ICA Ch5

BUS 361 ICA-Chapter 5
EFFICIENCY-UTILIZATION
Determine the utilization and the efficiency for each of these situations:
a. A loan processing operation that processes an average of 7 loans per day. The operation has a design capacity of 10
loans per day and an effective capacity of 8 loans per day.
b. A furnace repair team that services an average of four furnaces a day if the design capacity is six furnaces a day and
the effective capacity is five furnaces a day.
c. Would you say that systems that have higher efficiency ratios than other systems will always have higher utilization
ratios than those other systems? Explain.
PROCESSING REQUIREMENTS
A manager must decide which type of machine to buy, A, B, or C. Machine purchasing costs are as follows:
Product forecasts and processing times on the machines are as follows:
1
a. Assume that only purchasing costs are being considered. Which machine would have the lowest total cost, and how
many of that machine would be needed? Machines operate 10 hours a day, 250 days a year.
b. Consider this additional information: The machines differ in terms of hourly operating costs: The A machines have an
hourly operating cost of $10 each, B machines have an hourly operating cost of $11 each, and C machines have an
hourly operating cost of $12 each. Which alternative would be selected, and how many machines, in order to
minimize total cost while satisfying capacity processing requirements?
BREAK EVEN ANALYSIS 1

A firm's manager must decide whether to make or buy a certain item used in the production of vending machines. Making
the item would involve annual lease costs of $150,000. Cost and volume estimates are as follows:
1. Given these numbers, should the firm buy or make this item?
2
2. There is a possibility that volume could change in the future. At what volume would the manager be indifferent
between making and buying?

A small firm produces and sells automotive items in a five-state area. The firm expects to consolidate assembly of its
battery chargers line at a single location. Currently, operations are in three widely scattered locations. The leading
candidate for location will have a monthly fixed cost of $42,000 and variable costs of $3 per charger. Chargers sell for $7
each. Prepare a table that shows total profits, fixed costs, variable costs, and revenues for monthly volumes of 10,000,
12,000, and 15,000 units. What is the break-even point? Determine profit when volume equals 22,000 units.
3
A manager must decide how many machines of a certain type to purchase. Each machine can process 100 customers per
day. One machine will result in a fixed cost of $2,000 per day, while two machines will result in a fixed cost of $3,800
per day. Variable costs will be $20 per customer, and revenue will be $45 per customer.
a. Determine the break-even point for each range.
b. If estimated demand is 90 to 120 customers per day, how many machines should be purchased?
An entrepreneur decided to produce citrus products (orange juice, mandarin soda, etc.) in Northern Cyprus. After a
detailed analysis of other citrus producers, this entrepreneur concluded that for each 1 kg of citrus processed; 15
minutes of worker time is used. He has identified three potential locations for his production operations. He wants to
select the location which provides the lowest production costs. He has developed the following cost information
about his product and the three location alternatives:
Cost Item Guzelyurt Lefkosa Girne

Annual lease 200,000 TL 300,000 TL 300,000 TL
General overhead cost 50,000 TL 50,000 TL 100,000 TL
Labor cost per hour 12 TL 8.4 TL 4.8 TL
Material cost per kg 0.7 TL 0.7 TL 0.5 TL
(purchase cost of fruits)
Transportation cost per kg 0.3 TL 0.2 TL 0.3 TL
a. Determine the fixed and variable cost per kilo of citrus production for each location alternative.
Alternative Fixed Cost Variable Cost

Guzelyurt
Lefkosa
Girne
b. Construct the total cost curves for all three location alternatives on a graph.
c. Determine the range of sales over which each location would be preferred.
d. This entrepreneur believes that she can sell her products for 5 TL per kg. Determine the break-even point for
Guzelyurt.
4
DECISION ANALYSIS 1
A small building contractor has recently experienced two successive

years in which work opportunities exceeded the firm's capacity. The
contractor must now make a decision on capacity for next year.
Estimated profits under each of the two possible states of nature are
as shown in the table below. Which alternative should be selected if
the decision criterion is
a. Maximax?
b. Maximin?
c. Laplace?
d. Minimax regret?
DECISION ANALYSIS 2
Suppose after a certain amount of discussion, the contractor is able to subjectively assess the probabilities of low and high
demand: P(low) 0.3 and P(high) 0.7.
a. Determine the expected profit of each alternative. Which alternative is best from the expected payoff point of view?
Why?
5
b. Analyze the problem using a decision tree. Show the expected profit of each alternative on the tree.
c. Compute the expected value of perfect information. How could the contractor use this knowledge?
DECISION ANALYSIS 3
A year ago, a major potato producer suffered serious losses when a virus is affected the crop at the company’s farm.
Since then, steps have been take to eradicate the virus from the soil, and the specialist who directed these operations
estimates, on the basis of preliminary evidence, that there is 70% chance that eradication program has been successful.
The manager of the farm now has to decide on his policy for the coming season, and has identified two options.
1) He could go ahead and plant a full crop of potatoes. If the virus is still present, an estimated net loss of $20,000
will be incurred. However, if the virus is absent, an estimated net return of $90,000 will be earned.
2) He could avoid planting potatoes at all and turn the entire acreage over to the alternative crop. This would almost
certainly lead to net returns of $30,000.
a. Using a decision tree, determine the manager’s course of action.
6
b. The manager is now informed Ceres Laboratories could carry out a test on the farm that will indicate whether or
not the virus is still present in the soil. The manager has no idea as how accurate the test will be and the fee for
the test. However, he decides that he will initially assume that the test is perfectly accurate. If this is the case,
what is the maximum amount that the manager will be willing to pay for the test?

ICA Ch5

Uploaded by

Copyright:

Available Formats

ICA Ch5

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ICA Ch5

Uploaded by

Copyright:

Available Formats

BUS 361 ICA-Chapter 5

Product forecasts and processing times on the machines are as follows:

BREAK EVEN ANALYSIS 1

BREAK EVEN ANALYSIS 2

BREAK EVEN ANALYSIS 4

Cost Item Guzelyurt Lefkosa Girne

Alternative Fixed Cost Variable Cost

A small building contractor has recently experienced two successive

a. Using a decision tree, determine the manager’s course of action.

You might also like