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Quantitative Methods

1

. Garys Pipe and Steel Company expects sales next year to be P800,000 if the economy is

strong, P500,000 if the economy is steady, and P350,000 if the economy is weak. Gary

believes there is a 20 percent probability the economy will be strong, a 50 percent probability

of a steady economy, and a 30 percent probability of a weak economy. What is the expected

level of sales for next year?

Hotdogs self for P5.00 and cost Liberty P3 each. Unsold hotdogs are given to a local

orphanage without charge.

A. Construct a payoff table (conditional profits).

B. What are the expected payoff of stocking 30,000 hotdogs and the expected value of

perfect information?

4

The Visitors Club sells brewed coffee at Araneta Gym's LBA's season games. The frequency

distribution of the demand for cups of brewed coffee per game is presented below.

Unit sales volume

Probability

10,000

.10

20,000

.15

30,000

.25

40,000

.35

50,000

.15

The brewed coffee is sold for P1.00 a cup and the cost per cup is P0.25. Any unsold brewed

coffee is discarded because it will spoil before the next home game.

A. What is the estimated demand for brewed coffee at the next Araneta Gym's LBA's season

game using an expected value approach?

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?

C. What is the conditional profit (loss) per game of having 25,000 cups of brewed coffee

available but only selling 16,000 cups of coffee?

Liberty, Inc. has been operating the concession stands at the university football stadium. The

university has had successful football teams for many years; as a result the stadium is always

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

left. A review of the records of sales of the past five seasons revealed the following frequency

of hot dogs sold:

Total Games

10,000 hot dogs

5 times

20,000 hot dogs

10 times

30,000 hot dogs

20 times

40,000 hot dogs

15 times

50 total games

Gardenia Company makes corsages that it sells through salespeople on the streets. Each

sells for P2 and has variable production costs of P0.80. The salespeople receive a P0.50

commission on each corsage they sell, and the company must spend P0.05 to get rid of each

unsold corsage. The corsages last for only one week and cannot be carried in inventory.

The manager of the firm had estimated demand per week and associated probabilities as

follows:

Demand

Probability

100,000

0.20

120,000

0.20

140,000

0.30

160,000

0.30

A. What is the optimal weekly production of the corsage?

B. What is the value of perfect information?

PERT-CPM

5

. The following are four series of activities with number of days to complete the different

activities.

I. A-B-D-F: 25, 18, 25, 14

II. A-B-E-F: 25, 18, 18,14

III. A-C-E-F: 25. 12, 18, 14

Required:

A. Calculate the total time for each path, and identify the critical path.

B. Which of the path(s) in the network can be delayed? What is(are) the activity(ies) that can

be delayed and how many hours?

C. How many slack days are there in Path III?

D. What is the maximum number of days that can be applied to crash the critical path?

6

The contractor is 2 days behind of completion of one of its multi-million projects. The daily

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

Page 1 of 7

activities can be crashed at their respective costs:

1 day

Activity A

P135,000

Activity B

140,000

Activity C

125,000

Activity D

145,000

Activity E

155,000

Quantitative Methods

Required:

1. Which of the foregoing activity(ies) would be crashed? How much is the net benefit if the

activity(ies) are crashed?

2. Assuming that the daily penalty is P140,000, which activities) will be crashed?

Learning Curves

7

. Particular manufacturing job is subjected to an estimated 80% learning curve. The first unit

required 100 labor hours to complete.

REQUIRED:

A. What is the cumulative average time per unit after 8 units are completed?

B. What is the total time required to produce 2 units?; 4 units?

C. How many hours are required to produce the second unit?

8

manager believes that Leamwright could make the component with the following costs for the

first batch of 1,000 units.

Materials

P130,000

Direct labor and variable overhead

150,000

Total variable cost

P280,000

Making the component involves no incremental fixed costs because Learnwright could use

existing equipment. The production manager expects an 85% learning rate on direct labor and

variable overhead. Consider a batch to be 1,000 units.

A. Determine whether Leamwright should make or buy the component.

B. Assuming that the demand is a maximum of 16,000 units. Should Leamwright make or

buy the component?

2days

P260,000

285,000

240,000

295,000

280,000

Win Company manufactures large grape presses. The firm generally experiences a learning

effect on new models, at least through the first 64 or so units. Data on a new press appear

below:

Labor time for first unit

500 hour

Labor rate

P500 per hour

Variable overhead

P10 per labor hour

Materials

P5,000 per press

The manager of the firm wants to know the expected total cost of making the first 16 units,

assuming a learning effect on labor of 90 percent.

A. Prepare schedules showing the cumulative average time for all doubling points up through

16 units for a 90 percent learning rate.

B. Determine the total costs for the first 16 units using a learning curve of 90 percent.

Learnwright Company currently buys at component for one of its products at P220 per unit.

Leamwright needs 32,000 units of the component in the coming year. The product will be

redesigned, so that the component will not be needed beyond the coming year. The production

Exercises & Problems

Inventory Model

10

. I.M. Boring Company has projected sales of P72,000 pipes this year, an ordering cost of P6

per order, and carrying costs of P2.40 per pipe.

A. What is the economic ordering quantity?

B. How many orders will be placed during the year?

C. What will the average inventory be?

11

. U.R. Terrific Company is trying to improve its inventory control system and has installed an online 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 P1.008 per unit.

A. What is the economic ordering quantity?

B. What will be the average inventory be?

C. What is the total cost of inventory expected to be?

D. Assume a safety of stock of 30 units of inventory will be required as safety stock. What will

be the new average inventory be? What will the new total carrying cost be?

12

. Bayan Company uses 4,500 units of Part S-10 each year. The cost of placing one order of Part

S-10 is estimated to be about P20. Other costs associated with carrying Part S-10 in inventory

are:

Annual Cost per Part

Insurance

P0.20

Property taxes

0.09

Interest on funds invested

0.15

Other

0.06

Total cost

P0.50

A. Compute the economic order quantity (EOQ) for Part S-10.

Page 2 of 7

B. Assume that the company has been able to reduce the cost of placing an order to only

P8. Also assume that when the waste and inefficiency caused by inventories is

considered, the cost to carry a part in inventory jumps to P1.25 per unit. Under these

conditions, what would be the EOQ?

13

. Flux Company uses 9,000 units of Part K each year. To get better control over its inventories,

the company is anxious to determine the economic order quantity for this part.

A. The company has determined that the cost to place an order for the part is P30, and it has

determined that the cost to carry one part in inventory for one year is P1.50. Compute the

EOQ for the part.

B. Assume that the cost to place an order increases from P30 to P40 per order. What will be

the effect on the EOQ? Show computations.

C. Assume that the cost to carry a part in inventory increases from P1.50 to P2.50 per part.

(Ordering costs remain unchanged at P30 per order.) What will be the effect on the EOQ?

Show computations.

14

. A company annually consumes 50,000 units of Part X. The carrying cost of this part is P3.00

per year and the ordering costs are P200. The company uses an order quantity of 5,000 units.

Based on the information, compute:

A. Average number of inventory units.

B. Number of orders per year.

C. Using 360 days a year, the frequency of making an order.

D. The annual inventory costs, broken down into ordering and carrying costs.

E. The economic order quantity. Compute the amount of annual inventory costs if the

company uses the economic order quantity.

15

. Delma Company distributes medical supplies throughout the country. Selected information

relating to a quick-developing X-ray film carried by the company is given below:

Economic order quantity (EOQ)

700 units,

Maximum weekly usage

60 units

Lead time

4 weeks

Average weekly usage

50 units

Management is trying to determine the proper safety stock to carry on this inventory item and

to determine the proper reorder point.

A. Assume that no safety stock is to be carried. What is the reorder point?

B. Assume that a full safety stock is to be carried.

1. What would be the size of the safety stock in units?

Quantitative Methods

2. What would be the reorder point?

16

. Ibon Company uses a small casting in one of its finished products. The castings are purchased

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.

The castings are used evenly throughout the year in the production process on a 360-day-peryear 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 castings in carefully controlled temperature and humidity conditions, and

from the high cot of insurance.

Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The

days of delivery time and the percentage of their occurrence are shown in the following

tabulation:

Delivery Time (days)

Percentage of Occurrence

6

75

7

10

8

5

9

5

10

5

100

A. Compute the economic order quantity (EOQ).

B. Assume that the company is willing to assume a 15% risk of being out of stock. What

would be the safety stock? The reorder point?

C. Assume that the company is willing to assume only a 5% risk of being out of stock. What

would be the safety stock? The reorder point?

D. Assume a 5% stock-out risk as stated in (3) above. What would be the total cost of

ordering and carrying inventory for one year?

E. Refer to the original data. Assume that using process reengineering the company reduces

its cost of placing a purchase order to only P6. Also, the company estimates that when the

waste and inefficiency caused by inventories are considered, the true cost of carrying a

unit in stock is P7.20 per year.

Required:

A. Compute the new EOQ.

B. How frequently would the company be placing an order, as compared to the old

purchasing policy?

Multiple Choice

Page 3 of 7

3. A company is designing a new regional distribution warehouse. To minimize delays in loading

and unloading trucks, an adequate number of loading docks must be built. The most relevant

technique to assist in determining the proper number of docks is

A. linear programming

C. queuing theory

B. PERT/CPM analysis

D. correlation and regression analysis

14. Clay Co. operates three shipping terminals, referred to as X, Y, and Z. Of the total cargo

shipped, terminals X, Y, and Z handle approximately 60%, 30%, and 10%, respectively, with

error rates of 3%, 4%, and 6%, respectively. Clay's internal auditor randomly selects one

shipping document, ascertaining that this document contains an error. The probability that the

error occurred in terminal X is

A. 60%

C. 23%

B. 50%

D. 3%

4. Bye Co. is considering the sale of banners at the state university football championship game.

Bye could purchase these banners for P.60 each. Unsold banners would be unreturnable and

worthless after the game. Bye would have to rent a booth at the stadium for P250. Bye

estimates sales of 500 banners at P2.00 each. If Byes prediction proves to be incorrect and

only 300 banners were sold, the cost of this prediction error would be

A. P120

C. P170

B. P130

D. P280

5. A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now

will yield 100,000 bottles of wine netting P2 per bottle. If the wine maker waits and the weather

turns cold (probability 0.2), the yield will be cut in half but net P3 per bottle. If the 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-bottle yield, but

the net will be only P3 per bottle.

The optimal expected value is

A. P200,000

C. P350,000

B. P310,000

D. P400,000

8. The Polly Company wishes to determine the amount of safety stock that it should maintain for

Product D that will result in the lowest cost. The following information is available:

Stockout cost

P80 per occurrence

Carrying cost of safety stock

P2 per unit

Number of purchase orders

5 per year

The options available to Polly are as follows:

Exercises & Problems

Quantitative Methods

Units of safety stock

Probability of Running out of safety stock

10

50%

20

40%

30

30%

40

20%

50

10%

55

5%

The number of units of safety stock that will result in the lowest cost is

A. 20

C. 50

B. 40

D. 55

9. The following data refer to various annual costs relating to the inventory of a single-product

company:

Unit Transportation-in on purchases

P0.20

Storage per unit

0.12

Insurance per unit

0.10

Annual interest foregone from alternate investment of funds

P800

Annual number of units required

10,000

What is the annual interest cost per unit?

A. P0.22

C. P0.42

B. P0.30

D. P0.50

10. Happy Holidays produces three products: X, Y, and Z. Two machines are used to produce the

products. The contribution margin, sales demand, and time on each machine (in minutes) is as

follows:

Demand

CM

Time on M1

Time on M2

X

100

P10

5

10

Y

80

18

10

5

Z

100

25

15

5

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?

A.

B.

C.

D.

X

100

20

100

100

Y

80

80

40

80

Z

100

100

100

73

11. Ridgefield, Inc. is considering a three-phase research project. The time estimates for

Page 4 of 7

completion of phase 1 of the project are

Optimistic

4 months

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

Quantitative Methods

Solution

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 now 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. P31,790

D. P37,500

Exercises & Problems

Page 5 of 7

. (A)

(B) 40,000

(C) 9,750

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

(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

.

(B)

(C)

(D)

. (1)

E 2 days (280,000)

(2) B 1 day (140,000), or E for 2 days = P280,000

. (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)

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)

(A)

A-B-D-F = 82, A-B-E-F = 75, A-C-E-F = 69, Critical path A-B-D-F

Paths E can be delayed for a max. of 7 days and C & E for a max. of 13 days

Slack days = 82 69 = 13.

maximum crash days = 7

(82 75)

(A)

DL & VOH

Materials

Total

Unit Cost

Make

1,252,815

2,080,000

3,332,815

208.30

(B) Make

DL & VOH

Materials

Total

Unit cost

2,129,785

4,160,000

6,289,785

196,56

10

. (A)

(B) 120

(C) 300

600

11

. (A)

(B) 500

(C) 504

1,000

(130,000 x 16)

(130,000 x 32)

(D) 530

534.24 (530 X 1.008)

12

(A)

(B) 240

13

(A)

(B) 692.83

(C) 464.76

14

.

(B)

(C)

(D)

1.25

16

.

(B)

(C)

(D)

(E1)

2(9,000)(30)

600

1.50

2(9,000)(40)

1.50

2(9,000)(30)

2.50

(A)

10

Every 36 days

9,500

7,746

.

(B1)

(B2)

0.50

2(4,500)(8)

15

2(4,500)20

600

2,500 (5,000 2)

(50,000 5,000)

(360 10)

Ordering cost = 2,000 (200 x 10), Carrying Cost = 7,500 (2,500 x 3)

2(50,000)200

3

Ordering cost = 3,873 (19.36 x 200), Carrying Cost = (3,873) 1291 x 3

(A)

40

240

(A)

200 (50 X 4)

(10 X 4)

(60 X 4) or (50 x 4) + 40

1,800

150

1,050

450

1,350

2,700

4,050

6,750

300

2(54,000)90

3

360) x 1

360) x 7

360) x 3

360) x 9

(54,000

(54,000

(54,000

(54,000

Ordering cost (54,000 1,800) x 90

Carrying cost [(1,800 2) + 450] x 3

Total Cost of ordering& carrying

2(54,000)6

7.20

(54,000 300) = 180 times a year.

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