l PART 1 l Using Operations to Compete

Supplement
A
Decision Making
PROBLEMS
1. Williams Products
a. Break-even quantity
Q ( ) ( )
( )

Fixed costs Unit price Unit variale costs

units
!"#$ !1% !"
$
###
& ###
T'e (rap'ic approac' is s'o)n on t'e *ollo)in( illustration$ usin( Break-Even
Analysis +olver o* ,- .xplorer.
T)o lines must e dra)n/
Revenue/
Total cost/

+
1%
"# ### "
Q
Q $
. Pro*it0Revenue Total cost
( ) ( ) [ ] !11.## 1#$ ### !"#$ ### 2!"31#$ ###
!11#$ ### !14#$ ### !4#$ ###
pQ F cQ + +

c. Pro*it0Revenue Total cost
( ) ( ) ( ) !14.&# 1&$ ### !"#$ ### !" 1&$ ###
!1%5$ &## !1&#$ ### !65$ &##
pQ F cQ + + 1
]

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
1%
l PART 1 l Using Operations to Compete
T'ere*ore$ t'e strate(y o* usin( a price o* !14.&# )ill result in a (reater
contriution to pro*its.
d. Williams must also consider 'o) t'is product *its )it'in 'er existin( product line
*rom t'e perspective o* required tec'nolo(ies and distriution c'annels. ,t'er
marketin($ operations$ and *inancial criteria must also e considered.
4. 7ennin(s 8ompany
a. Break-even quantity
( ) ( )
( )
Fixed costs Unit price Unit variale costs
!%#$ ### !44 !1%
4#$ ### units
Q

T'e (rap'ic approac' is s'o)n on t'e *ollo)in( (rap' created y t'e Break-
Even Analysis +olver.
T)o lines are/
T)o lines are/
Revenue/
Total cost/

+
!44
!%#$
Q
Q ### 1%
. Alternative 1/ +ales increase y 6# percent$ to 44$5&# units.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
19
Decision Making l +UPP:.-.;T A l
Pro*it + ( )
( ) + ( )

pQ F cQ
!44 $ !%#$ !1% $
!11$
44 5&# ### 44 5&#
###
Alternative 4/ 8ost reduction to %& percent results in !1&.6# unit cost.
Pro*it + ( )
( ) + ( )

pQ F cQ
!44 $ !%#$ !1&. $
!65$
15 &## ### 6# 15 &##
4&#
T'ere*ore t'e cost reduction leads to 'i('er pro*its in t'is example.
c. <nitial unit pro*it is !44 !1% !1. ( ) ##
Alternative 1/ !44 !1% !1. ( ) ##
T'e percenta(e c'an(e in pro*it mar(in is =ero.
Alternative 4/
!44 !1&. !". ( ) 6# 5#
T'e percenta(e c'an(e is
!". !1 !1 . 5# "5 & ( )
percent increase.
6. <nteractive television service
F p c Q ( )
( )

!1& !1# $
!5&$
1& ###
###
1. Brook Trout
( )
( )
!1#$ "## %## !".5#
!19.9&
Q F p c
p F Q c

+
+

&. >ariel -anu*acturin(

a. Total cost Fixed cost ?ariale cost +
( )
( )
*irst process !6##$ ## !"##
second process !14#$ ### !9##
TC F cQ
TC Q
TC Q
+
+
+
At t'e reak-even quantity$
!6##$ !"## !14#$ !9##
!6## !1%#$
### ###
###
"##
+ +

Q Q
Q
Q units
Beyond "## units t'e *irst process ecomes more attractive.
. At Q %## units
( ) ( )
( ) ( )
*irst process !6##$ ### !"## %## !5%#$ ###
second process !14#$ ### !9## %## !%1#$ ###
T'e di**erence in total cost !%1#$ ### !5%#$ ### !"#$ ###
TC
TC
+
+

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
4#
l PART 1 l Using Operations to Compete
". ;e)s clippin( service
a.
Q
F F
c c
m a
a m

!1##$ !1$ $
!4. !".
$
### 6## ###
4& 4#
445 %1%
clippin(s
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
41
Decision Making l +UPP:.-.;T A l
. Pro*it Total Revenue Total 8ost
8urrent 2manual3 situation/
( ) + ( ) 44& ### ## ### 44& ### 4# $ !%. !1##$ $ !".
Pro*it !&$###
-oderni=ation/
( ) + ( ) 9## ### ## 6## ### 9## ### 4& $ !1. !1$ $ $ !4.
Pro*it !45&$###
t'e clippin( service s'ould e moderni=ed.
c.
!1$ 6##$ ###
514$%&5
!1.## !4.4&
F
Q
p c


clippin(s
5. @a'n -anu*acturin(
a. Total cost o* uyin( 5&# units *rom t'e supplier/
TC
b
( ) ( ) !1$ !1$ $ &## 5&# 14& ### unit units
Total cost o* makin( 5&# units in-'ouse/
TC
m
+ ( ) + ( ) !1$ !6## !1#$ !1$ $ 1## 5&# ### #9# ### unit unit units
T'ere*ore @a'n s'ould make t'e components in-'ouse$ savin( !6&$### per year.
. At t'e reak-even quantity$ t'e total cost o* t'e t)o alternatives )ill e equal/
!1$ !1#$ !1$
!1#$
&## ### 1##
1## ###
1##
Q Q
Q
Q
+

units
c. <* t'e decision is to Auy$B @a'n may (et a quantity discount *rom t'e supplier
2)e )ould e orderin( 5&# per year instead o* t'e current 1&# per year3. 7ust a
!&# per unit quantity discount )ould make t'e AuyB alternative more attractive
t'an t'e AmakeB alternative. Because t'e component is a key item$ @a'n s'ould
c'eck t'e reliaility o* t'e supplier and o* t'eir o)n processes. Reliaility may
ar(ue *or t'e AmakeB decision.
%. ( ) ( ) 8urrent Pro*it0 Price ?ariale cost Annual ?olume Annual Fixed 8osts
( ) ( ) ( ) !1#.## !&.## 6#$ ### !11#$ ###
!1#$ ###

a. Pro*it )it' ne) equipment ( ) ( ) ( ) !1#. !". $ !4##$ !# ## ## &# ### ###
Because t'e pro*it decreases$ Tec'no should not buy t'e ne) equipment.
. Pro*it )it' ne) equipment
( ) ( ) ( ) !11. !". $ !4##$ !4&$ ## ## 1& ### ### ###
Because t'e pro*it increases$ Tec'no should buy t'e ne) equipment i* t'ey also
raise t'e sellin( price.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
44
l PART 1 l Using Operations to Compete
9. T'is prolem is a t'inly dis(uised portrayal o* an actual situation *aced y Tri-+tate
>CT Association$ <nc. o* T'ornton$ 8olorado$ and )'ic' is common to many ot'er
R.A Utilities. @o)ever t'e costs$ prices$ and demands stated in t'e prolem are
*ictional.
a.
F
Q
p c

!%4$ &##$ ###

!4& !1#5.& per -W@
1$ ###$ ###
F
p c
Q
+ +
. Pro*it 2or loss3 Total Revenue D Total 8ost
( ) + ( )

( ) ( ) 1### ### 9&E & &## ### 1### ### 9&E
14& ### 4&# ###
$ $ !1#5. !%4$ $ $ $ !4&
!1#4$ $ !1#"$ $
:oss !1$ $ 14& ###
<n order to reak even$ t'e price )ould 'ave to e raised to
!1$14&$ ###
!1#5.& !111.%14
9&#$ ###
_
+

,
$ assumin( even more conservation )ould
not occur at t'is 'i('er price.
11#
14#
1##
%#
"#
1#
4#
#.4& #.&# #.5& 1.## 1.4&
?olume$ 2 $ in t'ousands o* -W@3 Q
Total Revenue
Total 8osts
Prolem 9
Prolem 11
Tri-8ounty >CT/
1#. .art'quake ... Build or Buy. T'is prolem is related to prolem 9.
Build/ F Qc
1 1
### ### 1&# ### 4&# ### + + ( ) !1#$ $ $ !6& !1&$ $ -W@
Buy/ F Qc
4 4
1&# ### 4&# ### + + ( ) !# $ !5& !11$ $ -W@
<t )ould e less costly *or Boulder to uy po)er *rom Tri-8ounty. ;ote t'at Boulder
enFoys a lo)er price 2!5&3 t'an Tri-8ounty c'ar(es its o)n R.A customers
2!1#5.&#3.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
46
Decision Making l +UPP:.-.;T A l
11. Tri-8ounty >CT continued. T'is prolem uilds on prolems 9 and 1# to s'o) t'at
Tri-8ountyGs R.A customers also ene*it *rom t'e ar(ain arran(ement )it' Boulder.
8ontriution *rom sales to Boulder
Remainin( *ixed costs to cover
( )
( )

Q p c
1&# ###
&## ###
&## ### &## ### ### ###
$ !5& !4&
!5$ $
!%4$ $ !5$ $ !5&$ $
Q
F
p c
p
F
Q
c

+ +
!5&$ $
$ $
!4& !1##
### ###
1### ###
per -W@
;ote t'at sellin( po)er to Boulder at a reduced price also reduces t'e price to t'e
R.A customers. @o)ever$ it may e di**icult to persuade R.As t'at sellin(
electricity to city slickers elo) AcostB also ene*its rural customers.
14. Forsite 8ompany
a. +ay t'at eac' criterion 2aritrarily3 receives 4# points/
Product Calculation Total Score
A 4# # " 4# # 5 4# # 1 4# 1# 4# # 4 . . . . . ( ) ( ) ( ) ( ) ( ) + + + + 0 &%
B 4# # % 4# # 6 4# # 5 4# # 1 4# 1# . . . . . ( ) ( ) ( ) ( ) ( ) + + + + 0 "1
8 4# # 6 4# # 9 4# # & 4# # " 4# # & . . . . . ( ) ( ) ( ) ( ) ( ) + + + + 0 &"
T'e est alternative is service B and t'e )orst is service 8. T'is relations'ip
'olds as lon( as any aritrary )ei('t is equally applied to all per*ormance criteria.
. :et
x
x
x x x x x
x
x

+ + + +

( )
point allocation to criteria 1$ 6$ 1$ and &
point allocation to criteria 4 R,<
points
points
points
4
4 1##
" 1##
1" 5 .
Product Calculation Total Score
A 1" 5 # " 666 # 5 1" 5 # 1 1" 5 1# 1" 5 # 4 . . . . . . . . . . ( ) ( ) ( ) ( ) ( ) + + + + 0 "#.#
B 1" 5 # % 666 # 6 1" 5 # 5 1" 5 # 1 1" 5 1# . . . . . . . . . . ( ) ( ) ( ) ( ) ( ) + + + + 0 &%.1
8
( ) ( ) ( ) ( ) ( ) 1".5 #.6 66.6 #.9 1".5 #.& 1".5 #." 1".5 #.& + + + +
0 "1.5
T'e rank order o* t'e services 'as c'an(ed to 8$ A$ B.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
41
l PART 1 l Using Operations to Compete
16. Five ne) products
a. :et
x
x
x
x x x x
x
x

+ + +

point allocation to criteria 4 and 6

point allocation to criterion 1
point allocation to criterion 1
points
points
points
1
1
1 1 1##
1# 1##
1#
Product Calculation Total Score
A 1# % 1# 6 1# 9 1# 5 ( ) ( ) ( ) ( ) + + + 0 54#
B 1# 5 1# % 1# & 1# " ( ) ( ) ( ) ( ) + + + 0 "&#
8 1# 6 1# 1 1# 5 1# 9 ( ) ( ) ( ) ( ) + + + 0 &9#
H 1# " 1# 5 1# " 1# 4 ( ) ( ) ( ) ( ) + + + 0 1&#
. 1# 9 1# 5 1# & 1# 5 ( ) ( ) ( ) ( ) + + + 0 5"#
. T'e t'res'old is # 5 1# 1# 1# 1# 1# 5## . + + + ( )
c. Because Product A and Product . score (reater t'an 5##$ t'ey s'ould e
considered *or introduction.
11. Accel-.xpress <nc.
a. T'e )ei('ted score *or :ocation A/
1# % 1# 5 1# 1 4# 5 4# 1 6# 5 "4# ( )( ) ( )( ) ( )( ) ( )( ) ( )( ) ( )( ) + + + + +
T'e )ei('ted score *or :ocation B/
1# & 1# 5 1# 5 4# 1 4# % 6# " "1# ( )( ) ( )( ) ( )( ) ( )( ) ( )( ) ( )( ) + + + + +
:ocation A must e c'osen.
. <* equal )ei('ts are placed on t'e criteria$ t'e t)o locations )ill e tied ecause
t'e sum o* t'e scores is 65 *or ot' A and B.
1&. Build-Rite 8onstruction
a. -aximin 8riterionIBest Hecision/ +ucontract ... Payo**/ !1##$###
. -aximax 8riterionIBest Hecision/ @ire ... Payo**/ !"4&$###
c. :aplace 8riterionIBest Hecision/ +ucontract ... Wei('ted Payo**/ !441$""5
Alternative Weighted Payoff
@ire + + !4&#$ $ !"4&$ !1&%$ ### 1## ### ### 6 666
+ucontract !1##$ $ !11&$ !441$ ### 1&# ### ### 6 ""5 + +

Ho not'in( !&#$ $ !6##$ !116$ ### %# ### ### 6 666 + +
d. -inimax Re(ret 8riterionI+ucontract ... -inimum -aximum Re(ret
!41#$###
Regrets ($000)
Deand for !oe "#roveents
Alternative $o% &oderate !igh &a'iu
@ire 1## 4&# 6&# ( )
1&# 1## &# "4& "4& # 6&#
+ucontract 1## 1## # 1&# 1&# # "4& 11& 41# 41#
@ire 1## &# &# 1&# %# 5# "4& 6## 64& 64&
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
4&
Decision Making l +UPP:.-.;T A l
1". Hecision Tree

2#."3
2#.13
!4#
!6#
!4&
2#.&3
2#.&3
!1&
!6#
2#.63
2#.13
2#.63
!4#
!1%
!41
(
Alternative 1
Alternative 4
!44.&#
!41.##

)
!44.&#
*
2#.43



!4#."#
!41
2#.&3
2#.63
!4"
!4#
!4&.##
Work *rom ri('t to le*t. @ere )e e(in )it' Hecision ;ode 4$ alt'ou(' Hecision
;ode 6 )ould e an equally (ood startin( point. T'e key concept is t'at )e cannot
e(in analysis o* Hecision ;ode 1 until )e kno) t'e expected payo**s *or Hecision
;odes 4 and 6.
Decision +ode )
1. <ts *irst alternative 2in t'e upper ri('t portion o* t'e tree3 leads to an event node
)it' an expected payo** o* !44.&# Jor #.&21&3 K #.&26#3L.
4. <ts second alternative leadin( do)n)ard reac'es an event node )it' an expected
payo** o* !4#."# Jor #.124#3 K #.621%3K #.62413L.
6. T'us t'e expected payo** *or decision node 4 is $)),-0$ ecause t'e *irst
alternative 'as t'e etter expected payo**. Prune t'e second alternative.
Decision +ode *
1. <ts second alternative leads to an event node 'as an expected payo** o* !41 Jor
#."24#3 K #.126#3L.
&. T'us t'e payo** *or decision node 6 is $)-$ ecause t'e *irst alternative 2!4&3 is
etter t'an t'e expected payo** *or t'e second alternative 2!413. Prune t'e second
alternative.
Decision +ode (
". T'e second alternative leads to an event node 'as an expected payo** o* !41 Jor
#.424&3 K #.&24"3K #.624#3L.
5. T'us t'e expected payo** *or decision node 1 is $).$ ecause t'e second
alternative 2!413 is etter t'an t'e expected payo** *or t'e second alternative
2!44.&#3. Prune t'e *irst alternative.
T'us t'e est initial c'oice 2Hecision 13 is to select t'e lo)er ranc'$ Alternative 4. <*
t'e top ranc' o* t'e susequent event occurs 2a 4#E proaility3$ t'en Hecision 6
must e made. +elect its *irst alternative.
8onclusion/ +elect t'e lo)er ranc'$ )it' an expected payo** o* $)..
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
4"
l PART 1 l Using Operations to Compete
15. ,ne mac'ine or t)o.
a. Hecision Tree
. Workin( *rom ri('t to le*t/
Decision +ode )
1. T'e est c'oice is to sucontact 2$(/000003$ )'ic' ecomes t'e expected
payo** *or Hecision ;ode 4. Prune t'e AHo not'in(B and Buy secondB
alternatives.
Decision +ode (
4. T'e alternative to uy one mac'ine 'as an expected value o* $(-)0000 Jor
#.%21"#$###3 K #.4214#$###L.
6. T'e alternative to uy t)o mac'ines 'as an expected value o* $(/)0000 Jor
#.%21%#$###3 K #.429#$###L.
1. T'us t'e est c'oice is to uy t)o mac'ines ecause it 'as a 'i('er expected
payo** 2!1"4$### versus !1&4$###3. Prune t'e one mac'ine alternative.
8onclusion/ Buy t)o mac'ines$ )it' an expected payo** o* $(/)0000.
1%. +mall$ medium$ or lar(e *acility.
a. Hecision Tree

Ho not'in(
.xpand lr(
*ac
Avera(e demand 2#.1#3
@i(' demand 2#.6&3
:o) demand 2#.4&3
!"#$###
!"#$###
!1%$###
*
!14&$###
Ho not'in(
.xpand lr(
*ac
!114$###
Avera(e demand 2#.1#3
@i(' demand 2#.6&3
:o) demand 2#.4&3
!44#$###
!14&$###
2!"#$###3
(

:ar(e
!5%$4&#
+mall
Avera(e demand 2#.1#3
@i(' demand 2#.6&3
:o) demand 2#.4&3
!1&#$###
!11#$###
2!4&$###3

)
!11&$###
!1#4$4&#
-edium

.xpand med
ac

!5&$###
Ho not'in(
.
!5&$###
.xpand med
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
45
Decision Making l +UPP:.-.;T A l
. Workin( *rom ri('t to le*t/
Decision +ode )
1. T'e est c'oice is to do not'in( 2$(-000003$ )'ic' ecomes t'e expected
payo** *or Hecision ;ode 4. Prune t'e A.xpand to lar(eB alternative.
Decision +ode *
4. T'e est c'oice is t'e A.xpand to lar(eB alternative 2$()-00003$ )'ic'
ecomes t'e expected payo** *or Hecision ;ode 6. Prune t'e A.xpand to
mediumB and AHo not'in(B alternatives.
Decision +ode .
6. T'e est c'oice is to do not'in( 2$1-00003$ )'ic' ecomes t'e expected
payo** *or Hecision ;ode 1. Prune t'e A.xpand to mediumB alternative.
Decision +ode (
1. T'e alternative to uild a lar(e *acility 'as an expected payo** o* $(()0000 Jor
#.6&244#$###3 K #.1#214&$###3 K #.4&2"#$###3L.
&. T'e alternative to uild a medium-si=ed *acility 'as an expected payo** o*
$(0)0)-0 Jor #.6&21&#$###3 K #.1#211#$###3 K #.4&24&$###L.
". T'e alternative to uild a small *acility 'as an expected payo** o* $120)-0 Jor
#.6&214&$###3 K #.1#25&$###3 K #.4&21%$###L.
5. T'us t'e est c'oice is to uild a lar(e *acility ecause it 'as a 'i('er
expected payo** 2$(()00003. Prune t'e medium and small alternatives.
8onclusion/ Build t'e lar(e *acility$ )it' an expected payo** o* $(()0000.
19. +mall or lar(e plant.
a. Hecision Tree 2payo**s are in millions o* dollars3
. Workin( *rom ri('t to le*t/
Decision +ode )
1. T'e est c'oice is t'e A.xpandB alternative 2$(.3$ )'ic' ecomes t'e
expected payo** *or Hecision ;ode 4. Prune t'e AHo not'in(B alternative.
Decision +ode (
4. T'e alternative to uild a small plant 'as an expected payo** o* $(),) illion
Jor #.5#2113 K #.6#2%3L.
6. T'e alternative to uild a lar(e plant 'as an expected payo** o* $(.,( illion
Jor #.5#21%3 K #.6#2&3L.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
4%
l PART 1 l Using Operations to Compete
1. T'us t'e est c'oice is to uild a lar(e plant ecause it 'as a 'i('er expected
payo** 2$(.,( illion). Prune t'e small plant alternative.
8onclusion/ Build t'e lar(e *acility$ )it' an expected payo** o* $(.,( illion.
4#. ,**s'ore 8'emicals
T'e decision tree )ould 'ave Fust one decision node )it' t)o ranc'es 2AuildB and
Ado not uildB3. T'e AuildB alternative is *ollo)ed y an event node/ AFacility
)orksB 2#.1#3 and AFacility *ailsB 2#."#3.
Decision +ode (
1. T'e AuildB alternative 'as an expected payo** o* $)00000000 Jor #.1
2!4#$###$###3 K #." 2D!1#$###$###3L
4. T'e Ado not uildB 'as a payo** o* $0.
6. T'us t'e est c'oice$ ased on t'e expected value criterion$ is to uild. Prune t'e
AHo not uildB alternative.
8onclusion/ Build t'e *acility$ )it' an expected payo** o* $) illion. ,* course$
political or environmental considerations mi('t also in*luence t'e *inal decision.
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.
49