7 Financial Management Part 4

Financial Management (Quantitative Methods)

QUANTITATIVE METHODS

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. 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.

A. PERT uses probability distribution on the activity times while CPM uses point estimates 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. 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. 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

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?

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 Use the following data to answer Question Nos. 10 through 12:

Financial Management (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 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

B. Activity BC 2 weeks C. Activity DE 1 week and activity BC 1 week D. Activity DE 1 week and activity EF 1 week Learning Curve i .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 ii

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

.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

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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

.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

.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

Financial Management (Quantitative Methods)

B. P37,950

D. P38,500

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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

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.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.

Expected Value x .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 xi

.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

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.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

.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 (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

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 xvi

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.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 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. 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.

.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

C. P23,800 D. P22,100

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

Financial Management (Quantitative Methods)

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

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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

.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

.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

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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 xxii .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 Theory of Constraints xxiii .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 as follows:

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: Delivery Time (days) 6 7 8 9 10

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Percentage of Occurrence 75 10 5 5 5 100

.What is the economic order quantity for the company. A. 1,800 C. 2,545

Financial Management (Quantitative Methods)

B. 1273

D. 2,700 xxix

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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

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.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

.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 xxx .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 Materials used (lbs.) 12,800 Number of defective units 20 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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