17 x11 FinMan E

Financial Management (E. Quantitative Methods)

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. D. PERT determines the least-cost path through a network while CPM determines the leasttime path through a network.

THEORIES: Economic Order Quantity 1. The economic order quantity is the order quantity that results in A. the minimum total annual inventory costs. B. no inventory shortages. C. the maximum total annual inventory costs. D. minimum ordering costs.

6. Critical Path Method (CPM) is a technique for analyzing, planning, and scheduling large, complex projects by determining the critical path from a single time estimate for each event in a project. The critical path: 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. C. Has completion that reflects the earliest time to complete the project. D. Is the maximum amount of time an activity may be delayed without delaying the total project beyond its target completion time.

Sensitivity analysis 2. Missile Company has correctly computed its economic order quantity as 500 units. However, management feels it would rather order quantities of 600 units. How should Missile’s total 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? A. Higher purchase-order cost and lower carrying cost. B. Higher purchase-order cost and higher carrying cost. C. Lower purchase-order cost and higher carrying cost. D. Lower purchase-order cost and lower carrying cost.

Queuing Theory 7. 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 docks is 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. B. Decrease the economic order quantity. C. Have no effect on the economic order quantity. D. Decrease the holding cost percentage.

Linear Programming Use the following information to answer question Nos. 8 and 9: The Kinis Company produces a cosmetic product in 60 gallon batches. The basic ingredients used 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. B. Have no effect on the economic order quantity. C. Increase the economic order quantity. D. Decrease the number of orders issued per year.

8. How would the objective function (minimization of product cost) be expressed? A. 70X + 170Y C. 170X + 70Y B. 18X + 15Y D. 18X + 42Y 9. Which of the following is not a constraint of the Kinis Company? A. X ≤ 18 C. Y ≥ 15 B. X + Y ≤ 60 D. X ≥ 0

PERT-CPM 5. Which one of the following statements best describes a difference between basic PERT and 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: 202

Financial Management (E. Quantitative Methods)

Sun, Inc. manufactures product X and product Y, which are processed as follows: Type A machine Type B machine Product X 6 hours 4 hours Product Y 9 hours 5 hours

C. Activity DE 1 week and activity BC 1 week D. Activity DE 1 week and activity EF 1 week Learning Curve 1 . Contratista, Inc. is considering a three-phase research project. The time estimates for completion of Phase 2 of the project are: Pessimistic 24 weeks Most likely 20 weeks Optimistic 10 weeks Using the program evaluation and review technique (PERT), the expected time for completion of Phase 2 should be A. 20 weeks C. 18 weeks B. 19 weeks D. 24 weeks

The contribution margin is P12 for product X and P7 for product Y. The available time daily for processing the two products is 120 hours for machine Type A and 80 hours for machine Type B. 10. How would the constraint for machine Type A be expressed? A. 4X + 5Y C. 4X + 5Y ≤ 80 B. 6X + 9Y ≤ 120 D. 12X + 7Y 11. How would the constraint for machine Type B be expressed? A. 4X + 5Y C. 4X + 5Y ≤ 80 B. 6X + 9Y ≤ 120 D. 12X + 7Y

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12. How would the objective function be expressed? A. 4X + 5Y C. 4X + 5Y ≤ 80 B. 6X + 9Y ≤ 120 D. 12X + 7Y PROBLEMS: PERT-CPM 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-perweek completion penalty. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities can be crashed. Activities Cost to Crash 1 Week Cost to Crash 2 Weeks BC P 8,000 P15,000 DE 10,000 19,600 EF 8,800 19,500 Castle desires to reduce the normal completion time of Job WW and, at the same time, report the highest possible income for the year. Castle should crash A. Activity BC 1 week and activity EF 1 week B. Activity BC 2 weeks

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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? A. 30 percent C. 41 percent B. 51 percent D. 64 percent

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Soft Inc. has a target total labor cost of P3,600 for the first four batches of a product. Labor is paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first batch take? A. 360 hours C. 57.6 hours B. 140.63 hours D. 230.4 hours

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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

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203

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

Financial Management (E. Quantitative Methods) 6

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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? A. 76.8 hours C. 120.0 hours B. 96.2 hours D. 48.0 hours

7

Sulit Company plans to begin production of a new product on July 1. An 80% learning curve is applicable to Sulit’s manufacturing operations. If it is expected to take 1,000 direct labor hours to produce the first unit, how many direct labor hours should it take to produce the third and fourth units? A. 640 C. 1,600 B. 960 D. 2,560

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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 bridge construction crew with some experience, the company would like to continue building bridges. Because of the investment in heavy machinery needed continuously by this crew, the company believes it would have to bring the average construction time to less than one year (52 weeks) per bridge to earn a sufficient return on investment. The average construction time will follow an 80% learning curve. To bring the average construction time (over all bridges constructed) below one year per bridge, the crew would have to build approximately A. 2 additional bridges. C. 3 additional bridges. B. 7 additional bridges. D. 8 additional bridges.

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Expected Value 10 . Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs P2 and sells for P3 through regular stores. Any boxes not sold through regular stores are sold through Dough’s thrift store for P1. Dough assigns the following probabilities to selling additional boxes: Additional sales Probability 60 0.6 100 0.4 What is the expected value of Dough’s decision to buy 100 additional boxes of muffins? A. P28 C. P52 B. P40 D. P68 11

Moss Point Manufacturing 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 at P4.00) 4,000 Fixed overhead 1,400 P15,400 *Applied on the basis of direct labor hours. *Applied at the rate of 10% 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 Point’s total cost on this order would be estimated at A. P26,400 C. P31,790 B. P37,950 D. P38,500 204

. Karen Company has three sales departments. Department A processes about 50 percent of sales, Department B about 30 percent, and Department C about 20 percent. In the past, Departments A, B, and C had error rates of about 2 percent, 5 percent, and 2.5 percent, respectively. A random audit of the sales records yields a recording error of sufficient magnitude to distort the company’s results. The probability that Department A is responsible for this error is A. 0.50 C. 0.20 B. 0.33 D. 0.25

12

. A beverage stand can sell either softdrinks or coffee on any given day. If the stand sells softdrinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is cold, the profit will be P2,000. The probability of cold weather on a given day at this time is 60%. The expected payoff if the vendor has perfect information is A. P3,900 C. P2,200 B. P1,360 D. P1,960

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. The Teeners’ Club sells fresh hot cider at Recto football games. The frequency distribution of the demand for cups of hot cider per game is presented below: Unit sales volume Probability 10,000 0.10 20,000 0.15 30,000 0.15

Financial Management (E. Quantitative Methods)

40,000 0.40 50,000 0.20 The hot cider is sold for P35.00 a cup and the cost per cup is P20.00. Any unsold hot cider is discarded because it will spoil before the next game. What is the estimated demand for hot cider at the next football game if a deterministic approach based on the most likely outcome is used? A. 34,500 C. 16,000 B. 40,000 D. 50,000 14

15

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

. Green Co. is considering the sale of banners in an exhibit fair. Green Co. could purchase these banners for P7.50 each. Unsold banners would be unreturnable and worthless after the exhibit. Green would have to rent a booth at the stadium for P4,000. Green estimates sales of 2,000 banners at P20.00 each. If Green’s prediction proves to be incorrect and only 1,500 banners were sold, the cost of this prediction error would be: A. P 6,250 C. P 4,750 B. P10,000 D. P 3,750

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. The optimal weekly production of the corsage is A. 120,000 C. 134,000 B. 140,000 D. 145,000

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. The value of perfect information is A. P14,400 B. P16,000

. The manager of Batanes Company has developed the following probability distribution of dairy sales of a highly perishable product. The company restocks the product each morning: X (Units Sold P (Sales =X) 150 0.20 175 0.40 200 0.15 225 0.10 250 0.10 275 0.05 If the company desires an 85% service level in satisfying sales demand, what should the initial balance be for each day? A. 191 C. 234 B. 225 D. 250

Question Nos. 21 through 24 re based on the following information: Glassco, Inc. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore, Glassco has conducted a market study, at a cost of P26,000, to determine which product will be more profitable. The results of the study show the following sales patterns. Sales of Desserts at P1.80 per unit Sales of Rolls at P1.20 per unit Volume Probability Volume Probability 250,000 .30 200,000 .20 300,000 .40 250,000 .50 350,000 .20 300,000 .20 400,000 .10 350,000 .10 The costs associated with the two products have been estimated by Glassco’s cost accounting department and are shown below: Dessert Rolls Ingredients per unit P 0.40 P 0.25 Direct labor per unit 0.35 0.30 Variable overhead per unit 0.40 0.20 Production tooling* 48,000.00 25,000.00 Advertising 30,000.00 20,000.00

Question Nos. 17 and 18 are based on the following: Sampaguita 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. 205

C. P23,800 D. P22,100

Financial Management (E. Quantitative Methods)

as follows: *Glassco treats production tooling as a current operating expense rather than capitalizing it as a fixed asset.

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 maximize the weekly contribution? X Y Z A. 100 80 100 B. 20 80 100 C. 100 40 100 D. 100 80 73

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. According to Glassco’s market study, the expected value of the sales volume of the breakfast rolls is A. 125,000 units C. 260,000 units B. 275,000 units D. 250,000 units

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. Applying a deterministic approach, Glassco’s revenue from sales of frozen desserts would be A. P549,000 C. P540,000 B. P195,000 D. P216,000

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. The expected value of Glassco’s operating profit directly traceable to the sale of frozen desserts is A. P198,250 C. P471,000 B. P150,250 D. P120,250

Inventory Management EOQ, Safety Stock, Reorder Point 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 from a foundry located in another Asian country. In total, KMU 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-per-year 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:

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. In order to recover the costs of production tooling and advertising for the breakfast rolls, Glassco’s sales of the breakfast rolls would have to be A. 37,500 units C. 100,000 units B. 60,000 units D. 54,000 units

Decision Tree 22 . 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 100,000bottle 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

Delivery Time (days) 6 7 8 9 10

Theory of Constraints 23 . Happy Holidays produces three products: X, Y, and Z. Two machines are used to produce the products. The contribution margins, sales demands, and time on each machine (in minutes) is

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Percentage of Occurrence 75 10 5 5 5 100

. What is the economic order quantity for the company.

206

Financial Management (E. Quantitative Methods)

A. 1,800 B. 1273

C. 2,545 D. 2,700

Materials used (lbs.) Number of defective units Defective units as a percentage of total units produced is: A. 5% C. 0.53% B. 1.05% D. 2.5%

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. Assuming that the company will not provide any safety stock units, how much would the annual inventory costs? 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

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. 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.) 400 207

12,800 20

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

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Answer: A

UnitsCumulative Average TimeComputation1500.002425.00(0.85 x 500.00)4361.25(0.85 x 425.00) 3

. Answer: C 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%

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Answer: B Average hours after 4th batch Hours used by 1st batch:

P3,600 ÷ 10 ÷ 4 units 90 ÷ 0.80 ÷ 0.80

90 140.63

Answer: C

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 Total labor cost used by 4 units: 129.6 x P15 6

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129.6 P1,944

Answer: A Learning curve (30 + 18) ÷ 2 ÷ 30 = Cumulative average time after 4 batches: 30 x 0.8 x 0.8 Total number of hours used by first 4 batches: 4 x 19.2

80.0% 19.2 76.8

Answer: B Cumulative average DLH after 4 units: Total DLH after 4 units: Less Total DLH used after 2 units Total DLH used by 3rd and 4th units

640 2,560 1,600 960

(1,000 x 0.8 x 0.8) 4 x 640 (1,000 x 0.8 x 2)

Answer: B

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

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Answer: A 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 Additional Hours 1,560 Costs Direct materials (1,500 x 3) Direct labor 1,560 x 8.50 Variable OH 1,560 x 4 Total variable Costs Fixed OH 10% x 24,000 Total Cost

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. Answer: C SalesConditional Profit (Loss) 60(60 x P3) + (40 x P1) – P200

P 4,500 13,260 6,240 24,000 2,400 P26,400 = P 20 100(100 x P3) – P200

=

100Expected Value: (P20 x 0.6) + (P100 x 0.4) = P52 11

. Answer: B 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 . Answer: C 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

. Answer: B 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.

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. Answer: B 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%.

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

Answer: B 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

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. Answer: A 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

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

Answer: C 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.

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Answer: D EV: (250 x 0.3) + (300 x 0.4) + (350 x 0.2) + (400 x 0.1) Expected sales (305,000 x P1.80) Less expected variable costs (305,000 x P1.15) Contribution margin Less fixed costs (P48,000 + P30,000) Expected profit Answer: C

305,000 P549,000 350,750 198,250 78,000 P120,250

Breakeven units, Glassco: (P45,000 ÷ 0.45) = 100,000 22

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Answer: B Expected value if immediately harvested: (100,000 x P2) Expected value if not harvested immediately: Cold weather: (50,000 x P3 x 0.20) Not cold with rain: (100,000 x P4 x 0.8 x 0.5) Not cold without rain: (100,000 x P3 x 0.8 x. 0.5) Total

. Answer: D 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) Machine 2: (100 x 10) + (80 x 5) + (100 x 5) Machine 1 has shortage in capacity of (2,800 – 2,400)

P200,000 P 30,000 160,000 120,000 P310,000

2,800 1,900 400

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

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Answer: A 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

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Answer: C Annual ordering cost: Annual carrying cost: Total cost

54,000/1800 x 90 1,800/2 x 3

2,700 2,700 5,400

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. Answer: B 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

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. Answer: D 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

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Answer: D Ordering cost (unchanged) Carrying cost Average inventory (1800/2) + 450 = 1,350 1,350 x 3

2,700 4,050

Total

6,750

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. Answer: A Safety unitsStock out costCarrying CostTotal 00.25 x 2,400 = 600 0 6001500.15 x 2,400 = 360150 x 3 = 450 8103000.10 x 2,400 = 240300 x 3 = 9001,1404500.05 x 2,400 = 120450 x 3 = ,3501,470Annual stockout cost (100% probability) based 30 orders (54,000/1800): 30 x 800 = 2,400 The probability of stockout is the inverse of assurance, say at zero safety stock, 6 days, its 75% probable that ordered goods will arrive, therefore, its 25% probable that it won’t.

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Answer: C Defective Units ÷ Actual Units Produced (20 ÷ 3,800) = 0.526%