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Reject Allowance Problem - 2 Problems

This document discusses two problems related to determining the optimal quantity (Q) to produce when considering reject allowances and expected profits. In Problem 1, the goal is to produce exactly 4 good castings. Various values of Q are considered and the expected profit calculated based on the probability of producing different quantities (x) of good castings. In Problem 2, the goal is to produce exactly 20 units, and again the expected profit is maximized by choosing the optimal value of Q. Both problems involve calculating net incomes and probabilities for different combinations of x and Q to determine which Q value has the highest expected profit.

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Maher M. Aqrabawi
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
133 views

Reject Allowance Problem - 2 Problems

This document discusses two problems related to determining the optimal quantity (Q) to produce when considering reject allowances and expected profits. In Problem 1, the goal is to produce exactly 4 good castings. Various values of Q are considered and the expected profit calculated based on the probability of producing different quantities (x) of good castings. In Problem 2, the goal is to produce exactly 20 units, and again the expected profit is maximized by choosing the optimal value of Q. Both problems involve calculating net incomes and probabilities for different combinations of x and Q to determine which Q value has the highest expected profit.

Uploaded by

Maher M. Aqrabawi
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Process requirements – Quantitydetermination

Scrap Estimates
◦ Determination of the quantity to be manufactured
for each component
For high volume production
The estimation of scrap

RejectAllowance Problem
◦ Determination the number of additional units to
allow when the number of items to produce are
very few and rejects randomly occur
For low volume production
The cost of scrap is very high
Reject allowance problem
x: Number of good units
p(x): Probability of producing exactly x good units
Q: Quantity of production
C(Q, x): Cost of producing Q units, with x good units
R(Q, x): Revenue from producing Q units, with x good units
P(Q, x): Profit from producing Q units, with x good units P(Q, x) = R(Q, x) -C(Q, x)
E[P(Q)]: Expected profit when Q units are produced
Q
EP(Q)=  P(Q, x) p(x)
x=0
Q
EP(Q)= R(Q, x) − C(Q, x)p(x)
x=0

How do we actually decide Q?


The goal is having exactly x units of good items. No more, no less!
Reject allowance problem
Q
EP(Q)= R(Q, x) − C(Q, x)p(x)
x=0

To maximize expected profit, Q can be determined


by enumerating over various values of Q
For most cost and revenue formulations the
equation is a concave function
X and Q are discrete variables, therefore p(X) is a
discrete probability function
If b is the number of defects then probability of
each number of defects may be different: P(b=1),
P(b=2) etc.
Reject Allowance Problem - Problem 1
4 castings needed, no less no more
Price=$30,000
Cost=$15,000
The probability of casting being good is 90%
➢ How many castings to produce?
➢ Probability of losing money?
 $0 x 4
Revenue R(Q, x) = 
$30000 * 4 = $120000 4 = x = Q

Cost C(Q, x) = $15000 * Q

Profit  −15000 * Q x 4
P(Q, x) = 
$120000 −15000 * Q 4 = x = Q

• Expected Profit:
Probabilities
For each Q, the probability associated with each x is
different!

The historical probabilities may be available


You may need to calculate the values of probability
mass function:

◦ Example: Probability of producing only 2 good items when


an order size is 10 and when the probability of producing a
good item is p = 95%
P(2) =  0.952 *(1− 0.95) (10−2)
10
2
Reject Allowance Problem - Problem 1
Probability mass function: (p=90%)
Casting Production
Good Castings
Reject Allowance Problem - Problem 1
Calculation of net income for combinations of x and Q

 −15000*Q x 4
P(Q,x) = 
$120000 −15000*Q 4 = x = Q
Reject Allowance Problem - Problem 1
Calculation of expected profits for Q = 4,5,6,7 and 8
Q
EP(Q)=  P(Q, x) p(x)
x=0

4 5 6 7 8
Reject Allowance Problem - Problem 1
Determination of Optimal Order Size

40000
35000
Expected Profit ($)

30000
25000
20000
15000
10000
5000
0
-5000 4 5 6 7 8
Q
Reject Allowance Problem - Problem 1
Probability of losing money (if Q=5)?

The probability of losing money on the transaction is the


probability of the net income being negative when Q equals 5.
Reject Allowance Problem - Problem 1
Calculation of net income for combinations of x and Q

A negative net cash flow occurs if less than 4 good castings


are produced.
Reject Allowance Problem - Problem 1
The probability of losing money on the transaction is the
probability of the net income being negative when Q equals 5.
A negative net cash flow occurs if less than 4 good castings
are produced.

The probability of producing less than 4 good castings equals:


0.00001+ 0.00045 + 0.0081 + 0.0729 = 0.0816
20 castings are needed (no more, no less)
Problem 2: C = $1100/unit
Price = $2500
Recycling Value = $200
➢ Q=? If maximizing expected profit
 $200Q x  20
R(Q, x) = 
$2500* 20 + (Q − 20) * 200 x = 20

C(Q, x) = $1100*Q

 (200 −1100)*Q x  20
P(Q, x) = 
$2500* 20 + (Q − 20) * 200−1100*Q x = 20

19 Q

E  P(Q)  =  − 900Q * p(x) +  ( 50,000 + 200Q − 4000 −1100Q ) p(x)


x=0 x=20
19 Q

=  − 900Q * p(x) +  ( 46,000 − 900Q ) p(x)


x=0 x=20
Reject allowance problem – Problem 2
19 Q
EP(Q)=  − 900Q* p(x) + (46,000 − 900Q)p(x)
x=0 x=20
Q
EP(Q)= −900Q + 46,000  p(x)
x=20

First determine the Expected profit for a chosen Q


Perform the same procedure for a new Q value
When the profit starts decreasing you have found
your solution

For each Q, the probability associated with each x is


different!
Historical probability distributions for the number of good products out of Q
P(Q,x): Calculation of net income for combinations of x and Q
 − 900*Q x  20
P(Q,x) = 
46000 − (900*Q) x = 20
Reject allowance problem – Problem 2

25000
Expected profit for Q
20000
15000
10000
5000
0
22 24 26 28 30
-5000 20
-10000

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