MGT

3500
Review #1
(20 pts.)
1. Lakewood Fashions must decide how many lots of assorted ski wear to order
for its three stores. Information on pricing, sales, and inventory costs has led
to the following payoff (profit) table, in thousands.




Demand



low medium high

1
lot
10
15
15
Order size 2
lots
8
30
30

3
lots
5
25
50

4
lots
2
15
60

Determine the best alternative based on the criteria listed below.
a. Laplace (Equal probabilities). 3rd
Order size
!
!"
1 lots: ! ( 10 + 15 + 15) = !
!

!!

!"

2 lots: ! ( 8 + 30 + 30) = !
3 lots: ! ( 5 + 25 + 50) = ! !The MAX
!

!!

4 lots: ! 2 + 15 + 60 = !
b. Criterion of pessimism. (best of the worst)



Demand



low medium

1
lot
10
15
Order size 2
lots
8
30

3
lots
5
25

4
lots
2
15

c. Criterion of optimism. (best of the best)



Demand



low medium

1
lot
10
15
Order size 2
lots
8
30

3
lots
5
25

4
lots
2
15

d. Hurwicz criterion
Alternative 1 = 0.4 (15) + 0.6 (10) = 15
Alternative 2 = 0.4 (30) + 0.6 (8) = 16.8
Alternative 3 = 0.4 (50) + 0.6 (5) = 23
Alternative 4 = 0.4 (60) + 0.6 (2) = 25.2




1

high
15
30
50
60

high
15
30
50
60

MGT 3500
Review #1

e. The criterion of regret. (the best of the worst)



Demand

Regret



low
medium high
Low Mediu
m
Order 1 lot
10
15
15
0
15
size
2 lots
8
30
30
2
0
3 lots
5
25
50
5
5
4 lots
2
15
60
8
15

High
45
20
10
0

(20 pts.)
2. Ernies Fish Market sells fresh trout. Trout are bought in Denver at $2.00
(Cost) per fish (including transportation cost) and (sold) for $4.00 per fish.
Any trout left over at the end of the week is sold to a cat food plant for $1.00
(Over-stock)per fish. The estimated cost of customer ill will if demand is not
met is $1 per fish (understock). According to past experience, the weekly
demand for trout has been as follows:

Demand
Probability of

demand
20
0.1
Sold
$ 4
21
0.2
Cost
$ 2
22
0.3
Profit
$ 2
23
0.2
Understock
- $1 / Profit: -$1
24
0.2
Over-stock
-1 / Profit : -$3

a. Determine the optimum quantity to stock per week.
b. What is the expected value of perfect information?
Payoff
20
21
22
23
24
Table

20
40
39
38
37
36
37.8
21
39
42
41
40
39
40.4
22
38
41
44
43
42
42.2
23
37
40
43
46
45
42.8
24
36
39
42
45
48
42.6
0.1
0.2
0.3
0.2
0.2



Expected Profit with Perfect Information = 40(0.1) + 42(0.2) + 44(0.3) +
46(0.2) +48(0.2)
= 44.4
Expected Opportunity Loss with Perfect Information = 44.4 42.8 = 1.6


2

MGT 3500
Review #1


Regret
Table
20
21
22
23
24

20

21

22

23

24

0
1 (2)
2
3
4
0.1

3 (1)
0
1
2
3
0.2

6
3
0
1
2
0.3

9
6
3
0
1
0.2

12
9
6
3
0
0.2

(1) Supply :20 ; Demand : 21
(21 -20) X 3[Loss in sale $2 & Demand not $1]
= 3

(2) Supply: 21 ; Demand :20
(20 21) X 1 [Sale in cat food plate & loss profit from orgin. sale $1]
=1
Marginal Analysis

1
1
=
= = 0.25
+
3+1
4
Probablity Stock
1
0.1
20
0.2
21 0.9
0.3
22 0.7
0.2
23 0.4
0.2
24 0.2

6.6
4
2.2
1.6
1.8

MGT 3500
Review #1
(10 pts.)
3. Solve the following decision tree. Clearly state the decision strategy you
determine.

A
210X0.25 + 20X0.35 + 62.5X0.4
= 31.5 + 70 + 25 = 126.5

A

B










B
B

50X0.2 + 320X0.8

= 100 + 256 = 356

C
.25


D
.35


E
.40





F .2



G .8

300X0.55 + 100X0.45
= 165 + 45 = 210

20

J

10X0.25+80X0.75
= 2.5 + 60 = 62.5
M

N

-30X.5 + 120X0.5

= -15 +600 = 45
-
50

Q


500X0.4+200X0.6
= 200+120 = 320
Q

Choosing If choose the alternative B
occurs, there are d ecision of F and G
appeared. Choose Q as an alternative,
decision Q and R occurs. Choose Q as an
alternative, decision Y and Z will occur.

T
.45
100

S
.55 300

0 U
.25 10

V
.75
80

150X0.3+100X0.4+50X0.3
= 45+40+15 = 100

W
.5
-30

X .5
120



Y .4
500

Z .6
200
AA
.3

BB
.4

CC
.3

150
100
50

MGT 3500
Review #1






(30 pts.)
4. Consider the following linear programming problem

Maximize
8X1 + 7X2
s.t.
15X1 + 5X2 75


10X1 + 6X2 60


X1 + X2 8


X1, X2 0
a. Use a graph to show each constraint and the feasible region.
15X1 + 5X2 75
Let X1 = 0
Let X2 = 0
15(0) + 5X2 = 75
15X1+ 5(0) = 75
X2 = 15

X1 = 5
Point: (0, 15), (5, 0)

10X1 + 6X2 60
Let X1 = 0
Let X2 = 0
10(0) + 6X2 = 60
10X1 + 6(0) = 60
X2 = 10

X1 = 6
Point: (0, 10), (6, 0)

X1 + X2 8
Point: (0,8), (8, 0)

Be carful of the feasible area, it depends on max. or min.

Max. Insides the line
Min. outsides the line

MGT 3500
Review #1

b. Identify the optimal solution point on your graph. What are the values
of X1 and X2 at the optimal solution?

Point A:
Line: S.t. 3 = X1 + X2 8
Point A: (0, 8)
[From the graph]

Point B:
Line: S.t.2 : S.t. 3 = (10X1 + 6X2 60) : (X1 + X2 8)
10X1 + 6X2 = 60
-) 6 (X1 + X2 = 8)
4X1 + 0X2 = 12
X1 = 3
Plug X1 = 3 into either S.t. 2 or S.t. 3:
S.t. 3: (3) + X2 = 8
X2 = 5
Point B: (3, 5)

Point C:
Line: S.t. 1 : S.t. 3 = 15X1 + 5X2 75 : X1 + X2 8
15X1 + 5X2 = 75


-) 5(X1 + X2 = 8)
10 X1 + 0X2 = 35
X1 = 3.5
Plug X1 = 3 into either S.t. 1 or S.t. 3:
S.t. 3 : (3.5) + X2 = 8
X2 = 4.5
Point C: (3.5, 4.5)

Point D:
Line: S.t. 3 = X1 + X2 8
Point D: (8, 0)
[From the graph]
c. What is the optimal value of the objective function?
Plug the point found in (b) into Maximize 8X1 + 7X2:
Point A: (0, 8)
8(0) + 7(8) = 56
Point B: (3, 5)
8(3) + 7(5) = 59
Point C: (3.5, 4.5) 8(3.5)+7(4.5) = 59.5
! MAX = Optimize
Point D: (8, 0)
8(8) + 7(0) = 48

d. What is the slack or surplus value for each of the constraints at the
optimal solution? [Plug the optimal value into each constrains]
S1:
S1 +15(3.5) + 5(4.5) = 75
S1 + 75 = 75
6

MGT 3500
Review #1
S1 = 0

S2:
S2+10(3.5) + 6(4.5) = 60
S2+ 62 = 60
S2 = 2

S3:
S3 + 3.5 + 4.5 = 8
S3 = 0

(20 pts.)
5. We want to select an advertising strategy to reach two types of customers:
homemakers in families with over $50,000 annual income and homemakers
in families with under $50,000 income. We feel that people in the first group
will purchase twice as much of our product as people in the second group,
and our goal is to maximize purchases.

We may advertise either on TV or in a magazine; one unit of TV
advertising costs $20,000 and reaches approximately 2,000 people in the
first group and 8,000 people in the second group. One unit of advertising in
the magazine costs $12,000 and reaches 6,000 people in the first group and
3,000 people in the second group. We require that at least 6 units on TV
advertising be used and that no more than 12 units of magazine advertising
be used, for policy reasons. The advertising budget is $180,000.

Formulate this problem as a linear programming problem. Clearly
define your decision variables and identify what each constraint refers to.



Cost
Group 1
Group 2
Min. Require
TV
20,000
2,000
8,000
6
Magazine 12,000
6,000
3,000
12
Maximize
(2,000 X 2) + 8,000
(6,000 X 2) + 3,000
X2
Equation X1 = 12,000
= 15,000

Let X1 = number of unit sale from TV advertised;
X2 = number of unit sale from Magazine advertised
Maximize 12,000 X1 +15,000X2
Constraint 20,000 X1 +12,000 X2 180,000
X1 6
X212
X1, X2 0



7