21534sm Finalnew Vol2 Cp15

15 Simulation
Basic Concepts
Monte Carlo The Monte Carlo method employs random numbers and is
Simulation used to solve problems that depend upon probability, where
physical experimentation is impracticable and the creation of
a mathematical formula impossible. In other words, it is
method of Simulation by the sampling technique.
First of all, the probability distribution of the variable under
consideration is determined; then a set of random numbers is
used to generate a set of values that have the same
distributional characteristics as the actual experience it is
devised to simulate.
Simulation Simulation is a quantitative procedure which describes a
process by developing a model of that process and then
conducting a series of organised trial and error experiments
to predict the behaviour of the process over time.
Steps in the Steps in Simulation Process-
Simulation (i) Define the problem or system you intend to simulate.
Process (ii) Formulate the model you intend to use.
(iii) Test the model; compare its behaviour with the
behaviour of the actual problem
environment.
(iv) Identify and collect the data needed to test the model.
(v) Run the simulation.
(vi) Analyze the results of the simulation and, if desired,
change the solution you are evaluating.
(vii) Rerun the simulation to test the new solution.
(viii) Validate the simulation, that is, increase the chances
that any inferences you draw about the real situation
from running the simulation will be valid.
Steps in Monte The steps involved in carrying out Monte Carlo Simulation
Carlo Simulation are:
© The Institute of Chartered Accountants of India

Simulation 15.2
(i) Select the measure of effectiveness of the problem.

(ii) Identify the variables which influence the measure of
effectiveness significantly.
(iii) Determine the proper cumulative probability
distribution of each variable selected under step (ii).
Plot these, with the probability on the vertical axis and
the values of variables on horizontal axis.
(iv) Get a set of random numbers.
(v) Consider each random number as a decimal value of the
cumulative probability distribution. With the decimal,
enter the cumulative distribution plot from the vertical
axis. Project this point horizontally, until it intersects
cumulative probability distribution curve. Then project
the point of intersection down into the vertical axis.
(vi) Record the value (or values if several variables are being
simulated) generated in step (v) into the formula
derived from the chosen measure of effectiveness.
Solve and record the value. This value is the measure of
effectiveness for that simulated value.
(vii) Repeat steps (v) and (vi) until sample is large enough
for the satisfaction of the decision maker.

15.3 Advanced Management Accounting
Simulation Technique
Question-1
(i) What is simulation?
(ii) What are the steps in simulation?
 Answer
(i) Simulation is a quantitative procedure which describes a process by developing a

model of that process and then conducting a series of organized trial and error
experiments to product the behaviour of the process over time.
(ii) Steps in the simulation process:
 Define the problem and system you intend to simulate.
 Formulate the model you intend to use.
 Test the model, compare with behaviour of the actual problem environment.
 Identify and collect data to test the model.
 Run the simulation.
 Analyse the results of the simulation and, if desired, change the solution you are
evaluating.
 Rerun the simulation to tests the new solution.
 Validate the simulation i.e., increase the chances of valid inferences.
Question-2
How would you use the Monte Carlo Simulation method in inventory control?
 Answer
Steps involved in carrying out Monte Carlo simulation are:

(i) Define the problem and select the measure of effectiveness of the problem that might
be inventory shortages per period.
(ii) Identify the variables which influence the measure of effectiveness significantly for
example, number of units in inventory.

Simulation 15.4
(iii) Determine the proper cumulative probability distribution of each variable selected with
the probability on vertical axis and the values of variables on horizontal axis.
(iv) Get a set of random numbers.
(v) Consider each random number as a decimal value of the cumulative probability
distribution with the decimal enter the cumulative distribution plot from the vertical axis.
Project this point horizontally, until it intersects cumulative probability distribution curve.
Then project the point of intersection down into the vertical axis.
(vi) Then record the value generated into the formula derived from the chosen measure of
effectiveness. Solve and record the value. This value is the measure of effectiveness
for that simulated value. Repeat above steps until sample is large enough for the
satisfaction of the decision maker.
Question-3
State major reasons for using simulation technique to solve a problem and also describe basic
steps in a general simulation process.
 Answer
Reasons
(i) It is not possible to develop a mathematical model and solutions with out some basic
assumptions.
(ii) It may be too costly to actually observe a system.
(iii) Sufficient time may not be available to allow the system to operate for a very long time.
(iv) Actual operation and observation of a real system may be too disruptive.
Steps
(i) Define the problem or system which we want to simulate.
(ii) Formulate an appropriate model of the given problem.
(iii) Ensure that model represents the real situation/ test the model, compare its behaviour
with the behaviour of actual problem environment.
(iv) Identify and collect the data needed to list the model.
(v) Run the simulation
(vi) Analysis the results of the simulation and if desired, change the solution.
(vii) Return and validate the simulation.

Question-4
Write a short note on the advantages of simulation.
 Answer
Advantages of simulation are enumerated below:

(i) Simulation techniques allow experimentation with a model of the system rather than the
actual operating system. Sometimes experimenting with the actual system itself could
prove to be too costly and, in many cases too disruptive. For example, if you are
comparing two ways of providing food service in a hospital, the confusion that would
result from operating two different systems long enough to get valid observations might
be too great. Similarly, the operation of a large computer centre under a number of
different operating alternatives might be too expensive to be feasible.
(ii) The non-technical manager can comprehend simulation more easily than a complex
mathematical model. Simulation does not require simplifications and assumptions to
the extent required in analytical solutions. A simulation model is easier to explain to
management personnel since it is a description of the behaviour of some system or
process.
(iii) Sometimes there is not sufficient time to allow the actual system to operate extensively.
For example, if we were studying long-term trends in world population, we simply could
not wait the required number of years to see results. Simulation allows the manager to
incorporate time into an analysis. In a computer simulation of business operation the
manager can compress the result of several years or periods into a few minutes of
running time.
(iv) Simulation allows a user to analyze these large complex problems for which analytical
results are not available. For example, in an inventory problem if the distribution for
demand and lead time for an item follow a standard distribution, such as the poison
distribution, then a mathematical or analytical solution can be found. However, when
mathematically convenient distributions are not applicable to the problem, an analytical
analysis of the problem may be impossible. A simulation model is a useful solution
procedure for such problems.

Simulation 15.6
Car Manufacturer’s Problem

Problem-1
A Car Manufacturing Company manufactures 40 cars per day. The sale of cars depends upon
demand which has the following distribution:
Sales of Cars Probability
37 0.10
38 0.15
39 0.20
40 0.35
41 0.15
42 0.05
The production cost and sale price of each car are ` 4 lakh and ` 5 lakh respectively. Any
unsold car is to be disposed off at a loss of ` 2 lakh per car. There is a penalty of ` 1 lakh per
car, if the demand is not met.
Required
(i) Using the following random numbers, estimate total profit/ loss for the company for the
next ten days:
9, 98, 64, 98, 94, 01, 78, 10, 15, 19
(ii) If the company decides to produce 39 cars per day, what will be its impact on
profitability?
 Solution
First of all random numbers 00-99 are allocated in proportion to the probabilities associated
with the sales of cars as given below:
Sales of Car Probability Cumulative Range for Random
Probability Numbers
37 0.10 0.10 00 − 09
38 0.15 0.25 10 − 24

39 0.20 0.45 25 − 44
40 0.35 0.80 45 − 79
41 0.15 0.95 80 − 94
42 0.05 1.00 95 − 99
Based on the given random numbers, we simulate the estimated sales and calculate the profit
/ loss on the basis of specified units of production.
Day Random Estimated Profit (Production 40 Cars Profit (Production 39 Cars /
Numbers Sale / Day) (`Lakh) Day) (`Lakhs)
1 9 37 `31 `33
(37Cars × `1 − 3Cars × `2) (37Cars × `1 − 2Cars × `2)
2 98 42 `38 `36
(40Cars × `1 − 2Cars × `1) (39Cars × `1 − 3Cars × `1)
3 64 40 `40 `38
(40Cars × `1) (39Cars × `1 − 1Car × `1)
4 98 42 `38 `36
(40Cars × `1 − 2Cars × `1) (39Cars × `1 − 3Car × `1)
5 94 41 `39 `37
(40Cars × `1 − 1Car × `1) (39Cars × `1 − 2Car × `1)
6 01 37 `31 `33
7 78 40 `40 `38
(40Cars × `1) (39Cars × `1 − 1Car × `1)
8 10 38 `34 `36
9 15 38 `34 `36
10 19 38 `34 `36
Total `359 `359
There is no additional profit or loss if the company decides to reduce production to 39 cars per
day.

Simulation 15.8
Publisher’s Problem
Problem-2
A Publishing house has bought out a new monthly magazine, which sells at ` 37.5 per copy.
The cost of producing it is ` 30 per copy. A Newsstand estimates the sales pattern of the
magazine as follows:
Demand Copies Probability
0  300 0.18
300  600 0.32
600  900 0.25
900  1,200 0.15
1,200  1,500 0.06
1,500  1,800 0.04
The newsstand has contracted for 750 copies of the magazine per month from the publisher.
The unsold copies are returnable to the publisher who will take them back at cost less ` 4 per
copy for handling charges.
The newsstand manager wants to simulate of the demand and profitability. The following
random number may be used for simulation:
27, 15, 56, 17, 98, 71, 51, 32, 62, 83, 96, 69.
Required
(i) Allocate random numbers to the demand pattern forecast by the newsstand.
(ii) Simulate twelve months sales and calculate the monthly and annual profit/loss.
(iii) Calculate the loss on lost sales.
 Solution
(i) Allocation of Random Numbers
Demand Probability Cumulative Probability Allocated RN
0 < 300 0.18 0.18 00 − 17
300 < 600 0.32 0.50 18 − 49
600 < 900 0.25 0.75 50 − 74
900 < 1,200 0.15 0.90 75 − 89

1,200 < 1,500 0.06 0.96 90 − 95

1,500 < 1,800 0.04 1.00 96 − 99
(ii) Simulation: Twelve Month’s Sales, Monthly and Annual Profit / Loss
Month RN Demand Sold Return Profit on Sales Loss on Net Lost
Return Profit Units
(`) (`) (`)
1 27 450 450 300 3,375 1,200 2,175 ---
(450Copies×`7.5) (300Copies×`4)
2 15 150 150 600 1,125 2,400 (1,275) ---
(150Copies×`7.5) (600Copies×`4)
3 56 750 750 --- 5,625 --- 5,625 ---
(750Copies×`7.5)
4 17 150 150 600 1,125 2,400 (1,275) ---
(150Copies×`7.5) (600Copies×`4)
5 98 1,650 750 --- 5,625 --- 5,625 900
(750Copies×`7.5)
6 71 750 750 --- 5,625 --- 5,625 ---
(750Copies×`7.5)
7 51 750 750 --- 5,625 --- 5,625 ---
(750Copies×`7.5)
8 32 450 450 300 3,375 1,200 2,175 ---
(450Copies×`7.5) (300Copies×`4)
9 62 750 750 --- 5,625 --- 5,625 ---
(750Copies×`7.5)
10 83 1,050 750 --- 5,625 --- 5,625 300
(750Copies×`7.5)
11 96 1,650 750 --- 5,625 --- 5,625 900
(750Copies×`7.5)
12 69 750 750 --- 5,625 --- 5,625 ---
(750Copies×`7.5)
Total 54,000 7,200 46,800 2,100
(iii) Loss on Lost Sale `15,750 (2,100 units × ` 7.5).

Simulation 15.10
Travelling Agency/ Reservation Centre’s Problem

Problem-3
A car rental agency has collected the following data on the demand for five-seater vehicles
over the past 50 days.
Daily Demand 4 5 6 7 8
No. of Days 4 10 16 14 6
The agency has only 6 cars at present.
Use the following 5 random numbers to generate 5 days of demand for the rental agency
Random Nos: 15, 48, 71, 56, 90
Required
(i) What is the average number of cars rented per day for the 5 days?
(ii) How many rentals will be lost over the 5 days?
 Solution
Daily Demand Days Probability Cumulative Probability Random No.
Assigned
4 4 0.08 0.08 00 − 07
5 10 0.20 0.28 08 − 27
6 16 0.32 0.60 28 − 59
7 14 0.28 0.88 60 − 87
8 6 0.12 1.00 88 − 99
Day Random No. Demand No. of Cars on Rent Rent Lost

1 15 5 5 ---
2 48 6 6 ---
3 71 7 6 1
4 56 6 6 ---
5 90 8 6 2
Total 29 3
 29Cars 
Average no. of Cars Rented are 5.8  
 5 
Rental Lost equals to 3 Cars

Problem-4
A refreshment centre in a railway station has two counters - (i) self-service (opted by 60 % of
the customers) and (ii) attended service (opted by 40 % of the customers). Both counters can
serve one person at a time. The arrival rate of customers is given by the following probability
distribution:
No. of Arrivals 1 3 4 0 2
Probability 0.10 0.30 0.05 0.20 0.35
Required
Formulate the associated interval of 2 digit random numbers for generating
(i) the type of service and
(ii) the arrival rate
 Solution
Type of Service Probability Cumulative Probability Random No. Interval

Self- Service 0.60 0.60 00 − 59
Attended Service 0.40 1.00 60 − 99
Arrival Rate
No. of Arrivals Probability Cumulative Probability Random Number Interval

0 0.20 0.20 00 − 19
1 0.10 0.30 20 − 29
2 0.35 0.65 30 − 64
3 0.30 0.95 65 − 94
4 0.05 1.00 95 − 99
Problem-5
A single counter ticket booking centre employs one booking clerk. A passenger on arrival
immediately goes to the booking counter for being served if the counter is free. If, on the other
hand, the counter is engaged, the passenger will have to wait. The passengers are served on
first come first served basis. The time of arrival and the time of service varies from one minute
to six minutes. The distribution of arrival and service time is as under:

Simulation 15.12
Arrival / Service Arrival Service

Time (Minutes) (Probability) (Probability)
1 0.05 0.10
2 0.20 0.20
3 0.35 0.40
4 0.25 0.20
5 0.10 0.10
6 0.05 ---
Required
(i) Simulate the arrival and service of 10 passengers starting from 9 A.M. by using the
following random numbers in pairs respectively for arrival and service.
Random numbers-
(60, 09); (16, 12); (08, 18); (36, 65); (38, 25); (07, 11); (08, 79); (59, 61); (53, 77); (03,
10).
(ii) Determine the total duration of
(1) Idle time of booking clerk and
(2) Waiting time of passengers.
 Solution
Random Allocation Table

Random No.
Random No.
(Probability)
(Probability)
(Probability)
Cumulative
Cumulative
Probability
Allocated
Allocated
Arrivals
Service
Service
Time *
Time *
Arrival
1 0.05 0.05 00 − 04 1 0.10 0.10 00 − 09

2 0.20 0.25 05 − 24 2 0.20 0.30 10 − 29
3 0.35 0.60 25 − 59 3 0.40 0.70 30 − 69
4 0.25 0.85 60 − 84 4 0.20 0.90 70 − 89
5 0.10 0.95 85 − 94 5 0.10 1.00 90 − 99
6 0.05 1.00 95 − 99
(*) in minutes

Simulation of Trails
R. No. Arrival* Time Start R. No. Time* Finish Time Waiting Time
Clerk Passenger
60 4 9.04 9.04 09 1 9.05 4 ---
16 2 9.06 9.06 12 2 9.08 1 ---
08 2 9.08 9.08 18 2 9.10 --- ---
36 3 9.11 9.11 65 3 9.14 1 ---
38 3 9.14 9.14 25 2 9.16 --- ---
07 2 9.16 9.16 11 2 9.18 --- ---
08 2 9.18 9.18 79 4 9.22 --- ---
59 3 9.21 9.22 61 3 9.25 --- 1
53 3 9.24 9.25 77 4 9.29 --- 1
03 1 9.25 9.29 10 2 9.31 --- 4
Total 6 6
(*) in minutes
In the above ten trial, the clerk was idle for 6 minutes and the passengers had to wait for 6
minutes.
Problem-6
An international tourist company deals with numerous personal callers each day and prides
itself on its level of service. The time to deal with each caller depends on the client's
requirements which range from, say, a request for a brochure to booking a round-the-world
cruise. If a client has to wait for more than 10 minutes for attention, it is company's policy for
the manager to see him personally and to give him a holiday voucher worth ` 15.
The company's observations have shown that the time taken to deal with clients and the
arrival pattern of their calls follow the following distribution pattern:
Time to deal Minutes 2 4 6 10 14 20 30

with clients Probability 0.05 0.10 0.15 0.30 0.25 0.10 0.05
Time between Minutes 1 8 15 25

call arrivals Probability 0.2 0.4 0.3 0.1

Simulation 15.14
Required
(i) Describe how you would simulate the operation of the travel agency based on the use
of random number tables;
(ii) Simulate the arrival and serving of 12 clients and show the number of clients who
receive a voucher (use line 1 of the random numbers below to derive the arrival pattern
and line 2 for serving times); and
(iii) Calculate the weekly cost of vouchers; assuming the proportion of clients receiving
vouchers derived from (ii) applies throughout a week of 75 operating hours.
Random Numbers
Line 1 03 47 43 73 86 36 96 47 36 61 46 98
Line 2 63 71 62 33 26 16 80 45 60 11 14 10
 Solution
Time to Deal with Clients

Time (Minutes) Probability Cumulative Probability Assigned Numbers
2 0.05 0.05 00 − 04
4 0.10 0.15 05 − 14
6 0.15 0.30 15 − 29
10 0.30 0.60 30 − 59
14 0.25 0.85 60 − 84
20 0.10 0.95 85 − 94
30 0.05 1.00 95 − 99
Time between Arrivals

Time (Minutes) Probability Cumulative Probability Assigned Numbers
1 0.20 0.20 00 − 19
8 0.40 0.60 20 − 59
15 0.30 0.90 60 − 89
25 0.10 1.00 90 − 99

Simulation Table for Time between Arrivals and Service Time

Client Time Between Arrival Time Time In Serving Time Out Waiting Voucher
Arrivals Time Time
1 1 1 1 14 15 --- ---
2 8 9 15 14 29 6 ---
3 8 17 29 14 43 12 Yes
4 15 32 43 10 53 11 Yes
5 15 47 53 6 59 6 ---
6 8 55 59 6 65 4 ---
7 25 80 80 14 94 --- ---
8 8 88 94 10 104 6 ---
9 8 96 104 14 118 8 ---
10 15 111 118 4 122 7 ---
11 8 119 122 4 126 3 ---
12 25 144 144 4 148 --- ---
Total Clients in a Week of 75Hours = 433 (75 hours × 60 minutes /10.4 # minutes)
# Average Time between Arrivals = 10.4 minutes (0.2 × 1 + 0.4 × 8 + 0.3 × 15 + 0.1 × 25)
2 out of the 12 clients receive `15 voucher. So the Cost will be `1,082.50 or `1,083 [(2/12 ×
433) × `15].

Taking Cycle Time as 148 minutes, Voucher Cost can be computed as follows:
`15 per Client × [(75 hours × 60 minutes /148 minutes) No. of Cycles × 2 Clients per Cycle
Time]
So, Voucher Cost will be `912.16
Bank’s Problem
Problem-7
With a view to improving the quality of customer services, a Bank is interested in making an
assessment of the waiting time of its customers coming to one of its branches located in a

Simulation 15.16
residential area. This branch has only one teller’s counter. The arrival rate of the customers
and the service rate of the teller are given below:
Time between two consecutive arrivals of Probability
customers (in minutes)
3 0.17
4 0.25
5 0.25
6 0.20
7 0.13
Service time by the teller (in minutes) Probability

3 0.10
4 0.30
5 0.40
6 0.15
7 0.05
Required
Simulate 10 arrivals of customers in the system starting 11 AM and show the waiting time of
the customers and idle time of the teller.
Use the following random numbers taking the first two random numbers digits each for trial
and so on:
11, 56, 23, 72, 94, 83, 83, 02, 97, 99, 83, 10, 93, 34, 33, 53, 49, 94, 37 and 97.
 Solution
Random Numbers Allocation

Arrivals
Time Between Two Probability Cumulative Random Nos.
Consecutive Arrivals of Probability Allocated
Customers in minutes
3 0.17 0.17 00 − 16
4 0.25 0.42 17 − 41

5 0.25 0.67 42 − 66
6 0.20 0.87 67 − 86
7 0.13 1.00 87 − 99
Service Time
Arrivals Time by the Probability Cumulative Random Nos.
Teller in minutes Probability Allocated
3 0.10 0.10 00 − 09
4 0.30 0.40 10 − 39
5 0.40 0.80 40 − 79
6 0.15 0.95 80 − 94
7 0.05 1.00 95 − 99
Simulation Table
S. R. Arrival Arrival Service R. Service Service Waiting Time Idle
No No Time Time Begins No Time in Ends for Customer Time
in A.M. A.M. minutes A.M. Time in In
minutes minutes mints
1 11 3 11.03 11.03 56 5 11.08 --- 3
2 23 4 11.07 11.08 72 5 11.13 1 ---
3 94 7 11.14 11.14 83 6 11.20 --- 1
4 83 6 11.20 11.20 02 3 11.23 --- ---
5 97 7 11.27 11.27 99 7 11.34 --- 4
6 83 6 11.33 11.34 10 4 11.38 1 ---
7 93 7 11.40 11.40 34 4 11.44 --- 2
8 33 4 11.44 11.44 53 5 11.49 --- ---
9 49 5 11.49 11.49 94 6 11.55 --- ---
10 37 4 11.53 11.55 97 7 12.02 2 ---
Total 4 10
Total Waiting Time of Customers: 4 minutes

Total Idle Time of Teller: 10 minutes

Simulation 15.18
Service Centre’s Problem

Problem-8
A computer service centre services laptops. It is proposed to study the arrival and servicing
pattern of the service centre. The following in information was collected, over a period of 100
days.
No. of computers Frequency of arrival Frequency of service

8 10 15
9 25 20
10 20 25
11 15 16
12 18 14
13 12 10
Required
Simulate the arrival and servicing pattern for 10 days and find out the average number of
laptops held for more than one day for service.
Assume FIFO method is followed for service/repair and there is one laptop held from previous
day for repair at the beginning of the first day.
Use the following series of random numbers:
Arrivals 69 45 46 10 82 16 35 70 57 92
Service 52 36 62 49 68 77 55 66 51 88
 Solution
The arrival patterns yield the following probability distribution. The numbers 00–99 are
allocated in proportion to the probabilities associated with each event.
Random No. Coding for Arrival
No. of Laptops Probability Cumulative Probability Random Numbers
8 0.10 0.10 00 – 09
9 0.25 0.35 10 – 34
10 0.20 0.55 35 – 54

11 0.15 0.70 55 – 69
12 0.18 0.88 70 – 87
13 0.12 1.00 88 – 99
The service patterns yield the following probability distribution. The numbers 00–99 are
Random No. Coding for Service
No. of Laptops Probability Cumulative Probability Random Numbers
8 0.15 0.15 00 – 14
9 0.20 0.35 15 – 34
10 0.25 0.60 35 – 59
11 0.16 0.76 60 – 75
12 0.14 0.90 76 – 89
13 0.10 1.00 90 – 99
Let us simulate the arrival and service of laptops for the next ten days using the given random
numbers / information.
Simulation Sheet
Day R. No. of No. of Laptops Opening R. No. of No. of Laptops Closing
Arrival Arrived Job Service Serviced* Job
1 69 11 1 52 10 2
2 45 10 2 36 10 2
3 46 10 2 62 11 1
4 10 9 1 49 10 0
5 82 12 0 68 11 1
6 16 9 1 77 12 0
7 35 10 0 55 10 0
8 70 12 0 66 11 1
9 57 11 1 51 10 2
10 92 13 2 88 12 3
Total 12
* This represents the service capacity of service centre.

Simulation 15.20
Totalof ClosingJobs
Average No. of Laptops held for more than one day =
No.of Days
12Laptops
=
10Days
= 1.2 Laptops per day
Bakery/ Retailer’s Problem – Perishable Commodity

Problem-9
A retailer deals in a perishable commodity. The daily demand and Supply are variables. The
data for the past 500 days show the following demand and supply:
Supply Demand
Availability (Kg.) No. of Days Demand (Kg.) No. of Days
10 40 10 50
20 50 20 110
30 190 30 200
40 150 40 100
50 70 50 40
The retailer buys the commodity at ` 20 per kg. and sell it at ` 30 per kg. Any commodity
remains at the end of the day, has no saleable value. Moreover, the loss (unearned profit) on
any unsatisfied demand is ` 8 per kg.
Required
Given the following pair of random numbers, simulate 6 days sales, demand and profit.
(31 ,18); (63 , 84); (15 , 79 ); (07 , 32); (43, 75); (81, 27)
The first random number in the pair is for supply and the second random number is for
demand viz. in the first pair (31, 18), use 31 to simulate supply and 18 to simulate demand.
 Solution
The demand and supply patterns yield the following probability distribution. The numbers 00-
99 are allocated in proportion to the probabilities associated with each event.

Availability Prob. Cum Random Demand Prob. Cum Random

(kg) Prob. Number (Kg) Prob. Numbers
Allocated Allocated
10 0.08 0.08 00 − 07 10 0.10 0.10 00 − 09
20 0.10 0.18 08 − 17 20 0.22 0.32 10 − 31
30 0.38 0.56 18 − 55 30 0.40 0.72 32 − 71
40 0.30 0.86 56 − 85 40 0.20 0.92 71 − 91
50 0.14 1.00 86 − 99 50 0.08 1.00 92 − 99
Let us simulate the supply and demand for the next six days using the given random numbers
in order to find the profit if the cost of the commodity is `20 per kg, the selling price is `30 per
kg, loss on any unsatisfied demand is `8 per kg and unsold commodities at the end of the
have no saleable value.
Day R Avail R Demand Buying Sales Profit Loss Net
No No Cost Revenue (`) * Profit
(i) (ii) (i) × Min. [(i) or (ii)] (iii) = (ii) – (i) (iv) (iii) – (iv)
`20 × `30
1 31 30 18 20 600 600 --- --- ---
2 63 40 84 40 800 1,200 400 --- 400
3 15 20 79 40 400 600 200 160 40
4 07 10 32 30 200 300 100 160 (60)
5 43 30 75 40 600 900 300 80 220
6 81 40 27 20 800 600 (200) --- (200 )
Total 800 400 400
(*) Due to unsatisfied Demand

During the simulated period of six days, the net profit of the retailer is `400.
Problem-10
A bakery sells a popular brand of bread. Cost price per bread is ` 16 and selling price per
bread is ` 20. Shelf life of the bread is 2 days and if it is not sold within two days, then it has
no sale value at the end of second day. Daily demand based on past experience is as under:
Daily Demand 0 20 25 35 40 45
Probability .01 .15 .30 .40 .10 .04

Simulation 15.22
Consider the following sequence of random numbers:

58, 80, 51, 09, 47, 26, 64, 43, 86, 35
Required
Using the sequence, simulate the demand for the next 10 days and find out the total profit or
loss for 10 days assuming 35 breads are purchased every day in the morning and there is an
opening stock of 5 breads (purchased the previous day) on the 1st day morning. Assume LIFO
basis (Last In First Out basis - where the fresh bread is sold first).
 Solution
The demand patterns yield the following probability distribution. The numbers 00–99 are
Random No. Coding for Demand
Demand Prob. Cum Prob. Random Numbers
0 0.01 0.01 00 – 00
20 0.15 0.16 01 – 15
25 0.30 0.46 16 – 45
35 0.40 0.86 46 – 85
40 0.10 0.96 86 – 95
45 0.04 1.00 96 – 99
Let us simulate the supply and demand for the next ten days using the given random numbers/
information in order to find the profit if
– the cost of the bread is `16,
– the selling price is `20 and
– unsold bread after the end of the 2nd Day have no saleable value.
Simulation Sheet for Finding Profit
Day Random Op. Demand Supply Waste Cl. Loss on Profit on Net
No Stock Stock Waste Sale Profit
(In No.) (In No.) (In No.) (In No.) (In No.) (In `) (In `) (In `)
1 58 5 35 35 5 0 80 140 60
(5b×`16) (35b×`4)
2 80 0 35 35 0 0 0 140 140
(35b×`4)

3 51 0 35 35 0 0 0 140 140
(35b×`4)
4 09 0 20 35 0 15 0 80 80
(20b×`4)
5 47 15 35 35 15 0 240 140 –100
(15b×`16) (35b×`4)
6 26 0 25 35 0 10 0 100 100
(25b×`4)
7 64 10 35 35 10 0 160 140 –20
(10b×`16) (35b×`4)
8 43 0 25 35 0 10 0 100 100
(25b×`4)
9 86 10 40 35 5 0 80 160 80
(5b×`16) (40b×`4)
10 35 0 25 35 0 10 0 100 100
(25b×`4)
*b refers to no. of breads
Profit on Sale of one Bread `4 (`20 – `16).
Total Profit for 10 Days is `680.
(`60 + `140 + `140 + `80 – `100 + `100 – `20 + `100 + `80 + `100)
Cost of Bread in Stock at the end of the 10th Day is `160 (10 Breads × `16).
Problem-11
A bakery bakes 100 cakes per day. The sale of cakes depends upon demand which has the
following distribution:
Sale of Cakes (Nos.) Probability
97 0.10
98 0.15
99 0.20
100 0.35
102 0.15
103 0.05
There is no carryover of inventory.

Simulation 15.24
The following details are given:

`
Variable Production cost per cake 14
Selling price per cake 18
Penalty attracted per unsold cake 3
Penalty attracted per unit of demand not met 1
Random Numbers to be used:

9, 98, 64, 98, 94, 01, 78, 10, 15, 19
Required
(i) Estimate the profit/loss for the next ten days using the above random numbers and
assuming 100 cakes are produced per day.
(ii) If the bakery decides to produce 97 cakes per day, will the profits as per (i) above
increase or decrease? Why?
 Solution
(i) According to the given distribution of demand, the random number coding for various
demand levels is shown in Table below:
Random Number Coding
Demand Probability Cumulative Probability Random Nos. Fitted
97 0.10 0.10 00 – 09
98 0.15 0.25 10 – 24
99 0.20 0.45 25 – 44
100 0.35 0.80 45 – 79
102 0.15 0.95 80 – 94
103 0.05 1.00 95 – 99
The simulated demand for the cakes for the next 10 days is given in the Table below in
order to find the estimated profit/loss if the variable cost of production is `14 per cake,
the selling price is `18 per cake, penalty on any unsatisfied demand is Re.1 per cake
and penalty on any unsold cake at the end of the day is `3 per cake.

Simulation Sheet
Day Random Demand of Prod. of Cakes Unsatisfied Unsold
No. Cakes Cakes Sold Demand Cake
1 9 97 100 97 - 3
2 98 103 100 100 3 -
3 64 100 100 100 - -
4 98 103 100 100 3 -
5 94 102 100 100 2 -
6 01 97 100 97 - 3
7 78 100 100 100 - -
8 10 98 100 98 - 2
9 15 98 100 98 - 2
10 19 98 100 98 - 2
Total 996 1,000 988 8 12
Calculation of “Bakery’s Profit/ Loss”
Amount (`)
Sales of Cakes (988 Cakes × `18) 17,784.00
Less: Variable Production Cost [(988 Cakes + 12 Cakes) × `14] 14,000.00
Less: Penalty on Unsatisfied Demand (8 Cakes × Re. 1) 8.00
Less: Penalty on Unsold Cakes (12 Cakes × `3) 36.00
Profit / (Loss) 3,740.00
(ii) If the bakery decided to produce 97 Cakes per day which is equal to minimum demand
level.
– Cakes Produced and Sold will be reduced to 970 i.e. 97 per day.
– Unsatisfied Demand will be increase to 26 Cakes (996 Cakes – 970 Cakes).
– There will be no unsold Cake at the end of the day as production is equal to
minimum demand level.
Calculation of “Bakery’s Profit/ Loss”
Amount (`)
Sales of Cakes (970 Cakes × `18) 17,460.00
Less: Variable Production Cost (970 Cakes × `14) 13,580.00

Simulation 15.26
Less: Penalty on Unsatisfied Demand [26 Cakes × Re. 1] 26.00

Less: Penalty on Unsold Cake [0 Cakes × `3] 0.00
Profit / (Loss) 3,854.00
In this situation, the estimated profit of the bakery will be increased by `114 (`3,854 –
`3,740).
The estimated profit is increased due to avoiding unnecessary variable production cost
as well as penalty on unsold stock. Further, Production of 97 cakes match with
minimum demand on a day.
Problem-12
A cake vendor buys pieces of cake every morning at `4.50 each by placing his order one day
in advance and sale them at `7.00each. Unsold cake can be sold next day at ` 2.00 per piece
and there after it should be treated as no value. The pattern for demand of cake is given
below:
Fresh Cake:
Daily Sale 100 101 102 103 104 105 106 107 108 109 110
Probability .01 .03 .04 .07 .09 .11 .15 .21 .18 .09 .02
One day old cake:

Daily Sale 0 1 2 3
Probability .70 .20 .08 .02
Use the following set of random numbers:

Fresh Cake 37 73 14 17 24 35 29 37 33 68
One day old cake 17 28 69 38 50 57 82 44 89 60
The vendor adopts the following rule.

If there is no stock of cake with him at the end of previous day, he orders for 110pieces
otherwise he orders 100 or 105 pieces whichever is nearest actual fresh cake sale on the
previous day.
Required
Starting with zero stock and a pending order of 105 pieces, simulate for 10 days and calculate
vendor's profit.

 Solution
Random No. Coding for Fresh Cake

No. of Cakes Probability Cumulative Probability Random Numbers
100 0.01 0.01 00 – 00
101 0.03 0.04 01 – 03
102 0.04 0.08 04 – 07
103 0.07 0.15 08 – 14
104 0.09 0.24 15 – 23
105 0.11 0.35 24 – 34
106 0.15 0.50 35 – 49
107 0.21 0.71 50 – 70
108 0.18 0.89 71 - 88
109 0.09 0.98 89 - 97
110 0.02 1.00 98 - 99
Random No. Coding for One Day Old Cake
0 0.70 0.70 00 – 69
1 0.20 0.90 70 – 89
2 0.08 0.98 90 – 97
3 0.02 1.00 98 – 99
Let us simulate the sale of fresh and one day old cakes for the next ten days using the given
random numbers / information.
Simulation Sheet
Day R. No. of Fresh Demand Sales Cl. Order One R.N. Sale of Loss
Fresh Stock Pcs. Stock Initiated Day of Old Pcs.
Cake Old Old Cake
Stock Cake Pcs.
1 37 105 106 105 0 110 0 17 -- --
2 73 110 108 108 2 105 0 28 -- --
3 14 105 103 103 2 105 2 69 0 2

Simulation 15.28
4 17 105 104 104 1 105 2 38 0 2

5 24 105 105 105 0 110 1 50 0 1
6 35 110 106 106 4 105 0 57 -- --
7 29 105 105 105 0 110 4 82 1 3
8 37 110 106 106 4 105 0 44 -- --
9 33 105 105 105 0 110 4 89 1 3
10 68 110 107 107 3 105 0 60 -- --
1,054 2 11
Calculation of Vendor’s Profit
Amount (`)
Sales of Fresh Cakes (1,054 Pcs. × `7) 7,378.00
Sale of One Day Old Cake (2 Pcs. × `2) 4.00
Total Sales Revenue 7,382.00
Less:Cost of Cakes Sold [`4.50 × (1,054 + 2) Pcs.] 4,752.00
Less: Cost of Spoilt Cakes [`4.50 × (11 + 3*) Pcs.] 63.00
Profit 2,567.00

* It is assumed that 3 Cakes of Closing Stock is not saleable.
Problem-13
A cake vendor buys pieces of cake every morning at `4.50 each by placing his order one day
in advance (at the time of receiving his previous order) and sale them at ` 7.00 each.
Unsold cake can be sold next day at `2.00 per piece and there after it should be treated as no
value. The pattern for demand of cake is given below:
Fresh Cake:
Daily Sale 100 101 102 103 104 105 106 107 108 109 110
Probability .01 .03 .04 .07 .09 .11 .15 .21 .18 .09 .02
One day old cake:

Daily Sale 0 1 2 3
Probability .70 .20 .08 .02

Use the following set of random numbers:

Fresh Cake 37 73 14 17 24 35 29 37 33 68
One day old cake 17 28 69 38 50 57 82 44 89 60
The vendor adopts the following rule.

If there is no stock of cake with him at the end of previous day, he orders for 110pieces
otherwise he orders 100 or 105 pieces whichever is nearest actual fresh cake sale on the
previous day.
Required
Starting with zero stock and a pending order of 105 pieces, simulate for 10 days and calculate
vendor's profit.
 Solution
Random No- Coding for Fresh Cake

100 0.01 0.01 00 – 00
101 0.03 0.04 01 – 03
102 0.04 0.08 04 – 07
103 0.07 0.15 08 – 14
104 0.09 0.24 15 – 23
105 0.11 0.35 24 – 34
106 0.15 0.50 35 – 49
107 0.21 0.71 50 – 70
108 0.18 0.89 71 – 88
109 0.09 0.98 89 – 97
110 0.02 1.00 98 – 99
Random No. Coding for One Day Old Cake
0 0.70 0.70 00 – 69
1 0.20 0.90 70 – 89
2 0.08 0.98 90 – 97
3 0.02 1.00 98 – 99

Simulation 15.30
Let us simulate the sale of fresh and one day old cakes for the next ten days using the given
random numbers / information.
Simulation Sheet
Day R. No. of Fresh Demand Sales Cl. Order One R.N. Sale Loss
Fresh Stock Pcs. Stock Initiated Day of Old of Old Pcs.
Cake Old Cake Cake
Stock Pcs.
1 37 105 106 105 0 110 0 17 0 0
2 73 110 108 108 2 110 0 28 0 0
3 14 110 103 103 7 105 2 69 0 2
4 17 105 104 104 1 105 7 38 0 7
5 24 105 105 105 0 105 1 50 0 1
6 35 105 106 105 0 110 0 57 0 0
7 29 110 105 105 5 110 0 82 0* 0
8 37 110 106 106 4 105 5 44 0 5
9 33 105 105 105 0 105 4 89 1 3
10 68 105 107 105 0 110 0 60 0 0
1051 1 18
Calculation of Vendor’s Profit

Amount (`)
Sales of Fresh Cakes (1,051 Pcs. × `7) 7,357.00
Sale of One Day Old Cake (1 Pcs. × `2) 2.00
Total Sales Revenue 7,359.00
Less: Cost of Cakes Sold [`4.50 × (1,051 + 1) Pcs.] 4,734.00
Less: Cost of Spoilt Cakes [`4.50 × 18 Pcs.] 81.00
Profit 2,544.00

Order for Day 2’s Sale - Vendor will initiate order in day one’s morning i.e. one day in
advance at the time of receiving previous order.
Vendor follows - If there is no stock of cake with him at the end of previous day, he orders
for 110 pieces otherwise he orders 100 or 105 pieces whichever is nearest actual fresh
cake sale on the previous day.

Accordingly to initiate order in day one’s morning vendor has to consider previous day’s
stock i.e. Day 0’s stock. But, there is no stock at the end of Day 0 or beginning of Day 1
(given in the problem). Accordingly Vendor will initiate order of 110 pieces in day 1’s
morning for day 2’s sales.
(*)
On 7th Day Demand for ‘One Day Old’ cake is one piece (as per random no. 82). But there
was nil stock at the end of the 6th Day. Accordingly, sale of one Day old cake is nil.
Book Store’s Problem

Problem-14
A book store wishes to carry systems analysis and design in stock. Demand is probabilistic
and replenishment of stock takes 2 days (i.e. if an order is placed in March 1, it will be
delivered at the end of the day on March 3). The probabilities of demand are given below:
Demand (Daily) 0 1 2 3 4
Probability 0.05 0.10 0.30 0.45 0.10
Each time an order is placed, the store incurs an ordering cost of ` 10 per order. The store
also incurs a carrying cost of ` 0.50 per book per day. The inventory carrying cost is
calculated on the basis of stock at the end of each day. The manager of the book-store wishes
to compare two options for his inventory decision:
A. Order 5 books, when the inventory at the beginning of the day plus orders outstanding
is less than 8 books.
B. Order 8 books, when the inventory at the beginning of the day plus orders outstanding
is less than 8 books.
Currently (beginning of the 1st day) the store has stock of 8 books plus 6 books ordered 2 days
ago and expected to arrive next day.
Required
Using Monte-Carlo simulation for 10 cycles, recommend which option the manager should
choose?
The two digits random numbers are given below:
89 34 78 63 61 81 39 16 13 73
 Solution
First of all, random numbers 00-99 are allocated in proportion to the probabilities associated
with demand as given below:

Simulation 15.32
Demand Probability Cumulative Probability Random Nos.

0 0.05 0.05 00 − 04
1 0.10 0.15 05 − 14
2 0.30 0.45 15 − 44
3 0.45 0.90 45 − 89
4 0.10 1.00 90 − 99
Based on the ten random numbers given, we simulate the demand per day in the table given
below:
It is given that stock in hand is 8 units and stock on order is 6 units (expected to receive on
next day).
Let us now consider both the options stated in the Problem.
Option-A
Order 5 Books, when the inventory at the beginning of the day plus orders outstanding is less
than 8 books:
Day Random Sales Op. Stock Qty. Qty. Recd. at Total Qty. Closing
No. Demand (in hand) Order End of the Day on Order Stock
1 89 3 8 --- --- 6 5
2 34 2 5 --- 6 --- 9
3 78 3 9 --- --- --- 6
4 63 3 6 5 --- 5 3
5 61 3 3 --- --- 5 0
6 81 3 0 --- 5 --- 5
7 39 2
8 16 2
9 13 1
10 73 3
Now on day 6, there is stock out position since 5 units will be received at the end of the day
and demand occurring during the day cannot be met. Hence, it will not be possible to proceed
further and we will have to leave the answer at this stage.

Option-B
than 8 books:
1 89 3 8 --- --- 6 5
2 34 2 5 --- 6 --- 9
3 78 3 9 --- --- --- 6
4 63 3 6 8 --- 8 3
5 61 3 3 --- --- 8 0
6 81 3 0 --- 8 --- 8
7 39 2
8 16 2
9 13 1
10 73 3
Now on day 6, there is stock out position since 8 units will be received at the end of the day
and demand occurring during the day cannot be met. Hence, it is not possible to proceed
further and we may leave the answer at this stage.
Alternatively
If we assume that the demand occurring during the day can be met out of stock received at
the end of the day, the solution will be as follows:
Option-A
Order 5 books when the inventory at the beginning of the day plus orders outstanding is less
than 8 books:
1 89 3 8 --- --- 6 5
2 34 2 5 --- 6 --- 9
3 78 3 9 --- --- --- 6
4 63 3 6 5 --- 5 3

Simulation 15.34
5 61 3 3 --- --- 5 0
6 81 3 0 5 5 5 2
7 39 2 2 5 --- 10 0
8 16 2 0 --- 5 5 3
9 13 1 3 --- 5 --- 7
10 73 3 7 5 --- 5 4
Carrying Cost = `19.50 (39 Books × `0.50)

Ordering Cost = `40.00 (4 Orders × `10)
Total Cost = `59.50 (`19.50 + `40.00)
Option-B
than 8 books:
1 89 3 8 --- --- 6 5
2 34 2 5 --- 6 --- 9
3 78 3 9 --- --- --- 6
4 63 3 6 8 --- 8 3
5 61 3 3 --- --- 8 0
6 81 3 0 --- 8 --- 5
7 39 2 5 8 --- 8 3
8 16 2 3 --- --- 8 1
9 13 1 1 --- 8 --- 8
10 73 3 8 --- --- --- 5
Carrying Cost = `22.50 (45 Books × `0.50)

Ordering Cost = `20.00 (2 Orders × `10)
Total Cost = `42.50 (`22.50 + `20.00)
Since Option B has lower cost, Manager should order 8 books.

Dietician’s Problem
Problem-15
A dietician wants to simulate arrivals of her patients and her consultation time with the
following random numbers. Her assistant has already prepared the random number allocation
tables.
The dietician wants to have an idea of her idle time and patients’ waiting time. She starts her
consultation at 10:00 a.m. and wants to give an appointment an interval of 20 minutes. The
Random Number table is as follows:
Arrival of patient 15 4 35 67 75 86 25
Consultation time 17 15 12 58 60 72 30
Random Number Allocation Table: 1
Patient Punctuality Probability Cumulative Probability Random No.
Minutes early 3 0.05 0.05 00 – 04
2 0.18 0.23 05 – 22
1 0.40 0.63 23 – 62
On time 0.25 0.88 63 – 87
Minutes late 2 0.08 0.96 88 – 95
4 0.04 1.00 96 – 99
Random Number Allocation Table: 2
Consultation Time Probability Cumulative Probability Random No.
15 0.13 0.13 00 – 12
18 0.15 0.28 13 – 27
20 0.28 0.56 28 – 55
25 0.34 0.90 56 – 89
30 0.10 1.00 90 – 99
Required
(i) Simulate the arrival and consultation times and find out the dietician’s idle times and
patients’ waiting times.
(ii) If clients are sensitive to waiting, how would you advise the dietician as a Management
Accountant, based on the results of your exercise?

Simulation 15.36
 Solution
(i) Simulation Sheet

Random Appt. Arrival Cons. Random Cons. Cons. Patient Diet’s
Patient
No. of Time Time of Start No. of time End Waiting Idle

Arrival Patient Time Cons. Time Time Time
1 15 10:00 09:58 10:00 17 18 10:18 - -
2 4 10:20 10:17 10:18 15 18 10:36 - -
3 35 10:40 10:39 10:39 12 15 10:54 - 3
4 67 11:00 11:00 11:00 58 25 11:25 - 6
5 75 11:20 11:20 11:25 60 25 11:50 5 -
6 86 11:40 11:40 11:50 72 25 12:15 10 -
7 25 12:00 11:59 12:15 30 20 12:35 15
Total 30 9
Assumption- Patients waiting before the appointment time is not taken for calculation of waiting
time.
(ii) The patients are sensitive to waiting time, hence if the appointment interval of 20
minutes will be increased to 25 minutes then there will be no patient waiting time, but
the dietician’s idle time will be increased to 24 minutes (refer the working note). Though
in the question it is not mentioned whether the dietician is available for any stretch of
time without considering her idleness in the clinic.
As a Management Accountant, the ADVICE would be to bring the equilibrium to both
the patients waiting time as well as to the dietician’s idle time. The equilibrium falls
between appointment interval time of 22 and 23 mins (shown by an arrow in working
note).
Working Notes
Simulation Sheet (Interval Time Increased to 21 Minutes)
Patient
No. of Time Time of Start No. of Time End Waiting Idle

1 15 10:00 09:58 10:00 17 18 10:18 - -

2 4 10:21 10:18 10:18 15 18 10:36 - -
3 35 10:42 10:41 10:41 12 15 10:56 - 5

4 67 11:03 11:03 11:03 58 25 11:28 - 7

5 75 11:24 11:24 11:28 60 25 11:53 4 -
6 86 11:45 11:45 11:53 72 25 12:18 8 -
7 25 12:06 12:05 12:18 30 20 12:38 12 -
Total 24 12
Statement Showing “Change in Appointment Interval Time and

Corresponding Waiting/ Idle Time”
Appointment Time Patient Diet’s Idle Time Remark
(mins.) Waiting Time (mins.) (mins.)
20 30 9 Refer Simulation Sheet
21 24 12 Refer Simulation Sheet
22 18* 15* *If Change in Appointment
Time by 1 min. (↑) than
23 12* 18* corresponding Patient Waiting
24 6* 21* Time change by is 6 mins (↓)
and Diet’s Idle Time change
25 -* 24* by 3 mins (↑).
Verification
Simulation Sheet (Interval Time Increased to 25 Minutes)
Patient
No. of Time Time of Start No. of Time End Waiting Idle

1 15 10:00 09:58 10:00 17 18 10:18 - -

2 4 10:25 10:22 10:22 15 18 10:40 - 4
3 35 10:50 10:49 10:49 12 15 11:04 - 9
4 67 11:15 11:15 11:15 58 25 11:40 - 11
5 75 11:40 11:40 11:40 60 25 12:05 - -
6 86 12:05 12:05 12:05 72 25 12:30 - -
7 25 12:30 12:29 12:30 30 20 12:50 - -
Total - 24

Solution to this question has been done with logical assumption. This question can also be
solved by taking some other logical assumption/(s).

Simulation 15.38
Simulation for Defectives

Problem-16
A company manufactures a component which requires a high degree of precision. Each unit of
the component is therefore subjected to a strict quality control test to ascertain whether there
is any defect in it. The defects are classified into three categories viz. A, B and C. if defect A
occurs in the output, it is scrapped. If defect B or C occurs in the output, it is reworked to
rectify the defect. The machine time required to rework defect B component is 30 minutes and
that for defect C is 45 minutes. The probabilities are as under:
Defect A Defect B Defect C
Defect occurring 0.15 0.20 0.10
Defect not occurring 0.85 0.80 0.90
Required
Using the following random numbers, simulate a study of 10 items of output and determine the
number of items with no defects, number of items scrapped due to occurrence of defect A and
the total machine time required for rework due to occurrence of defect B or C :
Random number for defect A:
48 55 91 40 93 01 83 63 47 52
Random number of defect B:
47 36 57 04 79 55 10 13 57 09
Random number for defect C:
82 95 18 96 20 84 56 11 52 03
 Solution
Random Number (R.N.) Allocation
Defect A Defect B Defect C
Defect Exist R. No. Defect R. No. Defect R. No.
or Not Allocation Exist Allocation Exist Allocation
Yes 00 − 14 Yes 00 − 19 Yes 00 − 09
No. 15 − 99 No 20 − 99 No 10 − 99

Simulation Table
Item Defect Defect Defect Whether Defect Items Rework
No. A B C Exists? Scrapped (minutes)
1 48 47 82 No --- ---
2 55 36 95 No --- ---
3 91 57 18 No --- ---
4 40 04 96 B --- 30
5 93 79 20 No --- ---
6 01 55 84 A 1 ---
7 83 10 56 B --- 30
8 63 13 11 B --- 30
9 47 57 52 No --- ---
10 52 09 03 B&C --- 75
Total 165
– No Defect exists in 5 items.
– Defect A exist in 1 item (item no.6), so it is scrapped.
– Defect B exists in 4 items and
– Defect C exists in 1 item, so they require rework.
– Rectification time required on reworking is 165 minutes.
Evaluation of Investment Projects

Problem-17
An Investment Corporation wants to study the investment projects based on four factors:
market demand in units, contribution per unit, advertising cost and the investment required.
These factors are felt to be independent of each other. In analyzing a new consumer product,
the corporation estimates the following probability distributions:
Demand (units) Contribution per unit Advertising Cost
No. Probability ` Probability ` Probability
10,000 0.20 25 0.25 50,000 0.22
20,000 0.25 35 0.30 60,000 0.33
30,000 0.30 45 0.35 70,000 0.44
40,000 0.25 55 0.10 80,000 0.01

Simulation 15.40
The data for proposed investments are as follows:

Investment (`) 50,00,000 55,00,000 60,00,000 65,00,000
Probability 0.10 0.30 0.45 0.15
Required
Using simulation process, repeat the trials 5 times, compute the Return on Investment (ROI)
for each trial and find the highest likely return.
Using the sequence (First 4 random numbers for the first trial, etc)
09 24 85 07 84 38 16 48 41 73 54 57 92 07 99 64
65 04 78 72
 Solution
Allocation of Random Numbers
Demand (units)
Units Probability Cumulative Probability Random Nos.
10,000 0.20 0.20 00 – 19
20,000 0.25 0.45 20 – 44
30,000 0.30 0.75 45 – 74
40,000 0.25 1.00 75 − 99
Contribution per unit

` Probability Cumulative Probability Random Nos.
25 0.25 0.25 00 – 24
35 0.30 0.55 25 – 54
45 0.35 0.90 55 – 89
55 0.10 1.00 90 − 99
Advertising Cost
50,000 0.22 0.22 00 – 21
60,000 0.33 0.55 22 – 54
70,000 0.44 0.99 55 – 98
80,000 0.01 1.00 99 − 99

Investment
50,00,000 0.10 0.10 00 – 09
55,00,000 0.30 0.40 10 – 39
60,00,000 0.45 0.85 40 – 84
65,00,000 0.15 1.00 85 – 99
Simulation Table
Random Demand Contribution Adv. Return Investment Return on
Number Units Per unit Cost Investment
(`) (`) (`) (`)
09, 24, 85, 07 10,000 25 70,000 1,80,000 50,00,000 3.60%
84, 38, 16, 48 40,000 35 50,000 13,50,000 60,00,000 22.50%
41, 73, 54, 57 20,000 45 60,000 8,40,000 60,00,000 14.00%
92, 07, 99, 64 40,000 25 80,000 9,20,000 60,00,000 15.33%
65, 04, 78, 72 30,000 25 70,000 6,80,000 60,00,000 11.33%
Highest Likely Return is 22.50% relating to trial 2.
Application of Simulation Technique in Project Management

Problem-18
The following table gives the activities in a construction project and the time durations with
associated probability of each activity:
Activity Predecessors Time (in Days) Probability
6 0.50
A ---
8 0.50
4 0.30
B --- 5 0.20
6 0.50
8 0.50
C A
16 0.50
8 0.30
D A, B
10 0.70

Simulation 15.42
2 0.20
E C, D
4 0.80
To simulate the project, use the following random numbers taking the first five random
numbers digits (representing the five activities) for each trial and so on:
11, 16, 23, 72, 94; 83, 83, 02, 97, 99; 83, 10, 93, 4, 33; 53, 49, 94, 37, 7
Required
Determine the ‘Critical Path’ and the ‘Project Duration’ for each trial.
 Solution
Random Numbers Allocation for each activity

Activity Time (in Days) Probability Cumulative Allocated Random
Probability Number
A 6 0.50 0.50 00-49
8 0.50 1.00 50-99
B 4 0.30 0.30 00-29
5 0.20 0.50 30-49
6 0.50 1.00 50-99
C 8 0.50 0.50 00-49
16 0.50 1.00 50-99
D 8 0.30 0.30 00-29
10 0.70 1.00 30-99
E 2 0.20 0.20 00-19
4 0.80 1.00 20-99
Simulation Table
Trial A B C D E
R. No. Time R. No. Time R. No. Time R. No. Time R. No. Time
1 11 6 16 4 23 8 72 10 94 4
2 83 8 83 6 02 8 97 10 99 4
3 83 8 10 4 93 16 4 8 33 4
4 53 8 49 5 94 16 37 10 7 2

Determination of “Critical Path and Project Duration for each trial”
Trial Project Duration Critical Path

1–2–4–5 1–2–3–4–5 1–3–4–5
(A–C–E) (A–D–E) (B–D–E)
1 18 20 18 1–2–3–4–5
(6 + 8 + 4) (6 + 10 + 4) (4 + 10 + 4) (A–D–E)
2 20 22 20 1–2–3–4–5
(8 + 8 + 4) (8 + 10 + 4) (6 + 10 + 4) (A–D–E)
3 28 20 16 1–2–4–5
(8 + 16 + 4) (8 + 8 + 4) (4 + 8 + 4) (A–C–E)
4 26 20 17 1–2–4–5
(8 + 16 + 2) (8 + 10 + 2) (5 + 10 + 2) (A–C–E)
Working Note
The Network for the given problem:
Miscellaneous
Problem-19
JCB Ltd. is considering a new project which will require an initial investment of ` 25,000. The
company has determined the following probabilities for net cash flows for three years
generated by this project:
Annual Net Cash Flows
Year 1 Year 2 Year 3
CF Prob. CF Prob. CF Prob.
7,500 0.20 10,000 0.10 7,500 0.10
10,000 0.50 12,500 0.30 10,000 0.20

Simulation 15.44
12,500 0.30 15,000 0.20 12,500 0.50

17,500 0.40 15,000 0.20
The firm wants to perform 5 simulation runs of this project’s life. The firm’s cost of capital is
10%.
To simulate the probability distributions of annual net cash flows, use the following sets of
random numbers
4, 4, 2; 9, 6, 3; 5, 7, 8; 0, 1, 6; 3, 1, 5
Required
Using simulation results. Calculate the average NPV.
Note
Assign a value ranging from 0 to 9 (in digits) to each year’s cash flow in such a way that the
number of digits assigned is proportionate to the probability of cash flow.
 Solution
Assigning Digit Values to Cash Flows

Year 1 Year 2 Year 3
CF Prob. Digits CF Prob. Digits CF Prob. Digits
7,500 0.20 0-1 10,000 0.10 0-0 7,500 0.10 0-0
10,000 0.50 2-6 12,500 0.30 1-3 10,000 0.20 1-2
12,500 0.30 7-9 15,000 0.20 4-5 12,500 0.50 3-7
17,500 0.40 6-9 15,000 0.20 8-9
Identifying Cash Flows Matching Random Numbers
Set Year 1 Year 2 Year 3
R. No. CF R. No. CF R. No. CF
1 4 10,000 4 15,000 2 10,000
2 9 12,500 6 17,500 3 12,500
3 5 10,000 7 17,500 8 15,000
4 0 7,500 1 12,500 6 12,500
5 3 10,000 1 12,500 5 12,500

Calculated Simulated Average NPVs

Set Year 1 Year 2 Year 3 Initial NPV
PVF* = 0.909 PVF* = 0.826 PVF* = 0.751 Outflow
CF PV CF PV CF PV
1 10,000 9,090 15,000 12,390 10,000 7,510 25,000 3,990
2 12,500 11,363 17,500 14,455 12,500 9,388 25,000 10,206
3 10,000 9,090 17,500 14,455 15,000 11,265 25,000 9,810
4 7,500 6,818 12,500 10,325 12,500 9,388 25,000 1,531
5 10,000 9,090 12,500 10,325 12,500 9,388 25,000 3,803
Total 29,340
Average NPV 5,868
* PVF (Present Value Factor) at 10% discount rate.
Problem-20
Finance Controller of Dunk Limited has drawn the following projections with probability
distribution:
Wages &
Raw Material Sales
Other Variable Overheads
` in 000 Probability ` in 000 Probability ` in 000 Probability
08 – 10 0.2 11 – 13 0.3 34 – 38 0.1
10 – 12 0.3 13 – 15 0.5 38 – 42 0.3
12 – 14 0.3 15 – 17 0.2 42 – 46 0.4
14 – 16 0.2 46 – 50 0.2
Opening cash balance is ` 40,000 and fixed cost is estimated at ` 15,000 per month.
Required
Simulate cash flow projection and expected cash balance at the end of the sixth month. Use
the following single digit random numbers.
Raw Material 431046
Wages & Other Variable Overheads 279189
Sales 066028

Simulation 15.46
 Solution
Allocation of Random Numbers

Raw Material Wages & Sales
Other Variable Overheads
Mid Cum. Random Mid Cum. Random Mid Cum. Random
Point Prob. Nos. Point Prob. Nos. Point Prob. Nos.
9 0.2 0−1 12 0.3 0−2 36 0.1 0
11 0.5 2−4 14 0.8 3−7 40 0.4 1−3
13 0.8 5−7 16 1.0 8−9 44 0.8 4−7
15 1.0 8−9 48 1.0 8−9
Simulation Table (` in 000)
Month Raw Wages & Sales Fixed Cost Net Cash Flow Cash Balancing
Material Other V.O (Opening `40
thousand)
1 11 12 36 15 -2 38
2 11 14 44 15 +4 42
3 9 16 44 15 +4 46
4 9 12 36 15 0 46
5 11 16 40 15 -2 44
6 13 16 48 15 +4 48

21534sm Finalnew Vol2 Cp15

Încărcat de

Informații document

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

21534sm Finalnew Vol2 Cp15

Încărcat de

Drepturi de autor:

Formate disponibile

15 Simulation

© The Institute of Chartered Accountants of India

(i) Select the measure of effectiveness of the problem.

© The Institute of Chartered Accountants of India

(i) Simulation is a quantitative procedure which describes a process by developing a

Steps involved in carrying out Monte Carlo simulation are:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Advantages of simulation are enumerated below:

© The Institute of Chartered Accountants of India

Car Manufacturer’s Problem

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

1,200 < 1,500 0.06 0.96 90 − 95

(iii) Loss on Lost Sale `15,750 (2,100 units × ` 7.5).

© The Institute of Chartered Accountants of India

Travelling Agency/ Reservation Centre’s Problem

Day Random No. Demand No. of Cars on Rent Rent Lost

© The Institute of Chartered Accountants of India

Type of Service Probability Cumulative Probability Random No. Interval

No. of Arrivals Probability Cumulative Probability Random Number Interval

© The Institute of Chartered Accountants of India

Arrival / Service Arrival Service

Random Allocation Table

1 0.05 0.05 00 − 04 1 0.10 0.10 00 − 09

© The Institute of Chartered Accountants of India

Time to deal Minutes 2 4 6 10 14 20 30

Time between Minutes 1 8 15 25

© The Institute of Chartered Accountants of India

Time to Deal with Clients

Time between Arrivals

© The Institute of Chartered Accountants of India

Simulation Table for Time between Arrivals and Service Time

© The Institute of Chartered Accountants of India

Service time by the teller (in minutes) Probability

Random Numbers Allocation

© The Institute of Chartered Accountants of India

Total Waiting Time of Customers: 4 minutes

© The Institute of Chartered Accountants of India

Service Centre’s Problem

No. of computers Frequency of arrival Frequency of service

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Bakery/ Retailer’s Problem – Perishable Commodity

© The Institute of Chartered Accountants of India

Availability Prob. Cum Random Demand Prob. Cum Random

(*) Due to unsatisfied Demand

© The Institute of Chartered Accountants of India

Consider the following sequence of random numbers:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

The following details are given:

Random Numbers to be used:

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Less: Penalty on Unsatisfied Demand [26 Cakes × Re. 1] 26.00

One day old cake:

Use the following set of random numbers:

The vendor adopts the following rule.

© The Institute of Chartered Accountants of India

Random No. Coding for Fresh Cake

© The Institute of Chartered Accountants of India

4 17 105 104 104 1 105 2 38 0 2