Manasci Reviewer

MANASCI Reviewer
DECISION THEORY
Decision Theory Environments:
1. Decision under certainty risk free environment; outcome (state of nature/event)
is known
2. Decision under uncertainty several outcomes, probability of outcome is unknown
2.1.
Maximax maximizing the maximum payoff
2.2.
Maximin maximizing the minimum payoff
2.3.
Minimax minimizing the maximum regret/opportunity loss
2.4.
Equally Likely/Laplace Criterion giving equal probability for all events to

happen
2.5.
Hurwicz Criterion of Realism (alpha of positive realism); 1 - (negative

outcome)
Example:
The New Era Toy Company, Inc. manufactures childrens wooden toys. The company
believes that the current trend toward sturdier and simpler toys will continue; thus New
Era must decide among three alternative methods of providing for anticipated higher
demand for its products. These are completely overhauling the existing plant and installing
computerized woodworking machinery; expanding the current plant and adding more
machines, or buying a competitors plant which is available. A fourth alternative would be
to limit production to the current plant capacity (do nothing). New Eras payoff table is as
follows:
States of Nature
Alternatives
High
Moderate
Low
Failure
Overhaul
30,000
10,000
-5,000
-50,000
Expand
60,000
20,000
-10,000
-70,000
Buy
50,000
15,000
-20,000
-60,000
Do Nothing
3,000
2,000
-1,000
-5,000
This reviewer is brought to you by the Young Entrepreneurs Society
MANASCI Reviewer
New Era management has no information on how demand will be likely to shape up.
Compute for Maximax, Maximin, Minimax and criterion of realism, with = 0.80 determine
the best choice for New Era under these conditions.
Given: = 0.80
Maximax
Maximin
Equally Likely
Hurwicz Criterion
30,000
-50,000
-3,750
14,000
60,000
-70,000
34,000
50,000
-60,000
-3,750
28,000
3,000
-5,000
-250
1,400
Expand
Do Nothing
Expand
Expand
Regret Values
High
Moderate
Low
Failure
Max Regret
30,000
10,000
4,000
45,000
45,000
9,000
65,000
65,000
10,000
5,000
19,000
55,000
55,000
57,000
18,000
57,000
Overhaul
MANASCI Reviewer
3. Decision under risk probability of each event happening is known/given

3.1
EMV (Expected Monetary Value)
3.2
Maximum Likelihood which event will most likely happen, then decide
which alternative has highest payoff
3.3
Criterion of Rationality/Laplace/Equally Likely
Worth of Perfect Information (EVPI or EVofPI) is the expected value

with the perfect information minus the maximum EV
3.4
Expected Opportunity Loss (EOL)
3.5
Marginal Analysis for discrete variables (continuous/metric variables),

such as demand and supply levels
Example:
If New Era can secure information on the probability of occurrence of demand as follows:
High = 0.50; Moderate = 0.35;
Low = 0.10; and Failure = 0.05.
States of Nature
Alternatives
High
Moderate
Low
Failure
Overhaul
30,000
10,000
-5,000
-50,000
Expand
60,000
20,000
-10,000
-70,000
Buy
50,000
15,000
-20,000
-60,000
Do Nothing
3,000
2,000
-1,000
-5,000
Probabilities
0.50
0.35
0.10
0.05
MANASCI Reviewer
Compute for the Expected Value, Maximum Likelihood, Criterion of Rationality, and the
Worth of Perfect Information. Determine the best choice for New Era under these
conditions.
EMV
-7,500
Where:
Xi = payoff for the alternative in state of nature i
P(Xi) = probability of achieving payoff Xi
(probability of state of nature i)
0
-1,500
-50
Expand
Max Likelihood
30,000
Event/State of
Nature most likely
to happen: High
60,000
50,000
Equally Likely
Equally Likely
would disregard
the probabilities
given
-3,750
0
-3,750
3,000
-250
Expand
Expand
*Expected Value of Perfect Information (EVPI) places an upper bound on what to pay for
additional information
MANASCI Reviewer
LINEAR PROGRAMMING (LP)

Technique to solve resource allocation problems
Program is modelling
-
Solving using equations
2 LP Techniques:
(1) Graphical Method
-
Good for 2 decision variables
(2) Simplex Method (Matrix)

-
More than 2 decision variables
Objective Function
Maximize a quantity
- Profit, Sales, Advertising Audience Reach, Market Share, etc.
Minimize a quantity
- Cost/Expense, Labour Hours, Machine Hours, Inventory Quantity, etc.
Constraints/Limitations
-
Conditions and/or resource limitations defined in the problem
Example of an LP Problem:
Maximize profit = 2X1 + 4X2
Where:
X1 = number of product X;
2 = profit per unit of product X;
X2 = number of product Y
4 = profit per unit of product Y
Subject to constraints:
2X1 + 3X2 40hrs (labour hours/week/employee)
0.50X1 + 1X2 50 planks (raw materials/wood)
3X1 + 4X2 = 100sqm (factory space)
2X1 + 3X2 = 40hrs (machine hours)
Chapter 7 of textbook (Quantitative Analysis for Management 11e, Render) Linear

Programming Models: Graphical and Computer Method
MANASCI Reviewer
LP GRAPHICAL METHOD
(7-18, p. 313) Objective Function: Minimize Faculty Wages/Salaries = Z
Decision Variables:
No. of Graduate courses = X1
No. of Undergraduate courses = X2
Faculty Wages Undergraduate = $2,500

Faculty Wages Graduate = $3,000
Subject to (constraints):
1)
demand for undergraduate courses
2)
demand for graduate courses
3)
courses offered (both)
*Non-negativity constraint
X2
Solution:
X1
X2
30
20
0
60
60
0
X1
Corner Point Solution:

Corner Point
Grad (X1)
Undergrad (X2)
Min Z
20
40
$160,000
30
30
$165,000
Point A: Intersecting Lines (

Substitute
to
and
;
Point B: Intersecting Lines (

Substitute
to
and
;
Decision:
Point A, Min Z = $ 160,000

X1 = 20, X2 = 40
MANASCI Reviewer
(7-19) Objective Function: Most profitable no. of computers for the coming month
Decision Variables:
Alpha 4 = X1
Beta 5 = X2
Profit per Alpha 4 = $1,200

Profit per Beta 5 = $1,800
1)
labor hours (5x160)
2)
Alpha 4 production
3)
Beta 5 production
X2
Solution:
X1
X2
Feasible Line
0
40
32
0
Segment
10
15
X1

Corner Point
Alpha 4 (X1)
Beta 5 (X2)
Max Z
10
24
$55,200
21.25
15
$52,500
Decision:
Point A, max Z = $ 55,200

Produce 10 units of Alpha 4 and 24 units of Beta 5
Note: MINIMIZE, nearest to the origin / MAXIMIZE, farthest from the origin
MANASCI Reviewer
(The Possibility Restaurant Case Analysis from Taylors book)

Objective Function: Maximize profit
Decision Variables:
Fish Dinner = X1
Beef Dinner = X2
Profit for each Fish Dinner = $12

Profit for each Beef Dinner = $16
1)
meals each night
2)
(time constraint)
3)
or
(health constraint)
4)
(percent constraint)
Solution:
X1
X2
0
60
60
0
0
80
40
0
30
20
90
10

Corner Point
Fish Dinner (X1)
Beef Dinner (X2)
Max Z
34.3
22.8
$776.23
40
20
$800
54
$744
Decision:
Point B, Max Z = $800

40 Fish meals and 20 Beef meals
Sourcehttp://www.scribd.com/doc/19938746/Taylor-Chap-2-Answers
MANASCI Reviewer
LP SIMPLEX METHOD
(Flair Furniture Problem)
STEP 1: Formulate the LP
Subject to:
1)
2)
Where X1 = no. of tables

X2 = no. of chairs
painting hours
carpenting hours
STEP 2: Convert Inequalities to Equations

Constraints
1)
Find how much slack

resources are available
idle/unused labor hours
2)
add slack variable

deduct slack variable (surplus)
= add dummy/artificial variable
STEP 3: Prepare the Initial Simplex Table
Decision variables Slack variables

BV = basic variable; constraints/resources
Cj = coefficient of decision variable (j = X1Xn) / profit per unit
Zj = gross profit given up in exchange for 1 unit of the variable (in the columns)
Cj Zj = net profit for each unit of decision variable
slack variable = idle/unused resources
slack variable is 0 on profit maximization
Optimal if all Cj Zj are 0 or negative = Max Z
MANASCI Reviewer
Table 1
7
Cj
BV
RHS Qty
X1
X2
S1
S2
Ratio
S1
100
50X1
S2
240
60X1
Zj
Cj - Zj
Incoming Variable
Outgoing Variable
Table 2
7
Cj
BV
RHS
X1
X2
S1
S2
Ratio
X1
50
0.5
0.5
100X2
S2
40
-2
40X2
Zj
350
3.5
3.5
1.5
-3.5
RHS
X1
X2
S1
S2
100 2
22
12
12
02
X1 Values
50
0.5
0.5
Old S2
RHS
240
X1
4
X2
3
S1
0
S2
1
Less: Pivot Number of S2 x

New X1 Values
(4x50)
200
(4x1)
4
(4x1)
4
(4x0.5)
2
(4x0)
0
New S2
40
-2
Cj - Zj
X1 Values
S2 Values
Note: Outgoing Variable (choose lowest ratio); Do not choose negative, zero, and undefined ratio
MANASCI Reviewer
Table 3
7
Cj
BV
RHS
X1
X2
S1
S2
X2
40
-2
X1
30
1.5
-0.5
Zj
410
0.5
1.5
-0.5
-1.5
RHS
X1
X2
S1
S2
40 1
01
11
-2 1
11
40
-2
RHS
X1
X2
S1
S2
Old X1
50
0.5
0.5
Less: Pivot Number of X1 x

New X2 Values
(0.5x40)
20
(0.5x0)
0
(0.5x1)
0.5
(0.5x-2)
-1
(0.5x1)
0.5
New X1
30
1.5
-0.5
Cj - Zj
Ratio
X2 Values
X2 Values
X1 Values
Optimal Solution is X1 = 40, X2 = 30, Max Z = 410 (since all Cj - Zj values are 0 and
negative)
MANASCI Reviewer
Problem:
Subject to:
1)
2)
Table 1
7
Cj
BV
RHS
X1
X2
X3
S1
S2
Ratio
S1
100
50X1
S2
240
60X1
Zj
Cj - Zj
Table 2
Cj
BV
RHS
X1
X2
X3
S1
S2
Ratio
X3
50
0.5
0.5
100X2
S2
40
-2
40X2
Zj
450
4.5
4.5
-2
0.5
-4.5
Cj - Zj
X3 Values
RHS
X1
X2
X3
S1
S2
100 2
22
12
22
12
02
50
0.5
0.5
X3 Values
S2 Values
RHS
X1
X2
X3
S1
S2
Old S2
240
Less: Pivot Number of S2 x

New X3 Values
(4x50)
200
(4x1)
4
(4x0.5)
2
(4x1)
4
(4x0.5)
2
(4x0)
0
New S2
40
-2
MANASCI Reviewer
Table 3
7
Cj
BV
RHS
X1
X2
X3
S1
S2
X2
40
-2
X3
30
1.5
-0.5
Zj
470
3.5
0.5
-2
-3.5
-0.5
Cj - Zj
Ratio
X2 Values
RHS
X1
X2
X3
S1
S2
40 1
01
11
01
-2 1
11
40
-2
X2 Values
X3 Values
RHS
X1
X2
X3
S1
S2
Old X3
50
0.5
0.5
Less: Pivot Number of X3 x

New X2 Values
(0.5x40)
20
(0.5x0)
0
(0.5x1)
0.5
(0.5x0)
0
(0.5x-2)
-1
(0.5x1)
0.5
New X3
30
1.5
-0.5
Optimal Solution is X1 = 0, X2 = 40, X3 = 30, Max Z = 470
MANASCI Reviewer
TRANSPORTATION MODEL
Shipment from sources to destination
Objective is to minimize transportation cost
2 Cases
1) Supply = Demand
(Balanced Transportation Model)
2) Supply > Demand

Supply < Demand
(Unbalanced Transportation Model)
Parts of a Transportation Table
Cost to transport to destination
MANASCI Reviewer
STEPS:
1) Choose from any of the three Initial Solution methods
a. Northwest Corner Rule (NCR)
- Start the allocation with the top left most cell of the table
b. Inspection Method (Greedy Method)
- Allocation will start with the cell with the lowest cost
c. Vogels Approximation Method (VAM)
- Lowest opportunity cost
2) Evaluate the Transportation Cost
a. Modified Distribution (MODI) Method
(1) Occupied cells
(2) Empty cells
= Cij = Ri + Kj
= Iij = Cij Ri - Kj
Where: Cij = cost for cell at row i and column j

Ri = row number
Kj = column number
Iij = improvement index at cell row i and column j
b. Stepping Stone Method

- Trace a closed path starting with the empty cell with the
most cost reduction to match Iij with the negative index
Note: MODI and Stepping Stone are to be done successively
Test for degeneracy if occupied cells are less than the total rows
and columns less 1, then there is No Feasible Solution.
MANASCI Reviewer
Example (QUICK Trucking)

QUICK Trucking Company was contracted to transport 620 crates of Davao pomelo from 3
warehouses (A, B, and C) to three fruit dealers (1, 2, and 3) in Metro Manila next week. The
available fruits from the three warehouses, the requirements of three dealers and the costs to
transport per crate are shown below
Warehouse
A
B
C
Available Supply
180 crates
200 crates
240 crates
620 crates
Fruit Dealer
1
2
3
Requirements
280 crates
150 crates
190 crates
620 crates
Cost to Transport per Crate

From
A
B
C
To
1
P24
20
26
2
P22
16
24
3
P22
24
18
Find the least cost delivery schedule using the transportation method.
Table 1 Using Northwest Corner Rule
Transportation Cost
A-1
B-1
B-2
C-2
C-3
180 x 24
100 x 20
100 x 16
50 x 24
190 x 18
Total Cost
4,320
2,000
1,600
1,200
3,420
12,540
MANASCI Reviewer
MODI Occupied Cells (Table 1)

C11 = R1 + K1
24 = 0 + K1
K1 = 24
C22 = R2 + K2
16 = -4 + K2
K2 = 20
C21 = R2 + K1
20 = R2 + 24
R2 = -4
C32 = R3 + K2
24 = R3 + 20
R3 = 4
C33 = R3 + K3
18 = 4 + K3
K3 = 14
Cell with cost reduction
MODI Empty Cells

I12 = C12 R1 K2
= 22 0 20
=2
I13 = C13 R1 K3
= 22 0 14
=8
(if units will be allocated to

C12, cost increases by 2)
I23 = C23 R2 K3
= 24 + 4 14
= 14
I31 = C31 R3 K1
= 26 4 14
= -2
(if units will be allocated to
C31, cost decreases by 2)
All Iijs should be zero or positive for the solution to be optimal.

An Iij with a negative index indicates that we should allocate there in order to reduce cost
Stepping Stone Method
_
+
+
_
Note: Only vertical and horizontal paths/no diagonal; you cannot deduct anything from a
cell with zero allocation (no minus signs on the cells with 0)
After tracing a closed path from the empty cell with the most cost reduction, add/subtract
the cost values of each cell sequential from the path and check if it matches the Iij with the
negative index.
+C31 C21 + C22 C32 = I31; 26 20 + 16 24 = -2
(If the answer is unequal, test for another closed path)
MANASCI Reviewer
To create Table 2, the only cells that will change are those from the closed path.
Choose the smallest no. of units from the pull-out cells (- sign). Afterwards, sequentially
add or subtractdepending on the cells signsthe allocation value of that cell to other
cells included in the path
Table 2
Transportation Cost
A-1
B-1
B-2
C-1
C-3
180 x 24
50 x 20
150 x 16
50 x 26
190 x 18
Total Cost
4,320
1,000
2,400
1,300
3,420
12,440
MANASCI Reviewer
MODI Occupied Cells (Table 2)

C11 = R1 + K1
24 = 0 + K1
K1 = 24
C31 = R3 + K1
26 = R3 + 24
R3 = 2
C21 = R2 + K1
20 = R2 + 24
R2 = -4
C22 = R2 + K2
16 = -4 + K2
K2 = 20
C33 = R3 + K3
18 = 2 + K3
K3 = 16
MODI Empty Cells

I12 = C12 R1 K2
= 22 0 20
=2
I23 = C23 R2 K3
= 24 + 4 16
=8
I13= C13 R1 K3
= 22 0 16
=8
I32 = C32 R3 K2
= 24 2 20
=2
The minimum cost is 12,440 since all Iijs are zero and positive.
QUICK Trucking using the Greedy/Inspection Method
*First allocation goes to the cell with the cheapest transportation cost. Satisfy the demand,
then allocate to the next cheapest cell.
Initial table of Greedy method is similar to Table 2 of NCR
Total Transportation Cost when computed equals 12,440, use MODI to evaluate
Note: Greedy Method is only applicable when only one lowest cost exists in the table

Manasci Reviewer

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Manasci Reviewer

Hochgeladen von

Copyright:

Verfügbare Formate

MANASCI Reviewer

Maximax maximizing the maximum payoff

Maximin maximizing the minimum payoff

Minimax minimizing the maximum regret/opportunity loss

Equally Likely/Laplace Criterion giving equal probability for all events to

Hurwicz Criterion of Realism (alpha of positive realism); 1 - (negative

This reviewer is brought to you by the Young Entrepreneurs Society

This reviewer is brought to you by the Young Entrepreneurs Society

3. Decision under risk probability of each event happening is known/given

EMV (Expected Monetary Value)

Criterion of Rationality/Laplace/Equally Likely

Worth of Perfect Information (EVPI or EVofPI) is the expected value

Expected Opportunity Loss (EOL)

Marginal Analysis for discrete variables (continuous/metric variables),

This reviewer is brought to you by the Young Entrepreneurs Society

This reviewer is brought to you by the Young Entrepreneurs Society

LINEAR PROGRAMMING (LP)

Solving using equations

Good for 2 decision variables

(2) Simplex Method (Matrix)

More than 2 decision variables

Conditions and/or resource limitations defined in the problem

Chapter 7 of textbook (Quantitative Analysis for Management 11e, Render) Linear

This reviewer is brought to you by the Young Entrepreneurs Society

Faculty Wages Undergraduate = $2,500

Corner Point Solution:

Point A: Intersecting Lines (

Point B: Intersecting Lines (

Point A, Min Z = $ 160,000

This reviewer is brought to you by the Young Entrepreneurs Society

Profit per Alpha 4 = $1,200

Corner Point Solution:

Point A, max Z = $ 55,200

This reviewer is brought to you by the Young Entrepreneurs Society

(The Possibility Restaurant Case Analysis from Taylors book)

Profit for each Fish Dinner = $12

Corner Point Solution:

Fish Dinner (X1)

Beef Dinner (X2)

Point B, Max Z = $800

This reviewer is brought to you by the Young Entrepreneurs Society

Where X1 = no. of tables

STEP 2: Convert Inequalities to Equations

Find how much slack

idle/unused labor hours

add slack variable

STEP 3: Prepare the Initial Simplex Table

Decision variables Slack variables

This reviewer is brought to you by the Young Entrepreneurs Society

Less: Pivot Number of S2 x

This reviewer is brought to you by the Young Entrepreneurs Society

Less: Pivot Number of X1 x

This reviewer is brought to you by the Young Entrepreneurs Society

Less: Pivot Number of S2 x

This reviewer is brought to you by the Young Entrepreneurs Society

Less: Pivot Number of X3 x

Optimal Solution is X1 = 0, X2 = 40, X3 = 30, Max Z = 470

This reviewer is brought to you by the Young Entrepreneurs Society

(Balanced Transportation Model)

2) Supply > Demand

(Unbalanced Transportation Model)

Parts of a Transportation Table

Cost to transport to destination