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Tutorial 1 Solutions

The foundry received an order for 4 custom castings at $30,000 each. It costs $15,000 to produce each casting with a 90% probability of being good. The optimal number of castings to produce is 4. As cost decreases, the optimal number increases, while changes in probability sensitivity impact the optimal number. The analysis considers net income outcomes from different production quantities given costs and success probabilities.

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Omar Abu-obialla
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301 views

Tutorial 1 Solutions

The foundry received an order for 4 custom castings at $30,000 each. It costs $15,000 to produce each casting with a 90% probability of being good. The optimal number of castings to produce is 4. As cost decreases, the optimal number increases, while changes in probability sensitivity impact the optimal number. The analysis considers net income outcomes from different production quantities given costs and success probabilities.

Uploaded by

Omar Abu-obialla
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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A foundry receives an order for four custom-designed castings.

The customer will pay $30,000 for each of f


customer will accept neither fewer nor more than four castings. It will cost $15,000 to produce each castin
independently; the probability of a casting being good is estimated to be 0.90.
a. How many castings should be produced?
b. What is the probability of losing money on the transaction?
c. It has been argued that the estimate of cost to produce each casting is not very accurate. Analyze the sen
production quantity to errors in estimating the values of the cost parameters; determine how much the co
has to decrease in order to increase by one the number of castings to produce.
d. It has been argued that the estimate of the probability of a casting being good is in- accurate. Analyze th
batch production quantity to changes in the probability. Shown below is the probability mass function for t
designed castings produced (x), based on Q castings scheduled for production.

X = 4 casting is needed (No more, no Less)


C = $15,000/unit
Recycling Value = $0
Price = $30,000 for 4
p=0.90

X 4
C 15000
R 0
P 30000
p 0.9
ill pay $30,000 for each of four good castings. The
000 to produce each casting. Each casting is produced

ry accurate. Analyze the sensitivity of the optimum batch


etermine how much the cost of producing each casting

d is in- accurate. Analyze the sensitivity of the optimum


obability mass function for the number of good custom-
R(Q,x)

C(Q,x)
o Less)

P(Q,x)
Solutions

0 x<4
30,000(4) x=>4

15,000Q

(-)15,000Q x<4
30,000(4)-15,000Q x=>4

(-)15,000Q
P(Q,x) 30,000(4)-15,000Q
Good Casting
X/Q 4
0 0.0001
1 0.0036
2 0.0486
3 0.2916
4 0.6561
5
6
7
1.00

P(Q,x)
Good Casting
X/Q 4
0 -60000
1 -60000
2 -60000
(-)15,000Q x<4 3 -60000
30,000(4)-15,000Q x=>4 4 60000
5
6
7
Expected profit 18,732
4
a 18,732
b
15,000 c 18,732
6,000 -60 54,732
12,000 -20 30,732
13,500 -10 24,732
16,500 10 12,732
18,000 20 6,732
30,000 100 -41,268
d
do same
Number of casting produced (Q)
5 6 7
0.0000 0.0000 0.0000
0.0004 0.0001 0.0000
0.0081 0.0012 0.0002
0.0729 0.0146 0.0026
0.3281 0.0984 0.0230
0.5905 0.3543 0.1240
0.5314 0.3720
0.4783
1.00 1.00 1.00

P(Q,x): Calculation of net income for combinations of x and Q


Number of casting produced (Q)
5 6 7
-75000 -90000 -105000
-75000 -90000 -105000
-75000 -90000 -105000
-75000 -90000 -105000
45000 30000 15000
45000 30000 15000
30000 15000
15000
35,225 28,098 14,673
5 6 7
35,225 28,098 14,673
0.0815
35,225 28,098 14,673
80,225 82,098 77,673
50,225 46,098 35,673
42,725 37,098 25,173
27,725 19,098 4,173
20,225 10,098 -6,327
-39,775 -61,902 -90,327
d (Q)

of x and Q
d (Q)

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