QUANTITATIVE METHODS IN MANAGEMENT

2nd Qtr AY 2012-2013

CASE #1: NEIGHBORHOOD PHARMACY, INC

The Neighborhood Pharmacy, Inc (NPI) is a small but rapidly growing operator of a number of large-scale discount pharmacies. A key contributor to the overall success of the company is a system of tight controls over inventory acquisition and carrying costs. The companys to tal annual costs for acquisition and inventory of pharmaceutical items are composed of the purchase cost of individual products supplied by wholesalers (purchase costs); the clerical, transportation and other costs associated with placing each individual order (order costs) and the interest, insurance and other expenses involved with carrying inventory-related costs are given by the following expression:

Where TC is inventory-related total costs during the planning period; P is the purchase price of the inventory item; X is the total quantity of the inventory item that is to be ordered (used) during the planning period (use requirement); A is the cost of placing an individual order for the inventory item (order cost); C is inventory carrying costs expressed on a per unit of inventory basis (carrying cost) and Q is the quantity of inventory ordered at any one point in time (order quantity). Here, Q is NPIs decision variable, whereas every other variable contained in the total cost function is beyond control of the firm (termed as exogenous). In analysing this total cost relation, NPI is concerned with picking the order quantity that will minimize total inventory-related costs. The optimal order quantity is typically referred to as the Economic Order Quantity (EOQ). During the relevant planning period, the per unit purchase cost for an important prescribed drug is period is . The cost of placing an order is and the per unit carrying cost is percent multiplied by the per unit purchase cost of the item. Analyze this situation and make the appropriate recommendation. . The total estimated use for the planning , calculated as the current interest rate of 12.5

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QUANTITATIVE METHODS IN MANAGEMENT

2nd Qtr AY 2012-2013

CASE #2: HI-C COMPANY

The Hi-C Company manufactures and cans three orange extracts: juice concentrate, regular juice, and jam. The products, which are intended for commercial use, are manufactured in 5-gallon cans. Jam uses Grade I oranges and the remaining two products use Grade II. The following table lists the usage of oranges as well as next years demand. Product Jam Concentrate Juice Orange Grade I II II lb Orange per 5-gal Can 5 30 15 Maximum Demand, cans 10,000 12,000 40,000

A market survey shows that the demand for regular juice is at least twice as high as that of the concentrate. In the past, Hi-C bought Grade I and Grade II oranges separately at the respective prices of 25 cents and 20 cents per pound. This year, an unexpected frost forced growers to harvest and sell the crop early without being sorted to Grade I and Grade II. It is estimated that 30% of the 3,000,000-lb crop falls into Grade I and that only 60% into Grade II. For this reason, the crop is being offered at the uniform discount price of 19 cents per pound. Hi-C estimates that it will cost the company about 2.15cents per pound to sort the oranges into Grade I and Grade II. The below-standard oranges (10% of the crop) will be discarded. For the purpose of cost allocation, the accounting department uses the following argument to estimate the cost per pound of Grade I and Grade II oranges. Because 10% of the purchased crop will fall below Grade II standard, the effective average cost per pound can be computed as

Given the ratio of Grade I to Grade II in the purchased lot is1 to 2, the corresponding average cost per pound based on the old prices is

Thus, the increase in the average price, , should be reallocated to the two grades by a 1:2 ratio, yielding a Grade I cost per ( )( ) ( )( ) pound of and a Grade II cost of . By using this information, the accounting department compiles the following profitability sheet for the three products, in 5-gal cans. Jam Sales Price Variable Costs Allocated Fixed Overhead Total Cost Net Profit 15.50 9.85 1.05 10.90 4.60 Concentrate 30.25 21.05 2.15 23.20 7.05 Juice 20.75 13.28 1.96 15.24 5.51

Analyze this situation and make the appropriate recommendation.

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QUANTITATIVE METHODS IN MANAGEMENT

2nd Qtr AY 2012-2013

CASE #3: SHOP EQUIPMENT

A shop manager is considering three alternatives to an existing milling machine. (a) (b) (c) Retrofit the existing mill with a power feed (PF). Buy a new mill with a computer-aided design (CAD) feature. Replace the mill with a machining center (MC).

The three alternatives are evaluated based on two criteria: monetary and performance. The following table provides the pertinent data, Criterion Monetary Initial Cost, $ Maintenance Cost, $ Training Cost, $ Performance Production Rate, units/day Setup Time, min Scrap, lb/day 8 30 440 14 20 165 40 3 44 12,000 2,000 3,000 25,000 4,000 8,000 120,000 1,500 2,000 PF CAD MC

The manager surmises that the monetary criterion is 1.5 times as important as the performance criterion. Additionally, the production rate is 2 times as important as the setup time, and 3 times as important as the scrap. The setup time is regarded as 4 times as important as the scrap. As for the monetary criteria, the manager estimates that the maintenance and training costs are of equal importance and the initial cost is 2 times as important as either of these two costs. Analyze this situation and make the appropriate recommendation.

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QUANTITATIVE METHODS IN MANAGEMENT

2nd Qtr AY 2012-2013

I.

INTRODUCTION

Problem Statement Variables Objectives Constraints

II.

SOLUTION

III.

RECOMMENDATION

CASE #4: BROKERAGE FIRM

Several individuals have set up separate brokerage firms that traded in highly speculative stocks. The brokers operated under a loose financial system that allowed extensive inter-brokerage transactions, including buying, selling, borrowing and lending. For the group of brokers as a whole, the main source of income was the commission they received from sales to outside clients. Eventually, the risky trading in speculative stocks became unmanageable and all the brokers declared bankruptcy. At the time the bankruptcy was declared, the financial situation was that all brokers owed money to outside clients and the interbroker financial entanglements were so complex that almost every broker owed money to every other broker in the group. The brokers whose assets could pay for their debts were declared solvent. The remaining brokers were referred to a legal body whose purpose was to resolve the debt situation in the best interest of outside clients. Because the assets and receivables of the nonsolvent brokers were less than their payables, all debts were prorated. The final effect was a complete liquidation of all the assets of the nonsolvent brokers. In resolving the financial entanglements within the group of nonsolvent brokers, it was decided that the transactions would be executed only to satisfy certain legal requirements, because, in effect, none of the brokers would be keeping any of the funds owed by others. As such, the legal body requested that the number of interbroker transactions be reduced to an absolute minimum. This means that if A owed B an amount X, and B owed A an amount Y,

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QUANTITATIVE METHODS IN MANAGEMENT

2nd Qtr AY 2012-2013
|. This amount would go from A to B if x > Y and from B to A if Y > X. If X = Y, the two loop transactions were reduced to one whose amount is | the transactions were completely eliminated. The idea was to be extended to all loop transactions involving any number of brokers. Analyze this situation and make the appropriate recommendation. Specifically, answer the following questions: (1) How should the debts be prorated? (2) How should the number of interbroker transactions be reduced to a minimum?

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