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Exam Review Problems:

The ABC Company produces steel tubes. The steel tube process is a stable cut-to-length operation
that generates tubes that have a mean of 12.00 inches and standard deviation of 0.10 inches.
The XYZ Company wishes to buy tubes from the ABC Company. The XYZ Company requires steel tubes
between 11.77 inches and 12.23 inches in length.

What is the Cp and what does it mean for the steel tube process?

What proportion of steel tubes can be expected to meet XYZs specifications?

If XYZ requires a 1.00 Cp from its suppliers, what does ABC need to do?

As operations manager of Baby Furniture, Inc., you must make a decision about
expanding your line of nursery furniture (that is, cribs, toy chests, dressers, etc.). In discussing the
possibilities with your sales manager, Mrs. Lockard, you decide that there definitely will be a market and
that your firm should enter that market. However, because nursery furniture is often painted rather than
stained you decide you need another process line. There is now doubt in your mind about the decision, and
you are sure that you should have a second process. But you do question how large to make it. A large
process line is going to cost $300,000 while a small process line will cost $200,000. The question,
therefore, is the demand for nursery furniture. After extensive discussion with Mrs. Lockard and Mr.
Utecht of Utecht Market Research, Inc., you determine that the best estimate you can make is that there is a
two-out-of-three chance of profit from sales as large as $600,000 and a one-out-of-three chance as low as
$300,000.
With a large process line, you could handle the high figure of $600,000. However, with a small process
you could not and would be forced to expand (at a cost of $150,000), after which time your profit from
sales would be $500,000 rather than the $600,000 because of the lost time in expanding the process. If you
do not expand the small process, your profit from sales would be held to $400,000. If you build a small
process and the demand is low, you can handle all of the demand. Should you open a large or small process
line?

Peter McWalters is president of Transformonics, a firm that produces power transformers for
personal computer manufacturers. Peters analysis of the various methods by which a new model of
transformer can be built has been narrowed down to one of three alternatives. Because of the rapidly
changing technology in the industry, Peter estimates the product life of the transformer to be one year.
Marketing has estimated that it can sell 5,000 of these new transformers within that time period. The three
alternative processes are:

Use existing equipment and fixtures, and hire high-skilled machinists and technicians at $16.00
per hour (including benefits). With this method, each transformer will require two (2) labor-hours
to assemble.

Use existing equipment but invest $30,000 in new fixtures and instruction manuals to simplify
some of the more complicated operations. Semi-skilled workers could therefore be employed at
$12.00 per hour (including benefits), with each transformer requiring one (1) labor-hour to
complete.

Invest $75,000 in new equipment, fixtures, and instruction manuals. This approach would
eliminate all of the complicated procedures, thereby requiring only unskilled labor, which could be
hired at $6.00 per hour (including benefits). With this method, each motor would require only 20
labor-minutes to complete.
The costs from Le Bistro, a French-style deli, are shown below. Fixed costs are $3500

per month.

Item
Sandwich
Soft drink
Homemade chips
Baked potato w/topping
Tea
Breakfast burrito
Crepe
Milkshake
Salad Bar

Price
$2.95
0.80
0.59
1.55
0.75
2.95
1.75
1.75
2.85

Cost
$1.25
0.30
0.18
0.47
0.25
1.20
0.55
0.80
1.00

Annual
Forecasted
Unit Sales
7,000 units
7,000 units
1,000 units
5,000 units
5,000 units
2,000 units
2,500 units
2,000 units
3,000 units

How many units of food would need to be sold in order to break even?
How many milkshakes would need to be sold, given current product mix, if the firm is to make 100,000
profit?

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