CITY UNIVERSITY OF HONG KONG

Department of Management Sciences

Module code & title : Session Time allowed : :

FB2201 Management Sciences II Semester B, 2004-2005 Two hours

This paper has EIGHT pages.

(Including this page.)

Instructions to students: 1. 2. 3. 4. This paper consists of FIVE questions. Attempt ALL FIVE questions. Start each question on a new page. A formula sheet is attached in Appendix 1.

Materials, aids and instruments permitted to be used during examination: Portable calculator.

Special materials other than standard materials (e.g., answer book or supplementary sheets) to be supplied to students: Nil

Question 1 (a)

(25 marks)

An investor has $70,000 to divide between four alternatives of investment, namely municipal bonds with an 8.5% annual return, certificates of deposit with a 5% annual return, treasury bills with a 6.5% annual return, and a growth stock fund with a 13% annual return. However, each alternative has a different perceived risk to the investor; thus, it is advisable to diversify. The investor wants to know how much to invest in each alternative in order to maximize the total annual return. The following guidelines have been established for diversifying the investment and lessening the risk perceived by the investor. 1. 2. 3. 4. No more than 20% of the investment should be in municipal bonds. The amount invested in certificates of deposit should not exceed the amount invested in the other three alternatives. At least 30% of the investment should be in certificates of deposit and treasury bills. To be safe, more should be invested in certificates of deposit and treasury bills than in municipal bounds and the growth stock fund by a ratio of at least 1.2 to 1. Formulate a linear programming model for the problem. (9 marks) (ii) Suppose that for every $1 invested in municipal bounds or growth stock fund, the investor must pay $0.01, and for every dollar invested in certificates of deposit or treasury bills, he must pay $0.005. Modify a constraint in the linear programming model in (i)? (2 marks) Show that the following guideline is redundant: The amount invested in municipal bounds should not exceed the amount invested in treasury bills and certificates of deposit. (2 marks)

(i)

(iii)

(b)

Consider the linear programming model: Minimize subject to X 100 . Y 10 . X, Y, Z 0 . (Constraint 1) (Constraint 2) (Constraint 3) X + 2Y + 4Z

Sensitivity Report: Adjustable Cells Cell $B$2 $C$2 $D$2 Constraints Cell $E$7 $E$8 Name 1 2 Final Value 100 10 Shadow Price 1 2 Constraint R.H. Side 100 10 Allowable Increase 1E + 30 1E + 30 Allowable Decrease 100 10 Name X Y Z Final Value 100 10 0 Reduced Cost 0 0 4 Objective Coefficient 1 2 4 Allowable Increase 1 1E + 30 1E + 30 Allowable Decrease 1E + 30 2 4

Based on the sensitivity report of the above linear programming model, answer the following questions: (i) What are the optimal values of X, Y and Z, and the minimum objective value? (2 marks) Over what range could the coefficient of X in the objective function vary without changing the current optimal values of X, Y and Z? (2 marks) If the coefficient of Y in the objective function were decreased by 1, what would be optimal values of X, Y and Z, and the minimum objective value? (3 marks) If the right-hand-side value in constraint 1 were decreased by 5, what would be the new minimum objective value? (2 marks) If the value of Z were forced to be 1, what would be the new minimum objective value? (3 marks) 2

(ii)

(iii)

(iv)

(v)

Question 2

(20 marks)

The production process at Dr Dominics Pizza can produce 400 pizza pies per day. The firm operates 250 days per year. Dr Dominics has a cost of $180 per production run and a holding cost of $5 per pie per year. The pies are frozen immediately after they are produced and stored in a refrigerated warehouse with a current maximum capacity of 2000 pies. Annual demand is estimated to be 37,500 pies per year. Determine the following [Give your answers to the nearest integer]: (a) The optimal production run quantity. (3 marks) (b) Given the current capacity of 2000 pies, is the optimal production run quantity found in part (a) still feasible? Explain. (3 marks) If the production set-up time is 1 day, what is the set up point? result. Interpret your (3 marks) (d) The optimal cycle time in working days (time between run starts). (3 marks) (e) The run length in working days. (3 marks) (f) Use a graph (inventory level versus time) to illustrate the inventory model, on which two production cycles labeled with production time, non-production time, maximum inventory level and set-up point are shown. (5 marks)

(c)

Question 3

(25 marks)

A nuclear power company is considering to build a nuclear power plant at either Hokkaido, Kyushu or Shikoku. The cost of building the power plant is $10 million at Hokkaido, $20 million at Kyushu, or $32 million at Shikoku. If the company builds the plant at Hokkaido and an earthquake occurs at Hokkaido during the next five years, construction will be terminated and the company will have to build a new power plant at Kyushu for a cost of $20 million and lose the initial cost of $10 million at Hokkaido. The company believes that there is a 20% chance that an earthquake (E) will occur at Hokkaido during the next five years. (a) Formulate the problem using a payoff table. Identify any inadmissible alternative(s) and explain. With reference to the expected monetary value, determine which city the plant should be built. (6 marks) Assume that the company can procure perfect information about the earthquake formations at a cost of $2.5 million. Should the company obtain perfect information at this cost? Explain. (4 marks)

(b)

For $1 million, a geologist can be hired to analyze the earth structure at Hokkaido. The geologists past records indicate that she predicted an earthquake (PE) on 95% of the occasions for which an earthquake occurred, and predicted no earthquake ( PE ) on 90% of the occasions for which an earthquake did not occur. (c) Verify that P ( E | PE ) = 0.704 , P( E | PE ) = 0.986 and P ( PE ) = 0.27 . (3 marks)

(d)

Using the posterior probabilities in (c), construct a complete decision tree diagram for the problem (including all the branch probabilities and node values). What strategy should the company adopt? Explain. (12 marks)

Question 4

(15 marks)

In one of the little-known battles of the World War I, a General lost the battle because his preparations were not complete when the enemy attacked. If the critical path method had been available, the general could have planned better. Suppose the following information about preparation activity and activity times in days was available.
Immediate predecessor A A A B B B, C D, F E, H E, H G K, I, J Duration Activity Code A B C D E F G H I J K L Activity Description Develop plan Advance cavalry scout Move engineering division Army march Cavalry reconnaissance Plan fortifications Build pontoon bridges Troops build earthworks Artillery placement Cavalry distribution of enemy supply lines Create supply lines Attack (Days) 2 5 2 4 3 1 4 3 1 3 2 1

(a) (b) (c) (d)

Construct a network diagram for the above activities.

(4 marks)

Determine the earliest and latest activity times, and activity slack for the network. (4 marks) Determine the critical path and the time between the generals receipt of battle orders and the onset of battle. (4 marks) How many days will the preparation time be shortened if time required for building pontoon bridges (activity G) decreases to two days only? Explain. (3 marks)

Question 5 (15 marks)

(a)

Explain how causal forecasting models differ from time series forecasting models. (2 marks) Given the following data on the number of pints of blood used in the emergency room of St. Pauls Hospital for a six-month time frame,
Period 1 2 3 4 5 6 Demand (units) 200 245 190 270 280 300

(b)

(i) (ii)

(iii)

Compute a 3-period moving average for periods 5 and 6. (2 marks) Develop a weighted 3-period moving average forecast using weights of 5, 3 and 1 for the most recent, next recent and most distant data respectively, for periods 5and 6. (2 marks) Suppose the exponential method is applied to the above data and a smoothing constant of 0.3 is adopted, what are the weights assigned to A1, A2, A3 and F1 if they are used to forecast the demand in period 4 (4 marks) (F4)?

(Notes: Aiactual demand in period i, Fiforecasted demand in period i.) (c) Monaghans pizza delivery service randomly selected a consecutive period of 4 weekdays and recorded the following orders for pizza at four different time period within the days, with an average order of 50.938 units per period.
Days Time period 11:00 A.M. - 2:00 P.M. 2:00 P.M. - 5:00 P.M. 5:00 P.M. - 8:00 P.M. 8:00 P.M. - 11:00 P.M. 1 62 73 42 35 2 53 81 45 36 3 56 85 35 36 4 48 66 37 25

(Note: Give you answer with 3 decimal places) (i) Suppose a linear trend forecast model has been developed for the total daily orders of pizza, i.e., Y = 202.54 2.12 X (X=1 represents Day 1, and X is in day units). Forecast the daily orders for pizza in day 5. (1 mark) Prove that the seasonal index for the period 5:00 P.M. - 8:00 P.M is 0.780. What does this index tell you about the orders for pizza within this specific period? (3 marks) Suppose that Monaghan forecasts the orders for pizza at 5:00 P.M. 8:00 P.M. in day 5 are 40 units. Using an appropriate seasonal index to adjust his forecast. (1 mark) End 6

(ii)

(iii)

Appendix 1

Formula Sheet - FB2201

1.

Bayes' Theorem is given by Pr (Bi A) = Pr (Bi ) Pr (A Bi ) for i = 1,2,Lk

Pr (B ) Pr (A B )
k i i i =1

2.

Q=

2 DCo , Ch

where

Co = ordering cost per order Ch = unit carrying cost per year D = annual demand

Total Inventory Cost = Co

D Q + Ch + PD Q 2 P = Purchase cost per unit

where

3.

Q=

2 DCo , d C h 1 p

where

Co = set-up cost per run (ordering cost per order) p = daily production rate d = daily demand rate

Total Inventory Cost = Co

D Q d + Ch 1 + PD Q 2 p P = Purchase cost per unit

where