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# Financial Management

## E. QUANTITATIVE METHODS for the activity times.

B. PERT does not allow for slack times on the activities while CPM does.
C. PERT considers only activity cost while CPM considers only activity time.
THEORIES: D. PERT determines the least-cost path through a network while CPM determines the least-
Economic Order Quantity time path through a network.
1. The economic order quantity is the order quantity that results in
A. the minimum total annual inventory costs. 6. Critical Path Method (CPM) is a technique for analyzing, planning, and scheduling large,
B. no inventory shortages. complex projects by determining the critical path from a single time estimate for each event
C. the maximum total annual inventory costs. in a project. The critical path:
D. minimum ordering costs. A. Is the shortest path from the first event to the last event for a project.
B. Is an activity within the path that requires the most number of time.
Sensitivity analysis C. Has completion that reflects the earliest time to complete the project.
2. Missile Company has correctly computed its economic order quantity as 500 units. However, D. Is the maximum amount of time an activity may be delayed without delaying the total
management feels it would rather order quantities of 600 units. How should Missiles total project beyond its target completion time.
annual purchase-order costs and total annual carrying cost for an order quantity of 600 units
compare to the respective amounts for an order quantity of 500 units? Queuing Theory
A. Higher purchase-order cost and lower carrying cost. 7. A company is designing a new regional distribution warehouse. To minimize delays in
C. Lower purchase-order cost and higher carrying cost. most relevant technique to assist in determining the proper number docks is
D. Lower purchase-order cost and lower carrying cost. A. Cost-volume-profit analysis C. Linear programming
B. PERT/CPM analysis D. Queuing theory
3. A decrease in inventory order costs will
A. Increase the reorder point. Linear Programming
B. Decrease the economic order quantity. Use the following information to answer question Nos. 8 and 9:
C. Have no effect on the economic order quantity. The Kinis Company produces a cosmetic product in 60 gallon batches. The basic ingredients used
D. Decrease the holding cost percentage. are material X, costing P70 per gallon, and material Y, costing P170 per gallon. No more than 18
gallons of X can be used, and at least 15 gallons of Y must be used.
4. An increase in inventory holding costs will
A. Decrease the economic order quantity. 8. How would the objective function (minimization of product cost) be expressed?
B. Have no effect on the economic order quantity. A. 70X + 170Y C. 170X + 70Y
C. Increase the economic order quantity. B. 18X + 15Y D. 18X + 42Y
D. Decrease the number of orders issued per year.
9. Which of the following is not a constraint of the Kinis Company?
PERT-CPM A. X 18 C. Y 15
5. Which one of the following statements best describes a difference between basic PERT and B. X + Y 60 D. X 0
the Critical Path Method (CPM) of network analysis?
A. PERT uses probability distribution on the activity times while CPM uses point estimates Use the following data to answer Question Nos. 10 through 12:

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Sun, Inc. manufactures product X and product Y, which are processed as follows: C. Activity DE 1 week and activity BC 1 week
Type A machine Type B machine D. Activity DE 1 week and activity EF 1 week
Product X 6 hours 4 hours
Product Y 9 hours 5 hours Learning Curve
1
. Contratista, Inc. is considering a three-phase research project. The time estimates for
completion of Phase 2 of the project are:
The contribution margin is P12 for product X and P7 for product Y. The available time daily for
Pessimistic 24 weeks
processing the two products is 120 hours for machine Type A and 80 hours for machine Type B.
Most likely 20 weeks
Optimistic 10 weeks
10. How would the constraint for machine Type A be expressed?
Using the program evaluation and review technique (PERT), the expected time for
A. 4X + 5Y C. 4X + 5Y 80
completion of Phase 2 should be
B. 6X + 9Y 120 D. 12X + 7Y
A. 20 weeks C. 18 weeks
B. 19 weeks D. 24 weeks
11. How would the constraint for machine Type B be expressed?
A. 4X + 5Y C. 4X + 5Y 80 2
. Wind Company expects an 85% learning curve. The first batch of a new product required 500
B. 6X + 9Y 120 D. 12X + 7Y
hours. The first four batches should take an average of
A. 361.25 hours C. 500.0 hours
12. How would the objective function be expressed?
B. 425.0 hours D. 322.4 hours
A. 4X + 5Y C. 4X + 5Y 80
B. 6X + 9Y 120 D. 12X + 7Y 3
. A learning curve of 80% assumes that production unit costs are reduced by 20% for each
doubling of output. What is the cost of the sixteenth unit produced as an approximate
percent of the first unit produced?
PROBLEMS:
A. 30 percent C. 41 percent
PERT-CPM
B. 51 percent D. 64 percent
2. Castle Building Company uses the critical path method to monitor construction jobs. The
company is currently 2 weeks behind schedule on Job WW, which is subject to a P10,500-per- 4
. Soft Inc. has a target total labor cost of P3,600 for the first four batches of a product. Labor
week completion penalty. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and
is paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first
critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities
batch take?
can be crashed.
A. 360 hours C. 57.6 hours
Activities Cost to Crash 1 Week Cost to Crash 2 Weeks B. 140.63 hours D. 230.4 hours
BC P 8,000 P15,000
DE 10,000 19,600 5
. Havenot has estimated the first batch of product will take 40 hours to complete. A 90%
EF 8,800 19,500 learning curve is expected. If labor is paid P15 per hour, the target labor cost for four batches
Castle desires to reduce the normal completion time of Job WW and, at the same time, report of product is
the highest possible income for the year. Castle should crash A. P600 C. P1,944
A. Activity BC 1 week and activity EF 1 week B. P2,160 D. P2,400
B. Activity BC 2 weeks

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6
. Hanip Co. used 30 hours to produce the first batch of units. The second batch took an
additional 18 hours. How many total hours will the first four batches require? Expected Value
10
A. 76.8 hours C. 120.0 hours . Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of
B. 96.2 hours D. 48.0 hours muffins costs P2 and sells for P3 through regular stores. Any boxes not sold through regular
stores are sold through Doughs thrift store for P1. Dough assigns the following probabilities to
7
. Sulit Company plans to begin production of a new product on July 1. An 80% learning curve is selling additional boxes:
applicable to Sulits manufacturing operations. If it is expected to take 1,000 direct labor hours Additional sales Probability
to produce the first unit, how many direct labor hours should it take to produce the third and 60 0.6
fourth units? 100 0.4
A. 640 C. 1,600 What is the expected value of Doughs decision to buy 100 additional boxes of muffins?
B. 960 D. 2,560 A. P28 C. P52
8
B. P40 D. P68
. A construction company has just completed a bridge over the Visayan area. This the first
bridge the company ever built and it required 100 weeks to complete. Now having hired a 11
. Karen Company has three sales departments. Department A processes about 50 percent of
bridge construction crew with some experience, the company would like to continue building sales, Department B about 30 percent, and Department C about 20 percent. In the past,
bridges. Because of the investment in heavy machinery needed continuously by this crew, the Departments A, B, and C had error rates of about 2 percent, 5 percent, and 2.5 percent,
company believes it would have to bring the average construction time to less than one year respectively. A random audit of the sales records yields a recording error of sufficient
(52 weeks) per bridge to earn a sufficient return on investment. The average construction time magnitude to distort the companys results. The probability that Department A is responsible
will follow an 80% learning curve. To bring the average construction time (over all bridges for this error is
constructed) below one year per bridge, the crew would have to build approximately A. 0.50 C. 0.20
A. 2 additional bridges. C. 3 additional bridges. B. 0.33 D. 0.25
12
9
. A beverage stand can sell either softdrinks or coffee on any given day. If the stand sells
. Moss Point Manufacturing recently completed and sold an order of 50 units that had the softdrinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be
following costs: P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is
Direct materials P 1,500 cold, the profit will be P2,000. The probability of cold weather on a given day at this time is
Direct labor (1,000 hours @ P8.50) 8,500 60%. The expected payoff if the vendor has perfect information is
Variable overhead (1,000 hours at P4.00) 4,000 A. P3,900 C. P2,200
Fixed overhead 1,400 B. P1,360 D. P1,960
P15,400
*Applied on the basis of direct labor hours. 13
. The Teeners Club sells fresh hot cider at Recto football games. The frequency distribution
*Applied at the rate of 10% of variable cost. of the demand for cups of hot cider per game is presented below:
The company has now been requested to prepare a bid for 150 units of the same product. Unit sales volume Probability
If an 80 percent learning curve is applicable, Moss Points total cost on this order would be
10,000 0.10
estimated at
20,000 0.15
A. P26,400 C. P31,790
30,000 0.15
B. P37,950 D. P38,500

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40,000 0.40
50,000 0.20 The manager of the firm had estimated demand per week and associated probabilities as
The hot cider is sold for P35.00 a cup and the cost per cup is P20.00. Any unsold hot cider follows:
is discarded because it will spoil before the next game. Demand Probability
What is the estimated demand for hot cider at the next football game if a deterministic 100,000 0.20
approach based on the most likely outcome is used? 120,000 0.20
A. 34,500 C. 16,000 140,000 0.30
B. 40,000 D. 50,000 160,000 0.30
14
. Green Co. is considering the sale of banners in an exhibit fair. Green Co. could purchase 16
. The optimal weekly production of the corsage is
these banners for P7.50 each. Unsold banners would be unreturnable and worthless after A. 120,000 C. 134,000
the exhibit. Green would have to rent a booth at the stadium for P4,000. Green estimates B. 140,000 D. 145,000
sales of 2,000 banners at P20.00 each. If Greens prediction proves to be incorrect and only
1,500 banners were sold, the cost of this prediction error would be: 17
. The value of perfect information is
A. P 6,250 C. P 4,750 A. P14,400 C. P23,800
B. P10,000 D. P 3,750 B. P16,000 D. P22,100
15
. The manager of Batanes Company has developed the following probability distribution of Question Nos. 21 through 24 re based on the following information:
dairy sales of a highly perishable product. The company restocks the product each morning: Glassco, Inc. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for
X (Units Sold P (Sales =X) introduction. However, plant capacity is limited, and only one product can be introduced at present.
150 0.20 Therefore, Glassco has conducted a market study, at a cost of P26,000, to determine which
175 0.40 product will be more profitable. The results of the study show the following sales patterns.
200 0.15 Sales of Desserts at P1.80 per unit Sales of Rolls at P1.20 per unit
225 0.10 Volume Probability Volume Probability
250 0.10 250,000 .30 200,000 .20
275 0.05 300,000 .40 250,000 .50
If the company desires an 85% service level in satisfying sales demand, what should the 350,000 .20 300,000 .20
initial balance be for each day? 400,000 .10 350,000 .10
A. 191 C. 234 The costs associated with the two products have been estimated by Glasscos cost accounting
B. 225 D. 250 department and are shown below:
Dessert Rolls
Question Nos. 17 and 18 are based on the following:
Ingredients per unit P 0.40 P 0.25
Sampaguita Company makes corsages that it sells through salespeople on the streets. Each
Direct labor per unit 0.35 0.30
sells for P2 and has variable production costs of P0.80. The salespeople receive a P0.50
Variable overhead per unit 0.40 0.20
commission on each corsage they sell, and the company must spend P0.05 to get rid of each
Production tooling* 48,000.00 25,000.00
unsold corsage. The corsages last for only one week and cannot be carried in inventory.

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as follows:
*Glassco treats production tooling as a current operating expense rather than capitalizing it as a Demand CM Time on M1 Time on M2
fixed asset. X 100 P10 5 10
Y 80 18 10 5
18
. According to Glasscos market study, the expected value of the sales volume of the breakfast Z 100 25 15 5
rolls is There are 2,400 minutes available on each machine during the week. How many units should
A. 125,000 units C. 260,000 units be produced and sold maximize the weekly contribution?
B. 275,000 units D. 250,000 units X Y Z
19 A. 100 80 100
. Applying a deterministic approach, Glasscos revenue from sales of frozen desserts would be
B. 20 80 100
A. P549,000 C. P540,000
C. 100 40 100
B. P195,000 D. P216,000
D. 100 80 73
20
. The expected value of Glasscos operating profit directly traceable to the sale of frozen
desserts is Inventory Management
A. P198,250 C. P471,000 EOQ, Safety Stock, Reorder Point
B. P150,250 D. P120,250 Question Nos. 25 through 30 are based on the following:
KMU Company uses a small casting in one of its finished products. The castings are purchased
21
. In order to recover the costs of production tooling and advertising for the breakfast rolls, from a foundry located in another Asian country. In total, KMU Company purchases 54,000
Glasscos sales of the breakfast rolls would have to be castings per year at a cost of P8 per casting.
A. 37,500 units C. 100,000 units The castings are used evenly throughout the year in the production process on a 360-day-per-year
B. 60,000 units D. 54,000 units basis. The company estimates that it costs P90 to place a single purchase order and about P3 to
carry one casting in inventory for a year. The high carrying costs result from the need to keep the
Decision Tree castings in carefully controlled temperature and humidity conditions, and from the high cot of
22
. A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now insurance.
will yield 100,000 bottles of wine netting P2 per bottle. If the wine maker waits and the Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of
weather turns cold (probability 0.2), the yield will be cut in half but net P3 per bottle. If the delivery time and the percentage of their occurrence are shown in the following tabulation:
weather does not turn cold, the yield will depend on rain. With rain (probability 0.5), a full yield
netting P4 per bottle will result. Without rain (probability 0.5), there will still be a full 100,000- Delivery Time (days) Percentage of Occurrence
bottle yield, but the net will be only P3 per bottle. 6 75
The optimal expected value is 7 10
A. P200,000 C. P350,000 8 5
B. P310,000 D. P400,000 9 5
10 5
Theory of Constraints 100
23
. Happy Holidays produces three products: X, Y, and Z. Two machines are used to produce the 24
products. The contribution margins, sales demands, and time on each machine (in minutes) is . What is the economic order quantity for the company.

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## A. 1,800 C. 2,545 Materials used (lbs.) 12,800

B. 1273 D. 2,700 Number of defective units 20
Defective units as a percentage of total units produced is:
25
. Assuming that the company will not provide any safety stock units, how much would the A. 5% C. 0.53%
annual inventory costs? B. 1.05% D. 2.5%
A. P2,700 C. P5,400
B. P8,100 D. P6,000 ANSWER EXPLANATIONS
26
. Assuming that the company is willing to assume a 15% risk of being out of stock, what would
be the number of safety stock?
A. 0 C. 300
B. 150 D. 450
27
. Assuming that the company is willing to assume only a 5% risk of being out of stock, what
would be the reorder point?
A. 450 C. 1,200
B. 1,050 D. 1,350
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. Assuming a 5% stock-out risk, what would be the total cost of ordering and carrying inventory
for one year?
A. 5,850 C. 6,075
B. 6,300 D. 6,750
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. Assuming that the cost of stock out is P800 per occurrence, which safety stock level is
necessary in reducing the cost?
A. 0 C. 300
B. 150 D. 450

Just-in-Time
30
. At the beginning of 2007, Silang Company installed a JIT purchasing and manufacturing
system. The following information has been gathered about one of the company's products
Theoretical annual capacity 4,000
Actual production 3,800
Production hours available 2,500
On-time deliveries 1,500
Total deliveries 1,600
Scrap (lbs.) 400

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1
Formula: (Pessimistic + 4Most likely + Optimistic) / 6
[24 + (20 x 4) +10] 6 = 19 weeks

2
UnitsCumulative Average TimeComputation1500.002425.00(0.85 x 500.00)4361.25(0.85 x 425.00)
3
UnitsCumulative Average TimeComputation11.0020.80(0.8 x 1.00)40.64(0.8 x 0.80)80.51(0.8 x 0.64)160.41(0.8 x
0.51)Percentage: 0.41 1.00 = 41.0%

4
Average hours after 4th batch P3,600 10 4 units 90
Hours used by 1st batch: 90 0.80 0.80 140.63

5
UnitsCumulative Average TimeComputation140.00236.00(0.9 x 40.00)432.40(0.9 x 36.00) Total number of
hours used by 4 units: 4 x 32.4 129.6
Total labor cost used by 4 units: 129.6 x P15 P1,944

6
Learning curve (30 + 18) 2 30 = 80.0%
Cumulative average time after 4 batches: 30 x 0.8 x 0.8 19.2
Total number of hours used by first 4 batches: 4 x 19.2 76.8

7
Cumulative average DLH after 4 units: (1,000 x 0.8 x 0.8) 640
Total DLH after 4 units: 4 x 640 2,560
Less Total DLH used after 2 units (1,000 x 0.8 x 2) 1,600
Total DLH used by 3rd and 4th units 960

8
No. of BridgesCumulative Average WeeksComputation1100.00280.00(0.8 x 100.0)464.00(0.8 x
80.00)851.20(0.8 x 64.00) It will take 8 bridges to complete them with cumulative average time in weeks of below 52.
The company needs to complete additional 7 bridges to have an average completion time of less than 52 weeks.

9
Cumulative Ave. DHL50 units20.0100 units16.0( 20 x 80% )200 units12.80( 16 x 80% )Total hrs required by 200
units 128.80 x 2,000 2,560
Less Hours used by first 50 units 1,000

Costs
Direct materials (1,500 x 3) P 4,500
Direct labor 1,560 x 8.50 13,260
Variable OH 1,560 x 4 6,240
Total variable Costs 24,000
Fixed OH 10% x 24,000 2,400
Total Cost P26,400

10
SalesConditional Profit (Loss) 60(60 x P3) + (40 x P1) P200 = P 20 100(100 x P3) P200 =
100Expected Value: (P20 x 0.6) + (P100 x 0.4) = P52

11
Dept.ErrorWeightProbabilityA0.020.010.01/.03 = 33.00%B0.050.015.015/03= 50.00% C0.0250.05.005/03=
16.67%0.03
12
Expected payoff:
Sale of coffee during cold weather 2,000 x 0.6 1,200
Sale of soft drinks during hot weather 2,500 x 0.4 1,000
Total 2,200

13
The expected sales based on the most likely outcome are 40,000. This is based on the concept that which one with the
highest probability is the most likely to happen.

14
The cost of prediction error = unsold units x purchase price
500 x 7.50 = P3,750

15
At the service level of 85%, there is 15% risk that the company runs out of stock. To achieve 85% level, 225 units
must be purchased at the start of day. (0.20 + 0.40 + 0.15 + 0.10 = 85%); 225 units corresponds to 85%.

16
PurchasesProbabilityDemand100,000120,000140,000160,000 20%100,00070,00053,00036,000
19,00020%120,00070,00084,00067,000 50,00030%140,00070,00084,00098,000
81,00030%160,00070,00084,00098,000112,000Expected Value 70,000 77,800 79,400 71,700Optimal
Production is 140,000 because it gives the highest pay off, which is 79,400

17
Perfect Information:
(70,000 x.20) + (84,000 x .20) + (98,000 x.3) + (112,000 x .30) = 93,800
Value of Perfect Info 93,800 79,400 = P14,400
Value of Perfect Info = Diff. Between payoff of Perfect Info and Optimal production

18
EV = (200 x 0.2) + (250 x 0.5) + (300 x 0.2) + (350 x 0.1) 60,000

19
300,000 x P1.80 = P540,000
The sales level of 300,000 has the highest probability (40%) and there it the level most likely to happen.

20
EV: (250 x 0.3) + (300 x 0.4) + (350 x 0.2) + (400 x 0.1) 305,000
Expected sales (305,000 x P1.80) P549,000
Less expected variable costs (305,000 x P1.15) 350,750
Contribution margin 198,250
Less fixed costs (P48,000 + P30,000) 78,000
Expected profit P120,250

21
Breakeven units, Glassco: (P45,000 0.45) = 100,000

22
Expected value if immediately harvested: (100,000 x P2) P200,000
Expected value if not harvested immediately:
Cold weather: (50,000 x P3 x 0.20) P 30,000
Not cold with rain: (100,000 x P4 x 0.8 x 0.5) 160,000
Not cold without rain: (100,000 x P3 x 0.8 x. 0.5) 120,000
Total P310,000

23
First step is to determine which machine has a constraint:
Required usage of Machine:
Machine 1: (100 x 5) + (80 x 10) + (100 x 15) 2,800
Machine 2: (100 x 10) + (80 x 5) + (100 x 5) 1,900
Machine 1 has shortage in capacity of (2,800 2,400) 400

Second step is to determine the order of profitability of the product lines per minute of machine 1.
Product X: P10 5 min. P2.00
Product Y: P18 10 min. 1.80
Product Z: P25 15 min. 1.67

The company should produce product Z last because it is the least profitable per minute of usage of Machine 1. It is
apparent that Choice D is the only possible correct response.

24
EOQ = the square root of 2 x annual units required x ordering cost carrying cost per unit
EOQ = the square root of 2 x 54,000 x 90,000 3 = 1,800

25
Annual ordering cost: 54,000/1800 x 90 2,700
Annual carrying cost: 1,800/2 x 3 2,700
Total cost 5,400

26
A 15% risk of out-of-stock means a 85% assurance that order will be received on time. Without having a safety stock,
the company will use a lead time of 6 days (75%). Therefore, 7-day lead time has 85% assurance or a 15% risk of
stockout. The safety stock level is for 1 day (7 6) or 150 units.
Daily requirements: 54,000/360 = 150

27
A 5% risk of out-of-stock means a 95% assurance that order will be received on time. This is estimated to have a lead
time of 9 days (the total of probability for 9 days is 95%).
Reorder point without safety stock 6 days x 150 900
Safety stock (9 6) 150 450
Reorder point 1,350

28
Ordering cost (unchanged) 2,700
Carrying cost
Average inventory (1800/2) + 450 = 1,350
1,350 x 3 4,050
Total 6,750

29