Practical Management Science
6th Edition
ISBN: 9781337406659
Author: WINSTON, Wayne L.
Publisher: Cengage,
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Chapter 11, Problem 56P
A common decision is whether a company should buy equipment and produce a product in house or outsource production to another company. If sales volume is high enough, then by producing in house, the savings on unit costs will cover the fixed cost of the equipment. Suppose a company must make such a decision for a four-year time horizon, given the following data. Use simulation to estimate the probability that producing in house is better than outsourcing.
- If the company outsources production, it will have to purchase the product from the manufacturer for $25 per unit. This unit cost will remain constant for the next four years.
- The company will sell the product for $42 per unit. This price will remain constant for the next four years.
- If the company produces the product in house, it must buy a $500,000 machine that is
depreciated on a straight-line basis over four years, and its cost of production will be $9 per unit. This unit cost will remain constant for the next four years. - The demand in year 1 has a worst case of 10,000 units, a most likely case of 14,000 units, and a best case of 16,000 units.
- The average annual growth in demand for years 2-4 has a worst case of 7%, a most likely case of 15%, and a best case of 20%. Whatever this annual growth is, it will be the same in each of the years.
- The tax rate is 35%.
- Cash flows are discounted at 8% per year.
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For a given perishable product, a retailer pays $5 for each unit, then sells them for $10 each. At the end of the day, units not sold at the store are disposed of, and the retailer receives just $1 for each. Given the following probability distribution describing daily demand, how many units should be stocked?
x Prob. (Demand = x) x Prob. (Demand = x)
0 0.01 7 0.18
1 0.02 8 0.14
2 0.04 9 0.09
3 0.07 10 0.05
4 0.09 11 0.02
5 0.12 12 0.01
6 0.15 13 0.01
The University of Miami bookstore stocks textbooks in preparation for sales each semester. It normally relies on departmental forecasts and preregistration records to determine how many copies of a text are needed. Preregistration shows 90
operations management students enrolled, but bookstore manager Vaidy Jayaraman has second thoughts, based on his intuition and some historical evidence. Vaidy believes that the distribution of sales may range from 70 to 90 units, according
to the following probability model:
Demand
70
75
80
85
90
Probability
0.10
0.20
0.20
0.10
0.40
This textbook costs the bookstore $82 and sells for $112. Any unsold copies can be returned to the publisher, less a restocking fee and shipping, for a net refund of $40.
a) Based on the given information, Vaidy's conditional profits table for the bookstore is:
Demand
70
75
80
85
90
Stock
p = 0.10
p= 0.20
p = 0.20
p = 0.10
p= 0.40
70
2100
2100
2100
2100
2100
75
$1,890
2250
2250
2250
2250
80
Chapter 11 Solutions
Practical Management Science
Ch. 11.2 - If the number of competitors in Example 11.1...Ch. 11.2 - In Example 11.1, the possible profits vary from...Ch. 11.2 - Referring to Example 11.1, if the average bid for...Ch. 11.2 - See how sensitive the results in Example 11.2 are...Ch. 11.2 - In Example 11.2, the gamma distribution was used...Ch. 11.2 - Prob. 6PCh. 11.2 - In Example 11.3, suppose you want to run five...Ch. 11.2 - In Example 11.3, if a batch fails to pass...Ch. 11.3 - Rerun the new car simulation from Example 11.4,...Ch. 11.3 - Rerun the new car simulation from Example 11.4,...
Ch. 11.3 - In the cash balance model from Example 11.5, the...Ch. 11.3 - Prob. 12PCh. 11.3 - Prob. 13PCh. 11.3 - The simulation output from Example 11.6 indicates...Ch. 11.3 - Prob. 15PCh. 11.3 - Referring to the retirement example in Example...Ch. 11.3 - A European put option allows an investor to sell a...Ch. 11.3 - Prob. 18PCh. 11.3 - Prob. 19PCh. 11.3 - Based on Kelly (1956). You currently have 100....Ch. 11.3 - Amanda has 30 years to save for her retirement. At...Ch. 11.3 - In the financial world, there are many types of...Ch. 11.3 - Suppose you currently have a portfolio of three...Ch. 11.3 - If you own a stock, buying a put option on the...Ch. 11.3 - Prob. 25PCh. 11.3 - Prob. 26PCh. 11.3 - Prob. 27PCh. 11.3 - Prob. 28PCh. 11.4 - Prob. 29PCh. 11.4 - Seas Beginning sells clothing by mail order. An...Ch. 11.4 - Based on Babich (1992). Suppose that each week...Ch. 11.4 - The customer loyalty model in Example 11.9 assumes...Ch. 11.4 - Prob. 33PCh. 11.4 - Suppose that GLC earns a 2000 profit each time a...Ch. 11.4 - Prob. 35PCh. 11.5 - A martingale betting strategy works as follows....Ch. 11.5 - The game of Chuck-a-Luck is played as follows: You...Ch. 11.5 - You have 5 and your opponent has 10. You flip a...Ch. 11.5 - Assume a very good NBA team has a 70% chance of...Ch. 11.5 - Consider the following card game. The player and...Ch. 11.5 - Prob. 42PCh. 11 - You now have 5000. You will toss a fair coin four...Ch. 11 - You now have 10,000, all of which is invested in a...Ch. 11 - Suppose you have invested 25% of your portfolio in...Ch. 11 - Prob. 47PCh. 11 - Based on Marcus (1990). The Balboa mutual fund has...Ch. 11 - Prob. 50PCh. 11 - Prob. 52PCh. 11 - The annual demand for Prizdol, a prescription drug...Ch. 11 - Prob. 54PCh. 11 - The DC Cisco office is trying to predict the...Ch. 11 - A common decision is whether a company should buy...Ch. 11 - Suppose you begin year 1 with 5000. At the...Ch. 11 - You are considering a 10-year investment project....Ch. 11 - Play Things is developing a new Lady Gaga doll....Ch. 11 - An automobile manufacturer is considering whether...Ch. 11 - It costs a pharmaceutical company 75,000 to...Ch. 11 - Prob. 65PCh. 11 - Rework the previous problem for a case in which...Ch. 11 - Prob. 68PCh. 11 - The Tinkan Company produces one-pound cans for the...Ch. 11 - Prob. 70PCh. 11 - In this version of dice blackjack, you toss a...Ch. 11 - Prob. 76PCh. 11 - It is January 1 of year 0, and Merck is trying to...Ch. 11 - Suppose you are an HR (human resources) manager at...Ch. 11 - You are an avid basketball fan, and you would like...Ch. 11 - Suppose you are a financial analyst and your...Ch. 11 - Software development is an inherently risky and...Ch. 11 - Health care is continually in the news. Can (or...
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