http://econweb.rutgers.edu/sani/cook/321/321-sample%20test.

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Economics of Production
11:373:321

Practice Test Questions:

Chapter 1

1-  Operations management is applicable

A) mostly to the manufacturing sector  
B) to the manufacturing sector exclusively  
C) to all firms, whether manufacturing and service  
D) to services exclusively  
E) mostly to the service sector 

2- The marketing function's main concern is with 

A) generating the demand for the organization's products or services  
B) procuring materials, supplies, and equipment  
C) producing goods or providing services  
D) securing monetary resources  
E) building and maintaining a positive image 

3- The five elements in the management process are 

A) accounting/finance, marketing, operations, and management  
B) plan, organize, staff, lead, and control  
C) organize, plan, control, staff, and manage  
D) plan, direct, update, lead, and supervise  
E) plan, lead, organize, manage, and control 

4- An operations manager is not likely to be involved in

A) the identification of customers' wants and needs  
B) work scheduling to meet the due dates promised to customers  
C) the quality of products and services to satisfy customers' wants and needs  
D) forecasting sales  
E) the design of products and services to satisfy customers' wants and needs 

5- The field of operations management is shaped by advances in which of the following?

A) information sciences  
B) chemistry and physics  
C) biology and anatomy  
D) industrial engineering and management science  
E) all of the above 

6- Which of the following is not a typical attribute of goods? 

A) output can be resold  
B) aspects of quality difficult to measure  
C) often easy to automate  
D) output can be inventoried  
E) production and consumption are separate 

7- Which of the following is not a typical service attribute? 

A) easy to store  
B) difficult to resell  
C) simultaneous production and consumption  
D) intangible product  
E) customer interaction is high 

8- Which of the following statements about trends in operations management is false? 

A) Job specialization is giving way to empowered employees.  
B) Local or national focus is giving way to global focus.  
C) Rapid product development is partly the result of shorter product cycles.  
D) Environmentally-sensitive production is giving way to low-cost focus.  
E) All of the above statements are true. 

9- Gibson Valves produces cast bronze valves on an assembly line, currently producing 1600 valves per
shift. If the production is increased to 2000 valves per shift, labor productivity will increase by
A) 10% 
B) 20% 
C) 25% 
D) 40% 
E) 50% 

Problem:

10) Mark's Ceramics spent $4000 on a new kiln last year, in the belief that it would cut energy usage 25%
over the old kiln. This kiln is an oven that turns "greenware" into finished pottery. Mark is concerned that
the new kiln requires extra labor hours for its operation. Mark wants to check the energy savings of the
new oven, and also to look over other measures of their productivity to see if the change really was
beneficial. Mark has the following data to work with:

  Last Year This Year

Production (finished units) 4000 4000
Greenware (pounds) 5000 5000
Labor (hrs) 350 375
Capital ($) 15000 19000
Energy (kWh) 3000 2600

Were the modifications beneficial? Show your work.

 
 

Chapter 1 Answer Key

1) C
2) A
3) B
4) A
5) E
6) B
7) A
8) D
9) C

10) The energy modifications did not generate the expected savings; labor and capital productivity
decreased. 

Resource Last Year This Year Change Pct.

s Change
400
Labor 0 / 350 = 11.43 4000 / 375 = 10.67 -0.76 -6.7%
400
Capital 0 / 15000= 0.27 4000 / 19000= .21 -0.06 -22.2%
400
Energy 0 / 3000 = 1.33 4000 / 2600 = 1.54 -0.21 15.4%

Chapters 2-4 (Handouts)

 Given the supply schedule in the below table:

point px qx
A 6 8000

B 5 6000

C 4 4000

D 3 2000

1-  Calculate the supply elasticity, θx for a movement from A to C:

A)  θx = 1.5
B)  θx = -1.5
C)  θx = 1.67
D)  θx = 1.67
Given the demand schedule in the below table:

point px qx
A 7 500

B 6 750

C 5 1250

D 4 2000

E 3 3250

2-  Calculate the demand elasticity, ηx for a movement from C to E:

A)  ηx = 4
B)  ηx = -4
C)  ηx = -0.92
D)  ηx = 0.92

3-  The production function q = K + L exhibits:

A)  increasing returns to scale.
B)  decreasing returns to scale.
C)  constant returns to scale.
D)  increasing returns to scale early on, but eventually decreasing returns to scale.
E)  decreasing returns to scale early on, but eventually increasing returns to scale.

4-  The production function

A)  exhibits constant returns to scale and constant marginal productivities for K and L.
B)  exhibits diminishing returns to scale and diminishing marginal productivities for K and L.
C)  exhibits constant returns to scale and diminishing marginal productivities for K and L.
D)  exhibits diminishing returns to scale and constant marginal productivities for K and L.

5-  In the short run, 

A)  all resources are fixed.
B)  all resources are variable. 
C)  at least one resource is fixed.
D)  there are no variable costs.

Labor Total product

(workers per (pizzas per

day) day)
0 0
1 10
2 25
3 37
4 45
5 50

6-  Based on the production data for Pat's Pizza Parlor in the above table, the marginal product of the 4th
worker is ________ pizzas.
A)  45
B)  10
C)  5
D)  8

7-  Based on the production data for Pat's Pizza Parlor in the above table, which worker has the largest
marginal product?
A) Worker 3
B) Worker 1
C) Worker 4
D) Worker 2

8-  Based on the production data for Pat's Pizza Parlor in the above table, the average product of labor
when 4 workers are hired is ________ pizzas.
A) 10
B) 11.25    
C) 8
D) 45

9- The law of diminishing returns occurs because

A) total production decreases as more of the variable input is used. 
B) the productivity of the variable input, such as labor, depends in part on the amount of fixed inputs such
as capital. 
C) the marginal product of an additional worker is greater than the marginal product of the previous
worker. 
D) adding more and more workers continues to decrease output.

Answer the next two questions based on the following information:

The owner of the Martin Marina believes that the relationship between the number of boats serviced and
the labor input is

q = -3 + 8.5L - 2L2

where:  q is the number of boats serviced per hour.

                 L is the number of people employed.

Her firm receives $20 for each boat serviced, and the wage rate for each person employed is $10.

10-  how many people should she employ to maximize profit?

A)  she should employ 2 people
B)  she should employ 20 people
C)  she should employ 1 people
D)  she should employ 10 people
E)  she should employ 5 people

11-  what will be the firm’s hourly profit? (assume that the only cost is labor cost)
A)  hourly profit should be equal $50
B)  hourly profit should be equal $300
C)  hourly profit should be equal $250
D)  hourly profit should be equal $200
E)  hourly profit should be equal $100
12-  At my company, the average product of labor,  where L is labor input per unit of time.
A)  labor always is subject to diminishing marginal returns.
B)  labor is subject to diminishing marginal returns only when L is grater than 5.
C)  labor always is not subject to diminishing marginal returns.
D)  labor always is not subject to diminishing marginal returns when L is greater than 5.

Problems:

13-  Consider the following production function:     q = 20KL

where:  q is the output rate

                 L is the number of units of labor per period of time.
            K is the number of units of capital per period of time.

The price of labor is $4 a unit, and the price of capital is $10 per unit

A)  write down the total cost function.

B)  what minimum combination of inputs should the firm use to produce 200 units of output per  period of
time

14- At your company the total cost function is TC = 100 + 3q – 2q2 +3q3 where q is output per day.

A)  what’s your company average cost function?

B)  what’s your company marginal cost function?
C)  at what output is marginal cost a minimum?

15- At my firm, the following relationship exists between the total cost, TC and output, q:

                                    TC = 40 + 3q +2q2

A)  what’s my firm average total cost?

B)  at what output is average total cost a minimum?

Chapter 2-4 Answer Key

1) A
2) B
3) C
4) C
5) C
6) D
7) D
8) B
9) B
10) A
11) E
12) A
13) A) TC = 4L + 10K   B) L = 5,  K = 2
14) A) AC = 100/q + 3 -2q +3q2       B)  MC = 3 -4q + 9q2       C) q = 0.22 units
15) A) AC = 40/q + 3 + 2q      B) q = 4.47 units

Chapter 2

1) Cost cutting in international operations can take place because of

A) lower indirect labor costs
B) less stringent regulations
C) lower wage scales
D) lower taxes and tariffs
E) all of the above

2) Which of the following represent reasons for globalizing operations?

A) to attract and retain global talent
B) to gain improvements in the supply chain
C) to improve operations
D) to expand a product's life cycle
E) All of the above are valid.

3) NAFTA seeks to
A) curb illegal immigration from Mexico to the United States
B) phase out all trade and tariff barriers between the United States, Canada, and Mexico
C) substitute cheap labor in Mexico for expensive labor in the United States
D) phase out all trade and tariff barriers between the United States and Mexico
E) All of the above are NAFTA goals.

4) Which of the following is true about business strategies?

A) An organization should stick with its strategy for the life of the business.
B) Organizational strategies depend on operations strategies.
C) Well defined missions make strategy development much easier.
D) Strategies are formulated independently of SWOT analysis.
E) All firms within an industry will adopt the same strategy.

5) Which of the following is true?

A) Corporate strategy is shaped by functional strategies.
B) Functional strategies are shaped by corporate strategy.
C) External conditions are shaped by corporate mission.
D) Corporate mission is shaped by functional strategies.
E) Functional area missions are merged to become the organizational mission.

6) Costs, quality, and human resource decisions interact strongly with the ________ decision.
A) supply-chain management
B) process and capacity design
C) goods and service design
D) layout design
E) All of the above are correct.
7) The PIMS program has identified the
A) distinctive competencies any company needs
B) operations decisions all organizations must make
C) characteristics of firms with high "ROI"
D) corporate decisions any company needs to make
E) all of the above

8) Cost minimization is an appropriate strategy in which stage of the product life cycle?
A) maturity
B) retirement
C) growth
D) introduction
E) decline

9) The three steps of the operations manager's job, in order, are

A) find the right staff, develop the strategy, establish the organizational structure
B) establish the organizational structure, find the right staff, develop the strategy
C) develop the strategy, establish the organizational structure, find the right staff
D) find the right staff, establish the organizational structure, develop the strategy
E) develop the strategy, find the right staff, establish the organizational structure

10) Which of the international operations strategies involves low cost reductions and low local
responsiveness?
A) transnational strategy
B) multidomestic strategy
C) global strategy
D) international strategy
E) none of the above

11) Which of the international operations strategies uses import/export or licensing of existing products?
A) international strategy
B )multidomestic strategy
C )global strategy
D )transnational strategy
E )none of the above

12) The stage in the product life cycle at which it is a poor time to change quality is
A) introduction
B) growth
C) decline
D) incubation
E) maturity

13) Response-based competitive advantage can be

A) reliable response
B) quick response
C) flexible response
D) all of the above
E) none of the above

14) Which of the following is not an operations strategic decision?

A) maintenance
B) inventory
C) quality
D) price
E) layout design
15) Which of the following is not an operations strategy?
A) low-cost leadership
B) experience
C) response
D) differentiation
E) All of the above are operations strategies.

Chapter 2 Answer Key

1) E
2) E
3) B
4) C 
5) B 
6) C 
7) C 
8) E 
9) C 
10) D
11) A
12) E
13) D
14) D
15) B

Chapter 3

1) The phases of project management are

A) planning, organizing, staffing, leading, and controlling
B) planning, scheduling, and controlling
C) different for manufacturing projects than for service projects
D) planning, programming, and budgeting
E) GANTT, CPM, and PERT

2) A project organization
A) is formed to ensure that programs (projects) get proper management and attention
B) is appropriate only in construction firms
C) often fails when the project cuts across organizational lines
D) is effective for companies with multiple large projects
E) A and D are both true.

3) Which of the following statements regarding Gantt charts is true?

A) Gantt charts give a timeline and precedence relationships for each activity of a project.
B) Gantt charts are visual devices that show the duration of activities in a project.
C) Gantt charts are expensive.
D) Gantt charts use the four standard spines of Methods, Materials, Manpower, and Machinery.
E) All of the above are true.
4) Which of the following statements regarding critical paths is true?
A) The duration of the critical path is the average duration of all paths in the project network.
B) The shortest of all paths through the network is the critical path.
C) Every network has exactly one critical path.
D) Some activities on the critical path may have slack.
E) On a specific project, there can be multiple critical paths, all with exactly the same duration.

5) A simple CPM network has three activities, D, E, and F. D is an immediate predecessor of E and of F.
E is an immediate predecessor of F. The activity durations are D=4, E=3, F=8.
A) The critical path is D-F, duration 12.
B) Slack at D is 3 units
C) Slack at E is 3 units
D) The critical path is D-E-F, duration 15.
E) Both A and C are true

6) The critical path for the network activities shown below is ________ with duration ________.

Immediate
Activity Duration Predecessors
A 2 ---
B 4 ---
C 6 A,B
D 1 A,B
E 2 B,C,D

A) A-D-E; 5
B) B-C-E; 12
C) B-E; 6
D) A-C-E; 10
E) B-D-E; 7

7) Which of the following statements regarding PERT times is true?

A) The probable time estimate is calculated as t = (a + 4m + b)/6.
B) Pessimistic time estimate is an estimate of the minimum time an activity will require.
C) Most likely time estimate is an estimate of the maximum time an activity will require.
D) The optimistic time estimate is an estimate of the maximum time an activity will require.
E) Expected time is an estimate of the time an activity will require if everything goes as planned.

8) In a PERT network, non-critical activities that have little slack need to be monitored closely
A) because near-critical paths could become critical paths with small delays in these activities
B) because they have a high risk of not being completed
C) because they are causing the entire project to be delayed
D) because PERT treats all activities as equally important
E) because slack is undesirable and needs to be eliminated

9) An activity on a PERT network has these time estimates: optimistic = 2, most likely = 5, and pessimistic
= 10. Its expected time is
A) 17
B) 5.67
C) 5.33
D) 5
E) none of these
10) A local project being analyzed by PERT has 42 activities, 13 of which are on the critical path. If the
estimated time along the critical path is 105 days with a project variance of 25, the probability that the
project will be completed in 95 days or less is
A) 4.2
B) 0.9772
C) -0.4
D) 0.0228
E) 0.3444

11) A project whose critical path has an estimated time of 120 days with a variance of 100 has a 20%
chance that the project will be completed before day ________ (rounded to nearest day).
A)124     B) 112     C) 220     D) 120 E) 98

12) Two activities are candidates for crashing on a CPM network. Activity details are in the table below.
To cut one day from the project's duration, activity ________ should be crashed first, adding ________ to
project cost.
 

Crash
Activity Normal Time Normal Cost Duration Crash Cost
One 8 days $6,000 6 days $6,800
Two 10 days $4,000 9 days $5,000

A) One; $6,800
B) Two; $1,000
C) Two; $5,000
D )One; $400
E) One or two should be crashed; $1,400

13) Which of the following statements regarding project management is true?

A) Project crashing is an optimizing technique.
B) "Project crashing" shortens a project by assigning more resources to at least one critical task
C) Both PERT and CPM require that network tasks have unchanging durations.
D) Crashing need not consider the impact of crashing an activity on other paths in the network.
E) Crash cost depends upon the variance of the activity to be crashed.

14) The expected activity time in PERT analysis is calculated as

A) the weighted average of a, m, and b, with m weighted 4 times as heavily as a and b
B) the sum of the optimistic, pessimistic, and most likely times, divided by six
C) the simple average of the optimistic, pessimistic, and most likely times
D) the sum of the activity variances, divided by six
E) the sum of the optimistic, pessimistic, and most likely times

Problem:

15) A network consists of the following list. Times are given in weeks.

Activity Preceding Duration

A --- 9
 B A 2
C A 12
D A 5
E B 6
F B 8
G C,F 3
H D 2
I H 8
J G,I 6
K E,J 2

a. Draw the network diagram.

b. Which activities form the critical path?
c. How much slack exists at activities A and F?
d. What is the duration of the critical path?

Chapter 3 Answer Key

1) B
2) E
3) B
4) E
5) D
6) B
7) A
8) A
9) C
10) D
11) B
12) D
13) B
14) A

Problem
15)
 

(a) Network diagram graphic

(b) paths A-D-H-I-J-K and A-C-G-J-K are critical;
(c) A has no slack; F has 2 units; (d) 32

Chapter 4

1) A forecast with a time horizon of about 3 months to 3 years is typically called a

A )medium-range forecast
B) long-range forecast
C) weather forecast
D) strategic forecast
E) short-range forecast

2) The two general approaches to forecasting are

A) judgmental and qualitative
B) historical and associative
C) mathematical and statistical
D) qualitative and quantitative
E) judgmental and associative

3) Which of the following uses three types of participants: decision makers, staff personnel, and
respondents?
A) consumer surveys
B) executive opinions
C) time series analysis
D) sales force composites
E) the Delphi method

4) Time series data may exhibit which of the following behaviors?

A) random variations
B) cycles
C) seasonality
D) trend
E) They may exhibit all of the above.

5) Which of the following is not present in a time series?

A) operational variations
B) trend
C) seasonality
D) cycles
E) random variations

6) Increasing the number of periods in a moving average will accomplish greater smoothing, but at the
expense of
A) responsiveness to changes
B) manager understanding
C) accuracy
D) stability
E) All of the above are diminished when the number of periods increases.

7) Given an actual demand of 103, a previous forecast value of 99, and an alpha of .4, the exponential
smoothing forecast for the next period would be
A )94.6     B) 97.4     C) 100.6     D) 101.6     E) 103.0

8)A forecasting method has produced the following over the past five months. What is the mean absolute
deviation?

Actual Forecast Error |Error|

10 11 -1 1
8 10 -2 2
10 8 2 2
6 6 0 0
9 8 1 1

A) -0.2     B) -1.0     C) 0.0     D) 1.2     E) 8.6

9)The last four months of sales were 8, 10, 15, and 9 units. The last four forecasts were 5, 6, 11, and 12
units. The Mean Absolute Deviation (MAD) is
A) 9         B) 10.5     C) -10     D) 3.5     E) 2

10) For a given product demand, the time series trend equation is 53 - 4 X. The negative sign on the
slope of the equation
A) implies that the RSFE will be negative
B) is an indication that product demand is declining
C) implies that the coefficient of determination will also be negative
D) is an indication that the forecast is biased, with forecast values lower than actual values
E) is a mathematical impossibility

11) The degree or strength of a linear relationship is shown by the

A) mean absolute deviation
B) RSFE
C )mean
D )alpha
E )correlation coefficient

12) A fundamental distinction between trend projection and linear regression is that
A) linear regression tends to work better on data that lack trends
B) trend projection uses two smoothing constants, not just one
C) trend projection uses least squares while linear regression does not
D) only linear regression can have a negative slope
E) in trend projection the independent variable is time; in linear regression the independent variable need
not be time, but can be any variable with explanatory power

Problems.

13) Given the following data, calculate the three-year moving averages for years 4 through 10.
 

Year Demand
1 74
2 90
3 59
4 91
5 140
6 98
7 110
8 123
9 99

14) Use exponential smoothing with α = 0.2 to calculate smoothed averages and a forecast for period 7
from the data below. Assume the forecast for the initial period is 7.

Period Demand
1 10
2 8
3 7
4 10
5 12
6 9

15) Favors Distribution Company purchases small imported trinkets in bulk, packages them, and sells
them to retail stores. They are conducting an inventory control study of all their items. The following data
are for one such item, which is not seasonal.

a. Use trend projection to estimate the relationship between time and sales (state the equation).
b. Calculate forecasts for the first four months of the next year.

  1 2 3 4 5 6 7 8 9 10 11 12
Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Sales 51 55 54 57 50 68 66 59 67 69 75 73
Chapter 4 Answer Key

1)A
2)D
3)E
4)E
5)A
6)A
7)C
8)D
9)D
10)B
11)E
12)E

Problems.

13)Year Demand 3-Year Moving Ave. 1 74 2 90 3 59 4 91 74.33 5 140 80.00 6 98 96.67 7 110 109.67 8
123 116.00 9 99 110.33 110.67

14)Period Demand Forecast 1 10 7.0 2 8 7.6 3 7 7.7 4 10 7.5 5 12 8.0 6 9 8.8

15)The trend projection equation is Y = 48.32 + 2.105 T. The next four months are forecast to be 75.68,
77.79, 79.89, and 82.00.

Chapter 11

1) What type of negotiating strategy requires the supplier to open its books to the purchasers?
A) market-based price model
B) cost-based price model
C) competitive bidding
D) price-based model
E) none of the above

2) Which one of the following statements about purchasing is true?

A) Purchasing provides a major opportunity for price increases.
B) Purchasing has an impact on the quality of the goods and services sold.
C) Competitive bidding is a major factor in long-term cost reductions.
D) The cost of purchases as a percent of sales is often small.
E) Purchasing is always more efficient than making an item.

3) In the make-or-buy decision, which of the following is not a reason for buying?
A) inadequate capacity
B) to obtain desired quality
C) lower inventory costs
D) patents or trade secrets
E) All of the above are reasons for buying.

4) Outsourcing
A) lets the outsourcing firm focus on its critical success factors
B) utilizes the efficiency which comes with specialization
C) may include facilities, people, and equipment
D) transfers traditional internal activities to outside vendors
E) All of the above are true of outsourcing.

5) A disadvantage of the "few suppliers" strategy is

A) the lack of cost savings for customers and suppliers
B) the risk of not being ready for technological change
C) possible violations of the Sherman Antitrust Act
D) the high cost of changing partners
E) All of the above are disadvantages of the "few suppliers" strategy.

6) Which of the following is not a condition that favors the success of vertical integration?
A )small market share
B )availability of managerial talent
C) availability of capital
D) required demand
E) All of the above favor the success of vertical integration.

7) The Japanese concept of a company coalition of suppliers is

A) poka-yoke
B) keiretsu
C) kaizen
D) illegal
E) dim sum

8) Which of the following is an advantage of the postponement technique?

A) reduction in automation
B) reduction in training costs
C) early customization of the product
D) reduction in inventory investment
E) better quality of the product

9) Which of the following best describes vendor managed inventory?

A) Small lots are delivered frequently.
B) There is only one supplier for all units of a particular product.
C) The supplier delivers only what the customer needs.
D) There is minimal purchasing-oriented paperwork.
E) The supplier maintains the inventory for the buyer.

10) Which of the following is not a component of negotiation strategies?

A) invoiceless bidding
B) market-based price model
C) competitive bidding
D) cost-based price model
E) combination of the above negotiation techniques

11) With the growth of JIT, which of the following distribution systems has been the biggest loser?
A) railroads
B) trucking
C) airfreight
D) waterways
E) pipelines

12) Which of the following devices represents an opportunity for technology to improve security of
container shipments?
A) devices that sense motion
B) devices that measure radiation or temperature
C) devices that can communicate the breaking of a container lock or seal
D) devices that identify truck and container location
E) all of the above

Chapter 11 Answer Key

1) B
2) B
3) B
4) E
5) D
6) A
7) B
8) D
9) E
10) A
11) A
12) E

Chapter 12

1) Which of the following is a function of inventory?

A) to take advantage of quantity discounts 
B) to decouple or separate parts of the production process 
C) to hedge against inflation 
D) to decouple the firm from fluctuations in demand and provide a stock of goods that will provide a
selection for customers 
E) All of the above are functions of inventory. 

2) ABC analysis divides on-hand inventory into three classes, generally based upon
A) the number of units on hand 
B) unit price 
C) annual dollar volume 
D) annual demand 
E) item quality 
3)Cycle counting
A) assumes that all inventory records must be verified with the same frequency 
B) is a process by which inventory records are verified once a year 
C) assumes that the most frequently used items must be counted more frequently 
D) provides a measure of inventory accuracy 
E) provides a measure of inventory turnover 

4) The two most basic inventory questions answered by the typical inventory model are
A) quantity and cost of orders 
B) order quantity and service level 
C) timing and cost of orders 
D) ordering cost and carrying cost 
E) timing and quantity of orders  

5) If the actual order quantity is the economic order quantity in a problem that meets the assumptions of
the economic order quantity model shown below, the average amount of inventory on hand

A) is smaller the smaller is the holding cost per unit 

B) is one-half of the economic order quantity 
C) is affected by the amount of product cost 
D) is zero 
E) All of the above are true. 

6) In the basic EOQ model, if D=6000 per year, S=$100, H=$5 per unit per month, the economic order
quantity is approximately
A) 24                B) 100               C) 141               D) 490               E) 600 

7) Which of the following statements about the basic EOQ model is true?
A )If annual demand were to double, the EOQ would increase. 
B) If the carrying cost were to increase, the EOQ would fall. 
C) If annual demand were to double, the number of orders per year would increase. 
D) If the ordering cost were to double, the EOQ would rise. 
E) All of the above statements are true. 

8) A product has demand of 4000 units per year. Ordering cost is $20 and holding cost is $4 per unit per
year. The EOQ model is appropriate. The cost-minimizing solution for this product will cost ________ per
year in total annual inventory costs.
A) $400 
B) $1200 
C) $800 
D) zero; this is a class C item 
E) cannot be determined because unit price is not known 

9) A product has demand of 4000 units per year. Ordering cost is $20 and holding cost is $4 per unit per
year. The cost-minimizing solution for this product is to order
A) every 20 days 
B) 10 times per year 
C) all 4000 units at one time 
D) 200 units per order 
E) none of the above 
10) An inventory decision rule states "when the inventory level goes down to 14 gearboxes, 100
gearboxes will be ordered." Which of the following statements is true?
A) Fourteen is the reorder point, and 100 is the order quantity. 
B) Fourteen is the safety stock, and 100 is the reorder point. 
C) The number 100 is a function of demand during lead time. 
D) One hundred is the reorder point, and 14 is the order quantity. 
E) None of the above is true. 

11) A production order quantity problem has daily demand rate = 10 and daily production rate = 50. The
production order quantity for this problem is approximately 612 units. The average inventory for this
problem is approximately
A) 61                B) 245               C) 300               D) 306               E) 490 

12) The EOQ model with quantity discounts attempts to determine

A) what is the lowest purchasing price 
B) what is the lowest amount of inventory necessary to satisfy a certain service level 
C) whether to use fixed-quantity or fixed-period order policy 
D) what is the shortest lead time 
E) how many units should be ordered 

Problems:

13)Your company has compiled the following data on the small set of products that comprise the specialty
repair parts division. Perform ABC analysis on the data. Which products do you suggest the firm keep the
tightest control over? Explain.

  Annual Demand Unit

Cost
R11 250 $250
S22 75 $90
T33 20 $60
U44 150 $150
V55 100 $75

14) A firm that makes electronic circuits has been ordering a certain raw material 250 ounces at a time.
The firm estimates that carrying cost is 30% per year, and that ordering cost is about $20 per order. The
current price of the ingredient is $200 per ounce. The assumptions of the basic EOQ model are thought to
apply. For what value of annual demand is their action optimal? 

15) Given the following data: D=65,000 units per year, S = $120 per setup, P = $5 per unit, and I = 25%
per year, calculate the EOQ and calculate annual costs following EOQ behavior. 

Chapter 12 Answer Key

1) E
2) C
3) D
4) E
5) B    
6) C
7) E
8) C
9) D    
10 )A
11) B    
12) E

13) R11 and U44 represent over 80% of the firm's volume in this area. R11 is classified A, U44 is
classified B, and all others are C. The tightest controls go to R11, then U44 because of their high
percentage of sales volume.

            Volume   Unit cost         Dollar volume     % Dollar volume Cumulative $-vol %         Class

R11        250       $250               $62,500                                     62.22%                         62.22%

A

U44        150       $150               $22,500                                     22.40%                         84.62%

B

V55        100       $75                 $7,500                                      7.47%                          

92.09%                         C

S22        75         $90                 $6,750                                      6.72%                           98.81%

C

T33         20         $60                 $1,200                                      1.19%                          

100.00%                       C

                                    Total     $100,450                                  

14) This problem reverses the unknown of a standard EOQ problem.

           solving for D results in D = 93,750

15) EOQ is 3533 units, for a total cost of $4,415.88

      = 3532.7

TC = (D/Q) ∙ S + (Q/2) ∙ H = (65000/3533) ∙ 120 + (3533/2) ∙ .25 ∙ 5 = 2207.94 + 2207.94 = 4415.88

 

Module A

1) Which of the following is not considered a step in the decision-making process?

A) Clearly identify the problem.
B) Select the best alternative.
C) Evaluate alternatives.
D) Develop objectives.
E) Minimize costs whenever possible.

2) A tabular presentation that shows the outcome for each decision alternative under the various possible
states of nature is called a(n)
A) payoff table
B) payback period matrix
C) feasible region
D) isoquant table
E) decision tree 

3) A decision maker who uses the maximin criterion when solving a problem under conditions of
uncertainty is
A) a pessimist
B) an economist
C) an optometrist
D) an optimist
E) making a serious mistake; maximin is not appropriate for conditions of uncertainty

4) The expected value of perfect information (EVPI) is the

A) average expected payoff
B) payoff for a decision made under perfect information
C) difference between the payoff under certainty and the payoff under risk
D) payoff under minimum risk
E) none of the above 

5) A decision-maker using the maximax criterion on the problem below would choose Alternative
________ because the maximum of the row maximums is ________.

                    States of nature

  1 2 3
Alternative 50 55 60
 A
Alternative 30 50 80
B
Alternative 70 80 70
C
Alternative -100 -10 140
D

A) A; 60         B) B; 80         C) C; 70         D) D; -100         E) D; 140

6) What is the EMV for Option 2 in the following decision table?

                                                 States of nature

Alternative S1 S2
Probability 0.4 0.6
Option 1 10,000 30,000
Option 2 5,000 45,000
Option 3 -4,000 60,000

 A) 10,000         B) 16,000         C) 20,000         D) 29,000         E) 30,000

7) Decision trees
A) give more accurate solutions than decision tables
B) are too complex to be used by decision makers
C) are especially powerful when a sequence of decisions must be made
D) are rarely used because one needs specialized software to graph them
E) give less accurate solutions than decision tables

8) What is the expected value under certainty in the following decision table?

                                                 States of nature

Alternative S1 S2
Probability 0.6 0.4
Option 1 200 300
Option 2 50 350

A) 50         B) 200         C) 260         D) 300         E) 350

9) What is the expected value of perfect information of the following decision table?

                                                 States of nature

Alternative S1 S2
Probability 0.6 0.4
Option 1 200 300
 Option 2 50 350

A) 0         B) 20         C) 50         D) 150         E) 200

10) The first step, and a key element, in the decision-making process is to
A) monitor the results
B) clearly define the problem
C) consult a specialist
D) select the best alternative
E) develop objectives

Problems:

11) An operations manager's staff has compiled the information below for four manufacturing alternatives
(A, B, C, and D) that vary by production technology and the capacity of the machinery. All choices enable
the same level of total production and have the same lifetime. The four states of nature represent four
levels of consumer

acceptance of the firm's products. Values in the table are net present value of future profits in millions of
dollars

                                                             States of nature

  1 2 3 4
Alternative A 50 55 60 65
Alternative B 30 50 80 130 
Alternative C 70 80 70 65
Alternative D -100   -10  150  220 

a. Assuming a maximax strategy, which alternative would be chosen?

b. If maximin were used, which would be chosen?

c. If the states of nature were equally likely, which alternative should be chosen?

12) An operations manager's staff has compiled the information below for four manufacturing alternatives
(E, F, G, and H) that vary by production technology and the capacity of the machinery. All choices enable
the same level of total production and have the same lifetime. The four states of nature represent four
levels of consumer

acceptance of the firm's products. Values in the table are net present value of future profits in millions of
dollars. Forecasts indicate that there is a 0.1 probability of acceptance level 1, 0.2 chance of acceptance
level 2,

0.4 chance of acceptance level 3, and 0.3 change of acceptance level 4.

                                                             States of nature

  1 2 3 4
Alternative E 50 50 70 60
Alternative F 30 50 80 130 
Alternative G 70 80 70 60
Alternative H -140   -10  150  220 

Using the criterion of expected monetary value, which production alternative should be chosen?

 Module A Answer Key

1) E
2) A
3) A
4) C
5) E
6) D
7) C
8) C
9) B
10) B

11)

(a) The maximax strategy selects the best of the best, which is $220. This happens when Alternative D is
selected.

(b) The maximin strategy selects the best of the worsts; the worsts are A=50, B=30, C=65, and D=-100.
The best of these is 65, associated with Alternative C.

(c) The averages for the four alternatives are A=57.5, B=72.5, C=71.25, and D=65. The highest of these
is 72.5, associated with Alternative B. 

12) The expected values are:

E = .1∗50 + .2∗50 + .4∗70 + .3∗60 = 5 + 10 + 28 + 18 = 61

F = .1∗30 + .2∗50 + .4∗80 + .3∗130 = 3 + 10 + 32 + 39 = 84

G = .1∗70 + .2∗80 + .4∗70 + .3∗60 = 7 + 16 + 28 + 18 = 69

H = .1∗-140 + .2∗-10 + .4∗150 + .3*220 = -10 -2 + 60 + 66 = 110

The highest of these occurs with production alternative H. 

 
 

 Module B

1) Which of the following is not a requirement of a linear programming problem?

A) constraint equations, expressed as linear equations
B) alternative courses of action
C) an objective function, expressed in terms of linear equations
D) an objective function, to be maximized or minimized
E) for each decision variable, there must be one constraint or resource limit

2) In linear programming, a statement such as "maximize contribution" becomes a(n)

A) decision variable
B) constraint
C) objective function
D) slack variable
E) violation of linearity

3) The feasible region in the diagram below is consistent with which one of the following constraints? 

A) 8X1 + 4X2 ≥ 160

B) 8X1 + 4X2 ≤ 160
C) 8X1 - 4X2  ≤ 160
D) 4X1 + 8X2 ≤ 160
E) 4X1 - 8X2  ≤160

4) The corner point solution method requires

A) moving the iso-profit line to the highest level that still touches some part of the feasible region
B) finding the value of the objective function at the origin
C) moving the iso-profit line to the lowest level that still touches some part of the feasible region
D) finding the coordinates at each corner of the feasible solution space
E) none of the above
5) For the two constraints given below, which point is in the feasible solution space of this minimization
problem? (1) 14X + 6Y ≥ 42 and (2) X - Y ≥ 3
A) X = -1, Y = 1
B) X = 0, Y = 4
C) X = 2, Y = 1
D) X = 2, Y = 0
E) X = 5, Y = 1

6) What combination of x and y will yield the optimum for this problem? Minimize $3X + $15Y, subject to
(1) 2X + 4Y ≤ 12 and (2) 5X + 2Y ≤ 10.
A) X = 0, Y = 0
B) X = 2, Y = 0
C) X = 1, Y = 5
D) X = 0, Y = 3
E) none of the above

7) A linear programming problem has three constraints:

2X + 10Y ≤ 100
4X + 6Y ≤ 120
6X + 3Y ≤ 90
What is the largest quantity of X that can be made without violating any of these constraints?

A) 50                B) 30                C) 20                D) 15                E) 10

8) A shadow price (or dual value) reflects which of the following in a maximization problem?
A) the increase in profit that would accompany one added unit of a scarce resource
B) the marginal gain in the objective realized by subtracting one unit of a resource
C) the market price that must be paid to obtain additional resources
D) the reduction in cost that would accompany a one unit decrease in the resource
E) none of the above

9) A firm makes two products, Y and Z. Each unit of Y costs $10 and sells for $40. Each unit of Z costs $5
and sells for $25. If the firm's goal were to maximize sales revenue, the appropriate objective function
would be
A) maximize $40Y = $25Z
B) maximize $30Y + $20Z
C) maximize $40Y + $25Z
D) maximize 0.25Y + 0.20Z
E) none of the above

10) Which of the following represents valid constraints in linear programming?

A) 1.5XY ≥ 500
B) 2X + 7Y ≥ 100
C) 2X ≥ 7XY
D) 2X2 + 7Y ≥ 50
E) All of the above are valid linear programming constraints.

Problems:

11) A manager must decide on the mix of products to produce for the coming week. Product A requires
three minutes per unit for molding, two minutes per unit for painting, and one minute for packing. Product
B requires two minutes per unit for molding, four minutes for painting, and three minutes per unit for
packing.

There will be 600 minutes available for molding, 600 minutes for painting, and 420 minutes for packing.
Both products have contributions of $1.50 per unit.

a. Algebraically state the objective and constraints of this problem.

b. Plot the constraints on the grid below and identify the feasible region.

 Module B Answer Key

1) E
2) C
3) B
4) D
5) E
6) A
7) D
8) A
9) B
10) B
11)

The objective of the problem is to maximize 1.50A + 1.50B,

The constraints are 3A + 2B ≤ 600, 2A + 4B ≤ 600, and 1A + 3B ≤ 420. The plot and feasible region
appear in the graph below.
 

Module C 

1) The information needs of a transportation problem include

A) the set of destinations and the capacity of each
B) the set of origins
C) the supply at each origin
D) the cost of shipping one unit from each origin to each destination
E) all of the above 

2) The transportation method is a special case of the family of problems known as

A) regression problems
B) linear programming problems
C) decision tree problems
D) simulation problems
E) statistical problems 

3) The initial solution to a transportation problem can be generated several ways, so long as   
A) all cells are filled
B) all supply and demand conditions are satisfied
C) it ignores cost
D) degeneracy does not exist
E) it minimizes cost
4) The northwest corner rule is best used
A) to calculate whether a feasible solution is also an optimal solution
B) to minimize the total shipping cost from several origins to several destinations
C) to calculate how much to transfer from one shipping route to another
D) to resolve cases of degeneracy in transportation problems
E) to generate an initial feasible solution to a transportation problem

5) For the problem data set below, what is the northwest corner allocation to the cell Source 1-Destination
1?

COSTS Dest. 1 Dest. 2 Dest. 3 Supply

Source 1 2 1 3 30
Source 2 4 2 1 40
Source 3 3 8 6 20
Demand 15 50 25 90 \ 90

A) 0                  B) 2                  C) 15                D) 30                E) 90

6) For the problem below, what is the quantity assigned to the cell Source 1-Destination 2 using the
intuitive method for an initial feasible solution?

COSTS Dest. 1 Dest. 2 Dest. 3 Supply

Source 1 2 1 3 50
Source 2 4 7 5 40
Source 3 3 12 6 30
120 \
Demand 50 45 25 120

A) 1                  B) 5                  C) 30                D) 45                E) 50

7) A transportation problem has a feasible solution when

A) the number of filled cells is one less than the number of rows plus the number of columns
B) the solution yields the lowest possible cost
C) all demand and supply constraints are satisfied
D) all of the improvement indexes are greater than or equal to zero
E) all the squares are used 

8) The total cost of the optimal solution to a transportation problem

A) can be calculated from the original northwest corner solution
B) is found by multiplying the amounts in each cell by the cost for that cell for each row and then
subtracting the products of the amounts in each cell times the cost of each cell for the columns

C) is calculated by multiplying the total supply (including any dummy values) by the average
cost of the cells
   
D) can be calculated based only on the entries in the filled cells of the solution
E) cannot be calculated from the information given

9) Consider the transportation problem and its optimal solution in the tables below. The cell Source 3
Destination 3 is currently empty. What would be the change in the objective function if the largest possible
amount were shipped using that route, leaving all the supply and demand conditions unchanged?
COSTS Dest. 1 Dest. 2 Dest. 3 Dest. 4 Supply
Source 1 12 18 9 11 105
Source 2 19 7 30 15 145
Source 3 8 10 14 16 50
Demand 80 60 70 90 300\300

Row
Shipments Dest. 1 Dest. 2 Dest. 3 Dest. 4 Total
Source 1 30 0 70 5 105
Source 2 0 60 0 85 145
Source 3 50 0 0 0 50
Col. Total 80 60 70 90 300\300

A) a decrease of $9
B) an increase of $450   
C) an increase of $630
D) fifty units
E) 0 

10) In a minimization problem, a positive improvement index in a cell indicates that

A) the solution is optimal
B) the problem has no feasible solution
C) the total cost will decrease if units are reallocated to that cell
D) the total cost will increase if units are reallocated to that cell
E) there is degeneracy

11) When the number of shipments in a feasible solution is less than the number of rows plus the number
of columns minus one
A) the solution is optimal   
B) a dummy source must be created   
C) there is degeneracy, and an artificial allocation must be created
D) the closed path has a triangular shape
E) a dummy destination must be created 

12) A transportation problem has 8 origins and 6 destinations. The optimal solution of this problem will fill
no more than ________ cells with quantities to be shipped.
A) 2   
B) 13
C) 14
D) 48
E) cannot be calculated without knowing the supply and demand totals

Module C Answer Key

1)D
2)B
3)B
4)E
5)C
6)D
7)C
8)D
9)C
10)D
11)C
12)B