Final Requirement in OR

S2-8

The Americo Oil Company is considering making a bid for a shale oil development contract to be
awarded by the federal government. The company has decided to bid $110 million. The company
estimates that it has a 60% chance of winning the contract with this bid. If the firm wins the contract, it
can choose one of the three methods for getting the oil from the shale. It can develop a new method for
oil extraction, use an existing (inefficient) process, or subcontract the processing to a number of smaller
companies once the shale has been excavated. The results from these alternatives are given as follows.

In millions
 The cost of preparing the contract/bid proposal is $2 million. If the company does not make a bid,
it will invest in an alternative venture with a guaranteed profit of $30 million. Construct a
sequential decision tree for this decision situation and determine whether the company should
make a bid.

Chapter 10

2. The manager of the Carpet City outlet needs to make an accurate forecast of the demand for Soft
Shag carpet (its biggest seller). If the manager does not order enough carpet from the carpet mill,
customers will buy their carpet from one of Carpet City’s many competitors. The manager has
collected the following demand data for the past 8 months:

Demand for Soft Shag

Month Carpet (1,000 yd.)
1 8
2 12
3 7
4 9
5 15
6 11
7 10
8 12

a. Compute a 3-month moving average forecast for months 4 through 9.

b. Compute a weighted 3-month moving average forecast for months 4 through 9. Assign
weights of 0.55, 0.33, and 0.12 to the months in sequence, starting with the most recent
month.
c. Compare the two forecasts by using MAD. Which forecast appears to be more accurate?
 WMA appears to be more accurate as MAD for it is low.

6. The manager of the Petroco Service Station wants to forecast the demand for unleaded gasoline next
month so that the proper number of gallons can be ordered from the distributor. The owner has
accumulated the following data on demand for unleaded gasoline from sales during the past 10
months:

Month Gasoline Demanded (gal.)

October 800
November 725
December 630
January 500
February 645
March 690
April 730
May 810
June 1,200
July 980

a. Compute an exponentially smoothed forecast, using an α value of 0.30.

b. Compute the MAPD.

10-29
Infoworks is a large computer discount store that sells computers and ancillary equipment and software
in the town where State University is located. Infoworks has collected historical data on computer sales
and printer sales for the past 10 years, as follows:

Year Personal Computers Sales Printers Sold

1 1,045 326
2 1,610 510
3 860 296
4 1,211 478
5 975 305
6 1,117 506
7 1,066 612
8 1,310 560
9 1,517 590
10 1,246 676

1. Develop a linear trend line forecast to forecast printer demand in year 11.
2. Develop a linear regression model relating printer sales to computer sales in order to forecast
printer demand in year 11 if 1,300 computers are sold.
3. Compare the forecasts developed in (a) and (b) and indicate which one appears to be more
 accurate.

10-31
Arrow Air is a regional East Coast airline that has collected data for the percentage available seats
occupied on its fliughts for four quarters-(1) January-March, (2) April-June, (3)July-September, and (4)
October-December-for the past 5 years Arrow Air also has collected data for the average percentage fare
discount for each of these quarters, as follows

a. Develop a seasonally adjusted forecast model for seat occupancy. Forecast seat occupancy for
year 6 by using a linear trend line forecast estimate for seat occupancy in year 6.

b. Develop linear regression models relating seat occupancy to discount fares in order to forecast
set occupancy for each quarter in year 6. Assume a fare discount of 20% for quarter 1, 36% for
quarter 2, 25% for quarter 2, and 30% for quarter 4.

c. Compare the forecasts developed in (a) and (b) and indicate which on e appears to be the best.

14-4

Sunshine House received a contract this year as a supplier of Girl Scout cookies. Sunshine currently has
five production lines, each of which will be dedicated to a particular kind of cookie. The production lines
differ by sophistication of machines, site, and experience of personnel. Given the following estimates of
processing times (in hours), assign cookies to lines so that the order can be completed as soon as
possible:
 Production Line

Cookies 1 2 3 4 5

Chocolate Mint 30 18 26 17 15

Peanut Butter 23 22 32 25 30

Shortbread 17 31 24 22 29

Fudge Delight 28 19 13 18 23

Macaroons 23 14 16 20 27

17-21