table.
No. of Boxes sold 20 30 40 50 60
Probability 0.1 0.3 0.4 0.1 0.1
How many boxes of bulbs he should buy?

9. Suppose a decision maker, faced four decision alternatives and four states of nature, develops
the following profit payoff table. State of nature
Decision Alternative S1 S2 S3 S4
A1 14 9 10 5
A2 11 10 8 7
A3 9 10 10 11
A4 8 10 11 13
(i) If the decision maker knows nothing about the probabilities of the state of nature what is the
recommended decision using the optimistic, conservative and minimax regret approaches?
(ii) Assuming that the payoff table provides cost rather than profit payoffs. what is the recommended
decision using the optimistic, conservative and minimax regret approaches?
 10. A company operates a chain word-processing franchises in Kolkata. For a daily fee of Rs 800,
company provides access to a personal computer, word-processing software and a printer to
students who need to prepare papers for their classes. Paper is provided at no additional cost.
The firm estimates that its daily variable cost per machine (principally due to paper, ribbons,
electricity, and wear and tear on the computers and printers) is about Rs 85. Prof Chandranath
is planning to open a franchise in Behala. A preliminary market survey has resulted in the
following probability distribution of the number of machines demanded per day during her
plan to work.
Number of machines 22 23 24 25 26 27
Probability 0.12 0.16 0.22 0.27 0.18 0.05
If she wishes to maximize her profit contribution, how many machines should Prof Chandranath plan
to have? What is the daily expected value of perfect information in this situation?

11. The marketing research department of SS group of industries has recommended to launch new
soaps of three different types. The marketing manager has to decide one of the types of soaps
to be launched under the following estimated payoff for various levels of sales.
Types of Soap Estimated levels of Sales
15,000 10,000 5,000
Business (in Rs lakh)
Ordinary soap 30 10 10
Natural soap 40 15 5
Deluxe soap 55 20 3

What will be the marketing manager's decision if: (a) Laplace criteria; (b) Hurwicz Rule for  = 0.65
and (c) Regret Criteria are applied.

12. A Logistic company is planning to setup four warehouses with different material handling
facilities in four alternative locations. The estimated contribution to profit arising out of which
warehouse type - location combination is given below [8]
L1 L2 L3 L4
WH1 100 210 320 150
WH2 85 120 170 180
WH3 120 250 190 170
WH4 170 165 155 195

If the success probabilities of L1, L2, L3 and L4 are 0.2, 0.4, 0.3 and 0.1 respectively, determine the
combination of the best WH configuration and the location using the following decision rules
(i) Laplace decision rule
(ii) Hurwicz Rule if , value for coefficient of indifference is 0.85.
 13. A fruit seller buys strawberries at Rs 20/- per kg and sells them at Rs 50/- per kg. The product
is perishable by nature and can’t be stored overnight. It has to be sold on the day of purchase.
From past experience, the seller knows that the daily demand will range between 10 to 13 kg
as given below.
Demand 10 11 12 13
Probability 0.15 0.30 0.30 0.25

Every kg of strawberries brought and not sold would lead to a loss of Rs 20/-, while every kg of that
could not be sold because of stock out would lead to an opportunity loss of Rs 30/- per kg. Construct
a pay off table and use it to determine the optimal amount of strawberries to be produced and the
expected profit. Also compute the Expected Value of Perfect Information.

14. The research department of HL Pvt Ltd has recommended the marketing department to launch
shampoo of three different types. The marketing manager has to decide one of the types of
shampoo to be launched under the following estimated payoff for various levels of sales.
Types of Estimated levels of Sales
Shampoo 15,000 10,000 5,000
Business (in Rs lakh)
Egg Shampoo 30 10 10
Clinic Shampoo 40 15 5
Deluxe Shampoo 55 20 3
What will be the marketing manager's decision if: (a) Laplace criteria; (b) Hurwicz Rule if  = 0.65
and (c) Regret Criteria are applied.

15. A department store with a bakery section is faced with the problem of how many cakes to
buy in order to meet the day’s demand. The departmental store prefers not to sell day-old left
over cakes and therefore a complete loss. The store has therefore collected information on the
past sales based on selected 100-day period as shown in the table below.
Sales per Day: 15 16 17 18
Number of Days: 20 40 30 10
A cake costs Rs 2.00 and sells for Rs 2.50. Construct a pay-off table and find the optimal
number of cakes that should be bought each day by minimizing Expected Monetary value.
16. Annual demand for a manufacturing company is expected to be as follows:
Units demanded 8000 10000 15000 20000
Probability 0.5 0.2 0.2 0.1
Revenues are Rs 35/unit. The existing manufacturing facility has annual fixed operating costs
of Rs 200000. Variable manufacturing costs are Rs 8/unit at the 8000 unit output level; Rs
5/unit at the 10000 unit level; Rs 6/unit at the 15000 unit level and Rs 7/unit at the 20000 unit
output level.
An expanded facility under consideration would require Rs 250000 fixed operating costs
annually. Variable costs would average Rs 9/unit at the 8000 unit output level; Rs 6/unit at the
10000 unit level; Rs 4/unit at the 15000 unit level and Rs 5/unit at the 20000 unit output level.
To maximize net earnings which size facility should be selected?
17. A dishware manufacturer is considering three alternative plant sizes. Demand depends upon
the selling price of the product; cost of manufacture depend on the size of the plant selected.
Demand is expected to be as follows:
Demand probabilities
Annual Demand (in sets of Selling price / set of dishware
dishware) Rs60 Rs42 Rs40
10000 0.2 0.1 0.05
20000 0.4 0.4 0.25
30000 0.3 0.4 0.4
40000 0.1 0.1 0.3

Anticipating operating costs for the three plant sizes for different levels of operation are:
Variable manufacturing cost/unit in Rs
Level of Plant Plant Size
Operation (in units of Small Medium Large
output)
10000 21 25 32
20000 16 14 18
30000 19 13 12
40000 26 18 14
Annual Fixed cost of Rs400000 Rs420000 Rs500000
Operation
Which alternative is most attractive on the basis of annual net earnings?
Case Study 1:

Sunsoft Information services, a small IT industry based in Salt Lake Sector-V, Kolkata,
primarily deals with accounting software which is quite popular with Small and Medium Enterprise.
It employs around 50 employees and has a annual turnover of about Rs 22 Crore. It has come up with
a new software, CostCalc which is a cost accounting software. This is a unique software and has
features to carry out cost accounting in a very easy way. The price of this software is around Rs 11
lakhs. The fixed cost which is the cost incurred to make the software, has bee Rs 4 crore. The
variable cost associated with shipping and onsite support, is around Rs 1 lakh per per copy of the
software. The average sale of this software is dependent on the following factors:
 Awareness
 Economic condition in the country
 Market conditions
 Competition
Based on these factors, the probabilities of the approximate sales that Sunsoft expects to make in the
year are as follows:
Sunsoft’s Expected Profit
Sales for the Year Profit = (sales X Price) – (Fixed Cost + Sales X Probability of
(Number of Variable Cost) Occurrence
Copies)
50 Rs 1 Crore 0.4
60 Rs 2 Crore 0.3
80 Rs 4 Crore 0.3

As regards the competition, AcctCalc is the market leader in accounting software and also has a big
software R&D department. It also has annual revenue of Rs 96 Crore. The solutions given by this
company are in the domain of accounting as well of Mobile software. AcctCalc has also been
working on a similar project for cost accounting software which could ease the way of cost
accounting. But due to some internal problems, they are not in a stage to ship the software till the end
of the year. Due o this, AcctCalc faces an opportunity cost because the entry of the new product viz
in the market. AcctCalc solution stands to lose substantial amount of Rs 5.4 Crore that it has invested
in the startup of the project.
Now, AcctCalc solutions wants to buy out the software CostCalc from the Sunsoft for an amount of
Rs 15 Crore though part cash part equity deal. The management at AcctCalc decides that if this is not
possible then they can attempt to enter into an agreement with Sunsoft where they can use the
superior reach and network of ActtCalc to garner more sales for the company. The revenue sharing
agreement with AcctCalc envisages that the product CostCalc would use AcctCalc’s brand name and
would retail for Rs 12 lakh. Out of this AcctCalc would get Rs 1 lakh for every copy sold as also
subsequently in the next year even though the price will come down to Rs 11 lakh because of
competition. Out of the balance of Rs 10 lakh per copy of software, Sunsoft would get Rs 5 lakh and
AcctCalc would get Rs 5 lakh. The approximate sales that could be garnered on this basis are as
follows:
Sunsoft Alliance with AcctCalc: Expected Profit
Sales for the Profit for AcctCalc Profit for Sunsoft Probability of
Year Occurance

80 Rs 0.8 crore Rs 4 crore 0.25

100 Rs 1.0 crore Rs 6 crore 0.42
120 Rs 1.2 crore Rs 8 crore 0.28
140 Rs 1.4 crore Rs 10 crore 0.05

Identically, both the above Tables relate to the first year.

Decision Situation by Sunsoft:
Now, Sunsoft has to decide as to how it can maximize its profits. Normally, a software like this, has a
shelf life of around 2 years after which competition enters the markets and the product is unable to
sustain due to declining operating margins.
The following assumptions are to be considered when we solve the problem for Sunsoft.
 The sales are calculated over two years because this is the shelf life of the product after
which competitors will make it unviable to operate in the market,
 The probabilities of the sales in each category remain same. The sales increase by 20% in
the second year.
What decision Sunsoft should take?
Case Study 2:

Haridas Pal has specialized in making Lord Ganesh idols which are installed during Ganesh Chaturthi
festival, in homes as well at public places. He is based in Kumartuli, Kolkata and earns his livelihood
for the year from this profession which keeps him busy for about two months in a year. He makes
two types of idols, big and small. The small one (2 feet height) cost him Rs 250 and sell for Rs 400
whereas the big ones (5 feet height) cost him Rs 1000 and sell for Rs 1500.
Last year, because of the supply of idols in Kolkata by another idol maker Jagdip based in Durgapur,
Haridas had suffered a big loss, so this time he wanted to consider the impact of the competition
before deciding on the number of idols to be made. Due to this activity being the only source of
livelihood, he was averse to take undue risk. He came to know that this last year’s competitor was not
certain to supply the idols in Kolkata as he has the habit of supplying the idols to different cities in
different years. From some knowledgeable sources, Haridas has predicted 40% probability of the
idols being supplied again this year by Jagdip. If it is so, the demand for idols made by him will
reduce by 30% in case of small idols and 20% in case of big idols. The following table gives the
demand for Ganapati idols under the two conditions.
Situation -1, Jagdip does not supply Idols in Kolkata
Demand for Big Idols Probability Demand for Small Probability
Idols
5000 0.3 250 0.05
10000 0.3 500 0.1
20000 0.2 1000 0.3
30000 0.1 1500 0.3
40000 0.05 2000 0.2
50000 0.05 2500 0.05

Situation -2, Jagdip supplies Idols in Kolkata

Demand for Big Idols Probability Demand for Small Probability
Idols
4000 0.3 200 0.05
7000 0.3 400 0.1
14000 0.2 800 0.3
21000 0.1 1200 0.3
28000 0.05 1600 0.2
35000 0.05 2000 0.05

Assuming that Haridas knows in advance about Jagdip’s plan of supplying idols in Kolkata before
starting his work on the idols, help Mr Haridas Pal regarding which option he should choose?
Case Study 3:

The hostel of IISWBM has 240 students and almost all of them invariably use mess facilities on a
day-to-day basis. The hostel is about a km away from the institute. Due to the extensive work load in
the TLM program, many a time, the students stay back in the institute and eat at some food joints
near the institute itself, and thus do not use the mess facilities for dinner. Such pattern is quite
irregular, and leaves little scope for the mess management to determine the exact demand for dinner
servings. On the other hand, the costs involved with the preparation of food were quite high since the
food got wasted. However, one of the TLM students, Mr DM, volunteered to help the mess
management in deciding the optimum level of food preparation using statistical EMV approach.
He met Mr Sen, the executive who takes care of the mess facility and obtained the data for demand of
dinner servings for the last 100 days. Then taking that as a base, he figured out the demand
probabilities for given levels of demand. Finally by constructing the EMV table, he arrived at the
optimum level of food preparation. The mess authorities estimated the number of students taking
dinner varied from 180 to 240. In order to use EMV criterion, it was assumed that number of students
taking dinner varied in multiples of 10, i.e., 180, 190, 200, 210, 220, 230, 240. Mr Sen calculated that
it costs Rs 20 to prepare a meal per student and the charges including other miscellaneous expenses
for dinner is Rs 30. Any meal that is not eaten is obviously wasted and has no salvage value. The
number of students taking dinner, based on the past records is given below:

Number of students dinning in the hostel Number of days

180 14
190 15
200 18
210 16
220 15
230 12
240 10

Suggest the solution to be offered by Mr DM.

Case Study 4:
There is a hotel near a football stadium. The stadium p[lays host to a number of matches of
the football league held every year. The hotel always get fully booked on the evening before the
football games, played in the afternoon, the next day. The past records have shown that although the
hotel is fully booked and many request for bookings are refused, there are some last moment
cancellations of the bookings. The hotel has collected data over the entire history of such matches and
has come up with the following distribution showing the number of cancellations and their respective
frequencies.

Number of Frequenc Cumulative Calculation of Mean value

cancellations y frequency Mean
0 5 5 0
1 8 13 8 5.6975
2 10 23 20
3 15 38 45
4 20 58 80
5 15 73 75
6 11 84 66
7 6 90 42
8 5 95 40
9 4 99 36
10 1 100 10

The hotel management is contemplating to introduce a new policy of overbooking of hotel rooms
(i.e., having more reservations for its rooms on the evening of the football matches) in order to cover
for the last minute cancellations of room bookings.
The average room rentals is Rs 1200 per night out of which the average profit per room per night is
Rs 500. But in case the number of over bookings are more than the number of cancellations, the hotel
will have to find a room in a nearby hotel and pay for the room rented for the customer. This will cost
the hotel Rs 2000 since room booked on such late notice are expensive. Given the probability
distribution of cancellations of rooms as above help the hotel in deciding the optimum number of
rooms to be overbooked.
Case Study 5:
Rajeev Holdings is a company that is contemplating venturing into the hotel / restaurant business. It
has bought the rights to develop some commercial areas in a new township being planned by the
authorities. The township will be housing the employees of a new industrial area being developed.
The township will hold a mix of population right from daily wage workers to the higher class
individuals.
Rajeev Holdings has not yet decided about the scale of its operations. It is not sure of the demand that
can be expected from the new market. It has to decide among four choices, viz opening a take away
restaurant, a budget restaurant, a specially restaurant and a hotel. The risks and returns involved in
these ventures vary widely. So the company has decided to get a market research conducted by a
consultancy organization. The market research survey estimated data relating to the population and
average level of income of the people who will be settling into the areas near the place where Rajeev
Holdings has obtained commercial rights. It has classified the possibilities as:
Low Population, Low Income (LP, LI) High Population, Low Income (HP, LI), Low Population,
High Income (LP, HI) and High Population High Income (HP, HI).
The data obtained by the market research organization is given in the form of a payoff table below.
The payoff table indicates the amount of profit the company is likely to make in a year by adopting a
particular strategy (e.g., opening a particular kind of restaurant) in a particular scenario or state of
nature (the population and socio economic condition of the market in the area).
Payoff Table
Options LP, LI HP, LI LP, HI HP, HI
Take away 8 20 15 7
Restaurant
Budget Restaurant -20 92 110 30
Specialty Restaurant -65 10 375 85
Hotel -710 -560 405 1200

It may be mentioned that the values in the table take into consideration the initial cost of setting upthe
infrastructure (e.g., building for a hotel) and normalizing it over many years to determine the cost for
one year.
Discuss the option to be exercised by the company.