1BUSN 6110 Operations and Project Management Test I (35 points)

Name_Jerry Rose Time: 3 hours

1. a Draw the CPM network. (3pts) Assumed all steps were in serial order as listed.

b. Find the Critical Path (2pts) ABCDEFG

c. If the project is to be shortened by four days, show which activities, in order of reduction, would be shortened

B3
and the resulting cost. (3pts)

Activity

B
Normal
Time (NT)

3
A7 Crash Time
(CT)

2
Normal Cost
(NC)

$7,000

5,000
Crash Cost
(CC)

$8,000

7,000
NT-CT

1
Cost/day to
expedite

$1,000

2,000

C 4 3 9,000 10,200 1 1,200

D 5 4 3,000 4,500 1 1,500

E 2 1 2,000 3,000 1 1,000

F 4 2 4,000 7,000 2 1,500

G 5 4 5,000 8,000 1 3,000

Current Remaining # Cost/Day to Least Cost Total Cost of Project

Critical Path of days Expedite Activity to All Activities Completion
Activity May Each Activity Expedite In network Time
be Shortened
ABCDEFG All activity times & costs Are normal $35,000 30
ABCDEFG A-1 A-1000 A-1000 $36,000 29
B-1 B-2000
C-1 C-1200
D-1 D-1500
E-1 E-1000
F-2 F-1500
G-1 G-3000

ABCDEFG A-0 B-2000 E-1000 $37,000 28

B-1 C-1200
C-1 D-1500
D-1 E-1000
E-1 F-1500
F-2 G-3000
G-1

ABCDEFG A-0 B-2000 C-1200 $38,200 27

B-1 C-1200
C-1 D-1500
D-1 F-1500
E-0 G-3000
F-2
G-1

ABCDEFG A-0 B-2000 D-1500 $39,700 26

B-1 D-1500
C-0 F-1500
D-1 G-3000
E-0
F-2
G-1

ABCDEFG A-0 $39,700 26

B-1
C-0
D-0
E-0
F-2
G-1

I would cut A, E, C and D one day each. It would reduce the project from 30 to 26 days (4 day reduction) and increase
cost to $39,700 ($4700 increase). Critical Path is still ABCDEFG.
2. If demand for product "A" were forecast at 1,000,000 units for the coming year and your factory
has one machine capable of producing 75,000 units per month, how much of product "A" might you
plan to acquire through outsourcing? (3pts.)

Organic production capacity = 75,000 x 12 = 900,000

Demand = 1,000,000

Amount to Outsource = 1,000,000 – 900,000 = 100,000

3. Comp X is considering the possibility of building a new addition to their product line. The company is considering two
options. The first is a small facility that it could build at a cost of $6M. If demand for new products is low, the company
expects to receive $10M in discounted revenues with the small facility. On the other hand, if demand is high, it is expects
$12M in d is counted revenues using the small facility. The second option is to build a large factory at a cost of $9M.
Were the demand to be low, the company would expect $10M in discounted revenues with the larger plant. If demand is
high, the company estimates that the discount revenues would be $14M. In either case, the probability of demand being
high is .40, and the probability of it being low is .60. Not constructing a new facility would result in no additional revenue.
Construct a decision tree. (4pts)

Option 1 – Small Facility

Cost - $6M
Demand Low -$10M
Demand High - $12M

Option 2 – Large Factory

Cost - $9M
Demand Low - $10M
Demand High - $14M

Small Facility NPV = $4.8M

Do Nothing NPV = $0
Large Facility NPV = $2.6M
Build Small Facility
4. Three fast-food chains are discussed in the text. McDonald's traditional process is
make-to-stock; Wendy's has a make-to-order process and Burger King has a process
which is a hybrid of the other two. Discuss the advantages and disadvantages of each of
these approaches. Why do you suppose that each of these approaches can survive in the
fast food industry? (5 pts)

Process Advantages Disadvantages

Make-to-Stock -Speedy delivery -Higher inventory levels
- Standardized product -Higher work-in process levels
- Quality less dependent on worker’s -Less product customization
skill

Make-to-Order - Activated only by actual order - Slower response time

- Inventory kept to minimum - Quality dependent on skill of worker
- Work-in-process kept to minimum - No product standardization
- Highly customized product
Hybrid - Speedy delivery of standardized - Minimizes the disadvantages above
product compared to a true MTS or MTO
- Quality less dependent on worker’s process.
skill
- Inventory kept to minimum (relative
to MTS)
- Work-in-process kept to minimum
(relative to MTS)
- Highly customized product

All 3 are able to survive because their processes and products appeal to different segments of the fast food market.
McDonald’s speedy, high volume delivery appeals to families with young kids. Burger Kings unique flame-broiled taste
appeals to a different segment or the market and Wendy’s approach appeals to those who like their burgers prepared the
old-fashioned way.
5. You are hired as a consultant to decide if your client should purchase a new, highly
specialized, piece of equipment. The product to be produced by this equipment is forecast to
have a total world wide demand of 15,000 units over the entire product life. The initial
investment to acquire and install the equipment is $256,000. The variable cost to produce
each unit will be $15 and the selling price for the finished product will be $30. Which of the
following best describes the situation the firm is facing? (5 pts)

Fixed Costs = $256,000

Price = $30
Vc = $15
Q = 15,000

$256,000 = ($30-$15) x 15,000

$256,000 = $15 x 15,000

$256,000 = $225,000

31,000 Loss

A. The company will recover its' initial investment

B. The company's total margin will be less than its investment

C. It's a good investment

D. The break-even is lower than the 15,000 units that are expected to sell

E. All of the above

6. Six-sigma programs believe that each step in a process is an opportunity to produce
defects. These programs seek to reduce defects by working on processes to reduce what
measure of output? (Explain.) (6pts.)

Six-sigma programs seek to reduce the variation in processes that leads to defects. The goal
is no more than 2 defects out of every billion units. The measure of output used to track
defects is called defects per million opportunities (DPMO).
1. Unit – the item produced
2. Defect- any item or event that doesn’t meet customer’s requirements
3. Opportunity – chance for defect to occur

DPMO = #of defects x 1,000,000

# of opportunities for error per unit x # of units

7. According to Wal-Mart 10K report for fiscal year ended 2006, the following information is
found: (5 pts.) find the inventory turnover rate for 2006 (per telecom with Louis).

Inventory Turnover = Cost of goods sold/ aggregate average inventory value

2006 2005

Cost of Sales 240,391 219,793

Inventory 32,191 29,762

I wasn’t sure if Inventory equaled aggregate average inventory value for the fiscal year
or not so I assumed it wasn’t.

32,191+29,762=61,953/2=30,976.5

Inventory Turnover = 240,391/30,976.5 = 7.76

If it was aggregate average inventory value for the whole year, then the calculation
would be

Inventory Turnover = 240,391/32,191 = 7.47