QUANTITATIVE TECHNIQUES USED IN BUSINESS

(Problems and solutions)

Prepared by:

Marille J. Rodolfo
1. Contrabida, Inc. is considering a three-phase research project. The time estimates for completion of Phase 2
of the project are:

Pessimistic 24 weeks
Most likely 20 weeks
Optimistic 10 weeks

Using the program evaluation and review technique (PERT), the expected time for completion of Phase 12
should be

A. 20 weeks
B. 19 weeks
C. 18 weeks
D. 24 weeks

Answer: B

Solution:
Pessimistic + 4 Most likely + Optimistic
6
= [24 + (20x4) + 10]
6
= 19 weeks

2. Solid Company expects an 85% learning curve. The first batch of a new product required 500 hours. The
first four batches should take an average of

A. 361.25 hours
B. 425.0 hours
C. 500.0 hours
D. 322.4 hours

Answer: A

Units Cumulative Average time Computation

1 500.00
2 425.00 (0.85 x 500.00)
3 361.25 (0.85 x 425.00)

3. A learning curve of 80% assumes a production unit costs are reduced by 20% for each doubling of output.
What is the cost of the sixteenth unit produced as an approximate percent of the first unit produced?

A. 30%
B. 51%
C. 41%
D. 64%
Answer: C

Units Cumulative Average Time Computation

1 1.00
2 0.80 (0.8 x 1.00)
3 0.64 (0.8 x 0.80)
4 0.51 (0.8 x 0.64)
5 0.41 (0.8 x 0.51)

4. Hard Inc. has a target total labor cost of P3, 600 for the first four batches of a product. Labor is paid P10 an
hour. If Hard expects an 80% learning curve, how many hours should the first batch take?

A. 360 hours
B. 140.63 hours
C. 57.6 hours
D. 230.4 hours

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

5. Boholano Company has completed a bridge over the Visayan area. This is the first bridge the company ever
built and it required 100 weeks to complete. Now having hired a bridge construction crew with some
experience, the company would like to continue building bridges. Because of the investment in heavy
machinery needed continuously by this crew, the company believes it would have to bring the average
construction time to less than one year (52 weeks) per bridge to earn a sufficient return on investment. The
average construction time will follow an 80% learning curve. To bring the average construction time (over all
bridges constructed) below one year per bridge, the crew would have to build approximately

A. 2 additional bridges
B. 7 additional bridges
C. 3 additional bridges
D. 8 additional bridges

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.

Answer: B
No. of bridges Cumulative Average DHL Computation
1 100.00
2 80.00 (0.8 x 100.00)
4 64.00 (0.8 x 80.00)
8 51.20 (0.8 x 64.00)

6. Glory Point Manufacturing recently completed and sold an order of 50 units that had the following costs:

Direct materials P1, 500

Direct labor (1,000 [email protected]) 8,500
Variable overhead (1,000 hours@ P4.00) 4,000
Fixed overhead 1,400

*Applied on the basis of direct labor hours

*Applied at the rate of 10% of variable cost

The company has now been requested to prepare a bid for 150 units of the same product. If an 80% learning
curve is applicable, Glory Point’s total cost on this order would be estimated at

A. P26,400
B. 37,950
C. 31,790
D. 38,500

Answer: A

Cumulative Average DHL

50 units 20.0
100 units 16.0 (20 x 0.80)
200 units 12.80 (16 x0.80)

Total hours 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 (1500 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 Overhead (10% x 24,000) 2,400
Total cost P 26,400
7. Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs
P2 and sells for P3 through regular stores. Any boxes not sold through regular stores are sold through Dough’s
thrift store for P1. Dough assigns the following probabilities to selling additional boxes:

Additional sales Probability

60 0.60
100 0.40

What is the expected value of Dough’s decision to buy 100 additional boxes of muffins?

A. P28
B. P40
C. P52
D. P68

Answer: C

Sales Conditional Profit (Loss)

60 (60 x P3) + (40 x P1) – P200 = P 20
100 (100 x P3) – P200 = 100

Expected value: ( P20 x 0.6) + ( P100 x 0.40) = P52

8. Liquid Company has three sales departments. Department A processes about 50% of sales, Department B about 30%
and Department C about 20%. In the past, departments A, B, and C had error rates of about 2 %, 5%, and 2.5%,
respectively. A random audit of the sales records yields a recording error of sufficient magnitude to distort the
company’s results. The probability that Department A is responsible for this error is

A.0.50
B.0.33
C.0.20
D.0.25

Answer: B

Department Error Weight Probability

A 0.02 0.010 .01/.03 = 33%
B 0.05 0.015 .015/.03 = 50%
C 0.025 0.05 0.005/.03 = 16.67%

9. A beverage stand can sell either softdrinks or coffee on any given day. If the stand sells softdrinks and the weather is
hot, it will make P2, 500; if the weather is cold, the profit will be P1, 000. if the stand sells coffee and the weather is hot,
it will make P 1,900; if the weather is cold, the profit will be P2, 000. The probability of cold weather on a given day at
this time is 60%. The expected payoff if the vendor has perfect information is

A. P3,900
B. P1, 360
C. P2, 200
D. P1, 960
Answer: C

Expected payoff 1, 200

Sale of coffee during cold weather (2,000 x 0.6) 1, 000
Sale of softdrinks during hot weather (2,500 x 0.4) 2, 200

10. Green Company is considering the sale of banners in an exhibit fair. Green Company could purchase these banners
for P7.50 each. Unsold banners would be unreturnable and worthless after the exhibit. Green would have to rent a
booth at the stadium for P4, 000. green estimates sales P2, 000 banners at P20.00 each. If green’s prediction proves to
be incorrect and only 1, 500 banners were sold, the cost of this prediction error would be:

A. P 6,250
B. P10, 000
C. P4,750
D. P 3,750

Answer: D

The cost of prediction error = unsold units x purchase price

= 500 x 7.50
= 3,750

11. A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now will yield 100,000
bottles of wine netting P2 per bottle. If the wine maker waits and the weather turns cold (probability 0.2), the yield will
be cut in half but net of P3 per bottle. If the weather does not turn cold, the yield will depend on rain. With rain
(probability 0.5), a full yield netting P4 per bottle will result. Without rain (probability 0.5), there will still be a full
100,000 bottle yield, but the net will be only P3 per bottle.

The optimal expected value is

A. P200, 000
B. P310, 000
C. P350, 000
D. P400, 000

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
For questions 12 to 13 refer to the following situation:

Mariposa Company 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 aP0.50 commission on each corsage they sell, and they company
must spend P0.05 to get rid of each unsold corsage. The corsages last only for 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

12. The optimal weekly production of the corsage is

A. 120,000
B. 140,000
C. 134,000
D. 145,000

Answer: B

Probability Demand Purchases

100,000 120,000 140,000 160,000
20% 100,000 70,000 53,000 36,000 19,000
20% 120,000 70,000 84,000 67,000 50,000
30% 140,000 70,000 84,000 98,000 81,000
30% 160,000 70,000 84,000 98,000 112,000
Expected value 70,000 77,800 79,400 71,700

Optimal production is 140,000 because it gives the highest payoff which is 79,400.

13. The value of perfect information is

A. P14, 400
B. P16, 000
C. 23,800
D. 22,100

Answer: A

Perfect information:
(70,000 x 0.20) + (84,000 x 0.20) + (98,000 x 0.30) + (112,000 x 0.30) = 93,800
Value of Perfect Information – 93,800 – 79,400 = P14, 400
Questions no. 14 through 17 is based on the following information:

Jobee, Inc. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for introduction. However, plant
capacity is limited, and only one product can be introduced at present. Therefore, Jobee has conducted a market study,
at a cost of P26, 000, to determine which product will be more profitable. The results of the study show the following
sales patterns:

Sales of desserts @ P1.80/unit Sales of Rolls @ P1.20/unit

Volume Profitability Volume Profitability
250,000 0.30 200,000 0.20
300,000 0.40 250,000 0.50
350,000 0.20 300,000 0.20
400,000 0.10 350,000 0.10

The costs associated with the two products have been estimated by Jobee’s cost accounting department and are shown
below:

Desserts Rolls
Ingredients per unit P 0.40 P 0.25
Direct labor per unit 0.35 0.30
Variable overhead per unit 0.40 0.20
Production tooling* 48,000.00 25,000.00
Advertising 30,000.00 20,000.00

*Jobee treats production tooling as a current operating expense rather than capitalizing it as a fixed asset.

14. According to Jobee’s market study, the expected value of the sales volume of the breakfast rolls is

A. 125,000 units
B. 275,000 units
C. 260,000 units
D. 250,000 units

Answer: C

EV = (200 x 0.2) + (250 x 0.5) + (300 x 0.2) + (350 x 0.1) 260,000 units

15. Applying a deterministic approach, Jobee’s revenue from sales of frozen desserts would be

A. P549, 000
B. P195, 000
C. P540, 000
D.P216, 000

Answer: C

300,000 x P1.80 P540, 000

The sales level of 300,000 has the highest probability (40%) and the level that is most likely to happen.
16. The expected value of Jobee’s operating profit directly traceable to the sale of frozen desserts is

A. P198, 250
B. P150, 250
C. P471, 000
D. P120, 250

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, 900
Less: expected variable costs (305,000 x P1.15) 350,750
Contribution margin 198,250
Less: Fixed costs (48,000 +30,000) 78,000
Expected profit P120,250

17. In order to recover the costs of production tooling and advertising for the breakfast rolls, Jobee’s sales of the
breakfast rolls would have to be

A. 37,500 units
B. 60,000 units
C. 100,000 units
D. 54,000 units

Answer: C

Breakeven units (45,000/0.45) 100,000

For questions 18 through 20 refer to the following situation below:

KKK Company uses a small casting in one of its finished products. The castings are purchased from a foundry located in
another Asian country. In total, KKK Company purchases 54,000 castings per year at a cost of P8 per casting.
The castings are used evenly throughout the year in the production process on a 360-day-per-year basis. The company
estimates that it costs P90 to place a single purchase order and about P3 to carry one casting in inventory for a year. The
high carrying costs results from the need to keep the castings in carefully controlled temperature and humidity
conditions, and from the high cost of insurance.
Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The delivery time and the
percentage of their occurrence are shown in the following tabulation:

Delivery Time (days) Percentage of Occurrence

6 75
7 10
8 5
9 5
 10 5
100

18. What is the economic order quantity for the company?

A. 1,800
B. 1,273
C. 2,545
D. 2,700

Answer: A

EOQ = 2 x AD x OC where; AD = annual demand/ units required

CC/u OC = ordering cost
CC/u = carrying cost per unit

EOQ = 2 x 54,000 x 90,000

3

EOQ = 1,800

19. Assuming that the company will not provide any safety stock units, how much would the annual inventory costs?

A. P2, 700
B. P8, 100
C. P5, 400
D. P6, 000

Answer: C

Annual ordering cost: 54,000/1,800 x 90 2,700

Annual carrying cost: 1,800/2 x 3 2,700
Total cost 5,400

20. Assuming that the company is willing to assure only a 5% risk of being out of stock, what would be the reorder
point?

A. 450
B. 1,050
C. 1,200
D. 1,350

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 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