Farm Grown, produces cases of perishable food products. Each case contains an assortment of vegetables.

A case costs $5 and sells for $15. Unsold cases are sold to a hotel at $3 a case. The probability distribution of demand is as follows:
No. of Cases Probabilities 1 0.3 2 0.4 3 0.3

Use the marginal analysis approach to find the optimal number of cases to be stocked incorporating the expected net value criterion. What is the probability that the decision maker will end up in a loss?

IMPORTANT POINTS:
You need to write down the greater than cumulative probability distribution to determine the optimal value using the marginal analysis approach. The distribution is:

No. of Cases Greater than cumulative Probability

1 0.7

2 0.3

3 0

Then enumerate the outcomes of 2 and 3. Probability of a loss is zero.

MARKETING-B Bill Holliday is not sure what he should do. He can either build a quadplex, a duplex or none at all. (both quadplex and duplex cannot be constructed owing to limited of funds). He can, if he so desires conduct a survey to assess the market at a cost of $3000. The survey has a 50% chance of a favorable outcome. When the market is favorable, he earns $15,000 with a quadplex, $5000 with a duplex. However, when the market is unfavorable, a quadplex leads to a loss of 20,000 and a duplex a loss of $10000. In the absence of a survey, the probability of a favorable market is 0.7. This increases to 0.9 when the survey reports a favorable market but drops to 0.4 when the survey reports an unfavorable market. Draw the decision tree diagram and determine the optimal decision for the expected value criterion.

IMPORTANT POINTS

Note that your diagram could be drawn in landscape form to appear more readable. Also show calculations separately so that your diagram is not cluttered. A decision has to be taken before the outcomes can be observed. Hence a decision to construct quadplex or duplex or none or conduct a survey should appear before an assessment of the potential market. Some students however, have highlighted the reverse. In few cases, students expressed a need for probabilities for quadplex or duplex when these are decisions and not outcomes with probabilities. Further, the option of no construction after a survey has been omitted by a few. The optimal alternative is to construct right away. Losses never occur. State loss =0. Avoid confusion while calculating the expected monetary value.

FINANCE
QUESTION A firm has an annual requirement for 1000 units of a component at a uniform rate. It costs $10 to place an order and the unit inventory carrying cost is $2. A supplier is willing to give $50 discount per order provided the order quantity exceeds or equals 200 units. Should the firm avail of the discount offer? The entire solution is as follows: The economic factors to be incorporated in the determination of an optimal procurement plan are as follows: (a) (b) (c) (d) Purchase value based on unit purchase cost. Ordering costs Inventory carrying costs. Discounts that could accrue from order sizes that exceed 200 units at the rate of $50 per order.

The unit purchase cost is independent of the order quantity (Q)and hence (a) would be identical for every procurement plan. Hence (a) is excluded from consideration. Suppose discounts are not to be availed of. Since demand is uniform and costs are constant, the optimal order quantity is obtained by the EOQ formula. EOQ = =

(2*Annual Demand * Ordering cost per order)/ Inventory carrying cost)

(2 * 1000* 10/2) = 100.

For this plan, Total cost

= 1000*10/ 100 + 100*2/2 = 200 Suppose however, discounts are to be incorporated. The cost curve obtained by considering (b) and (c) increases as the order quantity increases beyond EOQ. Further, as order quantity diminishes, discount reduces. Hence the total cost comprising of (b), (c) and (d) would be optimal for Q= 200 when at least 200 are to be ordered. Total cost for Q= 200 is obtained as 1000*10/ 200 + 200*2/2 +50*1000/200 =0. In other words, the total cost incurred would be the purchase value alone. Hence it is advantageous to order 200 units and avail of the discount.

THUS THE SOLUTION CAN BE PRESENTED IN A BRIEF AND TO THE POINT MANNER. USE OF CALCULUS IS NOT ENTIRELY APPROPRIATE WHEN THE OPTIMAL VALUE IS AT THE BOUNDARY POINT AND NOT AN INTERIOR POINT.

H.R & OPERATIONS

A company is currently working with a process which after paying for materials, labor etc., brings a profit of Rs. 12,000. The company is contemplating one of the following alternatives: (i) (ii) (iii) Continue with the current process Pay Rs. 6,000/ as royalty for a new process. This will bring a gross income of Rs. 20,000/ Conduct research R1 at a cost of Rs 10,000/. There is a 90% probability of successful. If this research is successful, it will bring a revenue of Rs 30,000/. If unsuccessful, the company may opt to pay royalty for the new process (Rs. 6000) and earn a gross revenue of Rs 20,000/ Conduct research R2 at a cost of Rs 8000/. There is a 60% probability of success. If this research is successful, it will bring a revenue of Rs 35,000/. If unsuccessful, the company may opt to pay royalty for the new process (Rs. 6000) and earn a gross revenue of Rs 20,000/ or continue with the current process

(iv)

Draw a decision tree diagram. Determine the optimal strategy using expected value criterion. Identify scenarios when this strategy leads to a loss. Determine the probability distribution of losses The comment on losses given for Marketing B holds. Similarly a neat display of the diagram is important