OPIM101 Management Science
Instructor: Onur Boyabatli
InterCat
This case is written by Pascale Crama, Assistant Professor of Operations Management at Singapore Management University. The case is
prepared solely as the basis for class discussion, and is no
The following actions should be taken to improve these measures:
(i) Value assets at replacement cost instead of historical cost. Depreciation
charges should also be based on replacement costs (see The impact of
depreciation in Chapter 19).
(ii) Use other
(b) The objective of maximizing sales revenue subject to a profit constraint is an
example of a satisfying model of business behaviour. This model recognizes that
single objectives such as profit maximization or revenue maximization may only
represent the
(120 2.5 hours). Therefore 75 additional hours (300 225) will be required,
and the revised contribution will be 14 842.50 [14 880 (75 0.5)]. This
represents an increase in contribution of 3402.50 (14 842.50 11 440).
(c)
Department 1
Department 2
Total hou
(iv) 10
The optimal solution results in zero output of X3. If one unit of X3 is
produced, it will be necessary to adjust the optimal programme in order to
create the resources to produce X3. The optimal adjustment if a unit of X3 is
to be produced is:
Con
(b) (iv) The table for the sensitivity analysis of objective function constraints
indicates that decreases in contribution will have no effect on the planned
allocations for divisions B, C and D. For division A the contribution would
have to be in excess
The application of linear
programming to management
accounting
Solutions to Chapter 25 questions
(a)
Selling price
Direct material
Variable overhead
Direct labour
Contribution
Type 1 labour hours
Contribution per Type 1 labour hour
Ranking
Pixie
()
111
(2
(c) Total relevant costs for three suppliers are:
()
3 162
3 162
6 324
18 972
Holding costs (2 EOQ/2 = 2 3162/2)
Fixed ordering costs (100 000/3162 100)
Relevant costs per supplier
Relevant costs for three suppliers
Total relevant costs for one supplier:
Alternatively the formula outlined in the question could have been used:
b=
nxy xy
nx2 (x)2
6(6721) 180(240)
=
6(6432) (180)2
= 0.4641
y = a + bx
a = y bx
a = (240/6) [ 0.4641 (180/6)] = 53.923
Therefore y = 54 0.46x (i.e. p(price) = 54 0.46Q)
Note that Q
Pricing decisions and profitability
analysis
Solutions to Chapter 10 questions
(a) The ROCE approach would be likely to yield an inadequate return because:
(i) Prime cost does not include any overheads. Consequently the profit margin
may be insufficient t
Question 1
This is a balanced transportation problem
Decision variables:

Let Xij be the amount of car transported from source i to destination j
Where source i = 1 is Morgantown,
source i = 2 is Youngtown,
source i = 3 is Pittsburg
and destination j = 1
Excel template
Decisions
Quantity
Constraints
Total A
Total B
Total C
Total D
Profit
Unit Price
Contribution
Minimized cost
X
Y
Z
Total
4000
0
0
4000
12000
8000
4000
24000
0
0
0
0
0
0
0
0
12000
8000
4000
24000
0
S$2
S$8,000
S$8,000
S$4 S$2.5
S$0
S$0
6400
(iii) Standard full manufacturing cost plus 15%
Full manufacturing cost per unit (880 000/100 000)
15% margin
Proposed transfer price
()
8.80
1.32
10.12
It could be argued that since the company will be operating at 100% capacity if
the transfers take pla
Calculation of labour cost
Cumulative production is 30 batches at the end of the fourth quarter, 75 batches
at the end of the first quarter and 120 batches at the end of the second quarter.
Time for the first 30 batches =
Time for the first 75 batches =
T
Standard costing and variance
analysis 2: further aspects
Solutions to Chapter 18 questions
Solution IM 18.1
(a) For the answer to this question you should refer to The future role of standard
costing in Learning Note 18.5 on the open access website.
(b)
Divisional financial performance
measures
Solutions to Chapter 19 questions
Solution IM 19.1
(a) See Profit centres and investment centres in Chapter 19 for the answer to this
question.
(b) See Prerequisites for successful divisionalization in Chapter 19
Number of innovations = 4
On the basis of the above information none of the divisional managers would
receive an annual salary bonus.
The office managers proposal
This will cause stocks to be 160 000 lower for both years and creditors will be
180 000 more
Therefore issues relating to multinational transfer pricing could be included in the
answer. For an explanation of these issues see International transfer pricing in
Chapter 20.
(c) To maximize group profits a linear programming model must be formulated
c
SP = 3000 0.80x
Total revenue for an output of x units = 3000x 0.80x2
Marginal revenue =
dTR
dx
= 3000 1.60x
Marginal cost = variable cost = 1050 (700 + 350)
At the optimum output level where MR = MC:
3000 1.60x = 1050
x = 1218.75 units (say 1219 units)
T
Transfer pricing in divisionalized
companies
Solutions to Chapter 20 questions
Solution IM 20.1
(a) For an explanation of why costplus transfer prices are unlikely to lead to the
maximization of group profits see Cost plus a mark up transfer prices in Ch
(i)
(ii)
(iii)
(iv)
distinguishing between controllable and uncontrollable costs;
dual responsibility;
determining the lowest level of responsibility for reporting purposes;
determining which information should be reported and the frequency of
reports;
(v
Solution IM 21.6
212
(a) (i) The traditional approach in the management control literature has been to
view results controls as a simple cybernetic system. This process is illustrated
in the diagram below. The control system consists of the following elem
where a company has spare capacity and wishes to evaluate a make or buy
decision.
(a) The number of employees (X2 ) is likely to be the least good estimator of total
costs. There is a large decline in total costs in month 8 and a large increase in
month 9
Quarterly sales of 6250 units
Total demand for period = 25 000 (6250 4)
Therefore
2 25 000 10
EOQ =
1
= 707
The EOQ formula shows that the optimum batch size varies in proportion to the
square root of total demand (sales volume). Therefore when quarterly
Note that the acquisition cost and delivery charge per unit remain unchanged irrespective of the order quantity. Therefore they are not relevant to the EOQ model.
Calculation of EOQ
EOQ =
=
H
2DO
2 24 000 1500
18
= 2000
The annual cost of purchasing, or
Resource consultation
The average consultations per consultant are budgeted at 1000 for each type of
consultant. The actual figures and utilization percentages are:
fulltime medical (900 a 10% decline)
dietary (833 a 16.7% decline)
fitness (1208 a 21% in
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