Sample Final Exam

Fall 2018
ISOM 2700

• There will be only multiple-choice questions in the actual final exam, although this
sample final contains descriptive questions.
• The actual final exam will have 33 questions, although there are 17 in the sample
final.
1. The following table shows actual sales of units for six months and a starting forecast
In January. What is the sales forecast for June using exponential smoothing with the
smoothing parameter 𝛼 = 0.2?
Actual Forecast
January 100 80
February 94
March 106
April 80
May 68
June 94
a. 71
b. 75
c. 80
d. 84
e. 90

2. The tracking signals computed using past demand history for three different
products are as follows. Each product used the same forecasting technique. Assume
that the three methods have comparable mean absolute deviations (MAD). Which of
the following comments are TRUE?

TS Method Method Method

1 1 1
-2.7 2
1.54 3
0.1
2 -2.32 -0.64 0.45
3 -1.7 2.05 1.08
4 -1.1 2.58 1.74
5 -0.87 -0.95 1.94
6 -0.05 -1.23 2.24
7 0.1 0.75 2.96
8 0.4 -1.59 3.02
9 1.5 0.47 3.54
10 2.2 2.74 3.75

a. Since there has been a rapid rise in the trend for method 1, the forecasting
model is poor
b. Method 2 does not show consistent bias in forecasts, so the forecasting model
is acceptable
c. Method 3 consistently generates positive and rapidly increasing TS, making it
even worse forecasting model than method 1
d. All of the above comments are true
e. None of the above comments are true

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3. Which of the following statements about quantitative forecasting methods is
FALSE?

a. Simple moving average is just a special case of weighted moving average, so

the latter is a better forecasting method
b. When there is a significant increasing or decreasing trend, higher values of the
smoothing parameter 𝛼 is more appropriate
c. Weighted moving average can be useful to capture seasonal effects
d. Linear regression can be useful when demand does not only depend on time,
but also on other factors
e. All of the above are true

4. Which of the following is not a cause of the Bullwhip effect?

a. Order batches
b. Forward buying
c. Inflated orders
d. Information sharing
e. All of the above are the cause of the Bullwhip effect

5. Consider Modern Active MBA, a periodical dedicated to selecting an MBA program

and getting the most out of the experience. The publisher charges the Penn Bookstore
$1.50 for each copy of MAMBA sold. It costs the publisher $0.35 to print and deliver
each copy of the magazine. Left over copies are discarded at a cost of $0.05 per copy
to the publisher. If it were up to the publisher, how many copies of a particular issue
of MAMBA should the publisher stock at the bookstore when the forecast of demand
is normally distributed with a mean of 40 and a standard deviation of 22?
a. 26
b. 34
c. 48
d. 54
e. 61

6. Gamma Airlines operates a flight from Denver to Boston. Two fares are offered, a
low fare of $175 and a high fare of $550. Low fare demand books before high fare
demand and there is ample demand at the low fare. Demand for the high fare is
estimated to be Normal with a mean of 35 and a standard deviation of 20. If the flight
has 90 coach seats, what is the optimal protection level for the high fare?
a. 40
b. 42
c. 45
d. 47
e. 50

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Questions from 7 to 9

Each year the admissions committee at a top business school receives a large number
of applications for admission to the MBA program and they have to decide on the
number of offers to make. Since some of the admitted students may decide to pursue
other opportunities, the committee typically admits more students than the ideal class
size of 720 students. You were asked to help the admission committee estimate the
appropriate number of people who should be offered admission. It is estimated that in
the coming year the number of people who will not accept the admission is normally
distributed with mean 50 and standard deviation 21. Suppose for now that the school
does not maintain a waiting list, that is, all students are accepted or rejected.

7. Suppose 750 students are admitted. What is the probability that the class size will
be at least 720 students?

Answer: ((750 – 720) – 50) / 21 = -0.9524 From the z-table, the probability that the
class size will be at least 720 = 0.1704

8. It is hard to associate a monetary value with admitting too many students or

admitting too few. However, there is a mutual agreement that it is about two times
more expensive to have a student in excess of the ideal 720 than to have fewer
students in the class. What is the appropriate number of students to admit?

Answer: The critical ratio is Cu / (Co + Cu) = Cu / (2 x Cu + Cu) = 0.3333. The required
safety factor z = normsinv (0.3333) = -0.4308. So overbooking quantity is 50 –
0.4308*21 = 41. Admit 720 + 41 = 761 students.

9. A waiting list mitigates the problem of having too few students since at the very last
moment there is an opportunity to admit some students from the waiting list. Hence,
the admissions committee revises its estimate: It claims that it is five times more
expensive to have a student in excess of 720 than to have fewer students accept
among the initial group of admitted students. What is your revised suggestion?

Answer: The critical ratio is Cu / (Cu + Cu) = Cu / (5 x Cu + Cu) = 0.1667. The required
safety factor z = normsinv (0.1667) = -0.9673. So overbooking quantity is 50 =
0.9673*21 = 29.7. Admit 720 + 30 = 750 students

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Questions from 10 to 11

Montanso is a large bio firm that sells genetically modified seed to farmers. They need
to decide how much seed to put into a warehouse to serve demand for the next
growing season. They will make one quantity decision. It costs Montanso $8 to make
each kilogram (kg) of seed. They sell each kg for $45. If they have more seed than
demanded by the local farmers, the remaining seed is sent overseas. Unfortunately,
they only earn $3 per kg from the overseas market (but this is better than destroying
the seed because it cannot be stored until next year). If demand exceeds their quantity,
then the sales are lost – the farmers go to another supplier. As a forecast for demand
they will use a normal distribution with a mean of 300,000 and a standard deviation of
106,000.

10. How many kilograms should they place in this warehouse before the 2019 growing
season?

Answer: cost of underage=$45-$8=$37. Cost of overage=$8-$3=$5.

F(z)=37/(37+5)=0.881. Using the Standard Normal Distribution Function table, we get
z=1.18. Q=1.18*106+300=425.08 thousand kgs.

11. Ignoring the analysis in the previous question, how many kilograms should they
place in this warehouse if they want to ensure that the stock-out probability is no
greater than 10%?

Answer: F(z)=0.9. Using the Standard Normal Distribution Function table, we get z=
1.29. Q=1.29*106+300=436.74 thousand kgs.

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Questions from 12 to 13

Jtrix Inc. offers high end, specialized testing services to contract manufacturers (CM)
of semiconductor equipment. Its weekly testing capacity is 125 hours, and it is sold in
1-hour blocks for $140/hour. The internal operating cost of its testing equipment is
$100/hour. Because of demand uncertainty induced by the recession, in the recent
past, CMs have often cancelled their orders for testing at the last moment. Jtrix
estimates that the number of cancelled hours (X) is distributed as the table below).
Jtrix does charge a cancelation penalty of $40 per canceled hour (that is, if a CM books
an hour but then cancels, they still pay Jtrix $40). If Jtrix ends up with unused capacity
due to cancellations, it is unable to sell that capacity to another customer, but it also
doesn’t incur the operating cost of $100/hour (that is, the $100 is incurred only when
operating). If its available capacity is insufficient to meet the booked demand, Jtrix has
the option to cannibalize testing time from its sister facility. However, doing so is
expensive for Jtrix, and increases its operating cost to $150/hour.

12. Suppose Jtrix decides to overbook by 10 hours each week, i.e., it sells exactly 135
hours of testing capacity each week. On average, how many hours of unused testing
capacity will it have in a given week?

Answer: The unused testing capacity is equivalent to the loss occurring due to too
many cancellations. We find the loss for 10 hours of overbooking as 4.23 from the
table.

13. Suppose Jtrix decides to overbook its capacity. How many hours should Jtrix sell
to CMs? Answer: The cost of underage is equal to the margin which is $40. The cost
of average is the loss incurred due to cannibalizing the sister facility, which is $150-
$140=$10. CR =$40/($40+$10) = 0.8. The overbooking level of 17 is the lowest
overbooking level satisfying the critical ratio. Hence it is the optimal overbooking level.

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As a result the optimal number of hours to sell is 17+125 = 142.

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Questions from 14 to 16
Hotel manager Basil Fawlty and his resourceful assistant Manuel run a 26 room hotel
in a quaint little town called Tourkey on the eastern sea coast. A combination of Mr.
Fawlty’s genial attitude and the absence of a respectable inn in the nearby vicinity
imply that Mr. Fawlty enjoys ample demand at his low fare of $159 per night.
Manuel notes that some customers will walk into the inn requesting a room for that
evening and they are willing to pay a high fare of $325 per night. Manuel knows this
demand is variable. (In reality, this demand is Poisson distributed with mean 7.5). He
suggests some rooms should be kept unsold to the low fare customers, so that they
can serve the high fare customers.
14. To maximize profits with Manuel’s plan, what is the booking limit that should be
set for low fare customers?

Answer: Co = 159, Cu = 325-159. Critical ratio is 0.5108. Based on the critical ratio,
the Protection Level for the Poisson distribution with mean 7.5 is 7. therefore, the
booking Limit is 26-7 = 19 rooms.

15. Basil scoffs at the idea: “Empty rooms! A bird in hand is better than two in the bush.
This brilliant idea of yours, Manuel, might work in Barcelona but definitely not at
Tourkey. Let me run the hotel my way. We will sell to everyone who reserves in
advance and ignore the walk-in demand”. If Basil has his way, what will be the hotel’s
expected revenue?

Answer: Revenue from Basil’s plan = 26*$159 = $4134.

16. Manuel replies: “If you are going to forgo the opportunity to sell to last minute
customers, let’s at least accept more than 26 reservations for the evening.” Checking
the data, Manuel observes that the number of “no-shows” is Poisson distributed with
mean 2.75. (Recall, a “no-show” is when a customer makes a reservation but doesn’t
show up to use the room that evening.) Manuel also notes that a $100 non-refundable
deposit is required with all reservations. However, if the hotel does not have a room
for a reservation holder, then they need to book that person in a B&B in the nearest
town. They decide that in those cases they would refund the customer’s deposit, and
pay for the customer’s stay in the B&B, which is $450. The customer would not be
happy, but they are getting a free night, so Manuel figures that there would be no loss
of good will. Finally, if they have an empty room due to a no-show, they also figure
that they would not be able to fill the room with a last minute customer. What is the
critical ratio they should use to choose an overbooking quantity to maximize revenue?

Answer: Cu = $159 because an empty room could have been filled by another
reservation that is worth $159. Co = $450 because over overbooking means a loss of
$450 relative to never accepting the reservation. Critical ratio = 159/(159+450)=0.26.

17. By selecting the parameters of a revenue sharing contract appropriately, it is

possible to:
I. Achieve the maximum possible profit in the supply chain by coordinating actions of the
supplier and the retailer.
II. Have the supplier’s profit equal to twice the retailer’s profit.
III. Ensure that the retailer orders the same amount of inventory as he would under any
wholesale price contract.

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Which of the above is/are true?

a. I only
b. II only
c. III only
d. I and II
e. All of the above

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Appendix: Standard Normal Distribution Table
F(z) = Pr( N(0,1) ≤ 𝑧 )

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