Financial Management

(E. Quantitative Methods)

E. QUANTITATIVE METHODS

for the activity times.

B. PERT does not allow for slack times on the activities while CPM does.
C. PERT considers only activity cost while CPM considers only activity time.
D. PERT determines the least-cost path through a network while CPM determines the leasttime path through a network.

THEORIES:
Economic Order Quantity
1. The economic order quantity is the order quantity that results in
A. the minimum total annual inventory costs.
B. no inventory shortages.
C. the maximum total annual inventory costs.
D. minimum ordering costs.

6. Critical Path Method (CPM) is a technique for analyzing, planning, and scheduling large,
complex projects by determining the critical path from a single time estimate for each event
in a project. The critical path:
A. Is the shortest path from the first event to the last event for a project.
B. Is an activity within the path that requires the most number of time.
C. Has completion that reflects the earliest time to complete the project.
D. Is the maximum amount of time an activity may be delayed without delaying the total
project beyond its target completion time.

Sensitivity analysis
2. Missile Company has correctly computed its economic order quantity as 500 units. However,
management feels it would rather order quantities of 600 units. How should Missiles total
annual purchase-order costs and total annual carrying cost for an order quantity of 600 units
compare to the respective amounts for an order quantity of 500 units?
A. Higher purchase-order cost and lower carrying cost.
B. Higher purchase-order cost and higher carrying cost.
C. Lower purchase-order cost and higher carrying cost.
D. Lower purchase-order cost and lower carrying cost.

Queuing Theory
7. A company is designing a new regional distribution warehouse. To minimize delays in
loading and unloading trucks, an adequate number of loading docks must be built. The
most relevant technique to assist in determining the proper number docks is
A. Cost-volume-profit analysis
C. Linear programming
B. PERT/CPM analysis
D. Queuing theory

3. A decrease in inventory order costs will

A. Increase the reorder point.
B. Decrease the economic order quantity.
C. Have no effect on the economic order quantity.
D. Decrease the holding cost percentage.

Linear Programming
Use the following information to answer question Nos. 8 and 9:
The Kinis Company produces a cosmetic product in 60 gallon batches. The basic ingredients used
are material X, costing P70 per gallon, and material Y, costing P170 per gallon. No more than 18
gallons of X can be used, and at least 15 gallons of Y must be used.

4. An increase in inventory holding costs will

A. Decrease the economic order quantity.
B. Have no effect on the economic order quantity.
C. Increase the economic order quantity.
D. Decrease the number of orders issued per year.

8. How would the objective function (minimization of product cost) be expressed?

A. 70X + 170Y
C. 170X + 70Y
B. 18X + 15Y
D. 18X + 42Y
9. Which of the following is not a constraint of the Kinis Company?
A. X 18
C. Y 15
B. X + Y 60
D. X 0

PERT-CPM
5. Which one of the following statements best describes a difference between basic PERT and
the Critical Path Method (CPM) of network analysis?
A. PERT uses probability distribution on the activity times while CPM uses point estimates

Use the following data to answer Question Nos. 10 through 12:

202

Financial Management
(E. Quantitative Methods)

Sun, Inc. manufactures product X and product Y, which are processed as follows:
Type A machine
Type B machine
Product X
6 hours
4 hours
Product Y
9 hours
5 hours

C. Activity DE 1 week and activity BC 1 week

D. Activity DE 1 week and activity EF 1 week
Learning Curve
1
. Contratista, Inc. is considering a three-phase research project. The time estimates for
completion of Phase 2 of the project are:
Pessimistic
24 weeks
Most likely
20 weeks
Optimistic
10 weeks
Using the program evaluation and review technique (PERT), the expected time for
completion of Phase 2 should be
A. 20 weeks
C. 18 weeks
B. 19 weeks
D. 24 weeks

The contribution margin is P12 for product X and P7 for product Y. The available time daily for
processing the two products is 120 hours for machine Type A and 80 hours for machine Type B.
10. How would the constraint for machine Type A be expressed?
A. 4X + 5Y
C. 4X + 5Y 80
B. 6X + 9Y 120
D. 12X + 7Y
11. How would the constraint for machine Type B be expressed?
A. 4X + 5Y
C. 4X + 5Y 80
B. 6X + 9Y 120
D. 12X + 7Y

12. How would the objective function be expressed?

A. 4X + 5Y
C. 4X + 5Y 80
B. 6X + 9Y 120
D. 12X + 7Y
PROBLEMS:
PERT-CPM
2. Castle Building Company uses the critical path method to monitor construction jobs. The
company is currently 2 weeks behind schedule on Job WW, which is subject to a P10,500-perweek completion penalty. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and
critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities
can be crashed.
Activities
Cost to Crash 1 Week
Cost to Crash 2 Weeks
BC
P 8,000
P15,000
DE
10,000
19,600
EF
8,800
19,500
Castle desires to reduce the normal completion time of Job WW and, at the same time, report
the highest possible income for the year. Castle should crash
A. Activity BC 1 week and activity EF 1 week
B. Activity BC 2 weeks

A learning curve of 80% assumes that production unit costs are reduced by 20% for each
doubling of output. What is the cost of the sixteenth unit produced as an approximate
percent of the first unit produced?
A. 30 percent
C. 41 percent
B. 51 percent
D. 64 percent

Soft Inc. has a target total labor cost of P3,600 for the first four batches of a product. Labor
is paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first
batch take?
A. 360 hours
C. 57.6 hours
B. 140.63 hours
D. 230.4 hours

Havenot has estimated the first batch of product will take 40 hours to complete. A 90%
learning curve is expected. If labor is paid P15 per hour, the target labor cost for four batches
of product is
A. P600
C. P1,944
B. P2,160
D. P2,400

203

Wind Company expects an 85% learning curve. The first batch of a new product required 500
hours. The first four batches should take an average of
A. 361.25 hours
C. 500.0 hours
B. 425.0 hours
D. 322.4 hours

Financial Management
(E. Quantitative Methods)
6

Hanip Co. used 30 hours to produce the first batch of units. The second batch took an
additional 18 hours. How many total hours will the first four batches require?
A. 76.8 hours
C. 120.0 hours
B. 96.2 hours
D. 48.0 hours

Sulit Company plans to begin production of a new product on July 1. An 80% learning curve is
applicable to Sulits manufacturing operations. If it is expected to take 1,000 direct labor hours
to produce the first unit, how many direct labor hours should it take to produce the third and
fourth units?
A. 640
C. 1,600
B. 960
D. 2,560

A construction company has just completed a bridge over the Visayan area. This the first
bridge the company ever built and it required 100 weeks to complete. Now having hired a
bridge construction crew with some experience, the company would like to continue building
bridges. Because of the investment in heavy machinery needed continuously by this crew, the
company believes it would have to bring the average construction time to less than one year
(52 weeks) per bridge to earn a sufficient return on investment. The average construction time
will follow an 80% learning curve. To bring the average construction time (over all bridges
constructed) below one year per bridge, the crew would have to build approximately
A. 2 additional bridges.
C. 3 additional bridges.
B. 7 additional bridges.
D. 8 additional bridges.

Expected Value
10
. Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of
muffins costs P2 and sells for P3 through regular stores. Any boxes not sold through regular
stores are sold through Doughs thrift store for P1. Dough assigns the following probabilities to
selling additional boxes:
Additional sales
Probability
60
0.6
100
0.4
What is the expected value of Doughs decision to buy 100 additional boxes of muffins?
A. P28
C. P52
B. P40
D. P68
11

Moss Point Manufacturing recently completed and sold an order of 50 units that had the
following costs:
Direct materials
P 1,500
Direct labor (1,000 hours @ P8.50)
8,500
Variable overhead (1,000 hours at P4.00)
4,000
Fixed overhead
1,400
P15,400
*Applied on the basis of direct labor hours.
*Applied at the rate of 10% of variable cost.
The company has now been requested to prepare a bid for 150 units of the same product.
If an 80 percent learning curve is applicable, Moss Points total cost on this order would be
estimated at
A. P26,400
C. P31,790
B. P37,950
D. P38,500
204

. Karen Company has three sales departments. Department A processes about 50 percent of
sales, Department B about 30 percent, and Department C about 20 percent. In the past,
Departments A, B, and C had error rates of about 2 percent, 5 percent, and 2.5 percent,
respectively. A random audit of the sales records yields a recording error of sufficient
magnitude to distort the companys results. The probability that Department A is responsible
for this error is
A. 0.50
C. 0.20
B. 0.33
D. 0.25

12

. A beverage stand can sell either softdrinks or coffee on any given day. If the stand sells
softdrinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be
P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is
cold, the profit will be P2,000. The probability of cold weather on a given day at this time is
60%. The expected payoff if the vendor has perfect information is
A. P3,900
C. P2,200
B. P1,360
D. P1,960

13

. The Teeners Club sells fresh hot cider at Recto football games. The frequency distribution
of the demand for cups of hot cider per game is presented below:
Unit sales volume
Probability
10,000
0.10
20,000
0.15
30,000
0.15

Financial Management
(E. Quantitative Methods)

40,000
0.40
50,000
0.20
The hot cider is sold for P35.00 a cup and the cost per cup is P20.00. Any unsold hot cider
is discarded because it will spoil before the next game.
What is the estimated demand for hot cider at the next football game if a deterministic
approach based on the most likely outcome is used?
A. 34,500
C. 16,000
B. 40,000
D. 50,000
14

15

The manager of the firm had estimated demand per week and associated probabilities as
follows:
Demand
Probability
100,000
0.20
120,000
0.20
140,000
0.30
160,000
0.30

. Green Co. is considering the sale of banners in an exhibit fair. Green Co. could purchase
these banners for P7.50 each. Unsold banners would be unreturnable and worthless after
the exhibit. Green would have to rent a booth at the stadium for P4,000. Green estimates
sales of 2,000 banners at P20.00 each. If Greens prediction proves to be incorrect and only
1,500 banners were sold, the cost of this prediction error would be:
A. P 6,250
C. P 4,750
B. P10,000
D. P 3,750

16

. The optimal weekly production of the corsage is

A. 120,000
C. 134,000
B. 140,000
D. 145,000

17

. The value of perfect information is

A. P14,400
B. P16,000

. The manager of Batanes Company has developed the following probability distribution of
dairy sales of a highly perishable product. The company restocks the product each morning:
X (Units Sold
P (Sales =X)
150
0.20
175
0.40
200
0.15
225
0.10
250
0.10
275
0.05
If the company desires an 85% service level in satisfying sales demand, what should the
initial balance be for each day?
A. 191
C. 234
B. 225
D. 250

Question Nos. 21 through 24 re based on the following information:

Glassco, Inc. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for
introduction. However, plant capacity is limited, and only one product can be introduced at present.
Therefore, Glassco has conducted a market study, at a cost of P26,000, to determine which
product will be more profitable. The results of the study show the following sales patterns.
Sales of Desserts at P1.80 per unit
Sales of Rolls at P1.20 per unit
Volume
Probability
Volume
Probability
250,000
.30
200,000
.20
300,000
.40
250,000
.50
350,000
.20
300,000
.20
400,000
.10
350,000
.10
The costs associated with the two products have been estimated by Glasscos cost accounting
department and are shown below:
Dessert
Rolls
Ingredients per unit
P
0.40
P 0.25
Direct labor per unit
0.35
0.30
Variable overhead per unit
0.40
0.20
Production tooling*
48,000.00
25,000.00
Advertising
30,000.00
20,000.00

Question Nos. 17 and 18 are based on the following:

Sampaguita Company makes corsages that it sells through salespeople on the streets. Each
sells for P2 and has variable production costs of P0.80. The salespeople receive a P0.50
commission on each corsage they sell, and the company must spend P0.05 to get rid of each
unsold corsage. The corsages last for only one week and cannot be carried in inventory.
205

C. P23,800
D. P22,100

Financial Management
(E. Quantitative Methods)

as follows:
*Glassco treats production tooling as a current operating expense rather than capitalizing it as a
fixed asset.

Demand
CM
Time on M1
Time on M2
X
100
P10
5
10
Y
80
18
10
5
Z
100
25
15
5
There are 2,400 minutes available on each machine during the week. How many units should
be produced and sold maximize the weekly contribution?
X
Y
Z
A.
100
80
100
B.
20
80
100
C.
100
40
100
D.
100
80
73

18

. According to Glasscos market study, the expected value of the sales volume of the breakfast
rolls is
A. 125,000 units
C. 260,000 units
B. 275,000 units
D. 250,000 units

19

. Applying a deterministic approach, Glasscos revenue from sales of frozen desserts would be
A. P549,000
C. P540,000
B. P195,000
D. P216,000

20

. The expected value of Glasscos operating profit directly traceable to the sale of frozen
desserts is
A. P198,250
C. P471,000
B. P150,250
D. P120,250

Inventory Management
EOQ, Safety Stock, Reorder Point
Question Nos. 25 through 30 are based on the following:
KMU Company uses a small casting in one of its finished products. The castings are purchased
from a foundry located in another Asian country. In total, KMU Company purchases 54,000
castings per year at a cost of P8 per casting.
The castings are used evenly throughout the year in the production process on a 360-day-per-year
basis. The company estimates that it costs P90 to place a single purchase order and about P3 to
carry one casting in inventory for a year. The high carrying costs result from the need to keep the
castings in carefully controlled temperature and humidity conditions, and from the high cot of
insurance.
Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of
delivery time and the percentage of their occurrence are shown in the following tabulation:

21

. In order to recover the costs of production tooling and advertising for the breakfast rolls,
Glasscos sales of the breakfast rolls would have to be
A. 37,500 units
C. 100,000 units
B. 60,000 units
D. 54,000 units

Decision Tree
22
. A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now
will yield 100,000 bottles of wine netting P2 per bottle. If the wine maker waits and the
weather turns cold (probability 0.2), the yield will be cut in half but net P3 per bottle. If the
weather does not turn cold, the yield will depend on rain. With rain (probability 0.5), a full yield
netting P4 per bottle will result. Without rain (probability 0.5), there will still be a full 100,000bottle yield, but the net will be only P3 per bottle.
The optimal expected value is
A. P200,000
C. P350,000
B. P310,000
D. P400,000

Delivery Time (days)

6
7
8
9
10

Theory of Constraints
23
. Happy Holidays produces three products: X, Y, and Z. Two machines are used to produce the
products. The contribution margins, sales demands, and time on each machine (in minutes) is

24

Percentage of Occurrence
75
10
5
5
5
100

. What is the economic order quantity for the company.

206

Financial Management
(E. Quantitative Methods)

A. 1,800
B. 1273

C. 2,545
D. 2,700

Materials used (lbs.)

Number of defective units
Defective units as a percentage of total units produced is:
A. 5%
C. 0.53%
B. 1.05%
D. 2.5%

25

. Assuming that the company will not provide any safety stock units, how much would the
annual inventory costs?
A. P2,700
C. P5,400
B. P8,100
D. P6,000

ANSWER EXPLANATIONS

26

. Assuming that the company is willing to assume a 15% risk of being out of stock, what would
be the number of safety stock?
A. 0
C. 300
B. 150
D. 450

27

. Assuming that the company is willing to assume only a 5% risk of being out of stock, what
would be the reorder point?
A. 450
C. 1,200
B. 1,050
D. 1,350

28

. Assuming a 5% stock-out risk, what would be the total cost of ordering and carrying inventory
for one year?
A. 5,850
C. 6,075
B. 6,300
D. 6,750

29

. Assuming that the cost of stock out is P800 per occurrence, which safety stock level is
necessary in reducing the cost?
A. 0
C. 300
B. 150
D. 450

Just-in-Time
30
. At the beginning of 2007, Silang Company installed a JIT purchasing and manufacturing
system. The following information has been gathered about one of the company's products
Theoretical annual capacity
4,000
Actual production
3,800
Production hours available
2,500
On-time deliveries
1,500
Total deliveries
1,600
Scrap (lbs.)
400
207

12,800
20

. Answer: B
Formula: (Pessimistic + 4Most likely + Optimistic) / 6
[24 + (20 x 4) +10] 6 = 19 weeks

Answer: A

UnitsCumulative Average TimeComputation1500.002425.00(0.85 x 500.00)4361.25(0.85 x 425.00)

3

. Answer: C
UnitsCumulative Average TimeComputation11.0020.80(0.8 x 1.00)40.64(0.8 x 0.80)80.51(0.8 x 0.64)160.41(0.8 x
0.51)Percentage: 0.41 1.00 = 41.0%

Answer: B
Average hours after 4th batch
Hours used by 1st batch:

P3,600 10 4 units
90 0.80 0.80

90
140.63

Answer: C

UnitsCumulative Average TimeComputation140.00236.00(0.9 x 40.00)432.40(0.9 x 36.00) Total number of

hours used by 4 units: 4 x 32.4
Total labor cost used by 4 units: 129.6 x P15
6

129.6
P1,944

Answer: A
Learning curve (30 + 18) 2 30 =
Cumulative average time after 4 batches: 30 x 0.8 x 0.8
Total number of hours used by first 4 batches: 4 x 19.2

80.0%
19.2
76.8

Answer: B
Cumulative average DLH after 4 units:
Total DLH after 4 units:
Less Total DLH used after 2 units
Total DLH used by 3rd and 4th units

640
2,560
1,600
960

(1,000 x 0.8 x 0.8)

4 x 640
(1,000 x 0.8 x 2)

Answer: B

No. of BridgesCumulative Average WeeksComputation1100.00280.00(0.8 x 100.0)464.00(0.8 x

80.00)851.20(0.8 x 64.00) It will take 8 bridges to complete them with cumulative average time in weeks of below 52.
The company needs to complete additional 7 bridges to have an average completion time of less than 52 weeks.
9

Answer: A
Cumulative Ave. DHL50 units20.0100 units16.0( 20 x 80% )200 units12.80( 16 x 80% )Total hrs required by 200
units 128.80 x 2,000
2,560
Less Hours used by first 50 units
1,000
Additional Hours
1,560
Costs
Direct materials (1,500 x 3)
Direct labor 1,560 x 8.50
Variable OH 1,560 x 4
Total variable Costs
Fixed OH 10% x 24,000
Total Cost

10

. Answer: C
SalesConditional Profit (Loss) 60(60 x P3) + (40 x P1) P200

P 4,500
13,260
6,240
24,000
2,400
P26,400
= P 20 100(100 x P3) P200

100Expected Value: (P20 x 0.6) + (P100 x 0.4) = P52

11

. Answer: B
Dept.ErrorWeightProbabilityA0.020.010.01/.03 =
33.00%B0.050.015.015/03=
50.00% C0.0250.05.005/03=
16.67%0.03
12
. Answer: C
Expected payoff:
Sale of coffee during cold weather 2,000 x 0.6
1,200
Sale of soft drinks during hot weather 2,500 x 0.4
1,000
Total
2,200
13

. Answer: B
The expected sales based on the most likely outcome are 40,000. This is based on the concept that which one with the
highest probability is the most likely to happen.

14

15

. Answer: B
At the service level of 85%, there is 15% risk that the company runs out of stock. To achieve 85% level, 225 units
must be purchased at the start of day. (0.20 + 0.40 + 0.15 + 0.10 = 85%); 225 units corresponds to 85%.

16

Answer: D
The cost of prediction error = unsold units x purchase price
500 x 7.50 = P3,750

Answer: B
PurchasesProbabilityDemand100,000120,000140,000160,000 20%100,00070,00053,00036,000
19,00020%120,00070,00084,00067,000 50,00030%140,00070,00084,00098,000
81,00030%160,00070,00084,00098,000112,000Expected Value 70,000 77,800 79,400 71,700Optimal
Production is 140,000 because it gives the highest pay off, which is 79,400

17

. Answer: A
Perfect Information:
(70,000 x.20) + (84,000 x .20) + (98,000 x.3) + (112,000 x .30) = 93,800
Value of Perfect Info 93,800 79,400 = P14,400
Value of Perfect Info = Diff. Between payoff of Perfect Info and Optimal production

18

19

20

21

Answer: C
EV = (200 x 0.2) + (250 x 0.5) + (300 x 0.2) + (350 x 0.1) 60,000

Answer: C
300,000 x P1.80 = P540,000
The sales level of 300,000 has the highest probability (40%) and there it the level most likely to happen.

Answer: D
EV: (250 x 0.3) + (300 x 0.4) + (350 x 0.2) + (400 x 0.1)
Expected sales (305,000 x P1.80)
Less expected variable costs (305,000 x P1.15)
Contribution margin
Less fixed costs (P48,000 + P30,000)
Expected profit
Answer: C

305,000
P549,000
350,750
198,250
78,000
P120,250

Breakeven units, Glassco: (P45,000 0.45) = 100,000

22

23

Answer: B
Expected value if immediately harvested:
(100,000 x P2)
Expected value if not harvested immediately:
Cold weather:
(50,000 x P3 x 0.20)
Not cold with rain:
(100,000 x P4 x 0.8 x 0.5)
Not cold without rain:
(100,000 x P3 x 0.8 x. 0.5)
Total

. Answer: D
First step is to determine which machine has a constraint:
Required usage of Machine:
Machine 1: (100 x 5) + (80 x 10) + (100 x 15)
Machine 2: (100 x 10) + (80 x 5) + (100 x 5)
Machine 1 has shortage in capacity of (2,800 2,400)

P200,000
P 30,000
160,000
120,000
P310,000

2,800
1,900
400

Second step is to determine the order of profitability of the product lines per minute of machine 1.
Product X: P10 5 min.
P2.00
Product Y: P18 10 min.
1.80
Product Z: P25 15 min.
1.67
The company should produce product Z last because it is the least profitable per minute of usage of Machine 1. It is
apparent that Choice D is the only possible correct response.
24

Answer: A
EOQ = the square root of 2 x annual units required x ordering cost carrying cost per unit
EOQ = the square root of 2 x 54,000 x 90,000 3 = 1,800

25

Answer: C
Annual ordering cost:
Annual carrying cost:
Total cost

54,000/1800 x 90
1,800/2 x 3

2,700
2,700
5,400

26

. Answer: B
A 15% risk of out-of-stock means a 85% assurance that order will be received on time. Without having a safety stock,
the company will use a lead time of 6 days (75%). Therefore, 7-day lead time has 85% assurance or a 15% risk of
stockout. The safety stock level is for 1 day (7 6) or 150 units.
Daily requirements: 54,000/360 = 150

27

. Answer: D
A 5% risk of out-of-stock means a 95% assurance that order will be received on time. This is estimated to have a lead
time of 9 days (the total of probability for 9 days is 95%).
Reorder point without safety stock 6 days x 150
900
Safety stock (9 6) 150
450
Reorder point
1,350

28

Answer: D
Ordering cost (unchanged)
Carrying cost
Average inventory (1800/2) + 450 = 1,350
1,350 x 3

2,700
4,050

Total

6,750

29

. Answer: A
Safety unitsStock out costCarrying CostTotal 00.25 x 2,400 = 600
0 6001500.15 x 2,400 = 360150 x 3 =
450 8103000.10 x 2,400 = 240300 x 3 = 9001,1404500.05 x 2,400 = 120450 x 3 = ,3501,470Annual stockout
cost (100% probability) based 30 orders (54,000/1800):
30 x 800 = 2,400
The probability of stockout is the inverse of assurance, say at zero safety stock, 6 days, its 75% probable that ordered
goods will arrive, therefore, its 25% probable that it wont.

30

Answer: C
Defective Units Actual Units Produced (20 3,800) = 0.526%