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OPIM 201– Business Processes

PRACTICE QUESTIONS FOR THE FINAL EXAM

Exercise 1: Income at the architectural firm Spraggins and Yunes for the period February to
June was as follows:

Month February March April May June

Income (in thousands) 70.0 68.6 64.8 71.7 71.3

a) Use trend-adjusted exponential smoothing to forecast the firm’s July income. Assume that
the initial forecast average for February is $65,000 and the initial trend adjustment is 0. The
smoothing constants selected are α=0.1 and β=0.2.

b) Resolve part a) with α=0.1 and β=0.8. Using MAPE, determine which smoothing constant
provides a better forecast.

Exercise 2: The following gives the number of accidents that have occurred on Florida State
Highway 101 during the last four months

Month Number of Accidents

January 30
February 40
March 60
April 90

Forecast the number of accidents that will occur in May, using least squares regression to
derive a trend equation.

Exercise 3: The Undergraduate Hospital is considering the purchase of a new ambulance. The
decision will rest partly on the anticipated mileage to be driven next year. The miles driven
during the past five years are as follows.

Year Mileage
1 3000
2 4000
3 3400
4 3800
5 3700

a) Forecast the mileage for next year using a two-year moving average.

b) Find the MAD for your forecast in part (a).

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c) Use a weighted two-year moving average with weights of 0.4 and 0.6 to forecast next year’s
mileage. (The weight of 0.6 is for the most recent year.) What is the MAD of this forecast?

d) Compute the forecast for year 6 using exponential smoothing, an initial forecast for year 1 of
3,000 miles, and α =0.5.

Exercise 4: An auto parts supplier sells Hardy-brand batteries to car dealers and auto
mechanics. The annual demand is approximately 1,200 batteries. The supplier pays $28 for
each battery and estimates that the annual holding cost is 30 percent of the battery's value. It
costs approximately $20 to place an order. The supplier currently orders 100 batteries per
month. It usually takes about 4 days to receive an order from the factory.

a) Determine the ordering, holding, and total inventory costs for the current order quantity.

b) What is reorder point with the current ordering policy?

c) Determine the economic order quantity (EOQ).

d) How many orders will be placed per year using the EOQ?

e) Determine the ordering, holding, and total inventory costs for the EOQ. How has ordering
cost changed? Holding cost? Total inventory cost?

f) What is the reorder point using the EOQ?

Exercise 5: Bell Computers purchases integrated chips at $350 per chip. The holding cost is $35
per unit per year, the ordering cost is $120 per order, and sales are steady, at 400 per month.
The company's supplier, Rich Blue Chip Manufacturing Inc., decides to offer price concessions in
order to attract larger orders. The price structure is shown below.

Quantity Purchased Price

1-99 units $350 per unit
100-199 units $325 per unit
200 and more units $300 per unit

What is the optimal order quantity and the minimum cost for Bell Computers to order,
purchase, and hold these integrated chips?

Exercise 6: Consider the situation by a manufacturer of play-stations, SUNNY, who is facing

Christmas demand. SUNNY sells the play-stations through a large retail chain, TOYS-are-MINE,
at a manufacturer (wholesale) price of 500 € per play-station. SUNNY’s unit manufacturing cost
is 350 € per play-station.

TOYS-are-MINE offers the play-stations for sale at its retail stores at the retail price of 800 € per
station. Its demand forecast for the upcoming Christmas season is for 200 000 stations, with a

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standard deviation of 50 000. The retail chain has to order ahead of the season. Any play
stations ordered will be delivered in time for the Christmas sales season, but no re-supply is
possible during the sales season.

Any play-station that will not be sold during the upcoming Christmas will be sold after the
season at a discount, for a price of 300€ per station.

a) What is the optimal order quantity for TOYS-are-MINE?

b) What is the optimal order quantity on this item, if the retailer and the manufacturer
were integrated into a single company?

Exercise 7: Elite Couture, a high-end fashion goods store has to decide on the quantity of Luella
Bartley handbags to sell during the Christmas season. The unit cost of the handbag is $28.50
and the handbag sells for $150. All handbags remaining unsold at the end of the season are
purchased by a discounter for $20 each. Further, there is a significant 40% inventory holding
cost incurred for each unsold bag. Demand for bags is distributed normally with mean 150 and
standard deviation 20. How many bags should be purchased to maximize expected profit?

Exercise 8: WAMB is a television station that has 250 thirty-second advertising slots during each
evening. The station is now selling advertising for the first few days in December, in an election
year. They could sell all the slots now for $4,000 each, but because of the Election Day, the
station may be able to sell slots to political candidates at the last minute for a price of $10,000
each. For now, assume that a slot not sold in advance and not sold at the last minute is
worthless to WAMB.

To help make this decision, the sales force has estimated that demand for advertising slots is
distributed normally with a mean of 150, and a standard deviation of 50.

a) How many slots for election day should WAMB sell in advance?

b) Now suppose that if a slot is not sold in advance and is not sold at the last minute, it may be
used for a promotional message worth $2000. Now how many slots should WAMB sell in
advance?

Exercise 9: Teddy Bower is an outdoor clothing and accessories chain that purchases a line of
parkas at $10 each from its Asian supplier, TeddySports. Unfortunately, at the time of order
placement, demand is still uncertain: Teddy Bower forecasts that its demand is Normally
distributed with mean 2100 and standard deviation 1200. Teddy Bower sells these parkas at
$22 each. Unsold parkas have little salvage value; Teddy Bower simply gives them away to a
charity.

a) What is the probability this parka turns out to be a "dog", defined as a product that sells less
than half of the forecast?

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b) How many parkas should Teddy Bower buy from TeddySports to maximize expected profit?

c) If Teddy Bower wishes to ensure a 98.5% in-stock probability, how many parkas should Teddy
Bower's order?

d) Assume Teddy Bower orders 3000 parkas. Evaluate Teddy Bower's stock-out probability.

Exercise 10: One unit of A is made of three units of B, one unit of C, and two units of D. B is
composed of two units of E and one unit of D. C is made of one unit of B and two units of E. E is
made of one unit of F. Items B, C, E, and F have one-week lead times; A and D have lead times
of two weeks. Assume lot-for-lot (L4L) lot sizing is used for items A, B, and F; lots of size 50, 50,
and 200 are used for items C, D, and E, respectively. Items C, E and F have on hand beginning
inventories of 10, 50, and 150, respectively; all other items have zero beginning inventory. We
are scheduled to receive 10 units of A in Week 2, 50 units of E in Week 1, and also 50 units of F
in Week 1. There are no other scheduled receipts. If 30 units of A are required in Week 8, find
the necessary planned order releases for all components.

Exercise 11: Consider information in the table below.

Item Children
Lot Lead time On Safety Scheduled
** Size (weeks) Hand Stock Receipt in (week)
A C(2), D
L4L 0
B C(2), D(2)
L4L 0
C E(5), F
L4L 0 200 20
D G(2) L4L 0 200 25 SR(1) = 50
E - POQ 3 1 1000 250
F - FOQ 2 100 SR(1) = 300
300
G - FOQ 1 50 100 SR(1) = 600
600
** Number in ( ) indicates multiplicity. No number means multiplicity of 1.

Both items A and B are end items. Information from the Master Production Schedule (for gross
requirements of A and B) is given below.

Determine the correct level of each item, and then complete all MRP calculations. The format
of the tabular form is given on the next page.

Item A Week 1 2 3 4 5 6 7
MPS 100 120 120 160

Item B Week 1 2 3 4 5 6 7
MPS 40 60 80 80 80

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Week 0 1 2 3 4 5 6 7
GR
SR
OH
PR
POR
GR
SR
OH
PR
POR
GR
SR
OH
PR
POR
GR
SR
OH
PR
POR
GR
SR
OH
PR
POR
GR
SR
OH
PR
POR

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Exercise 12: Cisco Systems, the market leader in the networking equipment industry, has
implemented a world class reverse logistics program. As a part of this program, retailers are
offered a rebate on unsold inventory at the end of each quarter. The retailers sell unsold
equipment at the price set by Cisco systems (i.e., they have no pricing power). However, based
on the rebate the retailers can decide the order quantity. The result of this rebate is (choose
the best answer):
a) The retailers’ underage cost increases; hence they order a larger quantity from Cisco.
b) The retailers’ underage cost decreases; hence they order a smaller quantity from Cisco.
c) The retailers‘ overage cost increases; hence they order a smaller quantity from Cisco.
d) The retailers’ overage cost decreases; hence they order a larger quantity from Cisco.
e) The retailers’ expected profits will always decrease.
f) Cisco’s expected profit will always decrease.
g) None of the above.

Exercise 13:

A B C

D E E E
2 2 3

H F F F F
2 2

G G G G G
2 2 2 2 3

Use the product structure from above. For end items A, B, and C, POR values have been
calculated for you. Lead times, lot sizing, safety stock, on hand and scheduled receipts for D, E,
F, G and H are given in the table below. Complete the remaining MRP calculations.

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Period 0 1 2 3 4 5 6
A POR 15 25 20
B POR 40 40
C POR 20 20 20
GR
ITEM D
SR 50
SS=10
OH 20
L=2
PR
FOQ 50
POR
GR
ITEM E
SR 50 50
SS=5
OH 25
L=1
PR
L4L
POR
GR
ITEM F
SR
SS=20
OH 30
L=1
PR
POQ2
POR
GR
ITEM H
SR 100
SS=50
OH 80
L=2
PR
FOQ50
POR
GR
ITEM G
SR 250
SS=0
OH 50
L=2
PR
FOQ50
POR

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SOLUTIONS

Exercise 1:
a) F feb = 65 and T feb = 0, hence FIT feb = 65

F mar = 65 + 0.1*(70 - 65) = 65.5 and T mar = 0 + 0.2*(65.5 - 65) = 0.1, hence FIT mar = 65.5 + 0.1 =
65.6

F apr = 65.6 + 0.1*(68.6 – 65.6) = 65.9 and T apr = 0.1 + 0.2*(65.9 – 65.6) = 0.16, hence FIT apr = 65.9
+ 0.16 = 66.06

F may = 66.06 + 0.1*(64.8 – 66.06) = 65.934 and T may = 0.16 + 0.2*(65.934 – 66.06) = 0.135, hence
FIT may = 65.934 + 0.135 = 66.069

F jun = 66.069 + 0.1*(71.7 – 66.069) = 66.632 and T jun = 0.135 + 0.2*(66.632 – 66.069) = 0.248,
hence FIT jun = 66.632 + 0.248 = 66.88

F jul = 66.88 + 0.1*(71.3 – 66.88) = 67.322 and T jul = 0.248 + 0.2*(67.322 – 66.88) = 0.336, hence
FIT jul = 67.322 + 0.336 = 67.658

Hence, income forecast for July is $67,658.

b) Income forecast for July with α=0.1 and β=0.8 is $69,703.

Month February March April May June

Income (in thousands) 70.0 68.6 64.8 71.7 71.3

Forecast part a) 65.0 65.6 66.06 66.069 66.88

MAPE part a) 7.14% 4.37% 1.94% 7.85% 6.2%

Forecast part b) 65.0 65.9 66.786 67.044 68.34

MAPE part b) 7.14% 3.93% 3.06% 6.49% 4.15%

Mean absolute percentage error (MAPE) and is given by

n
1 ei
MAPE = � � � �� ∗ 100
n Ai
i=1

MAPE for part a) is 5.5% and for part b) is 4.95% (take the average of all MAPE values). Hence
we can say that β=0.8 provides a better forecast.
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Exercise 2:
Month (x) Number of x xy x2
Accidents (y)

January (1) 30 1 30 1
February (2) 40 2 80 4
March (3) 60 3 180 9
April (4) 90 4 360 16
Total 220 10 650 30
Average 55 2.5

a = y − bx

b=
∑ xy − nx. y
∑ x − nx
2 2

650 − 4 ∗ 2.5 ∗ 55
b= = 20
30 − 4 ∗ 2.5 ∗ 2.5

a = 55 − 20 ∗ 2.5 = 5

The regression line is y = 5 + 20x. The forecast for May (x=5) is y = 5 + 20*5=105 accidents.

Exercise 3:

a) Forecast for year 6 is (3800+3700 )/2 = 3750 miles.

b)
Year Mileage Two-year moving Absolute
average Error
1 3000
2 4000
3 3400 3500 100
4 3800 3700 100
5 3700 3600 100
Total 300

MAD= 300/3 = 100

c) Forecast for year 6 is 3800*0.6+3700*0.4 = 3740 miles.

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Year Mileage Weighed moving Absolute

average Error
1 3000
2 4000
3 3400 3600 200
4 3800 3640 160
5 3700 3640 60
Total 420

MAD= 420/3 = 140

d) Forecast for year 6 is 3625 + 0.5 *(3700-3625) = 3663

Year Mileage Exponential Absolute

Smoothing Error
1 3000 3000
2 4000 3000 1000
3 3400 3500 100
4 3800 3450 350
5 3700 3625 75
Total 1525

MAD= 1525 /4= 381. 25

Exercise 4:

We are given the following information:

Annual demand: D = 1200 batteries per year
Purchase cost: c = $28 per battery
Holding cost: H = f*c = 0.30*(28) = $8.40 per battery per year
Ordering cost: K = $20 per order
Current order quantity: Q = 100 batteries

a) The current holding cost is H* Q/2 = 8.4 * 100 /2 = 420 and ordering cost is K* D/Q=
20*1200/100 = 240. Total inventory cost is then 420+240= $660 per year.

b) Reorder point is D*L = 1200 per year * 4 days/365 = 13 batteries

c) Q∗ = �(2DK)/H = �(2 ∗ 1200 ∗ 20)/8.4 = 76 batteries

d) There will be 1200/76 = 15.8 orders per year.

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e) The new holding cost is H* Q/2 = 8.4 * 76 /2 = 319.2 and ordering cost is K* D/Q=
20*1200/76 = 315.79. Total inventory cost is then $634.99 per year. Holding cost decreases
whereas ordering cost increases, but in total, total cost decreases by $25.01.

f) Reorder point does not change with the new policy, it is still D*L = 1200 per year * 4 days/365
= 13 batteries.

Exercise 5:

We are given the following information:

Annual demand: D = 12*400 = 4800 chips per year
Holding cost: H = $35 per chip per year
Ordering cost: K = $120 per order

As holding cost H does not depend on the price discount, we have a single EOQ.
𝐐∗ = �(𝟐𝐃𝐊)/𝐇 = �(𝟐 ∗ 𝟒𝟖𝟎𝟎 ∗ 𝟏𝟐𝟎)/𝟑𝟓 = 𝟏𝟖𝟏 chips

EOQ is not eligible for the first price schedule as Q must be between 1 and 99. In this price
schedule, it is optimal to order 99 chips. The cost corresponding to this ordering policy is as
follows:
Total cost = 350*4800 + 35*99/2 + 120*4800/99 = 1,687,551

EOQ is eligible for the second price schedule as EOQ is between 100 and 199. In this price
schedule, it is optimal to order EOQ=181 chips. The cost corresponding to this ordering policy is
as follows:
Total cost = 325*4800 + 35*181/2 + 120*4800/181 = 1,566,350

EOQ is not eligible for the third price schedule as Q must be more than 200 units. In this price
schedule, it is optimal to order 200 chips. The cost corresponding to this ordering policy is as
follows:
Total cost = 300*4800 + 35*200/2 + 120*4800/200 = 1,446,380

Therefore comparing costs for different price schedules, we can conclude that it is optimal to
order 200 units.

Exercise 6:

a) c u = p - c =€800 – €500= €300, c o = c – s = €500 - €300 =€200,

CR= c u /(c u +c o ) = €300/ (€300+€200) = 0.60

From standard normal table, we have: z*=0.26 and therefore

Q*= µ + z×σ=200,000+0.26*50,000=213,000.

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b) Then the manufacturing price would become an internal transfer price (charged to the
retailing division). The newsvendor calculation would then only take into account the
manufacturing cost of each station, and its retail sales price. The newsvendor computations are
revised as follows:

c u = r - c =€800 – €350= €450, c o = c – s = €350 - €300 =€50,

CR=c u /(c u +c o ) = €450/ (€450+€50) =0.9 and z= 1.29

Q* = μ + z x σ = 200,000 + 1.29 (50,000) = 264,500

Exercise 7:

Overage Cost, C o = $28.50 -$20 + 0.40 * 28.50 = $8.5 + $11.40 = $19.90

Underage Cost, C u = $150 - $28.50 = $121.50
Critical Ratio = C u /( C u + C o ) = 121.5/(121.5 + 19.9) = 0.8593
z = 1.08
Purchase quantity = Q = μ + z * σ = 150 + 1.08*20 = 171.6

Exercise 8:

a) This is a newsvendor problem, where Q = the number of slots to reserve. Therefore,

C u = cost of reserving one too few = $10,000-$4,000=$6,000
C o = cost of reserving one too many = $4,000.
Thus the critical ratio is CR= C u /(C u +C o )= 6,000/(6,000+4,000)=0.6
From standard normal table, we have z=0.26, therefore Q*=μ+ z x σ=150+0.26 x 50 = 163 slots.

As Q* is the number of slots reserved to be sold at the last minute, 250- Q* gives us the number
of slots that should be sold in advance. So WAMB should sell 250-163 = 87 slots in advance.

b) Now, this change affects the cost of overage, but not the cost of underage. Thus, C u is still
$6,000, but C o becomes 4,000-2,000=$2,000 because the firm has the chance to sell those left-
over slots at a price of 2,000. Therefore, the critical ratio becomes CR= C u /(C u +C o )=
6,000/(6,000+2,000)=0.75. We have z*=0.68, therefore Q*=μ+ z x σ=150+0.68 x 50 = 184 slots.

Thus WAMB should sell 250-184 = 66 slots in advance.

Note that the number of slots sold in advance must go down, since we have a higher “salvage
value“ if it is not sold later.

Exercise 9:

a) The parka sells less than half of the forecast if demand is 2100/2 = 1050 or fewer units. In
order to find the probability this parka turns out to be a "dog”, we should evaluate P (D<=1050).
z value corresponding to Q=1050 is z= (1050-2100)/1200= - 0.88. From the Standard Normal

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Distribution Function Table, this probability is P(z<= - 0.88)= 0.1894, which implies there is a
18.9% probability that the parka will be a dog.

b) To determine the profit maximizing order quantity, begin with the underage cost, Cu=22 -
10= 12, and the overage cost, Co=10 - 0 =10. The critical ratio is 12/(10+12)= 0.5455 . We see
from the Standard Normal Distribution Function Table that z=0.12. Convert that z-statistic back
into an order quantity, Q= 2100+ 0.12* 1200 = 2,244.

c) If Teddy Bower wishes to ensure a 98.5% in-stock probability, it must order Q parkas such
that P(D<=Q)>=0.985. z value corresponding to this probability is 2.17. Therefore, Teddy
Bower's should order Q= 2100 + 2.17*1200 = 4704 parkas.

d) If Teddy Bower orders 3000 parkas, it will have a stock out when D>Q=3000. This occurs with
a probability of 1- P(D<=Q). z value corresponding to Q=3000 is z=(3000-2100)/1200=0.75. So
stock-out probability is 1-0.7734=0.2266.

Exercise 10:

Level 0 A

Level 1 C(1)

Level 2 B(3) B(1)

Level 3 D(1) E(2) D(1) E(2) E(2) D(2)

F(1) F(1) F(1)

Level 4

Week 0 1 2 3 4 5 6 7 8
Item A GR 30
L4L SR 10
L=2 OH 10 10 10 10 10 10 0
PR 20
POR 20
ITEM C GR 20
FOQ 50 SR
L=1 OH 10 10 10 10 10 10 40 40 40
PR 50
POR 50

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ITEM B GR 50 60
L4L SR
L=1 OH 0 0
A3 PR 50 60
C1 POR 50 60
ITEM D GR 50 60 40
FOQ 50 SR
L=2 OH 0 40 0
A2 PR 50 100
B1 POR 50 100
ITEM E GR 100 220
FOQ SR 50
200 OH 50 100 100 100 0 180 180 180 180
L=1 PR 400
B2 400
C2 POR
ITEM F GR 400
L4L SR 50
L=1 OH 150 200 200 200 0
E1 PR 200
POR 200

Exercise 11:

Item A and B are at level 0, C and D are at level 1 and E, F and G are at level 2. There is no OH,
SR and SS for items A and B. Both have a lead time of 0 and L4L lot policy. Therefore, MPS given
in the problem becomes POR for Item A and B. (If you don’t believe, try it.)

Week 0 1 2 3 4 5 6 7
ITEM C GR 280 120 240 160 400 160 320
L4L SR
L=0 OH 200 20 20 20 20 20 20 20
SS=20 PR 100 120 240 160 400 160 320
A2 100 120 240 160 400 160 320
B2 POR
ITEM D GR 180 120 120 160 280 160 160
L4L SR 50
L=0 OH 200 70 25 25 25 25 25 25
SS=25 PR 75 120 160 280 160 160
A1 75 120 160 280 160 160
B2 POR

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ITEM E GR 500 600 1200 800 2000 800 1600

POQ 3 SR
L=1 OH 1000 500 2250 1050 250 2650 1850 250
SS=250 PR 2350 4400
C5 POR 2350 4400
ITEM F GR 100 120 240 160 400 160 320
FOQ SR 300
300 OH 100 300 180 240 80 280 120 100
L=2 PR 300 600 300
C1 POR 300 600 300
ITEM G GR 150 240 320 560 320 320
FOQ SR 600
600 OH 50 650 500 260 540 580 260 540
L=1 PR 600 600 600
SS=100 600 600 600
D2 POR

Exercise 12:

Option d) is the best answer. Rebates on unsold inventory do not affect the underage cost
(hence (a) and (b) are in-correct) but decrease the overage cost (hence (c) is incorrect) thus
leading to larger order quantities from Cisco. It is not clear what happens with profits which can
increase or decrease (hence (e) and (f) are incorrect).

Exercise 13:

Period 0 1 2 3 4 5 6
A POR 15 25 20
B POR 40 40
C POR 20 20 20
ITEM D GR 30 50 40
SS=10 SR 50
L=2 OH 20 20 70 40 40 40 50
FOQ 50 PR 50 50
A2 POR 50 50
ITEM E GR 150 20 190 60
SS=5 SR 50 50
L=1 OH 25 75 125 5 5 5 5
L4L PR 30 20 190 60
A2, B3 POR 30 20 190 60
C1

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ITEM F GR 30 100 190 140

SS=20 SR
L=1 OH 30 30 120 20 160 20 20
POQ2 PR 120 330
B2, E1 POR 120 330
ITEM H GR 100 100
SS=50 SR 100
L=2 OH 80 180 180 80 80 80 80
FOQ50 PR 100
D2 POR 100
ITEM G GR 240 660 60 60 60
SS=0 SR 250
L=2 OH 50 60 60 0 40 30 20
FOQ50 PR 600 100 50 50
C3, F2 POR 600 100 50 50

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