CPAR:MS 9110_QUANTITATIVE TECHNIQUES BATCH MAY 2022

MS 9110 – QUANTITATIVE TECHNIQUES

TOPIC OUTLINE

Definition
Basic Concepts
Purpose and Limitations

Definition

Probability Analysis Expected Value

QUANTITATIVE Decision Trees

TECHNIQUES
Gantt Chart

Project Management PERT Diagram

Learning Curve Critical Path Method

Linear Programming

LECTURE NOTES
BASIC CONCEPTS
QUANTITATIVE TECHNIQUES - refer to the application of the concepts of mathematics in
actual business operations.
OPERATIONS RESEARCH - refers to the discipline of applying quantitative methods
in organizational planning and control.
NOTE: Quantitative techniques are INEVITABLE in a business decision-making process.
PURPOSE:
(1) To facilitate decision making-process. (3) To help in choosing optimal strategy.
(2) To provide tolls for scientific research.
LIMITATIONS:
(1) Assumption-based. Due care must be exercised so not to lead to wrong conclusions.
(2) Application of quantitative techniques is somehow costly or expensive.
(3) Full application of quantitative techniques in decision-making ignores or disregards the qualitative
aspect of a decision.
(4) Quantitative techniques are tools for decision making only and NOT the decision itself.
PROBABILITY ANALYSIS
This technique is important especially for decision making since future events are unpredictable.
PROBABILITY - a mathematical expression of doubt or assurance about the
occurrence of a chance event. Its value varies from zero (0) to one
(1) or 100%
 PROBABILITY OF 0 - the event cannot occur
 PROBABILITY OF 1 OR 100% - the event is certain to occur
 PROBABILITY BETWEEN 0 AND 1 - indicates the likelihood of the event's occurrence.
TYPES OF PROBABILITIES
(1) Objective Probabilities - calculated from either logic or actual experience. For example, the probability
that a coin will yield heads is 0.50 or 50% on any single toss.
(2) Subjective Probabilities - estimates of the likelihood of future events are based on judgment and past
experience.

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BASIC TERMS USED IN PROBABILITY ANALYSIS

Mutually Exclusive - if two events cannot occur simultaneously.
Joint Probability - both events will occur.
Conditional Probability - one event will occur given that the other event has already
occurred.
Independent Events - the occurrence of one event has no effect on the other event.
Dependent Events - the occurrence of one event has an effect on the other event.
Payoff - the value assigned to the different outcomes from a decision.
THE CONCEPT OF EXPECTED VALUE
It is an application of PROBABILITY DISTRIBUTION MODEL. It is a rational mean for selecting the best
alternative (i.e. the alternative with the highest expected value).
To compute expected value (the weighted average of all outcomes):
PAYOFF of the OUTCOME x PROBABILITY
A decision tree diagram is normally devised to show several possible decisions or acts and the possible
consequences of each act. DECISION TREE is a DIAGRAMMATIC REPRESENTATION of a MULTI-DECISION
PROBLEM.
EXPECTED VALUE OF PERFECT INFORMATION
Perfect Information - the knowledge that a future state of nature (event) will occur with certainty. In this
case, it is assumed that the probability distribution is an accurate representation of the relative frequency
of future demand and that the decision maker knows exactly when each possible event will occur.
Expected value at certainty xxx
Highest expected value xxx
Expected value of perfect information (EVPI) xxx
NETWORK MODELS (PROJECT MANAGEMENT)
Network models involve project scheduling techniques that are designed to aid the planning and control of
large-scale projects that have many interrelated activities. These models aid management in predicting and
controlling costs that pertain to certain projects or business activities.
COMMON PROJECT SCHEDULING TECHNIQUES
(1) GANTT OR BAR CHART
It shows the different activities or tasks in a project, as well as their estimated start and completion
times
ADVANTAGES DISADVANTAGES
 A gantt chart is simple to construct and  A gantt chart does not show the
use, requiring no special tools or interrelationships among the activities in
mathematics. It can be used on all types a project. Only simple relationships can
of projects. be shown on the chart.
 A gantt chart is a very useful control
tool. As the project progresses, actual
completion time can be compared with
the plan.
 A gantt chart can be used to monitor the
activities in a project. It shows which
activity should be in progress as of a
certain date and how close it is to
completion time.
(2) PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT)
It is a networking technique used for planning and controlling the activities in a project. It provides
management pertinent information about a project, such as:
 expected completion time of the project;
 when each activity in a project is scheduled to start and finish;
 which part of the project must be finished on time to avoid making the whole project late;
 how resources may be shifted from one part to another part of the project without affecting the
overall completion time of the project;
 the progress of each part of the project as of a certain date.
PERT-RELATED TERMINOLOGIES:
EVENT - represents a specified accomplishment at a particular instant in time. It represents the start
or finish of an activity
ACTIVITY - task to be accomplished. It represents the time and resources necessary to move from
one node or event to another
Types of Activities:
Series - an activity cannot be performed unless its predecessor activity is finished.
Parallel - activities that can be performed simultaneously.

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BENEFITS OF PERT LIMITATIONS OF PERT

 PERT is a very useful technique for  Reliable time and cost data may not be
planning and controlling activities in a readily available and obtaining them may
project or the entire project itself. be difficult. Persons involved may
 Some of the procedures included in PERT overstate budgeted costs and time
or in PERT/CPM are in harmony with the estimates to avoid unfavorable variances
accountant's budgetary tasks and in the and pressure from their superiors.
application of a responsibility accounting
system.
 The technique may be used to solve
managerial problems pertaining to project
scheduling, information systems design,
and transportation systems design.
 PERT helps to keep the project on
schedule and to provide feedback to
management about the progress of each
part of the project.
(3) CRITICAL PATH METHOD (CPM)
 CRITICAL PATH METHOD (CPM) is considered as a subset of PERT. CPM is a network technique
that uses deterministic time and cost estimates. Aside from cost estimates, CPM includes the
concept of crash efforts and crash costs.
 CRITICAL PATH is the LONGEST path through the network
PURPOSE OF KNOWING THE CRITICAL PATH
(a) A delay in the completion of activities in the critical path would cause a delay in the
completion of the entire project.
(b) Shortening the total completion time of the whole project can be accomplished only by
shortening the critical path.
 EXPECTIME TIME (te) is the average time an activity would require if it were repeated several
times.
Te = (to + 4 tm + tp) ÷ 6
Where: to – optimistic time; tm – most likely time; tp – pessimistic time
 SLACK TIME is the length of time by which a particular activity can slip (be delayed) without
having any delaying effect on the end event.
(a) Activities along the critical path have a slack of zero (0).
(b) All non-critical activities have positive slack.
 CRASH TIME is the time required to complete an activity assuming that all available resources
(overtime, extra manpower, etc.) are devoted to such activity.
LEARNING CURVE
LEARNING CURVES - a mathematical expression of the phenomenon that incremental unit
costs to produce (or incremental unit time used to produce) decrease
as managers and labor gain experience from practice.
FORMULA FOR LEARNING CURVE:
y=axb
Where:
y = cumulative average time per unit or per batch
a = time taken to produce initial unot pr batch
x = cumulative units or batches
b = learning index (log % ÷ log 2)
LINEAR PROGRAMMING
LINEAR PROGRAMMING is a quantitative technique used to find the optimal solution to short-term resource
allocation problems, such as:
(a) maximization of the revenue, contribution margin, or profit function; and
(b) minimization of a cost function, subject to constraints, (e.g. limited resources, production capacity
levels, etc.)
METHODS FOR SOLVING LINEAR PROGRAMMING PROBLEMS
(1) GRAPHICAL METHOD - limited to problems with only two variables.
(2) SIMPLEX METHOD - applicable even when there are more than two variables. It is based on matrix or
linear algebra and provides a systematic way of algebraically evaluating each corner point in the
feasible area.

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DISCUSSION EXERCISES
STRAIGHT PROBLEMS
EXPECTED VALUE, PAYOFF TABLE & VALUE OF PERFECT INFORMATION
1. The CEBU CLUB sells brewed coffee at CEBU CITY GYM PBA's season games. The frequency
distribution of the demand for cups of brewed coffee per game is presented below.
Unit sales volume Probability
10,000 .10
20,000 .15
30,000 .25
40,000 .35
50,000 .15
The brewed coffee is sold for P1.00 a cup and the cost per cup is P0.25. Any unsold brewed coffee is
discarded because it will spoil before the next home game.
REQUIREMENTS:
(A) What is the estimated demand for brewed coffee at the next CEBU CITY GYM PBA's season
game using an expected value approach?
(B) What is the estimated demand for brewed coffee at the next CEBU CITY GYM PBA's season
game using a deterministic approach based on the most likely outcome?
(C) What is the conditional profit (loss) per game of having 25,000 cups of brewed coffee available
but only selling 16,000 cups of coffee?
2. BOHOL CORP. makes corsages that it sells through salespeople on the streets. Each sells for P2 and
has variable production costs of P0.80. The salespeople receive a P0.50 commission on each corsage
they sell, and the company must spend P0.05 to get rid of each unsold corsage. The corsages last for
only one week and cannot be carried in inventory.
The manager of the firm had estimated demand per week and associated probabilities as follows:
Demand Probability
100,000 0.20
120,000 0.20
140,000 0.30
160,000 0.30
REQUIREMENTS:
(A) What is the optimal weekly production of the corsage?
(B) What is the value of perfect information?
PERT-CPM
3. The following are four series of activities with number of days to complete the different activities.
I. A-B-D-F: 25, 18, 25, 14 III. A-C-E-F: 25. 12, 18, 14
II. A-B-E-F: 25, 18, 18,14
REQUIREMENTS:
(A) Calculate the total time for each path, and identify the critical path.
(B) Which of the path(s) in the network can be delayed? What is(are) the activity(ies) that can be
delayed and how many hours?
(C) How many slack days are there in Path III?
(D) What is the maximum number of days that can be applied to crash the critical path?
4. In a PERT Network, the optimistic time for a particular activity is 3 weeks, the most likely time is 5
weeks and the pessimistic time is 7 weeks. REQUIREMENTS: (A) The expected time to complete the
activity is (B) The best estimate of the standard deviation for the activity is
LEARNING CURVES
5. Particular manufacturing job is subjected to an estimated 80% learning curve. The first unit required
100 labor hours to complete.
REQUIREMENTS:
(A) What is the cumulative average time per unit after 8 units are completed?
(B) What is the total time required to produce 2 units?; 4 units?
(C) How many hours are required to produce the second unit?
6. ILOCOS CORP. manufactures large grape presses. The firm generally experiences a learning effect on
new models, at least through the first 64 or so units. Data on a new press appear below:
Labor time for first unit 500 hour
Labor rate P500 per hour
Variable overhead P10 per labor hour
Materials P5,000 per press
The manager of the firm wants to know the expected total cost of making the first 16 units, assuming
a learning effect on labor of 90 percent.
REQUIREMENTS:
(A) Prepare schedules showing the cumulative average time for all doubling points up through 16
units for a 90 percent learning rate.
(B) Determine the total costs for the first 16 units using a learning curve of 90 percent.

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7. ISABELA COMPANY currently buys at component for one of its products at P220 per unit. ISABELA
needs 32,000 units of the component in the coming year. The product will be redesigned, so that the
component will not be needed beyond the coming year. The production manager believes that
ISABELA could make the component with the following costs for the first batch of 1,000 units.
Materials P130,000
Direct labor and variable overhead 150,000
Total variable cost P280,000
Making the component involves no incremental fixed costs because ISABELA could use existing
equipment. The production manager expects an 85% learning rate on direct labor and variable
overhead. Consider a batch to be 1,000 units.
REQUIREMENTS: (A) Determine whether ISABELA should make or buy the component. (B) Assuming
that the demand is a maximum of 16,000 units. Should ISABELA make or buy the component?
LINEAR PROGRAMMING
8. PANGASINAN CORP. produces two products, PRODUCT X and PRODUCT Y, which must be processed
in two departments, Packing and Finishing. Packing has 240 hours available per month, while
Finishing has 192 hours.
The number of hours required to process the products in the two departments and the contribution
margin per unit are as follows:
PRODUCT X PRODUCT Y
CM per unit P32 P24
Required hours per unit:
Packing 4 2
Finishing 2 4
REQUIREMENT: How many units of PRODUCT X and PRODUCT Y must be produced to maximize
contribution margin?
MULTIPLE CHOICE (THEORIES)
1. The expected value of perfect information is the
A. Same as the expected profit under certainty.
B. Difference between the expected profit under certainty and expected opportunity loss.
C. Sum of the conditional profit (loss) for the best event of each act times the probability of each
event occurring.
D. Difference between the expected profit under certainty and expected monetary value of the best
act under uncertainty.
2. In deciding which activities to crash, one must
A. crash all critical activities.
B. crash lowest-cost activities.
C. crash activities on the critical path(s) only.
D. all of the above.
3. Critical Path Method (CPM) is a technique for analyzing, planning, and scheduling large, complex
projects by determining the critical path from a single time estimate for each event in a project. The
critical path:
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.
C. has completion that reflects the earliest time to complete the project.
D. is the maximum amount of time an activity may be delayed without delaying the total project
beyond its target completion time.
4. A company is designing a new regional distribution warehouse. To minimize delays in loading and
unloading trucks, an adequate number of loading docks must be built. The most relevant technique
to assist in determining the proper number docks is
A. Cost-volume-profit analysis C. Linear programming
B. PERT/CPM analysis D. Queuing theory
5. Which tool would most likely be used to determine the best course of action under conditions of
uncertainty?
A. Cost-volume-profit analysis C. Expected value
B. PERT D. Scattergraph
6. A Gantt chart (M1)
A. Shows the critical path for a project.
B. Is used for determining an optimal product mix.
C. Shows only the activities along the critical path of a network.
D. Does not necessarily show the critical path through a network.
7. Linear programming is an operations research technique that allocates resources. Mathematical
expressions are used to describe the problem. The measure of effectiveness that is to be maximized
or minimized is the (E2**)
A. Constraints. C. Objective function.

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B. Set of decision variables. D. Derivative of the function.

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