Name (print, please) _______________________________________________ ID ___________________________

Production Management 73-604 Fall 2000

Faculty of Business Administration
University of Windsor
Midterm Exam 1 Solution
Thursday, October 5, 6:00 8:00 pm
Instructor: Mohammed Fazle Baki
Aids Permitted: Calculator, straightedge, and a one-sided formula sheet.
Time available: 2 hours
Instructions:
This exam has 11 pages.
Please be sure to put your name and student ID number on each page.
Show your work.

Grading:
Question
1

/5

/5

Marks:

/4

/4

/7

/5

/12

/8

Total:

/50

Name:_________________________________________________

ID:_________________________

Question 1: (5 points)
True/False Questions (1 point each)
1.1 The idea of Supply-Chain Management is to apply a total system approach to managing the
entire flow of information, materials, and services from raw-materials suppliers through factories
and warehouses to the end users.
Answer: True

1.2 We should match Functional Products with a Responsive supply-chain.

Answer: False
1.3 Capacity can be defined in a production management context as the amount of resource inputs
available relative to output requirements over a particular period of time.
Answer: True
1.4 Typically, Master production Schedule is prepared before Aggregate Production Plan.
Answer: False
1.5 When considering the frequency of production capacity additions we need to consider the two
costs of upgrading too frequently with the costs of upgrading too infrequently.
Answer: True

Name:_________________________________________________

ID:_________________________

Question 2: (5 points)
Multiple Choice Questions (1 point each)
2.1 Which of the following products includes fashionable cloths and personal computers that typically
have a life cycle of just a few months?
a. Functional products
b. Innovative products
c. Bullwhip products
d. Value density products
2.2 When adding production capacity to a plant, which of the following issues should be considered?
a. Maintaining system balance
b. The frequency of capacity additions
c. Use of external capacity
d. All of the above
2.3 Which of the following statements about bottlenecks is best?
a. Bottlenecks are created by uniform demand.
b. When capacities are perfectly balance, it can be said that every operation is a
bottleneck.
c. Increasing bottleneck capacity does not increase plant capacity.
d. Bottlenecks are most likely to occur in a plant that produces functional products.
2.4 Capacity decisions are usually linked with other decision areas. If a system is well balanced,
which of the following changes requires a larger capacity cushion?
a. A new technology results in a faster production process.
b. Schedules for production are more stable.
c. The company promises faster delivery times to customers.
d. The capital intensity of the process is increased.
2.5 Matching the production rate to the order rate by hiring and laying off employees as the order
rate varies is which of the following Production Planning Strategies?
a. Stable workforce, with overtime
b. Stable workforce, with subcontract
c. Chase
d. Level

Name:_________________________________________________

ID:_________________________

Question 3 (4 points)
The manager of a custom manufacturer has just completed an order of two large turbines. The first
unit took 30,000 direct labor hours and the second one required only 27,000 hours. Next month 4
units will be produced. Estimate the number of direct labor hours required next month. The following
table reproduces some parts of Exhibits 2.5 and 2.6.
Unit
1
2
3
4
5
6
7
8

Unit Improvement Factor

80%
85%
90%
95%
1.0000 1.0000 1.0000 1.0000
0.8000 0.8500 0.9000 0.9500
0.7021 0.7729 0.8462 0.9219
0.6400 0.7225 0.8100 0.9025
0.5956 0.6857 0.7830 0.8877
0.5617 0.6570 0.7616 0.8758
0.5345 0.6337 0.7439 0.8659
0.5120 0.6141 0.7290 0.8574

Cumulative Improvement Factor

80%
85%
90%
95%
1.0000 1.0000 1.0000 1.0000
1.8000 1.8500 1.9000 1.9500
2.5021 2.6229 2.7462 2.8719
3.1421 3.3454 3.5562 3.7744
3.7377 4.0311 4.3392 4.6621
4.2994 4.6881 5.1008 5.5380
4.8339 5.3217 5.8447 6.4039
5.3459 5.9358 6.5737 7.2612

Answer1
Rate of learning is 27,000/30,000 = 0.90 90% (1 point)
Unit
3
4
5
6

Labor hour required

30,000(0.8462)
30,000(0.8100)
30,000(0.7830)
30,000(0.7616) (2 points)

Total 30,000(0.8462+0.8100+0.7830+0.7616) = 30,000(3.2008) = 96,024 hrs (1 point)

Answer 2
Rate of learning is 90% (1 point)
Cumulative number of hours required to produce
first 6 units = 30,000(5.101) = 153,030 hrs (1 point)
first 2 units = 30,000(1.900) = 57,000 hrs (1 point)
units 3, 4, 5, 6
= 96,030 hrs (1 point)

Name:_________________________________________________

ID:_________________________

Question 4 (4 Points)
Kelly construction wants to get in on the boom of student condominium construction. The company
must decide whether to purchase enough land to build a 100-, or 300-unit condominium complex.
Many other complexes are currently under construction, so Kelly is unsure how strong demand for its
complex will be. If the company is conservative and builds only a few units, it loses potential profits if
the demand turns out to be high. On the other hand, many unsold units would be costly to Kelly. The
net dollar returns associated with low and high levels of demand are shown below.
Decision
Build 100
Build 300

Demand
Low
$400,000
-200,000

High
$400,000
1,200,000

If P(Low) = 0.55, and P(High) = 0.45

a. (1 point) What is the maximum expected net dollar return?
b. (1 point) Which decision will maximize the expected net dollar return?
c. (2 points) Construct a decision tree.
Answer
Expected net dollar return, Build 100 = 0.55(400,000) + 0.45(400,000) = $400,000
Expected net dollar return, Build 300 = 0.55(-200,000) + 0.45(1200,000) = $430,000
Hence, maximum expected net dollar return = $430,000 (1 point)
Build 300 maximizes expected net dollar return. (1 point)

Name:_________________________________________________

ID:_________________________

Question 5 (7 points)
Your manager has given you two forecasting models and asks you to determine which one to use, if
any. Using the models on the last 4-month period, you find the following forecasts.
Month

Actual Demand

Forecast
Method 1

Method 2

190

174

180

220

179

189

205

191

207

210

195

215

For each method, compute MAD and tracking signal. Comment on which method to use, if any.
Assume that acceptable limit of the TS value is 3.0.
Method 1
Month Forecast Actual Deviation
1
2
3
4

174
179
191
195

190
220
205
210

16
41
14
15

RSFE Abs Dev Sum(Abs Dev)

(1 point)
16
57
71
86

16
41
14
15

16
57
71
86

MAD
TS
(1
(1 point)
point)
16.00
1.00
28.50
2.00
23.67
3.00
21.50
4.00

Method 2
Month Forecast Actual Deviation
1
2
3
4

180
189
207
215

190
220
205
210

10
31
-2
-5

RSFE Abs Dev Sum(Abs Dev) MAD

TS
(1 point)
(1 point) (1 point)
10
10
10
10.00
1.00
41
31
41
20.50
2.00
39
2
43
14.33
2.72
34
5
48
12.00
2.83

Method 2 has less MAD than Method 1. Furthermore, TS for Method 2 is 2.83. If acceptable limit of
the TS value is 3.0, Method 2 can be accepted. (1 point)

Name:_________________________________________________

ID:_________________________

Question 6 (5 points)
Here are the data for the past 4 months of actual sales of a particular product:
Month

Actual Demand

100

103

104

107

Calculate the exponential smoothing with trend component forecast for months 2-4 using an initial
trend forecast (T1) of 2, an initial exponential smoothing forecast (F1) of 98, an of 0.30, and a of
0.30.
Answer
Month, t

Actual,

Ft

Tt

FITt

100

98

100.00

103

104

107

100.00 + 0.30(100-100.00) = 100.00 2.00+0.30(100.00-100.00) =

(1 point)
2.00
(1 point)
102.00 + 0.30(103-102.00) = 102.30 2.00+0.30(102.30-102.00) =
2.09
104.39 + 0.30(104-104.39) = 104.27 2.09+0.30(104.27-104.39) =
2.06

102.00
(1 point)
104.39
106.33
(2
points)

Name:_________________________________________________

ID:_________________________

Question 7 (12 points)

Use regression analysis on deseasonalized demand to forecast demand in fall 2000, given the
following historical demand data:
Year

Season

1998

Winter
Spring
Summer
Fall
Winter
Spring
Summer
Fall

1999

Actual
Demand
49
36
44
31
33
22
28
18

Answer

Total
Average
n
b
a

1
2
3
4
5
6
7
8
36
4.5

49
36
44
31
33
22
28
18

1. Seasonal factors
2. Desea- 3. Regression
Average
Seasonal sonalized x*Deseaso- x^2
from same
factor demand
nalized
quarterly
demand
period
41.0
1.257
39.0
39.0
1
29.0
0.889
40.5
81.0
4
36.0
1.103
39.9
119.6
9
24.5
0.751
41.3
165.1
16
1.257
26.3
131.3
25
0.889
24.8
148.5
36
1.103
25.4
177.6
49
0.751
24.0
191.8
64
261 1053.91414 204
32.625

8
-2.9
45.5
4. Projection
5. Reseasonalize
x Deseasona- Seasonal
Forecast
lized demand
Factor
9
19.7
1.257
24.76
10
16.8
0.889
14.96
11
14.0
1.103
15.41
12
11.1
0.751
8.33

Name:_________________________________________________

ID:_________________________

Common mistakes:

Incorrect seasonal factors (-1)

Using regression on actual demand instead of deseasonalized demand (-3)
Replacing regression by another technique (-2)
Missing or incorrect projection (-2)
Missing or incorrect reseasonalization (-2)

Name:_________________________________________________

ID:_________________________

Question 8 (8 points)
Harold Grey owns a small farm in Salinas Valley that grows apricots. The apricots are dried on the
premises and sold to a number of large supermarket chains. Based on past experience and
committed contracts, he estimates that sales over the next three years in thousands of
packages will be as follows:
Year

Forecasted Demand (thousands of packages)

300

120

200

Assume that Grey currently has 3 workers on the payroll. He estimates that he will have 20,000
packages on hand at the end of the current year. Assume that, on the average, each worker is paid
$25,000 per year and is responsible for producing 30,000 packages. Inventory costs have been
estimated to be 4 cents per package per year, and shortages are not allowed.
Based on the effort of interviewing and training new workers, Farmer Grey estimates that it costs
$500 for each worker hired. Severance pay amounts to $1,000 per worker.
a. (2 points) Assuming that shortages are not allowed, determine the minimum constant workforce
that he will need over the next three years.
b. (6 points) Evaluate the cost of the plan found in part (a).
Answer
Computation of the workforce required for avoiding shortages (2 points)
Year Forecast Beginning Production Cumulative Cumulative
Workers
Inventory Requirement Production Units produced
Required
Requirement Per worker
1 300000
20000
280000
280000
30000
10
2 120000
120000
400000
60000
7
3 200000
200000
600000
90000
7
Workers hired
Workers fired
Total workers

7
0
10

Computation of cost
Year Forecast Beginning
Inventory
1 300000
20000
2 120000
20000
3 200000
200000
Total cost

774300

3500 (1 point)
0
3500
750000
(1 point)

Initial firing
cost
Initial
recruitment
Straighttime
cost
Actual
Production
300000
300000
300000
(1 point)

(1 point)

10

Ending
Inventory
20000
200000
300000
(1 point)

Inventory
Holding cost
800
8000
12000
(1 point)