MANAGEMENT ADVISORY SERVICES Quantitative Methods

Expected Value, Payoff Tables & Value of Perfect Information Hotdogs self for P5.00 and cost Liberty P3 each. Unsold hotdogs are given to a local
1
. Gary’s Pipe and Steel Company expects sales next year to be P800,000 if the economy is orphanage without charge.
strong, P500,000 if the economy is steady, and P350,000 if the economy is weak. Gary A. Construct a payoff table (conditional profits).
believes there is a 20 percent probability the economy will be strong, a 50 percent probability B. What are the expected payoff of stocking 30,000 hotdogs and the expected value of
of a steady economy, and a 30 percent probability of a weak economy. What is the expected perfect information?
level of sales for next year?
4
. Gardenia Company makes corsages that it sells through salespeople on the streets. Each
2
. The Visitors Club sells brewed coffee at Araneta Gym's LBA's season games. The frequency sells for P2 and has variable production costs of P0.80. The salespeople receive a P0.50
distribution of the demand for cups of brewed coffee per game is presented below. commission on each corsage they sell, and the company must spend P0.05 to get rid of each
Unit sales volume Probability unsold corsage. The corsages last for only one week and cannot be carried in inventory.
10,000 .10 The manager of the firm had estimated demand per week and associated probabilities as
20,000 .15 follows:
30,000 .25 Demand Probability
40,000 .35 100,000 0.20
50,000 .15 120,000 0.20
The brewed coffee is sold for P1.00 a cup and the cost per cup is P0.25. Any unsold brewed 140,000 0.30
coffee is discarded because it will spoil before the next home game. 160,000 0.30
A. What is the estimated demand for brewed coffee at the next Araneta Gym's LBA's season A. What is the optimal weekly production of the corsage?
game using an expected value approach? B. What is the value of perfect information?
B. What is the estimated demand for brewed coffee at the next Araneta Gym's LBA's season
game using a deterministic approach based on the most likely outcome? PERT-CPM
5
C. What is the conditional profit (loss) per game of having 25,000 cups of brewed coffee . The following are four series of activities with number of days to complete the different
available but only selling 16,000 cups of coffee? activities.
I. A-B-D-F: 25, 18, 25, 14
3
. Liberty, Inc. has been operating the concession stands at the university football stadium. The II. A-B-E-F: 25, 18, 18,14
university has had successful football teams for many years; as a result the stadium is always III. A-C-E-F: 25. 12, 18, 14
full. The university is located in an area that suffers no rain during the football season. From
time to time, Liberty has found itself very short of hotdogs and at other times it has had many Required:
left. A review of the records of sales of the past five seasons revealed the following frequency A. Calculate the total time for each path, and identify the critical path.
of hot dogs sold: B. Which of the path(s) in the network can be delayed? What is(are) the activity(ies) that can
Total Games be delayed and how many hours?
10,000 hot dogs 5 times C. How many slack days are there in Path III?
20,000 hot dogs 10 times D. What is the maximum number of days that can be applied to crash the critical path?
30,000 hot dogs 20 times
6
40,000 hot dogs 15 times . The contractor is 2 days behind of completion of one of its multi-million projects. The daily
50 total games penalty is P150,000 for any delay of completion time. The company has an opportunity of
meeting the completion time if crashing is applied on the different activities.
The PERT, which is not shown, indicated that the critical path is B-D-E-G-L. The following
Exercises & Problems Page 1 of 7
MANAGEMENT ADVISORY SERVICES Quantitative Methods

activities can be crashed at their respective costs: manager believes that Leamwright could make the component with the following costs for the
1 day 2days first batch of 1,000 units.
Activity A P135,000 P260,000 Materials P130,000
Activity B 140,000 285,000 Direct labor and variable overhead 150,000
Activity C 125,000 240,000 Total variable cost P280,000
Activity D 145,000 295,000 Making the component involves no incremental fixed costs because Learnwright could use
Activity E 155,000 280,000 existing equipment. The production manager expects an 85% learning rate on direct labor and
variable overhead. Consider a batch to be 1,000 units.
Required: A. Determine whether Leamwright should make or buy the component.
1. Which of the foregoing activity(ies) would be crashed? How much is the net benefit if the B. Assuming that the demand is a maximum of 16,000 units. Should Leamwright make or
activity(ies) are crashed? buy the component?
2. Assuming that the daily penalty is P140,000, which activities) will be crashed?
Inventory Model
10
Learning Curves . I.M. Boring Company has projected sales of P72,000 pipes this year, an ordering cost of P6
7
. Particular manufacturing job is subjected to an estimated 80% learning curve. The first unit per order, and carrying costs of P2.40 per pipe.
required 100 labor hours to complete. A. What is the economic ordering quantity?
B. How many orders will be placed during the year?
REQUIRED: C. What will the average inventory be?
A. What is the cumulative average time per unit after 8 units are completed? 11
B. What is the total time required to produce 2 units?; 4 units? . U.R. Terrific Company is trying to improve its inventory control system and has installed an on-
C. How many hours are required to produce the second unit? line computer at its retail stores. It anticipates sales of 126,000 units per year, an ordering cost
of P4 per order, and carrying costs of P1.08 per unit.
8
. Win Company manufactures large grape presses. The firm generally experiences a learning A. What is the economic ordering quantity?
effect on new models, at least through the first 64 or so units. Data on a new press appear B. What will be the average inventory be?
below: C. What is the total cost of inventory expected to be?
Labor time for first unit 500 hour D. Assume a safety of stock of 30 units of inventory will be required as safety stock. What will
Labor rate P500 per hour be the new average inventory be? What will the new total carrying cost be?
Variable overhead P10 per labor hour 12
Materials P5,000 per press . Bayan Company uses 4,500 units of Part S-10 each year. The cost of placing one order of Part
The manager of the firm wants to know the expected total cost of making the first 16 units, S-10 is estimated to be about P20. Other costs associated with carrying Part S-10 in inventory
assuming a learning effect on labor of 90 percent. are:
A. Prepare schedules showing the cumulative average time for all doubling points up through Annual Cost per Part
16 units for a 90 percent learning rate. Insurance P0.20
B. Determine the total costs for the first 16 units using a learning curve of 90 percent. Property taxes 0.09
Interest on funds invested 0.15
9
. Learnwright Company currently buys at component for one of its products at P220 per unit. Other 0.06
Leamwright needs 32,000 units of the component in the coming year. The product will be Total cost P0.50
redesigned, so that the component will not be needed beyond the coming year. The production A. Compute the economic order quantity (EOQ) for Part S-10.
Exercises & Problems Page 2 of 7
MANAGEMENT ADVISORY SERVICES Quantitative Methods

B. Assume that the company has been able to reduce the cost of placing an order to only 2. What would be the reorder point?
P8. Also assume that when the waste and inefficiency caused by inventories is
16
considered, the cost to carry a part in inventory jumps to P1.25 per unit. Under these . Ibon Company uses a small casting in one of its finished products. The castings are purchased
conditions, what would be the EOQ? from a foundry located in another Asian country. In total, Ibon Company purchases 54,000
castings per year at a cost of P8 per casting.
13
. Flux Company uses 9,000 units of Part K each year. To get better control over its inventories, The castings are used evenly throughout the year in the production process on a 360-day-per-
the company is anxious to determine the economic order quantity for this part. year basis. The company estimates that it costs P90 to place a single purchase order and
A. The company has determined that the cost to place an order for the part is P30, and it has about P3 to carry one casting in inventory for a year. The high carrying costs result from the
determined that the cost to carry one part in inventory for one year is P1.50. Compute the need to keep the castings in carefully controlled temperature and humidity conditions, and
EOQ for the part. from the high cot of insurance.
B. Assume that the cost to place an order increases from P30 to P40 per order. What will be Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The
the effect on the EOQ? Show computations. days of delivery time and the percentage of their occurrence are shown in the following
C. Assume that the cost to carry a part in inventory increases from P1.50 to P2.50 per part. tabulation:
(Ordering costs remain unchanged at P30 per order.) What will be the effect on the EOQ? Delivery Time (days) Percentage of Occurrence
Show computations. 6 75
7 10
14
. A company annually consumes 50,000 units of Part X. The carrying cost of this part is P3.00 8 5
per year and the ordering costs are P200. The company uses an order quantity of 5,000 units. 9 5
10 5
Based on the information, compute: 100
A. Average number of inventory units. A. Compute the economic order quantity (EOQ).
B. Number of orders per year. B. Assume that the company is willing to assume a 15% risk of being out of stock. What
C. Using 360 days a year, the frequency of making an order. would be the safety stock? The reorder point?
D. The annual inventory costs, broken down into ordering and carrying costs. C. Assume that the company is willing to assume only a 5% risk of being out of stock. What
E. The economic order quantity. Compute the amount of annual inventory costs if the would be the safety stock? The reorder point?
company uses the economic order quantity. D. Assume a 5% stock-out risk as stated in (3) above. What would be the total cost of
15
ordering and carrying inventory for one year?
. Delma Company distributes medical supplies throughout the country. Selected information E. Refer to the original data. Assume that using process reengineering the company reduces
relating to a quick-developing X-ray film carried by the company is given below: its cost of placing a purchase order to only P6. Also, the company estimates that when the
Economic order quantity (EOQ) 700 units, waste and inefficiency caused by inventories are considered, the true cost of carrying a
Maximum weekly usage 60 units unit in stock is P7.20 per year.
Lead time 4 weeks
Average weekly usage 50 units Required:
Management is trying to determine the proper safety stock to carry on this inventory item and A. Compute the new EOQ.
to determine the proper reorder point. B. How frequently would the company be placing an order, as compared to the old
A. Assume that no safety stock is to be carried. What is the reorder point? purchasing policy?
B. Assume that a full safety stock is to be carried.
1. What would be the size of the safety stock in units? Multiple Choice
Exercises & Problems Page 3 of 7
MANAGEMENT ADVISORY SERVICES Quantitative Methods

3. A company is designing a new regional distribution warehouse. To minimize delays in loading Units of safety stock Probability of Running out of safety stock
and unloading trucks, an adequate number of loading docks must be built. The most relevant 10 50%
technique to assist in determining the proper number of docks is 20 40%
A. linear programming C. queuing theory 30 30%
B. PERT/CPM analysis D. correlation and regression analysis 40 20%
50 10%
14. Clay Co. operates three shipping terminals, referred to as X, Y, and Z. Of the total cargo 55 5%
shipped, terminals X, Y, and Z handle approximately 60%, 30%, and 10%, respectively, with The number of units of safety stock that will result in the lowest cost is
error rates of 3%, 4%, and 6%, respectively. Clay's internal auditor randomly selects one A. 20 C. 50
shipping document, ascertaining that this document contains an error. The probability that the B. 40 D. 55
error occurred in terminal X is
A. 60% C. 23% 9. The following data refer to various annual costs relating to the inventory of a single-product
B. 50% D. 3% company:
Unit Transportation-in on purchases P0.20
4. Bye Co. is considering the sale of banners at the state university football championship game. Storage per unit 0.12
Bye could purchase these banners for P.60 each. Unsold banners would be unreturnable and Insurance per unit 0.10
worthless after the game. Bye would have to rent a booth at the stadium for P250. Bye Annual interest foregone from alternate investment of funds P800
estimates sales of 500 banners at P2.00 each. If Bye’s prediction proves to be incorrect and Annual number of units required 10,000
only 300 banners were sold, the cost of this prediction error would be What is the annual interest cost per unit?
A. P120 C. P170 A. P0.22 C. P0.42
B. P130 D. P280 B. P0.30 D. P0.50
5. A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now 10. Happy Holidays produces three products: X, Y, and Z. Two machines are used to produce the
will yield 100,000 bottles of wine netting P2 per bottle. If the wine maker waits and the weather products. The contribution margin, sales demand, and time on each machine (in minutes) is as
turns cold (probability 0.2), the yield will be cut in half but net P3 per bottle. If the weather does follows:
not turn cold, the yield will depend on rain. With rain (probability 0.5), a full yield netting P4 per Demand CM Time on M1 Time on M2
bottle will result. Without rain (probability 0.5), there will still be a full 100,000-bottle yield, but
X 100 P10 5 10
the net will be only P3 per bottle.
Y 80 18 10 5
The optimal expected value is
Z 100 25 15 5
A. P200,000 C. P350,000
B. P310,000 D. P400,000 There are 2,400 minutes available on each machine during the week. How many units should
be produced and sold to maximize the weekly contribution?
8. The Polly Company wishes to determine the amount of safety stock that it should maintain for A. B. C. D.
Product D that will result in the lowest cost. The following information is available: X 100 20 100 100
Stockout cost P80 per occurrence Y 80 80 40 80
Carrying cost of safety stock P2 per unit Z 100 100 100 73
Number of purchase orders 5 per year
The options available to Polly are as follows: 11. Ridgefield, Inc. is considering a three-phase research project. The time estimates for

Exercises & Problems Page 4 of 7

MANAGEMENT ADVISORY SERVICES Quantitative Methods

completion of phase 1 of the project are

Optimistic 4 months Solution
Most likely 8 months
Pessimistic 18 months
Using the program evaluation and review technique (PERT), the expected time for completion
of phase 1 should be
A. 8 months C. 10 months
B. 9 months D. 18 months

12. Wind Company expects an 85% learning curve. The first batch of a new product required 500
hours. The first four batches should take an average of
A. 361.25 hours C. 500.0 hours
B. 425.0 hours D. 322.4 hours

13. Havenot has estimated the first batch of product will take 40 hours to complete. A 90%
learning curve is expected. If labor is paid P15 per hour, the target labor cost for four batches
of product is
A. P600 C. P1,944
B. P2,160 D. P2,400

14. Hanip Co. used 30 hour 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?
A. 76.8 hours C. 120.0 hours
B. 96.2 hours D. 48.0 hours

15. Moss Company recently completed and sold an order of 50 units that had the following costs:
Direct materials P 1,500
Direct labor (1,000 hours @ P8.50) 8,500
Variable overhead (1,000 hours @ P4.00)* 4,000
Fixed overhead** 1,400
Total P15,400
* Applied on the basis of direct labor hours
**Applied at the rate of 10 percent of variable cost
The company has new been requested to prepare a bid for 150 units of the same product.
If an 80 percent learning curve is applicable, Moss Company's total cost on this order would be
estimated at
A. P26,400 C. P37,950
B. P31790 D. P37,500
Exercises & Problems Page 5 of 7
1
. 515,000 (800,000 X 20% + 500,000 X 50% + 350,000 X 30%)
2
. (A) 33,000 10,000 x 0.10 + 20,000 x 0.15 + 30,000 x 025 + 40,000 x 0.35 + 50,000 x 0.15
(B) 40,000
(C) 9,750 (16,000 x 1) – (25,000 x 0.25)
3
. (A)
Probability10%20%40%30%Exp.
ValueSup/Dem10,00020,00030,00040,00010,00020,00020,00020,00020,00020,00020,000(10,000)40,00040,00040,000
35,00030,000(40,000)10,00060,00060,00040,00040,000(70,000)(20,000)30,00080,00025,000(B) 58,000 Value
at certainty
40,000 Highest expected value
18,000 Value of perfect information.
4
. Payoff Table
Probability0.200.200.300.30Expected ValueSup/Dem100,000120,000140,000160,000100,00070,00070,00070,000
70,00070,000120,00053,00084,00084,000 84,00077,800140,00036,00067,00098,000
98,00079,400160,00019,00050,00081,000112,00071,700(B) 14,400 Value of perfect information = (93,800 –
79,400)
5
. (A) A-B-D-F = 82, A-B-E-F = 75, A-C-E-F = 69, Critical path A-B-D-F
(B) Paths E can be delayed for a max. of 7 days and C & E for a max. of 13 days
(C) Slack days = 82 – 69 = 13.
(D) maximum crash days = 7 (82 – 75)
6
. (1) E – 2 days (280,000)
(2) B – 1 day (140,000), or E for 2 days = P280,000
7
.
124816Cum. ave. time100806451.240.96Cum. time160256409.6655.36Incremental time6096153.6245.76
8
. (A) 5,248.8 (500 X 0.9 X 0.9 X 0.9 X 0.9 = 328.05 X 16)
(B) 2,756,888 (5,248.8 x 510) + (5,000 x 16)
9
. (A) Make
DL & VOH 1,252,815 (150,000 x 85% x 85% x 85% x 85% = 78,300.94 x 16)
Materials 2,080,000 (130,000 x 16)
Total 3,332,815
Unit Cost 208.30

(B) Make
DL & VOH 2,129,785 (150,000x 85% x 85% x 85% x 85% x 85%= 78,300.94 x 32)
Materials 4,160,000 (130,000 x 32)
Total 6,289,785
Unit cost 196,56
10
. (A) 600
(B) 120
(C) 300
11
. (A) 1,000
(B) 500
(C) 504
 (D) 530
534.24 (530 X 1.008)

12 2(4,500)20
. (A) 600
0.50
2(4,500)(8)
(B) 240
1.25

13 2(9,000)(30)
. (A) 600
1.50
2(9,000)(40)
(B) 692.83
1.50
2(9,000)(30)
(C) 464.76
2.50

14
. (A) 2,500 (5,000  2)
(B) 10 (50,000  5,000)
(C) Every 36 days (360  10)
(D) 9,500 Ordering cost = 2,000 (200 x 10), Carrying Cost = 7,500 (2,500 x 3)
2(50,000)200
(E) EOQ = 2,582
3
7,746 Ordering cost = 3,873 (19.36 x 200), Carrying Cost = (3,873) 1291 x 3
15
. (A) 200 (50 X 4)
(B1) 40 (10 X 4)
(B2) 240 (60 X 4) or (50 x 4) + 40

16 2(54,000)90
. (A) 1,800
3
(B) 150 (54,000  360) x 1
1,050 (54,000  360) x 7
(C) 450 (54,000  360) x 3
1,350 (54,000  360) x 9
(D) 2,700 Ordering cost (54,000  1,800) x 90
4,050 Carrying cost [(1,800  2) + 450] x 3
6,750 Total Cost of ordering& carrying
2(54,000)6
(E1) 300
7.20
(E2) every 2 days (54,000  300) = 180 times a year.