IMAT2401 Management Decision Making- economic order quantity

Question 1 (20 marks)

For this question you may find the formulae given at the end of the test paper helpful.

At the end of this question, save your excel file(s) with your pnumber_Q1 and submit via BB links. 

A mobile phone manufacturer needs to buy in a particular mobile phone case for a particular model of mobile phone that it manufactures. The demand for the phone case is reasonably constant at an annual rate of 6,000 per year. Each time the manufacturer makes an order they incur ordering costs of £20. They estimate their annual holding costs for the cases to amount to 20% of the cost price of the case which is £8 each.

a) By using Excel only, determine the economic order quantity for the phone cases. (4 marks)

b) By using Excel only, determine the total annual cost of holding and ordering the phone cases, associated with ordering the quantity in a) above. (3 marks)

c) If the manufacturer works 5 days a week for 50 weeks a year and there is a lead time of 5 days, state the reorder point. (2 marks)

d) Determine the cycle time (time between orders).(2 marks)

e) The manufacturer is considering manufacturing the mobile phone cases themselves and would do this in batches. They have the manufacturing capacity to make these at an annual rate of 20,000 per year. The cost of setting up production of the cases each time this is done is estimated to be £1,000 but the manufacturing cost of the cases would be £7.50 each (as opposed to the buy in cost of £8 each). The holding cost rate of 20% based on the £7.50 manufacturing cost applies here.  Use only Excel to determine the quantity they should make in each batch. (4 marks) 

f) Justify whether buying the cases in, or manufacturing the cases themselves, is the cheaper option. (5 marks)

Question 2 (20 marks)

a) A company needs to decide between building either a small or a large factory to produce a new product it has just developed.

The estimated potential profit associated with each decision alternative with four states of nature given in below table. The payoff table below gives these profits in £000’s.

b) If the company thinks the probability assessments P(S1) = 0.35, P(S2) = 0.30, P(S3) = 0.20, P(S4) = 0.15. Use Excel to determine which decision the company should make in order to maximize profits, using the expected value approach. Along with your recommended decision, state what the expected value is for this decision. You do not need to show any working.

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