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Hong Kong Polytechnic University

LGT3105 Operation Management


2011-12 Semester 2 Individual Assignment Company: Toys City Inc.

Student Name Student ID Group Component Teaching Staff Due Date

:Cheung Ho Yi, Holly :10548046D :2061 :LTL001 :Jiang Li :8th February, 2012

Question 1 If you were Mr. Lam, would you have accommodated David Cheung's vacation request? Why? What is the maximum time you would be comfortable giving David Cheung off if his only responsibility was the auditing of liquid assets Table 1
Activity 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Description Pre-audit preparation Observation of inventory General audit procedures Audit of liquid assets Inventory pricing Audit of fixed assets Audit of liabilities Audit of COGs Miscellaneous audit Lawyers letter Managements letter Subsequent review Preparation of financial statements Preparation of tax returns Partner/manager review Duration 28 25 22 35 145 22 93 25 11 1 1 18 15 12 6 Immediate Predecessors --1 2 2 2 3 5 5 4, 8 7 6, 9 6, 9 10, 11 10, 12 13, 14

Table 2
Activity Name 01. Pre-audit preparation 02. Observation of inventory 03. General audit procedures 04. Audit of liquid assets 05. Inventory pricing 06. Audit of fixed assets 07. Audit of liabilities 08. Audit of COGs 09. Miscellaneous audit 10. Lawyers letter 11. Managements letter 12. Subsequent review 13. Preparation of financial statements 14. Preparation of tax returns 15. Partner/manager review Early Start 0 28 53 53 53 75 198 198 223 291 234 234 292 292 307 Early Finish 28 53 75 88 198 97 291 223 234 292 235 252 307 304 313 Late Start 0 28 233 231 53 255 198 241 266 191 291 277 292 295 307 Late Finish 28 53 255 266 198 277 291 266 277 292 292 295 307 307 313 Slack 0 0 180 178 0 180 0 43 43 0 57 43 0 2 0

If I were Mr. Lam, I would have accommodated David Cheungs vacation request. As we can see in table 2, Audit of liquid asset (Activity 4) is not a critical activity that the early start is not equal to late start and the early finish is not equal to the late finish. There is a slack time of 178 hours, so it is possible to give David a vacation if he promises to come back before the 231st hour of the project which is the latest start time of audit of liquid asset. As a week involve 40 audit hours, the maximum time for David Cheungs off is 178/40 = 4.45 weeks.

Question 2 Part 1 Assume that for the first 106 duration hours all the activities were processed exactly on schedule. Recommend an accelerating plan that would meet the accelerated deadline (60 hours earlier than originally agreed) at minimum additional cost. As it is assumed that the activities were processed exactly on schedule for the first 106 duration hours, the desired project completion time of the remaining part should be 313 106 60 = 147hours. Therefore, the desired project completion time of the whole project is 147 + 106 = 253hours. In this question, we have to use the Time-Cost Model to reach the desired project completion time with minimal cost. In table 3, Exhibit 5 is converted into a new format with Possible Time Saved, Extra Cost and Cost/ Time Unit. Table 3
Normal Activity Time (a) 3. General audit procedures 4. Audit of liquid asset 5. Inventory pricing 6. Audit of fixed assets 7. Audit of liabilities 8. Audit of COGS 9. Miscellaneous audit 10. Lawyers letter 11. Managements letter 12. Subsequent review 13. Preparation of financial statements 14. Preparation of tax returns 15. Partner/manager review 22 35 92 22 93 25 11 1 1 18 15 12 6 Cost (b) 1200 1890 3055 1050 3880 1310 640 40 40 920 480 480 360 Acceleration Time (c) 22 35 56 22 48 25 9 1 1 3 10 2 6 Cost (d) 1200 1890 4600 1050 4720 1310 660 40 40 1670 1080 980 360 Possible Time Saved (a) (c) 0 0 36 0 45 0 2 0 0 15 5 10 0 Extra Extra Cost/ Cost (d) (b) 0 0 1545 0 840 0 20 0 0 750 600 500 0 Time Saved --42.92 -18.67 -10 --50 120 50 --

First, we have to draw network diagram with the early start/finish and late start/finish times and identify the critical path(s). Network Diagram 1

After drawing the first network diagram, we find out there is a critical path which is (01) Pre-audit Preparation (02) Observation of Inventory (05) Inventory Pricing (07) Audit of liabilities (10) Lawyer s letter (13) Preparation of Financial Statement (15) Partner/Manager Review Table 4 Identify the 1st task to crash
Normal Activity Time 3. General audit procedures 4. Audit of liquid asset 5. Inventory pricing 6. Audit of fixed assets 7. Audit of liabilities 8. Audit of COGS 9. Miscellaneous audit 10. Lawyers letter 11. Managements letter 12. Subsequent review 13. Preparation of financial statements 14. Preparation of tax returns 15. Partner/manager review 12 6 -Y 2 -10 0 50 -22 35 92 22 93 25 11 1 1 18 15 Task? --Y -Y --Y --Y (hours) --56 -48 -9 --3 10 Saved 0 0 36 0 45 0 2 0 0 15 5 hour --42.92 -18.67 -10 --50 120 Y Critical Crash Time Possible Time Crash Cost/ Best Option

Second, we have to determine which activities to crash. Since Activity 7 (Audit of Liabilities) is the activity on the critical path with the lowest crash cost, it is the best option to crash.

Third, we need to determine how long to crash. As we can see in Table 2, there is a slack of 43 hours in activity 8 and 9. Then, we decided to reduce 43 hours by crashing Activity 7 (Audit of Liabilities). The new duration of Activity 7 (Audit of Liabilities) is 50 hours. Therefore, a new critical path is created there is a crashing cost of 18.67 x 43 = $802.8. Since a new critical path is created, we have to draw the network diagram again with new early start/finish and late start/finish to identify the new critical path. Network Diagram 2

In network diagram 2, the duration of Activity 7 is changed from 93 hours to 50 hours. The new duration of the whole project is 270, which means we still have to reduce 270 253 = 17 hours. Except the critical path which is identified above, there is a new critical path. It is (01) Pre-audit Preparation (02) Observation of Inventory (05) Inventory Pricing (08) Audit of COGS (09) Miscellaneous audit (12) Subsequent review (14) Preparation of tax returns (15) Partner/Manager Review. Table 5 Identify the 2nd tasks to crash
Normal Activity Time 3. General audit procedures 4. Audit of liquid asset 5. Inventory pricing 6. Audit of fixed 22 ---0 -92 Y Y 56 36 42.92 35 ---0 -22 Path 1 -Path 2 -(hours) -Time Saved 0 hour -Option Critical Critical Crash Time Possible Crash Cost/ Best

assets 7. Audit of 50 liabilities 8. Audit of COGS 9. Miscellaneous 11 audit 10. Lawyers letter 11. Managements letter 12. Subsequent review 18 -Y 3 15 50 1 ---0 -1 Y --0 --Y 9 2 10 Y 25 -Y -0 -Y -48 2 18.67 Y

13. Preparation of financial statements 14. Preparation of tax returns 15. Partner/manager review 6 Y Y -0 -12 -Y 2 10 50 15 Y -10 5 120

Now, we have to identify the 2nd tasks to crash. As the table above mentioned, Activity 7 and 9 can reduce the two critical paths simultaneously and this combination of activities is with the lowest combined crash costs, we decided to crash activity 7 and 9 at a time. Since they both have 2 days of possible time saved, we decide to reduce 2 hours by crashing activity 7 and 9. Therefore, the crash limit of both activity 7 and 9 are reached and there is a crashing cost of (18.67 x 2) + (10 x 2) = $57.34. As 2 days is reduced, we have to draw the network diagram again with new early start/finish and late start/finish to identify the new critical path.

Network Diagram 3

In network diagram 3, the duration of Activity 7 is changed from 50 hours to 48 hours and duration of Activity is changed from 11hours to 9 hours. The new duration of the whole project is 268, which means we still have to reduce 268 253 = 15 hours. Table 6 Identify the 3rd tasks to crash
Crash Normal Activity Time 3. General audit procedures 4. Audit of liquid asset 5. Inventory pricing 6. Audit of fixed assets 7. Audit of liabilities 8. Audit of COGS 9. Miscellaneous audit 10. Lawyers letter 11. Managements letter 12. Subsequent review 13. Preparation of financial statements 14. Preparation of tax returns 15. Partner/manager review 6 Y Y -0 -12 -Y 2 10 50 22 35 92 22 48 25 9 1 1 18 15 --Y -Y --Y --Y Y Y Y Y --56 ------3 10 0 0 36 0 0 0 0 0 0 15 5 --42.92 ------50 120 Y Path 1 Path 2 (hours) Saved Critical Critical Time Time Cost/ hour Option Possible Crash Best

Now, we have to identify the 3rd task to crash. As we can see in table 6, Activity 5 is on the two critical paths and it is with the lowest crash costs. Hence, we decided to pick Activity 5 as the 3rd task to crash. As mentioned above, we still have to reduce 15 hours to reach the desired project duration (253hours). We chose to reduce 15 hours by crashing activity 5. Network Diagram 4

In network diagram 4 below, we can see that Activity 5s duration is changed from 145 hours to 130 hours and a new crashing cost $42.92 x 15 = $643.8 is created. Duration of the whole project is 253 hours which is the same as the desired completion time. The crashing cost for the whole project is 802.8 + 57.34 + 643.8 = $1503.94.

Question 2 Part 2 Would a corporate limit on per-hour reduction cost of $70 an hour ever become a problem if further reductions were required? Why? Table 7
Crash Normal Activity Time 3. General audit procedures 4. Audit of liquid asset 5. Inventory pricing 6. Audit of fixed assets 7. Audit of liabilities 8. Audit of COGS 9. Miscellaneous audit 10. Lawyers letter 11. Managements letter 12. Subsequent review 13. Preparation of financial statements 14. Preparation of tax returns 15. Partner/manager review 6 Y Y -0 -12 -Y 2 10 50 22 35 77 22 48 25 9 1 1 18 15 --Y -Y --Y --Y Y Y Y Y --56 ------3 10 0 0 21 0 0 0 0 0 0 15 5 --42.92 ------50 120 Y Path 1 Path 2 (hours) Saved hour Critical Critical Time Time Cost/ Option Possible Crash Best

For this question, we have to identify the largest reduction. We have to first identify the 1st task to crash. As we can see in table 7, Activity 5 is on the two critical paths and it is with the lowest crash costs. Hence, we decided to pick Activity 5 as the task for crashing. Since we are finding the largest reduction, we decided to reduce all possible time saved which is 21hours. In the network diagram 5 (below), we can see that the duration of Activity 5 is changed from 130 to 109 hours and the crashing limit of Activity 5 is reached. The cost of crashing activity 5 is $42.92 x 21 = $901.32.

Network Diagram 5

Table 8
Crash Normal Activity Time 3. General audit procedures 4. Audit of liquid asset 5. Inventory pricing 6. Audit of fixed assets 7. Audit of liabilities 8. Audit of COGS 9. Miscellaneous audit 10. Lawyers letter 11. Managements letter 12. Subsequent review 13. Preparation of 15 financial statements 14. Preparation of tax 12 returns 15. Partner/manager review 6 Y Y -0 --Y 2 10 50 Y 10 5 120 22 35 56 22 48 25 9 1 1 18 --Y -Y --Y --Y Y Y Y ---------3 0 0 0 0 0 0 0 0 0 15 ---------50 Path 1 Path 2 (hours) Saved hour Critical Critical Time Time Cost/ Option Possible Crash Best

To further the reduction, we have to identify the second tasks to crash. As the table above mentioned, Activity 13 and 14 can reduce the two critical paths simultaneously and this combination of activities is with the lowest combined crash costs, we decided to crash activity 13 and 14 at a time.

Since the maximum possible time saved for Activity 13 is 5 hours, we decide to reduce 5 hours by crashing activity 13 and 14. Therefore, the crash limit of both activity 13 is reached and there is a crashing cost of (120 x 5) + (50 x 5) = $850. Network Diagram 6

Table 9
Crash Normal Activity Time 3. General audit procedures 4. Audit of liquid asset 5. Inventory pricing 6. Audit of fixed assets 7. Audit of liabilities 8. Audit of COGS 9. Miscellaneous audit 10. Lawyers letter 11. Managements letter 12. Subsequent review 13. Preparation of financial statements 14. Preparation of tax 7 -Y 2 5 50 22 35 56 22 48 25 9 1 1 18 10 --Y -Y --Y --Y Y Y Y Y ---------3 -0 0 0 0 0 0 0 0 0 15 0 ---------50 -Path 1 Path 2 (hours) Saved hour Critical Critical Time Time Cost/ Option Possible Crash Best

returns 15. Partner/manager review

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Since there is no combination of activities can reduce the two critical paths simultaneously (Table 9) and there is no new critical path (Network Diagram 6), we have already reached the largest reduction. We reduced the remaining 21 hours by crashing activity 5 and reduce 5 hours by crashing activity 14 and activity 13 together. The total crashing hours are 21 + 5 = 26 hours. The total crashing cost is (21 x 42.92) + (5 x 120) + (5 x 50) = 901.32 + 600 + 250 = $1751.32. The largest possible reduction requires an average cost per hour is $1751.32/26 = $67.36. Therefore, n the average cost basis, the corporate limit on per-hour reduction cost of $70 an hour will not become a problem if further reductions were required. However, if we use marginal cost, the hours which is reduced by crashing Activity 13 an 14 will cost $50 + $120 = $170 per hour (Table 8). Therefore, the per-hour reduction cost of $70 an hour will not be enough.

Question 3 Assume that the 60-hour acceleration plan was implemented. After 199 duration hours, Mr. Lam found that the status of the project was as follows: Activity 1-6 were 100% completed, and all the activities except 5 had incurred exactly the budgeted costs, activity 5 costs $480 more than expected. Activity 7 was 33.33% completed, and had incurred $1127.5 in costs. Activity 8 was 35% completed, and had incurred $655 in costs. Without further crashing, how long do you expect the project to take now? How much do you expect the project to cost?
Budget (a) Activity Name $ 01. Pre-audit $1110 preparation 02. Observation of $1100 inventory 03. General audit $1200 procedures 04. Audit of liquid assets 05. Inventory pricing 06. Audit of fixed assets 07. Audit of liabilities 08. Audit of COGs Total $1890 $4850 $1050 $3880 $1310 74.29% 100% 18.18% 33.33% 64% 100% 100% 100% 33.33% 35% $1890 $5330 $1050 $1127.5 $655 $13462.5 $1404 $4850 $190.91 $1293.33 $838.4 $11986.64 $1890 $5330 $1050 $1293.33 $458.5 $13431.8 100% 100% $1200 $1200 $1200 100% 100% $1100 $1100 $1100 100% 100% $1110 $1110 $1110 % % Scheduled (b) Completed (c) ACWC (a) x (b) (a) x (c) BCWS BCWC

For the length of the project to take now, Schedule Variance = BCWC BCWS =$13431.8 - $11986.64 =$1445.16 Schedule Variance/BCWS =$1445.16/$11986.64 =12.06% Early The length that we expect the project to take = 253 x (1-0.1206) hours =222.4 hours

For the cost, Cost Variance = BCWC ACWC =$13431.8 - $13462.5 =-30.7 Cost Variance/BCWC =-30.7/13431.8 =0.2286% Over Budget The amount we expect the project to cost =(1+0.002286) x 19350 =19394.2341