Sample Final Examination

1. Palmgard International makes two products: inner glove and STS batting glove. Profit is $5 for the
inner glove and $ for the STS batting glove. The inner glove re!uires 1.5 s!. ft. of leather and "
inches of foam while the STS batting glove re!uires 1 s!. ft of leather and # inches of foam.
Palmgard receives 5$$ s!. ft of leather and 15 ft. of foam each da% for production. It takes "
minutes to construct an inner glove and # minutes to construct an STS batting glove and there are &$
hours available each da%. Palmgard re!uires that at least '5 inner gloves are made dail%. Set up the
(inear Program model )do not solve it*. (10%)
+ecision ,ariables are:
-1 . /umber of inner glove made dail%
-' . /umber of STS batting gloves made dail%
0a1imi2e dail% profit 5-1 3 -'
s.t. 1.5-1 3 1' 5$$ )leather*
"-1 3 #-' '1$$ )foam*
"-1 3 #-' #&$$ )labor*
-1 '5 )production*
-14 -' $.
'. 5 manager is considering to market )0* a product. 6ut he is not sure whether the market is good )g*
or not )g7*. 8is estimated pa%off matri1 is shown as follows.

g g7
0 9#4$$$ :;4$$$
07 $ $

p).* $.# $."
a. 5ccording to the 0in<e1pected regret criterion4 what is the manager7s decision= (10%)
b. /ow the manager wants to have additional information for his decision making. 8ow
much should he pa% at most for the additional information. (5%)
Pa%off table
> >1
0 9#$$$ <;$$$
01 $ $
?egret
> >1
0 $ ;$$$
01 9#$$$ $
@?)0* . $ ).#$* 3 ;$$$ )."$* . 54#$$
@?)01* . 9#$$$ ).#$* 3 $ )."$* . 194"$$
a. 0 . 54#$$ 0in<e1pected regret
b. Since in general @,PI . @A(4 the @,PI is $54#$$.
5lternativel%4 @,PI can be computed directl%4 as follow:
@?@, 9#$$$).#$* 3 <;$$$ )."$* . &4'$$$
@?@, $ ).#$* 3 $ )."$* . $
b. 194"$$ : &4'$$ . 54#$$
9. 5nswer the following !uestions using the following problem and its managerial summar% solution.
05- &-1 3 ;-' 3 1$-94
S.T.4 9-13'-'3'-9 B ''5$4 #-13 #-'3 "-9 B 9"$$4 -13 -'3'-9 B ;5$4 -13-' B &$$4
all variables are non<negative4 and the following managerial information: (25%)
Solution Total 5llowable 5llowable
,ariable Profit Profit 0in. c)C* 0a1.c)C*
-1 $ &.$ $ <0 ;.$
-' &$$. ;.$ '$$.$ &.$$ 0
-9 ""." 1$.$ """." $ 19.5
AbCective Dunction )0a1.* . &""."
(eft 8and Shadow 5llowable
Eonstraint SlackFSurplus Price 0in. ?8S 0a1. ?8S
E1 199.99 51"." $ 199.990
E' 9"$$ $ 1." 9'$$ 9"5$
E9 ;99.99 1"." $ ;99.99 0
E# &$$ $ '.99 5$ ;$$
9.1. Ghat are the optimal solution and the optimal value=
Aptimal solution is: -1 . $4 -' . &$$4 -9 . ""."4 with optimal value of &""."
9.'. Ghat is the allowable increase for each of the coefficients of the decision variables can reach
before changing the strateg%.
Dor cost coefficient c1 . & it is 1. Dor cost coefficient c' . ; it is unlimited. Ghile for cost coefficient c9
. 1$ it is 9.5
9.9 Ghat is the value of the unused portion of resource E1=
It is 51".".
9.9. 8ow much are %ou willing to pa% for additional units of resource number four.
$'.99 up to 1$$ units.
9.5. Ghat is the impact on the optimal solution if the obCective function is changed to -1 3 ;-' 3
1$-9 = Gh%=
The cost coefficient c1 in the new obCective function is within its allowable range. Therefore4 there is no
impact current optimal solution.
#. The 56E wants to market a new series program4 whose success probabilit% was estimated to be &$H.
Suppose a marketing research agenc% is hired to evaluate the program. The past e1perience indicates that
the agenc% has ;$H of accurac% in predicting a success and &$H of accurac% in predicting a failure. Ghat
is the probabilit% that the program is successful given a favorable prediction= Ghat is the probabilit% that
the program is a failure given an unfavorable prediction= (10%)
Positive
FAVORABLE prior Eonditional Coint posterior
Successful .&$ .;$ .' .'F." . .;5
Insuccessful .'$ .'$ .$# .$#F." . .$5
."
/egative
UNFAVORABLE prior Eonditional Coint posterior
Successful .&$ .1$ .$& .$&F.'# . .99
Insuccessful .'$ .&$ .1" .1"F.'# . ."
.'#
5. 5 compan% faces a decision with respect to a product )code named 0;;* developed b% one of its
research laboratories. It has to decide whether to proceed to test market 0;; or whether to drop it
completel%. It is estimated that test marketing will cost $1$$J. Past e1perience indicates that onl% 9$H of
products are successful in test market.
If 0;; is successful at the test market stage then the compan% faces a further decision relating to the si2e
of plant to set up to produce 0;;. 5 small plant will cost $15$J to build and produce '$$$ units a %ear
whilst a large plant will cost $'5$J to build but produce #$$$ units a %ear.
The marketing department have estimated that there is a #$H chance that the competition will respond
with a similar product and that the price per unit sold )in $* will be as follows )assuming all production
sold*:
(arge plant Small plant
Eompetition respond '$ 95
Eompetition do not respond 5$ "5
5ssuming that the life of the market for 0;; is estimated to be %ears and that the %earl% plant running
costs is $5$J )both si2es of plant < to make the numbers easierK* should the compan% go ahead and test
market 0;;=
a* >raph a decision three for this decision problem (15%)
b* @valuate the value of each node on the tree (15%)
c* ?ecommend the best course of action (10%)
5 detailed solution: The decision tree is given below. Gork on the decision tree from the left<hand side
of the tree to the right<hand side.
Path to terminal node ' < we drop 0;;
Total revenue . $
Total cost . $
Total profit . $
/ote that we ignore here )and below* an% mone% alread% spent on developing 0;; )that
being a sunk cost4 i.e. a cost that cannot be altered no matter what our future decisions
are4 so logicall% has no part to pla% in deciding future decisions*.
Path to terminal node # < we test market 0;; )cost $1$$J* but then find it is not successful so we drop
it
Total revenue . $
Total cost . 1$$
Total profit . <1$$ )all figures in $J*
Path to terminal node < we test market 0;; )cost $1$$J*4 find it is successful4 build a small plant
)cost $15$J* and find we are without competition )revenue for %ears at '$$$ units a %ear at $"5 per unit
. $;1$J*
Total revenue . ;1$
Total cost . '5$ 3 15$ )running cost*
Total profit . 91$
Path to terminal node & < we test market 0;; )cost $1$$J*4 find it is successful4 build a small plant
)cost $15$J* and find we have competition )revenue for %ears at '$$$ units a %ear at $95 per unit .
$#;$J*
Total revenue . #;$
Total cost . '5$ 3 15$
Total profit . <11$
Path to terminal node 1$ < we test market 0;; )cost $1$$J*4 find it is successful4 build a large plant
)cost $'5$J* and find we are without competition )revenue for %ears at #$$$ units a %ear at $5$ per unit
. $1#$$J*
Total revenue . 1#$$
Total cost . 95$ 3 15$
Total profit . $$
Path to terminal node 11 < we test market 0;; )cost $1$$J*4 find it is successful4 build a large plant
)cost $'5$J* and find we have competition )revenue for %ears at #$$$ units a %ear at $'$ per unit .
$5"$J*
Total revenue . 5"$
Total cost . 95$ 3 15$
Total profit . <1#$
Path to terminal node 1' < we test market 0;; )cost $1$$J*4 find it is successful4 but decide not to build
a plant
Total revenue . $
Total cost . 1$$
Total profit . <1$$
/ote that4 as mentioned previousl%4 we include this option because4 even if the product is successful in
test market4 we ma% not be able to make sufficient revenue from it to cover an% plant construction and
running costs.
8ence we can form the table below indicating4 for each branch4 the total profit involved in that branch
from the initial node to the terminal node.
Terminal node Total profit )$J*
' $
# <1$$
91$
& <11$
1$ $$
11 <1#$
1' <1$$

So far we have not made use of the probabilities in the problem < this we do in the second step where we
work from the right<hand side of the diagram back to the left<hand side.
/ow consider chance node " with branches to terminal nodes and & emanating from it. The branch to
terminal node occurs with probabilit% $." and total profit $91$J whilst the branch to terminal node &
occurs with probabilit% $.# and total profit <11$J. 8ence the e1pected monetar% value )@0,* of this
chance node is given b%
$." 1 )91$* 3 $.# 1 )<11$* . 1#' )$J*
@ssentiall% this figure represents the e1pected )or average* profit from this chance node )"$H of
the time we get $91$J and #$H of the time we get <$11$J so on average we get )$." 1 )91$* 3
$.# 1 )<11$** . 1#' )$J**.
The @0, for an% chance node is defined b% Lsum over all branches4 the probabilit% of the branch
multiplied b% the monetar% )$* value of the branchL. 8ence the @0, for chance node ; with branches to
terminal nodes 1$ and 11 emanating from it is given b%
$." 1 )$$* 3 $.# 1 )<1#$* . 9"# )$J*
Ge can now picture the decision node relating to the si2e of plant to build as below where the chance
nodes have been replaced b% their corresponding @0,7s.
8ence at the plant decision node we have the three alternatives:
)9* build small plant @0, . 1#'J
)#* build large plant @0, . 9"#J
)5* build no plant @0, . <1$$J
It is clear that4 in M terms4 alternative number # is the most attractive alternative and so we can discard the
other two alternatives4 giving the revised decision tree shown below.
Ge can now repeat the process we carried out above.
The @0, for chance node 9 representing whether 0;; is a success in test market or not is
given b%
$.9 1 )9"#* 3 $. 1 )<1$$* . 9;.' )$*
8ence at the decision node representing whether to test market 0;; or not we have the two alternatives:
)1* drop 0;; @0, . $
)'* test market 0;; @0, . 9;.'J
Part c: It is clear that4 in $ terms4 alternative number ' is preferable and so we should decide to test
market 0;;.
1 9
Tr% test market
5
Plant si2e
<1$$.$$
$.$$H
+rop 0;;
9$.$$H
91$.$$
"$.$$H
<11$.$$
#$.$$H
$$.$$
"$.$$H
<1#$.$$
#$.$$H
node #
node
node &
node 1$
node 11
/o plant
"
small
;
large
9;.'$
1#'
9"#
<1$$.$$
9"#