Practice Problems: Chapter 1, Operations and Productivity

Problem 1:
Mance Fraily, the Production Manager at Ralts Mills, can currently expect his operation to
produce 1000 square yards of fabric for each ton of raw cotton. Each ton of raw cotton requires 5
labor hours to process. He believes that he can buy a better quality raw cotton, which will enable
him to produce 1200 square yards per ton of raw cotton with the same labor hours.
What will be the impact on productivity (measured in square yards per labor-hour) if he
purchases the higher quality raw cotton?
Problem 2:
C. A. Ratchet, the local auto mechanic, finds that it usually takes him 2 hours to diagnose and fix
a typical problem. What is his daily productivity (assume an 8 hour day)?
Mr. Ratchet believes he can purchase a small computer trouble-shooting device, which will
allow him to find and fix a problem in the incredible (at least to his customers!) time of 1 hour.
He will, however, have to spend an extra hour each morning adjusting the computerized
diagnostic device. What will be the impact on his productivity if he purchases the device?
Problem 3:
Joanna French is currently working a total of 12 hours per day to produce 240 dolls. She thinks
that by changing the paint used for the facial features and fingernails that she can increase her
rate to 360 dolls per day. Total material cost for each doll is approximately $3.50; she has to
invest $20 in the necessary supplies (expendables) per day; energy costs are assumed to be only
$4.00 per day; and she thinks she should be making $10 per hour for her time. Viewing this from
a total (multifactor) productivity perspective, what is her productivity at present and with the
new paint?
Problem 4:
How would total (multifactor) productivity change if using the new paint raised Ms. Frenchs
material costs by $0.50 per doll?
Problem 5:
If she uses the new paint, by what amount could Ms. Frenchs material costs increase without
reducing total (multifactor) productivity?

ANSWERS:
Problem 1:

Current labor productivity =

New labor productivity =

1000 sq yds
= 200 sq yds per hour
1 ton*5 hours

1200 sq yds
= 240 sq yds per hour
1 ton * 5 hours

Productivity improves 20% = ( 240 - 200 ) / 200 = .2

Problem 2:

Current productivity =

8 hours per day

= 4 problems per day
2 hours per problem

Productivity with computer =

7 hours per day

= 7 problems per day
1 hour per problem

74 3

Productivity improves 75%

= = .75
4
4

Problem 3:

Currently

Using the new paint

Labor

12 hrs * $10 = $120

12 hrs * $10 = $ 120

Material

240 * $3.50 = $840

360 * $3.50 = $1260

Supplies

= $ 20

= $ 20

Energy

=$ 4

=$

Total Inputs

= $984

= $1404

Productivity

240/984 = 0.24

360/1404 = .26

Problem 4:

If the material costs increase by $0.50 per doll:

Using the new paint

Labor

12 hrs * $10 = $ 120

Material

360 * $4.00 = $1440

Supplies

=$

20

Energy

=$

Total Inputs

= $1584

Productivity

360/1584 = 0.23

Problem 5:

From the answer to Problem 3 we know the following:

Currently

Using the new paint

Labor

12 hrs * $10 = $120

12 hrs * $10 = $ 120

Material

240 * $3.50 = $840

360 * $3.50 = $1260

Supplies

= $ 20

= $ 20

Energy

=$ 4

=$

Total Inputs

= $984

= $1404

Productivity

240/984 = 0.24

360/1404 = .26

We want to know how high the material cost could go, using the new paint, before the
productivity drops to the current level of 0.24. In mathematical terms we make the material cost
a variable (X), set the new multifactor productivity value to the current level, 0.24, and solve for
X.

360/(($12x10) + 360 $(X) + $20 + $4) = 0.24

360 = 0.24($120 + 360$(X) + $20 + $4)
360 = $28.8 + 86.4$(X) + $4.8 + $.96
325.44 = 86.4$(X)
$(X)= 325.44/86.4 = $3.7666 $3.77
It follows then that the new paint could raise Materials cost by no more than approximately
$0.27 (the difference between $3.77 and $3.50) before Ms. French would experience a decrease
in multifactor productivity.

Practice Problems: Chapter 2, Operations Strategy in a Global

Environment
Problem 1:
Identify how changes in the external environment may affect the OM strategy for a
company. For example, what impact are the following factors likely to have on OM
strategy?
a. The occurrence of a major storm or hurricane.
b. Terrorist attacks of 9/11/01.
c. The much discussed decrease in the quality of American primary and secondary
school systems.
d. Trade Legislation such as WTO and NAFTA and changes in tariffs and quotas.
e. The rapid rate at which the cost of health insurance is increasing.
f. The Internet.
Problem 2:
Identify how the changes in the internal environment affect the OM strategy for a
company. For example, what impact are the following factors likely to have on OM
strategy?
a. The increased use of Local and Wide Area Networks (LANs and WANs)
b. An increased emphasis on service
c. The increased role of women in the workplace
d. The seemingly increasing rate at which both internal and external environments
change.
Problem 3:
Operations managers are called upon to support the organization's strategy. OM does this
with some combination of one of three strategies. What are these three strategies?

ANSWERS:
Problem 1:
a. A major storm or hurricane may have considerable impact on a companys facilities
and scheduling. Flooding and wind damage can make a facility unusable or
significantly reduce its capacity. Stocks of raw materials, especially agricultural
products, might be damaged or in short supply. The long-term availability of some
materials might be significantly reduced. There may be a shortage of important
services during the recovery. For example, the demand for roofers and builders is high
after a major storm and they would like to be able to rapidly increase their capacity to
handle the higher demand.
b. Terrorist activity has forced organizations to rethink, and in many cases expand, their
security systems. Firms have also had to reevaluate their supply networks and consider
increasing their inventory safety stock. They may also reassess the risks of foreign
locations and expansion.
c. A decrease in the skill levels of Americans entering the labor market requires that
organizations place more emphasis on training, turn to automation to obviate the need
for human labor, and hire from outside the United States.
d. WTO and NAFTA changed the rules for trading, opened new markets, and in some
instances, changed the role of labor versus capital (where labor is especially low cost,
emphasis often shifts from the use of capital to the use of labor).
e. The increasing cost of health insurance adds significantly to the cost of labor. Some
large US organizations are passing on this increased cost to the employees or reducing
other parts of the benefit package in response to these pressures.
f. The Internet has promoted globalization of markets, and eliminated barriers of
geography and time.
Problem 2:
a. The increased use of LANs and WANs has, among other things, enabled new
organizational structures, the movement of the locus of responsibility further down the
organizational hierarchy (elimination of middle management), and the increasing
practicality of JIT operations, mass customization, etc..
b. The increased emphasis on service has, among other things, fostered an increased
information or information technology content of many products. Firms are also
increasing training because so much of the service economy is dependent upon
individual competence.
c. The increased role of women in the workplace is requiring an increased emphasis on
the creation and communication of appropriate human resource policies. It may also
be fostering the creation of flexible work schedules and, to a lesser degree,
telecommuting.

d. Some companies seem to be adopting the perspective that their main problem is now
the management of change as opposed to the management of a specific process or
product. If nothing else, the management of change is becoming a formal part of the
managers responsibility.
Problem 3:
OM managers support the firm's strategy by achieving a competitive advantage through
some combination of differentiation, low-cost leadership, and response.

Practice Problem: Chapter 3, Project Management

Problem 1:
The following represent activities in a major construction project. Draw the network to
represent this project.

Activity

Immediate Predecessor

C, E

F, G

Problem 2:
Given the following Time Chart and Network Diagram, find the Critical Path.

Activity

Variance

1/9

1/9

12

16/9

4/9

1/9

Problem 3:
What is the variance in completion time for the critical path found in Problem 2?
Problem 4:
A project has an expected completion time of 40 weeks and a standard deviation of 5
weeks. It is assumed that the project completion time is normally distributed.
(a) What is the probability of finishing the project in 50 weeks or less?
(b) What is the probability of finishing the project in 38 weeks or less?
(c) The due date for the project is set so that there is a 90% chance that the project will
be finished by this date. What is the date?

Problem 5:
Development of a new deluxe version of a particular software product is being
considered. The activities necessary for the completion of this project are listed in the
table below along with their costs and completion times in weeks.

Activity

Normal
Time

Crash
Time

Normal
Cost

Crash
Cost

Immediate
Predecessor

2,000

2,600

2,200

2,800

500

500

2,300

2,600

900

1,200

B, D

3,000

4,200

C, E

1,400

2,000

(a) What is the project expected completion date?

(b) What is the total cost required for completing this project on normal time?
(c) If you wish to reduce the time required to complete this project by 1 week, which
activity should be crashed, and how much will this increase the total cost?

ANSWERS:
Problem 1:

Problem 2:
Critical path: ACDE = 14

Problem 3:
Total variance = variances of activities on critical path
Total variance = 1/9 + 16/9 + 4/9 + 1/9 = 2 2/9 = 2.44
And =

2.44 = 1.6

Problem 4:

(a) Z =

50 40
=2
5

Therefore: P (X 50) = P(Z 2) = 0.97725

(b) Z =

2
= 0.4
5

Therefore: P (X 38) = P(Z 0.4) = 0.34458

(c) 90% Z = 1.28 = ( - ) / = 40 / 5
Therefore: = 1.28*5 + 40 = 46.4weeks

Problem 5:

(a)

Project completion time is therefore t A + t D + t E + t F + t G = 4 + 8 + 6 + 3 + 4 = 25

(b) Total cost = $2, 000 + $2200 + $500 + $2,300 + $900 + $3, 000 + $1, 400 = $12,300
(c) Crash D 1 week at an additional cost of

$2, 600 $2,300 $300

=
= $75
84
4

Practice Problems: Chapter 6, Managing Quality

Problem 1:
The accounts receivable department has documented the following defects over a 30-day period:

Category

Frequency

Invoice amount does not agree with the check amount

108

Invoice not on record (not found)

24

No formal invoice issued

18

Check (payment) not received on time

30

Check not signed

Invoice number and invoice referenced do not agree

12

What techniques would you use and what conclusions can you draw about defects in the accounts
receivable department?
Problem 2:
Prepare a flow chart for purchasing a Big Mac at the drive-through window at McDonalds.
Problem 3:
Draw a fishbone chart detailing reasons why a part might not be correctly machined.

ANSWERS:
Problem 1:

Category

Frequency

Percent

Invoice amount does not agree with the check amount

108

54

Invoice not on record (not found)

24

12

No formal invoice issued

18

Check (payment) not received on time

30

15

Check not signed

Invoice number and invoice referenced do not agree

12

200

100

Use a Pareto chart to organize the defects and conclude that the obvious problem (about half the
defects) is the failure of the check to agree with the companys records as to the correct amount.
Other problems are late payments and an apparent invoice-filing problem in the office. Notice that
27% of these common errors appear to be the result of procedural problems within accounts
receivable (invoice not on record, no invoice issued, and invoice numbering problems). This value
could be considerably higher depending on how much of the problem of disagreement between
invoice and check amounts is the result of accounts receivable process problems.

Problem 2:

Distance

Symbol

Activity

--

Pull up to speaker

--

Press button

--

Wait for response

--

Verbalize order

--

Get confirmation of order and cost

20

Move car up in line

--

Wait

20

Move car up in line

--

Wait

--

Verify order and cost

--

Pay and receive order

--

Leave

--

Realize they forgot the extra catsup!

Problem 3

Practice Problems: Chapter 7, Process Strategy

Problem 1:
Jackson Custom Machine Shop has a contract for 130,000 units of a new product. Sam Jumper, the
owner, has calculated the cost for three process alternatives. Fixed costs will be: for generalpurpose equipment (GPE), $150,000; flexible manufacturing (FMS), $350,000; and dedicated
automation (DA), $950,000. Variable costs will be: GPE, $10; FMS, $8; and DA, $6. Which should
he choose?
Problem 2:
Solve Problem 1 graphically
Problem 3:
Using either your analytical solution found in Problem 1, or the graphical solution found in
Problem 2, identify the volume ranges where each process should be used.
Problem 4:
If Jackson Custom Machine is able to convince the customer to renew the contract for another one
or two years, what implications does this have for his decision?
ANSWERS:
Problem 1:
Solve for the crossover between GPE and FMS:
10X + 150000 = 8X + 350000
or
2X = 200000

x = 100,000 units
Solve for the crossover between FMS and DA:
8X + 350000 = 6X + 950000
or
2X = 600000

X = 300000
Therefore, at a volume of 130,000 units, FMS is the appropriate strategy.

Problem 2 & 3:

Below 100,000 units use GPE, between 100,000 and 300,000 use FMS, above 300,000 use DA
Problem 4:

If Jackson Custom Machine is able to get the customer to extend the contract for another two years,
the owner would certainly wish to take advantage of the savings using Dedicated Automation.

Practice Problems: Chapter 8, Location Strategies

Problem 1:
A major drug store chain wishes to build a new warehouse to serve the whole Midwest. At the
moment, it is looking at three possible locations. The factors, weights, and ratings being considered
are given below:

Ratings
Factor

Weights

Peoria

Des Moines

Chicago

Nearness to markets

20

Labor cost

Taxes

15

Nearness to suppliers

10

10

10

Which city should they choose?

Problem 2:
Balfours is considering building a plant in one of three possible locations. They have estimated the
following parameters for each location:

Location

Fixed Cost

Variable Cost

Waco, Texas

$300,000

$5.75

Tijuana, Mexico

$800,000

$2.75

Fayetteville, Arkansas

$100,000

$8.00

For what unit sales volume should they choose each location?

Problem 3:
Our main distribution center in Phoenix, AZ is due to be replaced with a much larger, more modern
facility that can handle the tremendous needs that have developed with the citys growth. Fresh
produce travels to the seven store locations several times a day making site selection critical for
efficient distribution. Using the data in the following table, determine the map coordinates for the
proposed new distribution center.

Store Locations

Map Coordinates (x,y)

Truck Round Trips per Day

Mesa

(10,5)

Glendale

(3,8)

Camelback

(4,7)

Scottsdale

(15,10)

Apache Junction

(13,3)

Sun City

(1,12)

Pima

(5,5)

10

Problem 4:
A company is planning on expanding and building a new plant in one of three countries in Middle
or Eastern Europe. The general manager, Patricia Donegal, has decided to base her decision on six
critical success factors: technology availability and support, availability and quality of public
education, legal and regulatory aspects, social and cultural aspects, economic factors, and political
stability.
Using a rating system of 1 (least desirable) to 5 (most desirable) she has arrived at the following
ratings (you may, of course, have different opinions). In which country should the plant be built?

Critical Success Factor

Turkey

Serbia

Slovakia

Technology availability and support

Availability and quality of public education

Legal and regulatory aspects

Social and cultural aspects

Economic factors

Political stability

Problem 5:
Assume that Patricia decides to use the following weights for the critical success factors:
Technology availability and support

0.3

Availability and quality of public education

0.2

Legal and regulatory aspects

0.1

Social and cultural aspects

0.1

Economic factors

0.1

Political stability

0.2

Would this change her decision?

Problem 6:
Patricias advisors have suggested that Turkey and Slovakia might be better differentiated by either
(a) doubling the number of critical success factors, or (b) breaking down each of the existing
critical success factors into smaller, more narrowly defined items, e.g., Availability and quality of
public education might be broken into primary, secondary, and post-secondary education. How
would you advise Ms. Donegal?

ANSWERS:
Problem 1:

Ratings

Weighted Ratings

Weights

Peoria

Des
Moines

Chicago

Peoria

Des
Moines

Chicago

Nearness to
markets

20

80

140

100

Labor cost

40

40

20

Taxes

15

120

135

105

Nearness to
suppliers

10

10

10

100

60

100

Sum of Weighted ratings:

340

375

325

Factor

Therefore, it appears that based upon the weights and rating, Des Moines should be chosen.

Problem 2:
Transition between Waco and Tijuana:

300, 000 + (5.75 x) = 800, 000 + (2.75 x)

3 x = 500, 000
x = 166, 000

Transition between Waco and Fayetteville:

300, 000 + (5.75 x) = 100, 000 + (8.00 x)

200, 000 = 2.25 x
88,888 = x

Problem 3:

New Distribution Center should be located at:

Cx =

(10*3) + (3*3) + (4* 2) + (15*6) + (13*5) + (1*3) + (5*10) 255

=
= 7.97
3 + 3 + 2 + 6 + 5 + 3 + 10
32

Cy =

(5*3) + (8*3) + (7 * 2) + (10*6) + (3*5) + (12*3) + (5*10) 214

=
= 6.69
3 + 3 + 2 + 6 + 5 + 3 + 10
32

Problem 4:

Critical Success Factor

Turkey

Serbia

Slovakia

Technology availability and support

Availability and quality of public education

Legal and regulatory aspects

Social and cultural aspects

Economic factors

Political stability

23

19

22

Based upon her ratings of the critical success factors, Patricia should choose Turkey. From a
practical perspective, given the small difference between the scores for Turkey and Slovakia, and
the subjectivity of the ratings themselves, Patricia would be better advised to develop additional
critical success factors, more carefully weigh the individual factors; or, in general, to acquire more
information before making her decisions.

Problem 5:

Critical Success Factor

Wgt

Turkey

Serbia

Technology availability and support

0.3

1.2

0.9

1.2

Availability and quality of public

education

0.2

0.8

0.8

0.6

Legal and regulatory aspects

0.1

0.2

0.4

.5

Social and cultural aspects

0.1

0.5

0.3

0.4

Economic factors

0.1

0.4

0.3

0.3

Political stability

0.2

0.8

0.4

0.6

= 3.9

Slovakia

3.1

3.6

No, in this case, use of the weighting factors does not change the recommendation. One might
again suggest that additional information be considered in making the decision.
Problem 6:

(a) Doubling the number of critical success factors. There are two issues here. First, from a
practical perspective there are a limited number of truly critical success factors and these
should be the ones presently being considered. Any additional factors should be of secondary
or tertiary importance. Second, given the subjective nature of the rating process, adding
additional factors would also increase the overall margin of error of the final ratings to a degree
that may eliminate any gain in differentiation arising from the use of the additional factors. The
use of a maximum of seven to nine critical success factors is usually appropriate.
(b) Given that ones ability to estimate or rate an aggregate is usually better than ones ability to
estimate or rate the individual components of the aggregate, this approach is unlikely to
provide much help.

Practice Problems: Chapter 9, Layout Strategy

Problem 1:
As in most kitchens, the baking ovens in Loris Kitchen in New Orleans are located in one area
near the cooking burners. The refrigerators are located next to each other as are the dishwashing
facilities. A work area of tabletops is set aside for cutting, mixing, dough rolling, and assembling of
final servings, although different table areas may be reserved for each of these functions.
Given the following Interdepartmental Activity Matrix, develop an appropriate layout for Loris
Kitchen.

Interdepartmental Activity Matrix

Cooking burners (A)

Cooking
Burners (A)

Refrigerators (B)

Dishwashing (C)

Work Area (D)

193

12

82

222

Refrigerator (B)
Dishwashing (C)
Work Area (D)

The present layout is:

with a distance of 10 feet between adjacent areas.

Computing the Load * Distance measure:

Load * Distance
A to B

7 * 10

A to C

193*20

A to D

12*30

B to C

4*10

B to D

82*20

C to D

222*10

Total

70
3860
360
40
1640
2220
8190

Develop a preferred layout. What is the sum of the loads * distance of your new layout?

Problem 2:
A firm must produce 40 units/day during an 8-hour workday. Tasks, times, and predecessor
activities are given below.

Task

Time (Minutes)

Predecessor(s)

10

D, E

Total

38 minutes

Determine the cycle time and the appropriate number of workstations to produce the 40 units per
day.

ANSWERS
Problem 1:
From the Activity Matrix, C and D should be next to each other and A should be next to C. The
other relationships are minor by comparison. One possible solution is:

with a distance of 10 feet between adjacent areas.

Computing the Load * Distance measure:

Load * Distance
A to B

7 * 10

70

A to C

193*10

1930

A to D

12*20

240

B to C

4*20

80

B to D

82*30

2460

C to D

222*10

2220

Total

7000

Further improvement is possible. Try analyzing the following layouts.

Problem 2:

Cycle time =

Production time available 8 hrs *60 minutes/hr 480

=
=
= 12 minutes/cycle
Units required
40 units
40

Minimum number of workstations =

=

Cycle time

Work time required

Cycle time

38 minutes
= 3.17 station
12 minutes/cycle

3.17 workstations must be rounded up to 4 as 3 workstations would not be able to produce the
required output.
One layout not necessarily optimal

Practice Problems: Chapter 11, Supply-Chain Management

Problem 1:
Determine the sales necessary to equal a dollar of savings on purchases for a company
that has a net profit of 6% and spends 70% of its revenues on purchases.
Problem 2:
Determine the sales necessary to equal a dollar of savings on purchases for a company
that has a net profit of 8% and spends 40% of its revenues on purchases.
Problem 3
Phil Carter, President of Carter Computer Components, Corp. has the option of shipping
computer transformers from its Singapore plant via container ship or airfreight. The
typical shipment has a value of $75,000. A container ship takes 24 days and costs $5,000;
airfreight takes 1 day and costs $8,000. Holding cost is estimated to be 40% in either
case. How should shipments be made?
Problem 4
Carol King is evaluating the inventory performance of Johnston Systems. A recent annual
report (all figures in millions) indicates assets of $16,000, inventory of $1,000, and cost
of goods sold of $24,000. What is the inventory turnover and what percent of assets are
tied up in inventory?

ANSWERS
Problem 1:
From Table 11.3, we see that this company would have to increase sales by
approximately $5.56
Problem 2:
From Table 11.3, we see that this company would have to increase sales by
approximately $2.94
Problem 3:
Cost via container ship:

[24 *

(.40 * 75,000)
] + 5,000 = (24 * 82.19) + 5,000 = 1,972.56 + 5,000 = $6,972.56
365

Cost via airfreight:

[1*

(.40 * 75,000)
] + 8,000 = (1* 82.19) + 8,000 = 82.19 + 8,000 = $8,082.19
365

Therefore, use the container ship as it has a lower total cost.

Problem 4

Cost of good sold / inventory investment = 24,000 / 1,000

= 24 (inventory turnover)
Total inventory investment/ Total assets = 1,000 / 16,000
= .0625 = 6.25% (percent of assets in inventory)

Practice Problems: Chapter 12, Inventory Management

Problem 1:
ABC Analysis
Stock Number

Annual
$
Volume

Percent of Annual $
Volume

J24

12,500

46.2

R26

9,000

33.3

L02

3,200

11.8

M12

1,550

5.8

P33

620

2.3

T72

65

0.2

S67

53

0.2

Q47

32

0.1

V20

30

0.1

= 100.0

What are the appropriate ABC groups of inventory items?

Problem 2:
A firm has 1,000 A items (which it counts every week, i.e., 5 days), 4,000 B items (counted
every 40 days), and 8,000 C items (counted every 100 days). How many items should be counted
per day?
Problem 3:
Assume you have a product with the following parameters:

Demand = 360
Holding cost per year = $1.00 per unit

Order cos t: = $100 per order

What is the EOQ?
Problem 4:

Given the data from Problem 3, and assuming a 300-day work year; how many orders should be
processed per year? What is the expected time between orders?
Problem 5:

What is the total cost for the inventory policy used in Problem 3?
Problem 6:

Assume that the demand was actually higher than estimated (i.e., 500 units instead of 360 units).
What will be the actual annual total cost?
Problem 7:

If demand for an item is 3 units per day, and delivery lead-time is 15 days, what should we use for
a re-order point?
Problem 8:

Assume that our firm produces type C fire extinguishers. We make 30,000 of these fire
extinguishers per year. Each extinguisher requires one handle (assume a 300 day work year for
daily usage rate purposes). Assume an annual carrying cost of $1.50 per handle; production setup
cost of $150, and a daily production rate of 300. What is the optimal production order quantity?

Problem 9:

We need 1,000 electric drills per year. The ordering cost for these is $100 per order and the
carrying cost is assumed to be 40% of the per unit cost. In orders of less than 120, drills cost $78;
for orders of 120 or more, the cost drops to $50 per unit.
Should we take advantage of the quantity discount?
Problem 10:

Litely Corp sells 1,350 of its special decorator light switch per year, and places orders for 300 of
these switches at a time. Assuming no safety stocks, Litely estimates a 50% chance of no shortages
in each cycle, and the probability of shortages of 5, 10, and 15 units as 0.2, 0.15, and 0.15
respectively. The carrying cost per unit per year is calculated as $5 and the stockout cost is
estimated at $6 ($3 lost profit per switch and another $3 lost in goodwill, or future sales loss). What
level of safety stock should Litely use for this product? (Consider safety stock of 0, 5, 10, and 15
units)
Problem 11:

Presume that Litely carries a modern white kitchen ceiling lamp that is quite popular. The
anticipated demand during lead time can be approximated by a normal curve having a mean of 180
units and a standard deviation of 40 units. What safety stock should Litely carry to achieve a 95%
service level?

ANSWERS
Problem 1:
ABC Groups
Class

Items

Annual
Volume

Percent of $
Volume

J24, R26

21,500

79.5

L02, M12

4,750

17.6

P33, T72, S67, Q47, V20

800

2.9

= 100.0

Problem 2:
Item
Class

Quantity

Policy

Number of Items to
Count Per Day

1,000

Every 5 days

1000/5 = 200/day

4,000

Every
days

40 4000/40=100/day

8,000

Every
days

100 8000/100=80/day

Total items to count: 380/day

Problem 3:

EOQ =

2 * Demand * Order cost

2 * 360 * 100
=
= 72000 = 268 items
1
Holding cost

Problem 4:

N=

Demand 360
=
= 134
. orders per year
268
Q

T=

Working days
= 300 / 134
. = 224 days between orders
Expected number of orders

Problem 5:

Demand * Order Cost (Quantity of Items) * ( Holding Cost ) 360 * 100 268 * 1
+
=
+
= 134 + 134 = $268
Q
2
268
2

TC =

Problem 6:
TC =

Demand * Order Cost (Quantity of Items) * ( Holding Cost ) 500 * 100 268 * 1
+
=
+
= 186.57 + 134 = $320.57
268
2
Q
2

Note that while demand was underestimated by nearly 50%, annual cost increases by only 20%
(320 / 268 = 1.20) an illustration of the degree to which the EOQ model is relatively insensitive to
small errors in estimation of demand.
Problem 7:
ROP = Demand during lead - time = 3 * 15 = 45 units

Problem 8:

Q*p =

2 * Demand * Order Cost

=

Daily Usage Rate

Holding Cost 1
Daily Production Rate

(2)(30,000)(150)
= 3000 units
100
1.501

300

Problem 9:

Q*p ($78) =

(2)(1000)(100)
= 80 units
(0.4)(78)

Q*p ($50) =

(2)(1000)(100)
= 100 units = 120 to take advantage of quantity discount.
(0.4)(50)

Ordering 100 units at $50 per unit is not possible; the discount does not apply until 120 the order
equals 120 units. Therefore, we need to compare the total costs for the two alternatives.
Total cos t = Demand * Cost +

Demand * Order Cost (Quantity of Items) * ( Holding cos t )

+
Q
2

Total cos t ($78) = (1000)(78) +

(1000)(100) (80)(0.4)(78)
+
= $80,498
80
2

Total cos t ($50) = (1000)(50) +

(1000)(100) (120)(0.4)(50)
+
= $52,033
120
2

Therefore, we should order 120 each time at a unit cost of $50 and a total cost of $52,033.
Problem 10:

Safety stock = 0 units:

Carrying cost equals zero.

Stockout cos ts = (Stockout cos t * possible units of shortage * probability of shortage * number of orders per year )

S0 = 6 * 5* 0.2 *

1350
1350
1350
+ 6 * 10 * 015
. *
+ 6 * 15* 015
. *
= $128.25
300
300
300

Safety stock = 5 units:

Carrying cos t = $5 per unit * 5 units = $25

Stockout cost: S5 = 6* 5* 015

. *

1350
1350
+ 6* 10* 015
. *
= $60.75
300
300

Total cos t = carrying cos t + stockout cos t = $25 + $60.75 = $85.75

Safety stock = 10 units:

Carrying cos t = 10 * 5 = $50.00

. *
Stockout cost: S10 = 6* 5* 015

1350
= $20.25
300

Total cos t = carrying cos t + plus stockout cos t = $50.00 + $20.25 = $70.25
Safety stock = 15:

Carrying cos t = 15* 5 = $75.00

Stockout cos ts = 0 (there is no shortage if 15 units are maintained)
Total cos t = carrying cos t + stockout cos t = $75.00 + $0 = $75.00

Therefore: Minimum cost comes from carrying a 10-unit safety stock.

Problem 11:

To find the safety stock for a 95% service level it is necessary to calculate the 95th percentile on
the normal curve. Using the standard Normal table from the text, we find the Z value for 0.95 is
1.65 standard units. The safety stock is then given by:
(165
. * 40) + 180 = 66 + 180 = 246 Ceiling Lamps

Practice Problem: Chapter 13, Aggregate Planning

Problem 1:
Set the following problem up in transportation format and solve for the minimum cost
plan.
Period
Feb

Mar

Apr

55

70

75

Regular

50

50

50

Overtime

Subcontract

12

12

10

Beginning Inventory

10

Demand

Capacity

Costs
Regular time

$60 per unit

Overtime

$80 per unit

Subcontract

$90 per unit

Inventory carrying cost

$1 per unit per month

Back order cost

$3 per unit per month

ANSWERS
Problem 1:

Practice Problems: Chapter 14, Material Requirements Planning

(MRP) and ERP
Problem 1:
The Hunicut and Hallock Corporation makes two versions of the same basic file cabinet,
the TOL (Top-of-the-line) five drawer file cabinet and the HQ (High-quality) five drawer
filing cabinet.
The TOL and HQ use the same cabinet frame and locking mechanism. The drawer
assemblies are different although both use the same drawer frame assembly. The drawer
assemblies for the TOL cabinet use a sliding assembly that requires four bearings per side
whereas the HQ sliding assembly requires only two bearings per side. (These bearings are
identical for both cabinet types.) 100 TOL and 300 HQ file cabinets need to be assembled
in week #10. No current stock exists.
Develop a material structure tree for the TOL and the HQ file cabinets.
Problem 2:
Develop a gross material requirements plan for the TOL and HQ cabinets in the previous
example.
Problem 3:
Develop a net material requirements plan for the TOL and HQ file cabinets in the
previous problems assuming a current on-hand finished goods inventory of 100 TOL
cabinets. The lead times are given below.
Painting and final assembly of both HQ and TOL requires 2 weeks.
Both cabinet frames and lock assembly require 1 week for manufacturing.
Both drawer assemblies require 2 weeks for assembly.
Both sliding assemblies require 2 weeks for manufacturing.
Bearings require 2 week to arrive from the supplier.

Problem 4:
If the TOL file cabinet has a gross material requirements plan as shown below, no
inventory, and 2 weeks lead time is required for assembly, what are the order release
dates and lot sizes when lot sizing is determined using lot-for-lot? Use a holding cost of
$2.00 and a setup cost of $20.00, and assume no initial inventory.

Gross Material Requirements Plan

Week

TOL

50

100

50

10
100

Problem 5:
If the TOL file cabinet has a gross material requirements plan as shown below, no
inventory, and 2 weeks of lead time is required for assembly, what are the order release
dates and lot sizes when lot sizing is determined by EOQ (Economic Order Quantity)?
Use a holding cost of $2.00 and a setup cost of $20.00, and assume no initial inventory.

Gross Material Requirements Plan

Week
TOL

3
50

5
100

7
50

10
100

Problem 6:
If the TOL file cabinet has a gross materials requirements plan as shown below, no
inventory, and 2 weeks of lead time is required for assembly, what are the order release
dates and lot size when lot sizing is determined using PPB (part period balancing)? Use a
holding cost of $2.00 and a setup cost of $20,000, and no initial inventory.

Gross Material Requirements Plan

Week
TOL

3
50

5
100

7
50

10
100

ANSWERS
Problem 1:

Problem 2:

Gross Requirements Plan

Week

10

TOL

100

HQ

300

Problem 3:

Week
1

Required date

10

Lead
Time

100

2 weeks

300

2 weeks

TOL
Order release date
Required date
HQ

Cabinet
frame and
lock

HQ drawer
assembly

Drawer
frame
assembly

HQ sliding
assembly

Order release date

300

Required date

300

1 week

1500

2 weeks

Order release date

300

Required date
Order release date

1500

Required date

1500

2 weeks

1500

2 weeks

Order release date

1500

Required date
Order release date

1500

Required date

6000

Bearings
Order release date

6000

Receipts:
300 cabinet frames and locks in week 8
1500 HQ drawer assemblies in week 8
1500 drawer frame assemblies in week 6
1500 HQ sliding assemblies in week 6
6000 bearings in week 4

2 weeks

Problem 4:

Gross Material Requirements Plan

Week

TOL
Release dates
and lot sizes

50

50

100

100

50

50

10
100

100

Holding cost = $0
Setup cost = 4 * $20 = $80
Total cost = $80
Problem 5:
Solution using POM for Windows:
Gross Material Requirements Plan
Week

TOL
Release dates
and lot sizes

72

50

100

96

48

Holding cost = $280

Setup cost = 4 * $20 = $80
Total cost = $360

50

10
100

96

Problem 6:
Solution using POM for Windows:
Gross Material Requirements Plan
Week

TOL
Release dates
and lot sizes

50

50

100

100

50

Holding cost = $0
Setup cost = 4 * $20 = $80
Total cost = $80

50

10
100

100

Practice Problems: Chapter 17, Maintenance and Reliability

Problem 1:
California Instruments, Inc., produces 3,000 computer chips per day. Three hundred are tested for a
period of 500 operating hours each. During the test, six failed: two after 50 hours, two at 100 hours,
one at 300 hours, and one at 400 hours.
Find FR(%) and FR(N).
Problem 2:
If 300 of these chips are used in building a mainframe computer, how many failures of the
computer can be expected per month?
Problem 3:
Find the reliability of this system:

Problem 4:
Given the probabilities below, calculate the expected breakdown cost.

Number of Breakdowns

Daily Frequency

Assume a cost of $10 per breakdown.

ANSWERS
Problem 1:
FR(%) = failures per number tested = 6/300 = 0.02 = 2%
FR(N) = failures per operating time:
Total time = 300 * 500 = 150,000 hours
Downtime = 2(450) + 2(400) + 1(200) + 1(100) = 2,000 hours
Operating time = Total time Downtime = 150,000 2,000 = 148,000
Therefore: FR(N) = 6/148,000 = 0.0000405 failures/hour
MTBF = 1/FR(N) = 24,691 hours
Problem 2:
Converting the units of FR(N) to months:
FR(N) = 0.0000405 * 24 hours/day * 30 days/month = 0.029 failures/month
FR(N) for the 300 units:
FR(N) = 0.029 failures/month * 300 units = 8.75 failures/month
MTBF for the mainframe:
MTBF = 1/FR(N) = 1/8.75 = 0.11 month = 0.11 * 30 = 3.4 days
Calculation for MTBF assumes that failure of any one chip brings down entire system.
Problem 3:

R = [0.95 + 0.92(1 0.95)] * [0.98] * [0.90 + 0.90(1 0.90)]

= 0.996 * 0.98 * 0.99 = 96.6%

Problem 4:

Number of Breakdowns

Daily Frequency

Probability

0.3

0.2

0.2

0.3

Expected number of breakdowns = (0)(0.3) + (1)(0.2) + (2)(0.2) + (3)(0.3)

= 0 + 0.2 + 0.4 + 0.9
= 1.5 breakdowns/day
Expected breakdown cost = Expected number of breakdowns * Cost per breakdown
= 1.5 * $10
= $15/day