MANAGEMENT ADVISORY SERVICES

Quantitative Methods

Expected Value, Payoff Tables & Value of Perfect Information

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

Exercises & Problems

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
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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.
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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?

Exercises & Problems

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
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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
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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

515,000 (800,000 X 20% + 500,000 X 50% + 350,000 X 30%)

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

(16,000 x 1) (25,000 x 0.25)

(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

124816Cum. ave. time100806451.240.96Cum. time160256409.6655.36Incremental time6096153.6245.76

. (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

(150,000 x 85% x 85% x 85% x 85% = 78,300.94 x 16)

(130,000 x 16)

(150,000x 85% x 85% x 85% x 85% x 85%= 78,300.94 x 32)

(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)

(E) EOQ = 2,582

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

(E2) every 2 days

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.