Financial Management

(E. Quantitative Methods)

E. QUANTITATIVE METHODS for the activity times.

B. PERT does not allow for slack times on the activities while CPM does.
C. PERT considers only activity cost while CPM considers only activity time.
THEORIES: D. PERT determines the least-cost path through a network while CPM
Economic Order Quantity determines the least-time path through a network.
1. The economic order quantity is the order quantity that results in
A. the minimum total annual inventory costs. 6. Critical Path Method (CPM) is a technique for analyzing, planning, and
B. no inventory shortages. scheduling large, complex projects by determining the critical path from a single
C. the maximum total annual inventory costs. time estimate for each event in a project. The critical path:
D. minimum ordering costs. A. Is the shortest path from the first event to the last event for a project.
B. Is an activity within the path that requires the most number of time.
Sensitivity analysis C. Has completion that reflects the earliest time to complete the project.
2. Missile Company has correctly computed its economic order quantity as 500 units. However, D. Is the maximum amount of time an activity may be delayed without delaying
management feels it would rather order quantities of 600 units. How should Missile’s total the total project beyond its target completion time.
annual purchase-order costs and total annual carrying cost for an order quantity of 600 units
compare to the respective amounts for an order quantity of 500 units? Queuing Theory
A. Higher purchase-order cost and lower carrying cost. 7. A company is designing a new regional distribution warehouse. To minimize
B. Higher purchase-order cost and higher carrying cost. delays in loading and unloading trucks, an adequate number of loading docks
C. Lower purchase-order cost and higher carrying cost. must be built. The most relevant technique to assist in determining the proper
D. Lower purchase-order cost and lower carrying cost. number docks is
A. Cost-volume-profit analysis C. Linear programming
3. A decrease in inventory order costs will B. PERT/CPM analysis D. Queuing theory
A. Increase the reorder point.
B. Decrease the economic order quantity. Linear Programming
C. Have no effect on the economic order quantity. Use the following information to answer question Nos. 8 and 9:
D. Decrease the holding cost percentage. The Kinis Company produces a cosmetic product in 60 gallon batches. The basic
ingredients used are material X, costing P70 per gallon, and material Y, costing P170
4. An increase in inventory holding costs will per gallon. No more than 18 gallons of X can be used, and at least 15 gallons of Y
A. Decrease the economic order quantity. must be used.
B. Have no effect on the economic order quantity.
C. Increase the economic order quantity. 8. How would the objective function (minimization of product cost) be expressed?
D. Decrease the number of orders issued per year. A. 70X + 170Y C. 170X + 70Y
B. 18X + 15Y D. 18X + 42Y
PERT-CPM
5. Which one of the following statements best describes a difference between basic PERT and 9. Which of the following is not a constraint of the Kinis Company?
the Critical Path Method (CPM) of network analysis? A. X ≤ 18 C. Y ≥ 15
A. PERT uses probability distribution on the activity times while CPM uses point estimates B. X + Y ≤ 60 D. X ≥ 0

202
 Financial Management
(E. Quantitative Methods)

the highest possible income for the year. Castle should crash
Use the following data to answer Question Nos. 10 through 12: A. Activity BC 1 week and activity EF 1 week
Sun, Inc. manufactures product X and product Y, which are processed as follows: B. Activity BC 2 weeks
Type A machine Type B machine C. Activity DE 1 week and activity BC 1 week
Product X 6 hours 4 hours D. Activity DE 1 week and activity EF 1 week
Product Y 9 hours 5 hours
Learning Curve
i
The contribution margin is P12 for product X and P7 for product Y. The available time daily for . Contratista, Inc. is considering a three-phase research project. The time
processing the two products is 120 hours for machine Type A and 80 hours for machine Type B. estimates for completion of Phase 2 of the project are:
Pessimistic 24 weeks
10. How would the constraint for machine Type A be expressed? Most likely 20 weeks
A. 4X + 5Y C. 4X + 5Y ≤ 80 Optimistic 10 weeks
B. 6X + 9Y ≤ 120 D. 12X + 7Y Using the program evaluation and review technique (PERT), the expected time
for completion of Phase 2 should be
11. How would the constraint for machine Type B be expressed? A. 20 weeks C. 18 weeks
A. 4X + 5Y C. 4X + 5Y ≤ 80 B. 19 weeks D. 24 weeks
B. 6X + 9Y ≤ 120 D. 12X + 7Y ii
. Wind Company expects an 85% learning curve. The first batch of a new product
12. How would the objective function be expressed? required 500 hours. The first four batches should take an average of
A. 4X + 5Y C. 4X + 5Y ≤ 80 A. 361.25 hours C. 500.0 hours
B. 6X + 9Y ≤ 120 D. 12X + 7Y B. 425.0 hours D. 322.4 hours
iii
. A learning curve of 80% assumes that production unit costs are reduced by 20%
PROBLEMS: for each doubling of output. What is the cost of the sixteenth unit produced as
PERT-CPM an approximate percent of the first unit produced?
A. 30 percent C. 41 percent
2. Castle Building Company uses the critical path method to monitor
B. 51 percent D. 64 percent
construction jobs. The company is currently 2 weeks behind schedule on Job
WW, which is subject to a P10,500-per-week completion penalty. Path A-B- iv
. Soft Inc. has a target total labor cost of P3,600 for the first four batches of a
C-F-G-H-I has a normal completion time of 20 weeks, and critical path A-D- product. Labor is paid P10 an hour. If Soft expects an 80% learning curve, how
E-F-G-H-I has a normal completion time of 22 weeks. The following many hours should the first batch take?
activities can be crashed. A. 360 hours C. 57.6 hours
Activities Cost to Crash 1 Week Cost to Crash 2 Weeks B. 140.63 hours D. 230.4 hours
BC P 8,000 P15,000
v
DE 10,000 19,600 . Havenot has estimated the first batch of product will take 40 hours to complete. A
EF 8,800 19,500 90% learning curve is expected. If labor is paid P15 per hour, the target labor cost
Castle desires to reduce the normal completion time of Job WW and, at the same time, report for four batches of product is

203
 Financial Management
(E. Quantitative Methods)

A. P600 C. P1,944 If an 80 percent learning curve is applicable, Moss Point’s total cost on this
B. P2,160 D. P2,400 order would be estimated at
A. P26,400 C. P31,790
vi
. Hanip Co. used 30 hours to produce the first batch of units. The second batch took an B. P37,950 D. P38,500
additional 18 hours. How many total hours will the first four batches require?
A. 76.8 hours C. 120.0 hours Expected Value
B. 96.2 hours D. 48.0 hours x
. Dough Distributors has decided to increase its daily muffin
purchases by 100 boxes. A box of muffins costs P2 and sells for P3
vii
. Sulit Company plans to begin production of a new product on July 1. An 80% learning curve through regular stores. Any boxes not sold through regular stores
is applicable to Sulit’s manufacturing operations. If it is expected to take 1,000 direct labor are sold through Dough’s thrift store for P1. Dough assigns the
hours to produce the first unit, how many direct labor hours should it take to produce the third following probabilities to selling additional boxes:
and fourth units?
A. 640 C. 1,600 Additional sales Probability
B. 960 D. 2,560 60 0.6
100 0.4
viii
. A construction company has just completed a bridge over the Visayan area. This the first What is the expected value of Dough’s decision to buy 100 additional boxes of
bridge the company ever built and it required 100 weeks to complete. Now having hired a muffins?
bridge construction crew with some experience, the company would like to continue building A. P28 C. P52
bridges. Because of the investment in heavy machinery needed continuously by this crew, B. P40 D. P68
the company believes it would have to bring the average construction time to less than one xi
year (52 weeks) per bridge to earn a sufficient return on investment. The average . Karen Company has three sales departments. Department A processes about
construction time will follow an 80% learning curve. To bring the average construction time 50 percent of sales, Department B about 30 percent, and Department C about
(over all bridges constructed) below one year per bridge, the crew would have to build 20 percent. In the past, Departments A, B, and C had error rates of about 2
approximately percent, 5 percent, and 2.5 percent, respectively. A random audit of the sales
A. 2 additional bridges. C. 3 additional bridges. records yields a recording error of sufficient magnitude to distort the company’s
B. 7 additional bridges. D. 8 additional bridges. results. The probability that Department A is responsible for this error is
A. 0.50 C. 0.20
ix
. Moss Point Manufacturing recently completed and sold an order of 50 units that had the B. 0.33 D. 0.25
following costs: xii
Direct materials P 1,500 . A beverage stand can sell either softdrinks or coffee on any given day. If the
Direct labor (1,000 hours @ P8.50) 8,500 stand sells softdrinks and the weather is hot, it will make P2,500; if the weather
Variable overhead (1,000 hours at P4.00) 4,000 is cold, the profit will be P1,000. If the stand sells coffee and the weather is hot,
Fixed overhead 1,400 it will make P1,900; if the weather is cold, the profit will be P2,000. The
P15,400 probability of cold weather on a given day at this time is 60%. The expected
*Applied on the basis of direct labor hours. payoff if the vendor has perfect information is
*Applied at the rate of 10% of variable cost. A. P3,900 C. P2,200
The company has now been requested to prepare a bid for 150 units of the same product. B. P1,360 D. P1,960

204
 Financial Management
(E. Quantitative Methods)

xiii
. The Teeners’ Club sells fresh hot cider at Recto football games. The A. 191 C. 234
frequency distribution of the demand for cups of hot cider per game is B. 225 D. 250
presented below:
Unit sales volume Probability Question Nos. 17 and 18 are based on the following:
Sampaguita Company makes corsages that it sells through salespeople on the
10,000 0.10
streets. Each sells for P2 and has variable production costs of P0.80. The
20,000 0.15
salespeople receive a P0.50 commission on each corsage they sell, and the
30,000 0.15
company must spend P0.05 to get rid of each unsold corsage. The corsages last for
40,000 0.40
only one week and cannot be carried in inventory.
50,000 0.20
The hot cider is sold for P35.00 a cup and the cost per cup is P20.00. Any unsold hot cider
The manager of the firm had estimated demand per week and
is discarded because it will spoil before the next game.
What is the estimated demand for hot cider at the next football game if a deterministic associated probabilities as follows:
approach based on the most likely outcome is used? Demand Probability
A. 34,500 C. 16,000 100,000 0.20
B. 40,000 D. 50,000 120,000 0.20
140,000 0.30
xiv
. Green Co. is considering the sale of banners in an exhibit fair. Green Co. could purchase 160,000 0.30
these banners for P7.50 each. Unsold banners would be unreturnable and worthless after
xvi
the exhibit. Green would have to rent a booth at the stadium for P4,000. Green estimates . The optimal weekly production of the corsage is
sales of 2,000 banners at P20.00 each. If Green’s prediction proves to be incorrect and A. 120,000 C. 134,000
only 1,500 banners were sold, the cost of this prediction error would be: B. 140,000 D. 145,000
A. P 6,250 C. P 4,750
xvii
B. P10,000 D. P 3,750 . The value of perfect information is
A. P14,400 C. P23,800
xv
. The manager of Batanes Company has developed the following probability B. P16,000 D. P22,100
distribution of dairy sales of a highly perishable product. The company
restocks the product each morning: Question Nos. 21 through 24 re based on the following information:
X (Units Sold P (Sales =X) Glassco, Inc. has two products, a frozen dessert and ready-to-bake
150 0.20 breakfast rolls, ready for introduction. However, plant capacity is
175 0.40 limited, and only one product can be introduced at present. Therefore,
200 0.15 Glassco has conducted a market study, at a cost of P26,000, to
225 0.10 determine which product will be more profitable. The results of the
250 0.10 study show the following sales patterns.
275 0.05 Sales of Desserts at P1.80 per unit Sales of Rolls at P1.20 per unit
If the company desires an 85% service level in satisfying sales demand, what should the Volume Probability Volume Probability
initial balance be for each day? 250,000 .30 200,000 .20

205
 Financial Management
(E. Quantitative Methods)

300,000 .40 250,000 .50 weather turns cold (probability 0.2), the yield will be cut in half but net P3 per
350,000 .20 300,000 .20 bottle. If the weather does not turn cold, the yield will depend on rain. With rain
400,000 .10 350,000 .10 (probability 0.5), a full yield netting P4 per bottle will result. Without rain
The costs associated with the two products have been estimated by Glassco’s (probability 0.5), there will still be a full 100,000-bottle yield, but the net will be only
cost accounting department and are shown below: P3 per bottle.
Dessert Rolls The optimal expected value is
A. P200,000 C. P350,000
Ingredients per unit P 0.40 P 0.25
B. P310,000 D. P400,000
Direct labor per unit 0.35 0.30
Variable overhead per unit 0.40 0.20
Theory of Constraints
Production tooling* 48,000.00 25,000.00
Advertising 30,000.00 20,000.00
xxiii
. Happy Holidays produces three products: X, Y, and Z. Two
machines are used to produce the products. The contribution
*Glassco treats production tooling as a current operating expense rather than capitalizing it as a margins, sales demands, and time on each machine (in minutes) is
fixed asset. as follows:
Demand CM Time on M1 Time on M2
xviii
. According to Glassco’s market study, the expected value of the sales volume of the breakfast X 100 P10 5 10
rolls is Y 80 18 10 5
A. 125,000 units C. 260,000 units Z 100 25 15 5
B. 275,000 units D. 250,000 units There are 2,400 minutes available on each machine during the
xix
week. How many units should be produced and sold maximize the
. Applying a deterministic approach, Glassco’s revenue from sales of frozen desserts would be weekly contribution?
A. P549,000 C. P540,000 X Y Z
B. P195,000 D. P216,000
A. 100 80 100
xx B. 20 80 100
. The expected value of Glassco’s operating profit directly traceable to the sale of frozen
C. 100 40 100
desserts is
D. 100 80 73
A. P198,250 C. P471,000
B. P150,250 D. P120,250
Inventory Management
xxi
. In order to recover the costs of production tooling and advertising for the breakfast rolls, EOQ, Safety Stock, Reorder Point
Glassco’s sales of the breakfast rolls would have to be Question Nos. 25 through 30 are based on the following:
A. 37,500 units C. 100,000 units KMU Company uses a small casting in one of its finished products. The castings are
B. 60,000 units D. 54,000 units purchased from a foundry located in another Asian country. In total, KMU Company
purchases 54,000 castings per year at a cost of P8 per casting.
Decision Tree The castings are used evenly throughout the year in the production process on a 360-
xxii
. A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now day-per-year basis. The company estimates that it costs P90 to place a single
will yield 100,000 bottles of wine netting P2 per bottle. If the wine maker waits and the purchase order and about P3 to carry one casting in inventory for a year. The high

206
 Financial Management
(E. Quantitative Methods)

xxix
carrying costs result from the need to keep the castings in carefully controlled temperature and . Assuming that the cost of stock out is P800 per occurrence, which safety stock
humidity conditions, and from the high cot of insurance. level is necessary in reducing the cost?
Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of A. 0 C. 300
delivery time and the percentage of their occurrence are shown in the following tabulation: B. 150 D. 450

Delivery Time (days) Percentage of Occurrence Just-in-Time

xxx
6 75 . At the beginning of 2007, Silang Company installed a JIT purchasing and
7 10 manufacturing system. The following information has been gathered about one of
8 5 the company's products
9 5 Theoretical annual capacity 4,000
10 5 Actual production 3,800
100 Production hours available 2,500
On-time deliveries 1,500
xxiv
. What is the economic order quantity for the company. Total deliveries 1,600
A. 1,800 C. 2,545 Scrap (lbs.) 400
B. 1273 D. 2,700 Materials used (lbs.) 12,800
Number of defective units 20
xxv
. Assuming that the company will not provide any safety stock units, how much would the Defective units as a percentage of total units produced is:
annual inventory costs? A. 5% C. 0.53%
A. P2,700 C. P5,400 B. 1.05% D. 2.5%
B. P8,100 D. P6,000
ANSWER EXPLANATIONS
xxvi
. Assuming that the company is willing to assume a 15% risk of being out of stock, what would
be the number of safety stock?
A. 0 C. 300
B. 150 D. 450
xxvii
. Assuming that the company is willing to assume only a 5% risk of being out of stock, what
would be the reorder point?
A. 450 C. 1,200
B. 1,050 D. 1,350
xxviii
. Assuming a 5% stock-out risk, what would be the total cost of ordering and carrying inventory
for one year?
A. 5,850 C. 6,075
B. 6,300 D. 6,750

207
i
. Answer: B
Formula: (Pessimistic + 4Most likely + Optimistic) / 6
[24 + (20 x 4) +10] ÷ 6 = 19 weeks
ii
. Answer: A
UnitsCumulative Average TimeComputation1500.002425.00(0.85 x 500.00)4361.25(0.85 x 425.00)
iii
. Answer: C
UnitsCumulative Average TimeComputation11.0020.80(0.8 x 1.00)40.64(0.8 x 0.80)80.51(0.8 x 0.64)160.41(0.8 x
0.51)Percentage: 0.41 ÷1.00 = 41.0%

iv
. Answer: B
Average hours after 4th batch P3,600 ÷ 10 ÷ 4 units 90
Hours used by 1st batch: 90 ÷ 0.80 ÷ 0.80 140.63
v
. Answer: C
UnitsCumulative Average TimeComputation140.00236.00(0.9 x 40.00)432.40(0.9 x 36.00) Total number of
hours used by 4 units: 4 x 32.4 129.6
Total labor cost used by 4 units: 129.6 x P15 P1,944
vi
. Answer: A
Learning curve (30 + 18) ÷ 2 ÷ 30 = 80.0%
Cumulative average time after 4 batches: 30 x 0.8 x 0.8 19.2
Total number of hours used by first 4 batches: 4 x 19.2 76.8
vii
. Answer: B
Cumulative average DLH after 4 units: (1,000 x 0.8 x 0.8) 640
Total DLH after 4 units: 4 x 640 2,560
Less Total DLH used after 2 units (1,000 x 0.8 x 2) 1,600
Total DLH used by 3rd and 4th units 960
viii
. Answer: B
No. of BridgesCumulative Average WeeksComputation1100.00280.00(0.8 x 100.0)464.00(0.8 x
80.00)851.20(0.8 x 64.00) It will take 8 bridges to complete them with cumulative average time in weeks of below 52.
The company needs to complete additional 7 bridges to have an average completion time of less than 52 weeks.
ix
. Answer: A
Cumulative Ave. DHL50 units20.0100 units16.0( 20 x 80% )200 units12.80( 16 x 80% )Total hrs required by 200
units 128.80 x 2,000 2,560
Less Hours used by first 50 units 1,000
Additional Hours 1,560

Costs
Direct materials (1,500 x 3) P 4,500
Direct labor 1,560 x 8.50 13,260
Variable OH 1,560 x 4 6,240
Total variable Costs 24,000
Fixed OH 10% x 24,000 2,400
Total Cost P26,400
x
. Answer: C
SalesConditional Profit (Loss) 60(60 x P3) + (40 x P1) – P200 = P 20 100(100 x P3) – P200 =
100Expected Value: (P20 x 0.6) + (P100 x 0.4) = P52

xi
. Answer: B
Dept.ErrorWeightProbabilityA0.020.010.01/.03 = 33.00%B0.050.015.015/03= 50.00% C0.0250.05.005/03=
16.67%0.03
xii
. Answer: C
Expected payoff:
Sale of coffee during cold weather 2,000 x 0.6 1,200
Sale of soft drinks during hot weather 2,500 x 0.4 1,000
Total 2,200
xiii
. Answer: B
The expected sales based on the most likely outcome are 40,000. This is based on the concept that which one with the
highest probability is the most likely to happen.
xiv
. Answer: D
The cost of prediction error = unsold units x purchase price
500 x 7.50 = P3,750
xv
. Answer: B
At the service level of 85%, there is 15% risk that the company runs out of stock. To achieve 85% level, 225 units
must be purchased at the start of day. (0.20 + 0.40 + 0.15 + 0.10 = 85%); 225 units corresponds to 85%.
xvi
. Answer: B
PurchasesProbabilityDemand100,000120,000140,000160,000 20%100,00070,00053,00036,000
19,00020%120,00070,00084,00067,000 50,00030%140,00070,00084,00098,000
81,00030%160,00070,00084,00098,000112,000Expected Value 70,000 77,800 79,400 71,700 Optimal
Production is 140,000 because it gives the highest pay off, which is 79,400
xvii
. Answer: A
Perfect Information:
(70,000 x.20) + (84,000 x .20) + (98,000 x.3) + (112,000 x .30) = 93,800
Value of Perfect Info – 93,800 – 79,400 = P14,400
Value of Perfect Info = Diff. Between payoff of Perfect Info and Optimal production
xviii
. Answer: C
EV = (200 x 0.2) + (250 x 0.5) + (300 x 0.2) + (350 x 0.1) 60,000
xix
. Answer: C
300,000 x P1.80 = P540,000
The sales level of 300,000 has the highest probability (40%) and there it the level most likely to happen.
xx
. Answer: D
EV: (250 x 0.3) + (300 x 0.4) + (350 x 0.2) + (400 x 0.1) 305,000
Expected sales (305,000 x P1.80) P549,000
Less expected variable costs (305,000 x P1.15) 350,750
Contribution margin 198,250
Less fixed costs (P48,000 + P30,000) 78,000
Expected profit P120,250
xxi
. Answer: C
Breakeven units, Glassco: (P45,000 ÷ 0.45) = 100,000
xxii
. Answer: B
Expected value if immediately harvested: (100,000 x P2) P200,000
Expected value if not harvested immediately:
Cold weather: (50,000 x P3 x 0.20) P 30,000
Not cold with rain: (100,000 x P4 x 0.8 x 0.5) 160,000
Not cold without rain: (100,000 x P3 x 0.8 x. 0.5) 120,000
Total P310,000
xxiii
. Answer: D
First step is to determine which machine has a constraint:
Required usage of Machine:
Machine 1: (100 x 5) + (80 x 10) + (100 x 15) 2,800
Machine 2: (100 x 10) + (80 x 5) + (100 x 5) 1,900
Machine 1 has shortage in capacity of (2,800 – 2,400) 400

Second step is to determine the order of profitability of the product lines per minute of machine 1.
Product X: P10 ÷ 5 min. P2.00
Product Y: P18 ÷ 10 min. 1.80
Product Z: P25 ÷ 15 min. 1.67

The company should produce product Z last because it is the least profitable per minute of usage of Machine 1. It is
apparent that Choice D is the only possible correct response.
xxiv
. Answer: A
EOQ = the square root of 2 x annual units required x ordering cost ÷ carrying cost per unit
EOQ = the square root of 2 x 54,000 x 90,000 ÷ 3 = 1,800
xxv
. Answer: C
Annual ordering cost: 54,000/1800 x 90 2,700
Annual carrying cost: 1,800/2 x 3 2,700
Total cost 5,400
xxvi
. Answer: B
A 15% risk of out-of-stock means a 85% assurance that order will be received on time. Without having a safety stock,
 the company will use a lead time of 6 days (75%). Therefore, 7-day lead time has 85% assurance or a 15% risk of
stockout. The safety stock level is for 1 day (7 – 6) or 150 units.
Daily requirements: 54,000/360 = 150
xxvii
. Answer: D
A 5% risk of out-of-stock means a 95% assurance that order will be received on time. This is estimated to have a lead
time of 9 days (the total of probability for 9 days is 95%).
Reorder point without safety stock 6 days x 150 900
Safety stock (9 – 6) 150 450
Reorder point 1,350
xxviii
. Answer: D
Ordering cost (unchanged) 2,700
Carrying cost
Average inventory (1800/2) + 450 = 1,350
1,350 x 3 4,050
Total 6,750
xxix
. Answer: A
Safety unitsStock out costCarrying CostTotal 00.25 x 2,400 = 600 0 6001500.15 x 2,400 = 360150 x 3 =
450 8103000.10 x 2,400 = 240300 x 3 = 9001,1404500.05 x 2,400 = 120450 x 3 = ,3501,470Annual stockout
cost (100% probability) based 30 orders (54,000/1800):
30 x 800 = 2,400
The probability of stockout is the inverse of assurance, say at zero safety stock, 6 days, its 75% probable that ordered
goods will arrive, therefore, its 25% probable that it won’t.
xxx
. Answer: C
Defective Units ÷ Actual Units Produced (20 ÷ 3,800) = 0.526%