Systems Analysis and Optimization Homework 2

Question 1: Modeling Business Logic

Model the following situations exactly using binary/integer variables and linear
constraints (keep in mind that IF-THEN statements are not linear constraints). Your
constraints should capture the logic exactly, nothing more, nothing less.

i.

A bookstore is trying to decide what books to sell. If it sells any large-sized

books, it must buy an oversized bookcase. It should not buy the bookcase if it
is not going to sell any large-sized books. At most, 100 oversized books will
be sold.

ii.

A doctor is trying to make up his schedule for the next week. He needs to
decide which days to visit each patient. He has four patients, and he does not
want to visit more than two in a given day. However, he does not want to
visit his patients on more than 3 days.

Question 2:
AllCotton textiles has contracted to provide HappyKart clothing retail with T-shirts
under the following terms: (1) 100,000 T-shirts will be delivered
to HappyKart in one month, and (2) HappyKart has an option to take delivery of an
additional 100,000 T-shirts in three months by giving AllCotton 30 days notice.
HappyKart will pay $5.00 for each T-shirt that it purchases. AllCotton manufactures the
T-shirts using a batch process, and manufacturing costs are as follows: (1) there is a
fixed setup cost of $250,000 for any manufacturing batch run, regardless of the size of
the run,and (2) there is a marginal manufacturing cost of $2.00 per T-shirt regardless of
the size of the batch run. AllCotton must decide whether to manufacture all 200,000
T-shirts now or whether to only manufacture 100,000 now and manufacture
the other 100,000 T-shirts only if HappyKart exercises its option to buy those T-shirts. If
AllCotton manufactures 200,000 now and HappyKart does not exercise its option, then
the manufacturing cost of the extra 100,000 T-shirts will be totally lost. AllCotton
believes there is a 50% chance HappyKart will exercise its option to buy the additional
100,000 T-shirts.
(i)
Draw a decision tree for the decision that AllCotton faces.
(ii)

Determine the preferred course of action for AllCotton assuming it uses

expected profit as its decision criterion.

(iii)

AllCotton has access to a corporate espionage firm that can exactly determine
if HappyKart will be exercising the option. How much can AllCotton pay this
firm for this information?

Question 3
Catchem Corporation is considering development and introduction of a new mousetrap
into the market and would like to assess the profitability of this project. There is a
significant technological uncertainty about the cost of product development and
production, as well as market uncertainty about products success and the competitors
action.
Specifically, the VP of R&D expects the product development cost to be $30,000, with
standard deviation of $5000. The VP of production estimates that the production cost
could be as low as $6 per unit, or as high as $9 per unit, but she believes that most
probably it will be $8 per unit. Once produced, if the mousetrap does not become
popular, the total sales can be expected to be 60,000 units at a price of $10 per unit. On
the other hand, if the mousetrap does catch attention, the sales could be as high as
100,000 units. However, in that case, new competition can be expected to move in and
drive the price down to $8 a unit. From the preliminary research, the marketing VP
believes that there is a 60% chance that the mousetrap will be a hit.
Use simulation to estimate the profitability of this project and assess the risk of the
company losing money on this project. Interpret the simulation results appropriately
using confidence intervals. When you are running your simulation model, set the number
of iterations in @Risk to 1000 and fix the seed to 1.
Question 4
Historical data indicate that the starting salary for a new MBA graduate in a leading
management consulting firm can be modeled using a Normal distribution with mean
$90,000 and standard deviation $20,000. Suppose that second-year salaries increase by
exactly 20%. Suppose also that the bonus each year can be modeled using a Normal
distribution with mean $25,000 and standard deviation $5,000. Suppose that the bonus is
independent of the initial salary (and is also independent of the annual salary increase).
Answer the following questions.
i.
What is the expected annual compensation (salary plus bonus) for a new hire?
ii.
What is the standard deviation of the annual compensation for a new hire?
iii. What is the expected annual compensation of an employee after completing one
year at the firm, i.e., just after his/her salary increase is announced?
iv.
What is the standard deviation of an employees annual compensation after
completing one year at the firm, i.e., just after his/her salary increase is
announced?
v.
What is the probability that an employees annual compensation after completing
one year in the firm, i.e., just after the salary increase is announced, will exceed
$140,000?

(Q2.17 in B&F)
In a particular town there are two automobile rental agencies that offer different prices for
a weekend out-of-state automobile rental. An automobile rental at Express Car Rentals
(ECR) costs $195 and includes free unlimited mileage. An automobile rental at Discount
Rentals Agency (DRA) costs $130 plus a mileage charge; the first 300 miles are free and

each additional mile costs $0.20 per mile. A market survey indicates that the miles driven
by rent-a-car customers for weekend rentals obeys the probability distribution shown in
the table below.
Miles driven
200
300
400
500
600
700
800
900

Probability
0.07
0.19
0.23
0.14
0.07
0.13
0.09
0.08

a. Last weekend, Ann rented a car from ECR and Bill rented a car from DRA. They
were charged the same amount for their rentals. How many miles did Bill drive?
b. What is the probability that a randomly selected rent-a-car customer will find a
better price at ECR?
c. Carol handles reservations at DRA. A customer calls and says that he would like
to rent a car for the weekend. He also says that according to his estimate of the
distance he is going to travel, it will be less expensive for him to rent a car from
DRA. What is the expected cost that Carol will charge this customer?