MID TERM EXAMINATION

Solve the following: Show your complete solution. Submit it in a hard copy. Short bond and 12 font size
Calibri.

1. Esther Grey sells cookies in Cavite. Esther is filling out the orders for next week’s supply of
cookies and she is uncertain what sales will be Esther has the table below as historical
representation of profits given certain sales and buying – level combinations.

Weekly sales Buy 400 Buy 500 Buy 600

400 P 100 P 50 P 0
300 100 150 100
400 100 150 200
a. Using the maximax decision criterion, what advice can you give Esther about quantities of
cookies to buy next week?
b. What advice can you give Esther using the maximum decision criterion?
c. What can you advice Esther using the minimax-regret decision criterion?

2. Johann Raphael has been presented the following payoff table showing payoff’s for three
alternative decisions X, Y and Z as well as three state of nature A, B, C

State of Nature Alternative

X Y Z
A P8000 P7000 P6000
B 4000 6000 5000
C -1000 2000 4000

Which alternative should Johann chooses using the maximax decision criterion? Maximin
decision? Minimax-regret criterion?

3. The Belting Machines production manager must choose a method for assembling parts. The size
of the production run will depend on the number of units ordered, which is an uncertain
quantity. The following quantities are believed be equally likely. 4,000, 6,000, 8,000 and 10,000.
The parts will be sold for P200 each regardless of quantity ordered.
The following data apply to the three methods of production

Methods

X Y Z
Set up cost P200, 000 P160, 000 P100, 000
Unit material cost 20 30 40
Unit labor cost 20 20 30

a. Using total profit form the parts as the payoff, construct payoff table.
b. Determine the expected payoff for each alternative. Which method will maximize expected
payoff?

4. Consider the payoff table of Eunice Bistro

Lunch Combo
Demand Probability 1 2 3
High 0.3 P80, 000 P100, 00 P50, 000
Moderate 0.5 50,000 -40,000 40,000
Low 0.2 30,000 20,000 40,000

Compute the expected payoff for each lunch combo. Which lunch combo gives the highest
payoff?

5. Erika Grace Bakery must determine whether or not to market a new cake mixture. Management
must also decide whether to conduct a consumer test that would cost P25, 000. If the mix is
 successful Erika Grace will have a profit of P400, 000. If the company fails, the bakery will lose
P80, 000. Not marketing the product will not affect the profit. The cake mix is considered 60%
chance of success without testing. The assumed probability for a favorable test marketing result
is 50%. Given a favorable test result, the chance of product success is judged to be 75%.
However, if the test result are unfavorable. The probability for the product’s success if judged to
be only 35%.
Determine the expected payoff.

6. Camille Cosmetics wishes to determine whether or not to market a new face powder. The
marketing manager may order a consumer testing program for P50, 000. The present value of all
future profits for a successful product is P1, 000,000. Not marketing the face powder will not
affect profits. The manager judges that the face powder would have a 60-40 chance of success
without testing customer testing will be either favorable (60% chance) or unfavorable. Given a
favorable test result, the chance of product success is judge to be 75%. But for an unfavorable
test result, the face powder’s success probability is judged to be only 40%.
Determine the expected payoff

7. Danielle’s Clothing Shop is considering a move to a new shopping mall. Danielle thinks that if she
move there is a 20% chance her business will decline by P100, 000, a 30%chance it will remain
stable, and a 50% chance it will increase by P200, 000. She believes there is a 70% chance that
the new mall will be built and her business will increase by P400, 000. If the mall is not built, she
thinks her business will decline by about P100, 000. Time is of the essence, the mall owners
need an answer immediately or she will lose any chance to locate there.
Determine the expected payoff.

8. John and Eunice is considering four investments alternatives: stocks, bonds, real estate and
saving certificates. These certificates will be held for one year. Historical stock patterns indicate
that there is a 20% change stocks will decline by 20%, a 30% chance they will remain stable, and
50% chance they will increase in value by 25%. The stock in question do not pay dividends. The
bonds stand a 40% chance of increasing in value by 10% and 60% chance remaining stale, and
they yield 15%. The real estate being considered has a 20 percent chance of increasing by 25% in
value, a 20% chance increasing 15% in value, and 60% chance of remaining stable. The savings
certificates yield 9% with certainty.
Determine the best alternative with the highest expected value.

9. Joshua experience an annual demand of P500, 000 for electric drills at the JC Hardware Store. It
cost Joshua P150 to place an order and his carrying cost is 185.
a. How often should Joshua place an order per year?
b. How many units per order should Joshua place for the drills?

10. The annual demand for school bags at the Patricia Bags Company estimated P600, 000 and the
carrying cost is 20%. The company estimate order costs to be P250 per order.
a. Find the optimal number of days’ supply per order.
b. Find the optimal number of units per order if the selling price is P110 per bag.

11. Isabela Manufacturing Company uses P900, 000 annually of a particular ingredient in its
assembly department. The purchasing manager estimates the ordering cost at P600 and the
annual storage cost of 22%.
a. Determine the optimal number of orders per year.
b. Determine the number of days’ supply per order.
c. Determine the optimal number of peso per order.

12. Sales of desktop computer at E.G. Electronics have been as follows:

Year Quarter Sales

 2015 1 20
2 35
3 48
4 32

2016 1 40
2 35
3 45
4 28

2017 1 32
2 42
3 35
4 48

Develop the least regression equation using all data. Develop the forecasts for all quarters.

13. Demand for a new sports runner model from the L.F. Belting industries have been as follows:

Year Quarter Demand

2015 1 80
2 75
3 86
4 90

2016 1 95
2 88
3 85
4 90

2017 1 82
2 95
3 98
4 100

a. Develop the least square regression equation using all data.

b. Determine the forecasts for all quarters.

14. Hamsun Deco has to decide whether or not to open a small dress shop near the university belt, a
few blocks from her. Her options are to open a small shop, a medium-sized shop, or no shop at
all. The market for a dress shop can be good, average or bad. The probabilities are 0.2 for a good
market, 0.5 for an average, and 0.3 for a bad market. The no profit loss for the medium-sized or
small shops for the various market conditions are given in the table. Building no shops at all
yields no loss and no gain. What do you recommend?

Alternatives Good market (Php) Average Market Bad Market

(Php)
Small shop P85,000 P20,000 -30,000
Medium-sized shop 120,000 45,000 -70,000
No shop 0 0
Probabilities 0.20 0.50 0.30

15. John Paul Kerstin, president of ABC Industries is considering whether or not to build a
manufacturing plant in Laguna. His decision is summarized in the following table:

Alternatives Favorable Market Unfavorable Market

Build large plant P500,000 -P200,000
Build small plant P160,000 -P70,000
Don’t build 0 0

a. Determine the best strategy expected monetary value (EMV)

b. What is the expected value of perfect information (EVPI)

16. A store owner must decide whether to build a small or a large facility at a new location. Demand
at a location can be either small or large, which probabilities estimated to be 0.4 and 0.6,
respectively. If small facility is built and demand proves to be high, the manager may choose not
to expand (pay-off = P235, 000) or to expand (pay-off = P275, 000). If a small facility is built and
demand is low, there is no reason to expand and the payoff is P220, 000. If a large facility is built
and demand proves to be low, the choice is to do nothing (P60, 000) or to stimulate demand
through local advertising. The response to advertising may be either modest or sizable, with
their probabilities estimated to be 0.3 and 0.7, respectively. If it is modest, the payoff grows to
P230, 000 if the response is sizeable. Finally, if a large facility is built and demand turns out to be
high, the payoff is P900, 000.
a. Determine the expected payoff for each decision and event mode.
b. Which alternative-building a small facility or building a large facility – has the higher
expected payoff?

17. The lease contract of Alpha-Omega, Inc., is about to expire. Management must decide whether
to renew the lease for another ten years or to relocate near the site of a proposed restaurant.
The town planning board is currently debating the merits of granting approval to the restaurant.
A consultant has estimated the net present value of Alpha-Omega’s two alternatives under each
rate of nature as shown below. What course of action would you recommend using?
a. Maximax
b. Maximin
c. Laplace
d. Minimax regret

Options Restaurant Approach Restaurant Rejected

Renew P500,000 P4,000,000
Relocate 6,000,000 200,000

18. Mary Grace has P15, 000 for one year. She can either put the money into a savings account that
pays 6 ½ per year compounded every 3 months, or invest it all in a stock that will pay P550 in
dividends during the year. Also, if she invest her money in the stick at the end of the year for
either P12,000 or P10,500, depending on whether the stock market is up or down that time, her
stockbroker has told her that
P(market will be up at the end of the year) = 0.40
P(market will be down at the end of the year) = 0.60

19. Toshiba Philippines carries a line of electric iron. Given the following data:
a. Compute a three-month and five-month moving average
b. Plot the original data and two moving averages on the same graph.
c. Forecast October sales volume using the following:
1. A linear trend equation
2. A five-month moving average
3. The Naïve Model
4. Exponential Smoothing with a smoothing constant equal to 0.20, assuming a September
forecast of 20.
 MONTH SALES (000 units)
January 25
February 20
March 18
April 23
May 26
June 24
July 22
August 25
September 20

20. A dry cleaner uses exponential smoothing to forecast usage of equipment in its main plant.
August was 93 percent of capacity; actual usage was 88.6 percent of capacity. Forecast use a
smoothing constant of 0.1
a. Prepare a forecast for September.
b. Assuming actual September usage of 92 percent, prepare a forecast for October usage.
(Same table for #19)

21. An electrical contractor’s records during the last five weeks indicate the number of job requests:

WEEK REQUESTS
1 30
2 35
3 32
4 28
5 36

Predict the number of requests for week 6 using each of these methods:
a. Naive Model
b. A four-period moving average
c. Exponential smoothing with = 0.30

22. A cellphone company’s marketing department has developed a linear trend equation that can be
used to predict annual sales of its popular cellphone model

Yt = 105 + 25t

Where:
Yt = Annual sales (000 cellphones) in year t
T = 0 at 2012

a. Are annual sales increasing or decreasing

b. Predict annual sales for 2017

23. The manager of seafood restaurant was asked to establish a pricing policy on lobster dinner.
Experimenting with prices produced the following data.

AVERAGE NUMBER PRICE, x (PESOS)

SOLD PER DAY, y
250 600
220 650
200 630
230 580
 180 620
210 610
240 590

a. Plot the data and a regression line on the same graph

b. Using the regression equation, obtain y, when the price is P595

24. A farmer in Bulacan is considering either leasing some extra land or investing in savings
certificates at the local bank. If weather conditions are good next year, the extra land will allow
the farmer to have an excellent harvest. However, if weather conditions are ad, the farmer will
lose money. The savings certificates will result in the same return regardless of the weather
conditions. The return for each investment given each type of weather condition is shown in the
following payoff table. Select the best decision using the following decision criteria: (a) Maximax
and (b) Maximin.
Decision Weather
good Bad
Lease land P450,000 -P200,000
Buy savings Certificates 50,000 50,000

25. A service crew at the AUS Hotel has been offered of management position. Although accepting
the offer would assure him a job if there were recession, if good economic condition prevailed
he would actually make less money as a supervisor than as a service (because of the large tips he
gets as service crew). His salary during the next five years for each job given each future
economic condition is shown in the following payoff table. Select the best decision using the
following decision criteria: (a). maximax and (b) maximin.

Decision Economic conditions

Good Bad
Service crew P620,000 P340,000
Supervisor 500,000 500,000

26. Given the following payoff table, what is the recommended decision under each of the following
criteria: (i) maximin; (ii) maximax; and (iii) minimax regret?

Alternative Decision State of nature

S1 S2 S3
D1 430 480 515

D2 500 530 562

D3 630 674 706

D4 600 621 649

27. Given the following payoff table, what is the recommended decision under each of the following
criteria: (i) maximin; (ii) maximax, and (iii) minimax regret?

Alternative State of nature

Decision S1 S2 S3 S4
D1 70 78 60 36

D2 82 90 85 80

D3 72 64 50 43

D4 75 88 64 43

28. The owner of the MSS Construction Company must decide among building a housing
development, constructing shopping center, or leasing all the company’s equipment to another
 company. The profit that will result from each alternative will be determine by whether material
costs remain stable or increase. The profit from each alternative given the two possibilities for
material costs is shown in the following payoff table. Determine the best decision using the
following decision criteria: (a) maximax; (b) maximin; and (c) Minimax Regret.

Decision Material Costs

stable increase
Houses P5,375,000 P2,500,000
Shopping center 7,250,000 2,000,000
Leasing 3,000,000 3,000,000

29. An investor in considering investing in stocks, or bonds under uncertain economic conditions.
The payoff table of returns for the investor’s decision situation is shown below. Determine the
best investment using the following decision criteria: (a) Maximax; (b) Maximin; and Minimax
Regret.

Decision Material Costs

Good Stable Poor
Stocks P250,000 P350,000 P150,000
Bonds 200,000 200,000 200,000
Real Estate -100,000 500,000 300,000

30. A local real estate investor in Cebu is considering three investments: a theater, a restaurant, or a
motel. Profits from the theater will be relatively stable under any conditions; profits from the
restaurant or model will be affected by the availability of gasoline and the number of tourists.
The following the payoff table shows the profit or loss that could result from each investment.
Determine the best investment using the following decision criteria: (a) Maximax; (b) Maximin;
and (c) Minimax Regret.

Investment Economic Conditions

Shortage Stable Supply Surplus
Theater P300,000 P300,000 P250,000
Restaurant 100,000 400,000 300,000
Motel -400,000 1,250,000 1,000,000

31. Sofia Jhudiel is a writer of fiction novels. A movie company and a TV network, both want
exclusive rights to one of her most popular works. If she signs with the network she will receive a
single lump sum, but if she signs with the movie company the amount she will receive depends
on the market response to the movie. Sofia’s payoffs are summarized below (in thousands):

Decision State of nature

Small box office Medium box office Large box office
Sign with Movie 3,000 15,000 40,000
company
Sign with TV Network 13,500 13,500 13,500

If the probability estimates for the states of nature are P(small)=0.25, P(medium)=0.60,
P(large)=0.15, to whom should Sofia sell the right? What is the most Sofia willing to pay to learn
what size of the box office would be before she deices with whom to sign?
32. MSS Manufacturing is planning the introduction of a new product. The cost to set up to
manufacture one of the product’s components is very high, so MSS is considering purchasing
that component rather than manufacturing it. One set up to manufacture the component,
however, MSS’s variable cost per unit would be low in comparison to the purchase price of the
component. MSS’s materials manager has calculated the net profit in millions of pesos for three
different levels of demand below:

Decision Demand
Low Medium High
Make component 11 35 55
Buy component 17 29 46

The states of nature have probabilities P(low)=0.40, P(medium)=0.35, and P(high)=0.25. Draw a
decision tree and use it to decide whether MSS should make or buy the component.

33. The manager of a commercial loan department of a bank must decide how to allocate loans
among various loan proposals. The manager has the following payoff table, which shows profits
for various loan strategies and economic scenarios:

Strategy Demand
Stable Changing
A 2,500,000 1,000,000
B 500,000 4,000,000

The manager believes that a stable economy is four times as likely as a changing economy.
However, the manager is somewhat uncomfortable with this personal assessment and would like
to take advantage of a governmental research agency’s services regarding the probability of each
type of economy. According to the agency, its reliability for such forecasts in the past has been.

Forecast Actual
Stable Changing
A 0.90 0.30
B 0.10 0.70

a. Using the criterion of maximizing expected payoff, what strategy would the manager select
without using the agency?
b. If the manager decides to use the agency, what should be the revised probabilities for the
economy for each forecast possibility?
c. Prepare a tree diagram that illustrates the problem.
d. If the agency fee P150, 000, would you recommend using the agency?
 34. A manager has developed a table that shows payoffs for a future store. The payoffs depend on
the size of the store and the strength of demand (in thousands)

Store Size Demand

Low High
Small 1,500 2,500
Large 500 4,000

The manager estimates that the probability of low demand is 0.50, and the probability of high
demand is 0.50. The manager could request that a local research firm conduct a survey (cost: 100,000)
that could better indicate whether demand will be low or high. In discussion with the research firm, the
manager has learned the following about the reliability of surveys conducted by the firm:

Survey Showed Actual Results Was

Low High
Low 0.90 0.30
High 0.10 0.70

a. If the manager should decide to use the survey, what would the revised probabilities be for
demand, and what probabilities should be used for survey results?
b. Construct a tree diagram for this problem?
c. Would you recommend that the manager use the survey?

35. The SJS Company distributes mountain bikes to various municipalities. The company must base
its monthly distribution schedule on a forecast of how may mountain bikes will be demanded
from it. The company has gathered the following company data for the past 8 months from its
sales records. Compute the adjusted exponentially smoothed forecast using β value of 0.10
and 0.30.

Month Jan Feb Mar Apr May Jun Jul Aug

Demand 500 640 600 560 580 630 700 750

a. Forecast Table:

Month Actual Forecast ( β = 0.10) Forecast ( β =0.30)

January
February
March
April
May
June
July
August
September

b. Graph:
36. A manager has developed a table that shows payoffs for a future store. The payoffs depend on
the size of the store and the strength of demand (in thousands):

Store size Demand

Low High
Small 1,500 2,500
Large 500 4,000

The manager estimates that the probability of low demand is 0.50, and the probability of high
demand is 0.50. The manager could request that a local research firm conduct a survey (cost:
100,000) that could better indicate whether demand will be low or high. In discussion with the
research firm, the manager has learned the following about the reliability of surveys conducted
by the firm:

Survey showed Actual results was

Low High
Low 0.90 0.30
High 0.10 0.70

a. If the manager should decide to use the survey, what would the revised probabilities be for
demand, and what probabilities should be used for survey results?
b. Construct a tree diagram for this problem
c. Would you recommend that the manager use the survey ?

37. SSS Resort, Inc., is planning to build a recreational resort in Batangas. Four plans are being
considered, depending on the size of the resort and the number of sporting and recreational
facilities to be included. These plans range from a less expensive, smaller resort (plan 1) to an
expensive, full service resort (plan 4). Demand for the resort’s services s expected to be low,
medium, or high, with probabilities 0.20, 0.45, and 0.35, respectively. The payoff table is show
below (in thousands):

Decision Demand
Low Medium High
1 4,000 4,250 4,500
2 3,500 4,750 5,000
3 3,000 4,250 7,500
4 2,000 3,500 12,500

a. Compute the expected value of perfect information

b. Suppose SSS Resort, Inc., conducts a market research study and obtains an analysis which
will denote by I. The conditional likelihood’s of I are as follows: P (I/low) = 0.10, P (I/medium)
=0.50, and P (I/high) = 0.40. Determine the posterior Bayes decision.
c. If SSS Resort, Inc., paid P750, 000 for the report, did they pay too much?
38. A real estate development company, Omega, Inc., is considering the purchase of one of three
“packages” put together by its director of marketing. Each package contains a different
combination of land acreage by type of land, zoning, and geographic location. The value of the
investment will depend on which of four population growth patterns occurs in the next few
years. The payoff table is given below (in millions):

Plan Demand
Low Medium High
1 4,000,000 4,250,000 4,500,000
2 3,500,000 4,750,000 5,000,000
3 3,000,000 4,250.000 7,500,000
4 2,000,000 3,500,000 12,500,000

a. Determine the Bayes decision, given the following probability density: P( s 1 ) = 0.20, P(
s 2 )=0.25, P( s 3 )=0.45, and P( s 4 ) = 0.10.
b. Compute the expected value of perfect information.
c. Suppose the marketing director spends P5,000,000 on market study and obtains some
information, which we denote by I. The conditional likelihood probabilities of I are as
follows: P( I /s1 )=0.10, P( I / s2 )=0.30, P( I /s3 )=0.35, P( I / s 4 )=0.25. Determine
the posterior Bayes decision. Was the P5, 000,000 well spent?

39. A company has developed a new product. It needs to decide whether or not to product test and
market test before launch, and has been advised that even through these processes do cost
money, they increase the likelihood of success for the product. (Note that the company can only
market test a product once it has passed product testing. If it fails either test it is regarded as
worthless). The company has been able to obtain details of the costs of these testing processes,
together with historical data which suggests how much the likely success of the product is
enhanced by successful testing. Launching the product will cost P20,000,000 and estimates of
profit are as follows:

Highly successful = P140, 000,000

Moderately successful = P70, 000,000
Low level success = P35, 000,000
Failure = P7, 000,000

The historic data that has been gives the following results:
Chances of No Testing Product Testing Product Testing and
Market testing
High success 0.10 0.10 0.15
Medium success 0.25 0.40 0.45
Low success 0.35 0.40 0.35
Failure 0.30 0.10 0.05

Product testing cost P7, 000,000 and the market testing cost P7, 000,000. Should the product fail
either of these tests it is abandoned. The probability of passing product testing is 0.80 and the
probability of passing market testing is 0.90. The alternative to this process is to sell the product
design for P35, 000,000. What is the best option of the company?
40. Giving the following payoff table, what is the recommended decision under each of the following
criteria: (i) maximin; (ii) maximax; and (iii) minimax regret?
a.
Alternative Decision State of Nature
S1 S2 S3
D1 124 156 122

D2 235 167 164

D3 166 254 146

D4 232 345 212

b.
Alternative State of Nature
Decision S1 S2 S3 S4
D1 34 23 42 54

D2 53 32 33 64

D3 26 12 25 45

D4 35 26 33 36

41. The manager tries to determine is trying to determine what stock to invest in, the wisdom of
manager’s decision depends on the state of the stock market in one year. There are three
possible states nature: the market could go down, stay about the same, or it could go up. The
manager had narrowed the investment choices to four stocks. The payoffs for the various
combinations of investment choices and market conditions are shown in the table below. What
are correct investment choices given the following decision criteria: (a) maximin; (b) maximax;
and (c) minimax regret?

Alternative Decision State of Nature

Market is up Market is unchanged Market is down
Stock A P200,000 P50,000 -P150,000
Stock B 235,000 120,000 60,000
Stock C 550,000 0 -50,000
Stock D 85,000 50,000 -100,000