Ramish Arif (23816)

MBA Evening
FIRST PRACTICE PROBLEMS SET: MGT 510, IBA KARACHI: FALL 2022

The purpose of this assignment is to prepare you for the upcoming Midterm Exam and
also to help you master all the course content we have covered so far. This is a graded
assignment and this is worth 4% of your course grade. Each part of each question is
worth 0.25 points. You are all allowed to discuss amongst yourselves the solution
methods and strategies, but the solution each of you submits must be your own. Any two
submissions found to be a replica of each other, wholly or partially, will both get a zero.

Q1)- (Shah Alam Palm Oil Company): Palm oil is harvested from the fruit of oil palm trees and is
widely used as a cooking oil throughout Africa, Southeast Asia, and parts of Brazil. It is
becoming widely used throughout the world as it is a lower cost alternative to other vegetable
oils and has other attractive properties.

You are working for the Shah Alam Palm Oil Company (SAPOC) that harvests, processes, and
sells palm oil throughout the region. You are asked to review the sales volume (in pounds) of
your premium palm oil by one of your customers, a local grocery store in the region.

The spreadsheet with the monthly sales volume of palm oil is attached. Analyze the data and
answer the following questions:

(a)- Take a look at the data and chart or plot the demand (vertical axis) against the months
(horizontal axis). Do you detect any type of trend over the last three years? Which of the
following is correct? Please include your plot in the solution and also write a one line answer
justifying your selected option.

A-Yes, there appears to be a POSITIVE trend

B-No, the demand appears to STATIONARY with no trend

C-Yes, there appears to be a NEGATIVE trend

D-It cannot be deciphered with this data

Ans: A is the correct option as we can see the data plot clearly demonstrates that there is a
general positive trend. A fast trendline estimate shows that the trend, or slope, is going upward
during the three-year period.
(b)- Does there appear to be any seasonality in the demand pattern? Please write a one line
answer justifying your selected option.

A-No, there does not appear to be any seasonality

B-There is not enough data to infer any seasonality

C-Yes, there appears to be some sort of seasonality

Ans: In my opinion, this seems to be some sort of seasonalily appears in this data as we can
see that from May till Aug, demand goes up for the oil in the provided 3 years. Hence C is the
correct answer

(c)- What is the forecast for demand in January 2015 . . . using a naive model? …. using a
cumulative model? …. and using a 12 Period Moving Average model? Please solve using MS
Excel and include the spreadsheet in your solution.

Ans: (Excel Sheet is attached)

Naive Model 1512

Cumulative Model 957.9444444
12 Period Moving Average model 1173.666667

(d)- What is the root mean square error (RMSE) for a forecast for these three years of demand .
. . using a cumulative model? …. and using a 12 Period Moving Average model? Please solve
using MS Excel and include the spreadsheet in your solution.

Ans: RMSE using a cumulative Model = 419.86 (Excel Sheet is attached)

RMSE using a 12 Period Moving Average Model = 423.33 (Excel Sheet is attached)

(e)- Which of the three models, if any, do you think is most appropriate for forecasting the
demand in January 2015? Select the best option & write a one line answer justifying your
selected option.

A- The Naive Model

B- The Cumulative Model

C- The 12 Period Moving Average Model

D- None of these models are appropriate

Ans: D is the correct option as none of these models are applicable to this set of demand data.
The primary reason is that demand for palm oil has shown both a positive trend and seasonality.
These three models all assume stationary demand. The naive model is illogical because
demand in January looks nothing like demand in December. Furthermore, the cumulative and
moving average models imply that demand will be near to average.

Q2)- (Partial Foods): You are responsible for managing the inventory for the trendy upscale
specialty food store, Partial Foods. You are trying to set the inventory policy for one of your most
popular cheeses, Mad Cow Cheddar, which comes in 1 pound wheels. It is a stable selling
cheese with an average weekly demand of 14 wheels/week.

Your fixed cost of placing an order from the farm that produces Mad Cow Cheddar is $90/order
and the cheese itself costs you $12.50 per wheel. Assume that there are 52 weeks in a year
and that the annual inventory holding charge is 20%.

(a)- What should your economic order quantity be, in wheels? Round to the nearest integer
value. Show all your working steps.

Data:

Fixed Cost of placing an order =Ct = $90/order

Demand = 14*52 = D = 728 Wheels/year

Cost of Wheel per year = 12.5*0.20 = Ce = $2.5/wheel/year

Solution

2×𝑐𝑡×𝐷 2×90×728
EOQ = 𝐶𝑒
= 2.5
= 228.94 ≃ 229 Wheels per Order

(b)- Under this ordering policy, how many weeks on average will the Mad Cow Cheddar be on
your shelf? Round to the nearest integer value. Show all your working steps.

Ans: We need to know the order cycle length to determine how long the cheese will sit on the
shelf on average.

Order cycle Length = T* = EOQ/D = 229/728 = 0.314 year or 16.3 weeks

Average time = 16.3/2 = 8.16 ≃ 8 weeks

(c)- Your manager tells you that you cannot simply use all of the shelf space you want for free.
There is an opportunity cost for shelf space at Partial Foods of $10/sqft/week and each wheel of
Mad Cow Cheddar occupies 0.15 sqft of space. What should your economic order quantity, in
wheels, be now? Round to the nearest integer value. Show all your working steps.

Ans: Opportunity Cost = 10*52*0.15 = $78

New Ce = 2.5+78 = $80.5

2×𝑐𝑡×𝐷 2×90×728
EOQ = 𝐶𝑒
= 80.5
= 40.34 ≃ 40 Wheels per Order
(d)- Your manager still thinks you order too much cheese and has limited your shelf space to a
maximum of 3 square feet. There is no back room, so all of your Mad Cow Cheese wheels need
to fit within that space. What should your economic order quantity, in wheels, be now? Round to
the nearest integer value. Show all your working steps.

Ans: 3/0.15 = 20 Wheels should be EOQ in order to meet the shelf space

Q3)- (Better Brain Pills): Your uncle owns a pharmacy that sells an over-the-counter drug,
BetterBrain. Every 10 days, the vendor comes by to check the inventory levels and order more
of the drug. It takes about 3 more days to get the new order in. Demand per day is about 20
bottles, but can vary. The standard deviation is around 5 units/day. The pharmacy currently
keeps an average stock of about 200 bottles on hand to protect against stockouts, just in case
demand levels or lead times are greater than expected, as well as to cover the normal weekly
demand until the replenishment occurs.

You like and respect your uncle, but you do not think he is managing things correctly. You
decide to look at his inventory management and see how he compares to what you calculate.

(a)- For a cycle service level of 95%, what is the average cycle stock for this periodic review
policy? Round to the nearest integer

Data:

Daily Demand = 20 Bottles

Standard Deviation = 5 units/day

Lead time = 3 +10 = 13 days

Safety Stock = 200 Bottles

CSL = 95% i.e. z= 1.65

𝐷𝑥𝑅 20𝑥10
Ans: Average Cycle Stock = 2
= 2
= 100 Bottles

(b)- What is the safety stock for this periodic review policy? Round to the nearest integer

Ans: Safety stock = z x (standard deviation of demand x (lead time)^½) = 1.65 x ( 5 x

(3+10)½)=29.74≈ 30 units

(c)- Based on your analysis, which statements do you agree with? You may select more than
one.

A. Your uncle has too little inventory

B. Your uncle has too much inventory

C. Your uncle will probably has a cycle service level below 95%

D. Your uncle will probably has a cycle service level above 95%

E. You cannot tell your uncle anything

Give a one line justification for your choice. Note: Make sure you select all of the correct
options—there may be more than one!

Ans: His inventory is 130 bottles (100+30) at service level 95%, that’s why he must have
above service level than 95%

(d)- Your uncle is adamant about keeping his current inventory stock of 200 bottles. What is the
implied CSL for his current inventory policy? Enter your answer to 4 decimal places

Ans: .Safety Stock at 200 bottles = 200-100 = 100

100 = z5 10 + 3

z = 5.56

CSL level is above 100% at z = 5.56, Current inventory is much high as compared to
required

(e)- You conclude that your uncle is crazy, but you want to see the impact of this periodic review
policy on the inventory on hand if the review is done more frequently. Hence, you decide to
check the inventory every 5 days instead of every 10 days. Lead time remains equal to 3 days.
For a cycle service level of 95%, what is the cycle stock for this periodic review policy? Round to
the nearest integer. What is the safety stock for this periodic review policy? Round to the
nearest integer

Data:

Review = 5 Days

Lead time = 3 days

CSL Level = 95%

Solution:

Cycle Stock = D x R = 20x5=100 Bottles

Safety Stock = z∂𝐷(𝐿+𝑅)= 1.65 (5)( 5 + 3 = 23 Bottles

The inventory level has been decreased

Q4)- (DrugCo): DrugCo is a moderately sized retailer that sells over the counter drugs and other
items. It consists of 20 stores in two different cities (A and B). The stores have a variety of
different schedules. The open hours for the stores range from 40 to 168 hours per week. The
average weekly revenue for these stores, organized by the number of open hours per week, is
attached.

(a)- You believe there is a linear relationship between the number of hours a store is open and
the weekly revenue. Develop a linear regression equation for weekly revenue for City A where
Weekly Revenue = βo + β1 * (Hours Open)

What are the value for the intercept or βo the other coefficient β1 for this model for City A?

Ans:

intercept or βo = 660 (working in the excel sheet attached)

coefficient β1 = 6.34 (working in the excel sheet attached)

(b)- What is the adjusted R2 for this model for City A? Enter the value as a decimal, so if it is
37.89%, enter 0.3789. Is the regression model we developed in Part (a) a good model for
forecasting sales?

2
Ans: Adjusted 𝑅 =0.876 (working in the excel sheet attached)

The model is good since adjusted R2 and R2, both are high

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Ramish Arif (23816)

MBA Evening