Decision Analysis By Prof.

Girish Phatak

Fifth Topic Decision Analysis Problems discussed in the Class

Q.1 A departmental store purchases Christmas trees, which can be ordered only in lots
of 100. Each tree selling price Rs. 40 each. Unsold trees, however, have no salvage
value. The purchase price of the trees is Rs. 25 each The probability distribution
obtained from analysis of past data is given below:

Trees sold probabilities

100 0.20
200 0.35
300 0.25
400 0.15
500 0.05

(a) Setup a payoff table

(b) How much quantity should the departmental store buy to maximize its profit?

Q.2 A manufacturer of sewing machines is faced with the problem of selecting one of
the two models for manufacturing. The profit depends on the market acceptability
of the model which are present is uncertain but is had been broadly classified into
four categories: excellent, good, fair and poor.
The profits or losses (losses are indicated by negative sign) expected by the
management from the different levels of market acceptability of the models are as
follows:
__________________________________________________________________
Market Profit (Rs.) for the model for the
Indicated market acceptability
__________________________
Deluxe Janata
__________________________________________________________________
Excellent 60,000 78,000
Good 28,000 38,000
Fair 18,000 8,000
Poor 8,000 -12,000
__________________________________________________________________
Which product should the company select from the standpoint of maximin (gain)
criterion?
 Q.3 A company is making a large boiler installation. A certain automatic monitoring unit
is critical for the operation of the whole system. At the time of original order, the spares
for this unit can be purchased for Rs. 2,000 per unit. The probability distribution for the
failure of the unit during the life time of installation is given as :
__________________________________________________________
_______Failure_________________________Probability____________
0 0.35
1 0.25
2 0.20
3 0.15
4 0.05
___________________________________________________________
If a spare is needed and is not available, the total cost of idle time and replacement
cost will be Rs. 15,000. Unused spares have no salvage value.
Determine the optimal no. of spares to be ordered.
Q.4 A newspaper boy is thinking of selling a special one time edition of a sports magazine to
his regular newspaper customers. Based on his knowledge of his customers, he believes
that he can sell between 9 to 12 copies.
The magazines can be purchased at Rs. 8 each and can be sold for Rs. 12
each. Magazine that are not sold can be returned to the publisher for a refund
of 50%.
(a) Construct the decision matrix for the above inventory problem
indicating possible monetary consequences.
(b) Determine the best decision from the stand point of
(i) Maximin criteria (ii) Maximax criteria
(iii)Hurwiez a-criterion assuming a=0.40
(iv) Minimax regret criteria (v) Laplace criteria

Q.5 Agent Corner, an authorized dealer in domestic appliances find that the cost of
holding refrigerator in stock for a week is Rs. 50.
 Customers who cannot get a new refrigerator immediately wanted to go to another
dealer for which expected profit is Rs. 350 per customer.

Probability distribution of demand is as follows:

No. of refrigerator: 0 1 2 3 4 5 6
Probability : 0.05 0.10 0.20 0.30 0.20 0.10 0.05

Assuming that there is no time lag between ordering and delivery, how many
refrigerators should we order per week?

Q.6 A departmental store buys Christmas tree at a landing cost of Rs 25 each and sells
them at an average of Rs 40. Any tree left over after the selling season has no resale
value.

The productivity distribution of sale of trees derived from analysis of pas t sales data is
under:
Tree (sale) Probability

100 0.10
200 0.15
300 0.35
400 0.20
500 0.10
600 0.05
700 0.05

a) How many trees should be department store buy to maximize its profit?

b) If trees left after the selling season cost Rs 5 each to remove ,does it affect the
inventory decision?

Q.7 A newspaper boy is thinking of selling a special one time edition of a sports magazine to
his regular newspaper customers. Based on his knowledge of his customer the copies of the
magazine with probabilities estimated as under:

No of copies probability

6 0.10
7 0.15
8 0.35
9 0.20
10 0.10
11 0.05
12 0.05

The magazine can be purchased at Rs 8 each and can be sold for Rs 12 Each.
 a) Magazines that are not sold can be required to the publisher for a refund of
50%.Determine optimum quantity to be purchased?
b) If the publisher does not take back the unsold magazines and the boy is forced to sell
them as scrap at rs 1.50, what should be the order quantity.
c) And if the boy gets magazines “on sale basis”,what quantity should be ordered?

Q.8 A Ship building company has launched a program for the construction of new class of
ships. Certain spare units like prime over, each costing 200000 have to be purchased. If these
units are not available when needed, a serious loss is incurred which is in order of Rs
10000000 each instance requirements of spares with the corresponding probabilities are given
below.

Nos of spares: 0 1 2 3 4 5

Probability of 0.876 0.062 0.041 0.015 0.005 0.001

requirement
How many spares should the company buy in order to optimize inventory decision?

Fifth Topic Decision Analysis Problems for Practice

Q.1 A perishable item is ordered only once each demand period. Acquisition cost is
$3, selling price is $5, and salvage value is $1.50. What is optimal order quantity?
Given:

Demand Probability
100 0.1
110 0.2
120 0.2
130 0.3
140 0.1
150 0.1

Q.2 A newspaper boy buys papers for Rs 1.30 each and sells them for Rs 1.40 each. He
cannot return unsold newspapers. Daily demand has the following distribution.

No. of customers: 23 24 25 26 27 28 30 31 32
Probability: 0.01 0.03 0.06 0.10 0.20 0.25 0.10 0.05 0.05

If each day's demand is independent of the previous day’s, how many papers he should order
each day?