Financial Management

(E. Quantitative Methods)

E. QUANTITATIVE METHODS 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 least-
THEORIES: time path through a network.
Economic Order Quantity
1. The economic order quantity is the order quantity that results in 6. Critical Path Method (CPM) is a technique for analyzing, planning, and scheduling large,
A. the minimum total annual inventory costs. complex projects by determining the critical path from a single time estimate for each event
B. no inventory shortages. in a project. The critical path:
C. the maximum total annual inventory costs. A. Is the shortest path from the first event to the last event for a project.
D. minimum ordering costs. 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.
Sensitivity analysis D. Is the maximum amount of time an activity may be delayed without delaying the total

a
2. Missile Company has correctly computed its economic order quantity as 500 units. However, project beyond its target completion time.

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management feels it would rather order quantities of 600 units. How should Missile’s total
annual purchase-order costs and total annual carrying cost for an order quantity of 600 units Queuing Theory
compare to the respective amounts for an order quantity of 500 units? 7. A company is designing a new regional distribution warehouse. To minimize delays in

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A. Higher purchase-order cost and lower carrying cost. loading and unloading trucks, an adequate number of loading docks must be built. The

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B. Higher purchase-order cost and higher carrying cost. most relevant technique to assist in determining the proper number docks is

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C. Lower purchase-order cost and higher carrying cost. A. Cost-volume-profit analysis C. Linear programming
D. Lower purchase-order cost and lower carrying cost. B. PERT/CPM analysis D. Queuing theory

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3. A decrease in inventory order costs will Linear Programming
A. Increase the reorder point. Use the following information to answer question Nos. 8 and 9:

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B. Decrease the economic order quantity. The Kinis Company produces a cosmetic product in 60 gallon batches. The basic ingredients used
C. Have no effect on the economic order quantity. are material X, costing P70 per gallon, and material Y, costing P170 per gallon. No more than 18

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D. Decrease the holding cost percentage. gallons of X can be used, and at least 15 gallons of Y must be used.

4. An increase in inventory holding costs will 8. How would the objective function (minimization of product cost) be expressed?
A. Decrease the economic order quantity.
m e A. 70X + 170Y C. 170X + 70Y
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B. Have no effect on the economic order quantity. B. 18X + 15Y D. 18X + 42Y
C. Increase the economic order quantity.
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D. Decrease the number of orders issued per year. 9. Which of the following is not a constraint of the Kinis Company?
A. X ≤ 18 C. Y ≥ 15
PERT-CPM B. X + Y ≤ 60 D. X ≥ 0
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5. Which one of the following statements best describes a difference between basic PERT and
the Critical Path Method (CPM) of network analysis? Use the following data to answer Question Nos. 10 through 12:
A. PERT uses probability distribution on the activity times while CPM uses point estimates Sun, Inc. manufactures product X and product Y, which are processed as follows:
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for the activity times.

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 Financial Management
(E. Quantitative Methods)

Type A machine Type B machine

Product X 6 hours 4 hours Learning Curve
Product Y 9 hours 5 hours i. Contratista, Inc. is considering a three-phase research project. The time estimates for
completion of Phase 2 of the project are:
The contribution margin is P12 for product X and P7 for product Y. The available time daily for Pessimistic 24 weeks
processing the two products is 120 hours for machine Type A and 80 hours for machine Type B. Most likely 20 weeks
Optimistic 10 weeks
10. How would the constraint for machine Type A be expressed? Using the program evaluation and review technique (PERT), the expected time for
A. 4X + 5Y C. 4X + 5Y ≤ 80 completion of Phase 2 should be
B. 6X + 9Y ≤ 120 D. 12X + 7Y A. 20 weeks C. 18 weeks
B. 19 weeks D. 24 weeks

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11. How would the constraint for machine Type B be expressed?
A. 4X + 5Y C. 4X + 5Y ≤ 80 ii. Wind Company expects an 85% learning curve. The first batch of a new product required 500

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B. 6X + 9Y ≤ 120 D. 12X + 7Y 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

d
12. How would the objective function be expressed?
A. 4X + 5Y C. 4X + 5Y ≤ 80

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B. 6X + 9Y ≤ 120 D. 12X + 7Y iii. A learning curve of 80% assumes that production unit costs are reduced by 20% for each

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doubling of output. What is the cost of the sixteenth unit produced as an approximate
percent of the first unit produced?

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PROBLEMS: A. 30 percent C. 41 percent
PERT-CPM B. 51 percent D. 64 percent
2. Castle Building Company uses the critical path method to monitor construction jobs. The

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company is currently 2 weeks behind schedule on Job WW, which is subject to a P10,500-per- iv. Soft Inc. has a target total labor cost of P3,600 for the first four batches of a product. Labor
week completion penalty. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and is paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first

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critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities batch take?
can be crashed. A. 360 hours C. 57.6 hours
B. 140.63 hours D. 230.4 hours
Activities Cost to Crash 1 Week
m e Cost to Crash 2 Weeks
BC P 8,000
co rc P15,000
v. Havenot has estimated the first batch of product will take 40 hours to complete. A 90%
DE 10,000 19,600
learning curve is expected. If labor is paid P15 per hour, the target labor cost for four batches
EF 8,800 19,500
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of product is
Castle desires to reduce the normal completion time of Job WW and, at the same time, report A. P600 C. P1,944
the highest possible income for the year. Castle should crash B. P2,160 D. P2,400
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A. Activity BC 1 week and activity EF 1 week

B. Activity BC 2 weeks vi. Hanip Co. used 30 hours to produce the first batch of units. The second batch took an
C. Activity DE 1 week and activity BC 1 week additional 18 hours. How many total hours will the first four batches require?
D. Activity DE 1 week and activity EF 1 week
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A. 76.8 hours C. 120.0 hours

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 Financial Management
(E. Quantitative Methods)

B. 96.2 hours D. 48.0 hours stores are sold through Dough’s thrift store for P1. Dough assigns the following probabilities to
selling additional boxes:
vii. Sulit Company plans to begin production of a new product on July 1. An 80% learning curve is Additional sales Probability
applicable to Sulit’s manufacturing operations. If it is expected to take 1,000 direct labor hours 60 0.6
to produce the first unit, how many direct labor hours should it take to produce the third and 100 0.4
fourth units? What is the expected value of Dough’s decision to buy 100 additional boxes of muffins?
A. 640 C. 1,600 A. P28 C. P52
B. 960 D. 2,560 B. P40 D. P68
viii. A construction company has just completed a bridge over the Visayan area. This the first xi. Karen Company has three sales departments. Department A processes about 50 percent of
bridge the company ever built and it required 100 weeks to complete. Now having hired a sales, Department B about 30 percent, and Department C about 20 percent. In the past,
bridge construction crew with some experience, the company would like to continue building

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Departments A, B, and C had error rates of about 2 percent, 5 percent, and 2.5 percent,
bridges. Because of the investment in heavy machinery needed continuously by this crew, the respectively. A random audit of the sales records yields a recording error of sufficient

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company believes it would have to bring the average construction time to less than one year magnitude to distort the company’s results. The probability that Department A is responsible
(52 weeks) per bridge to earn a sufficient return on investment. The average construction time for this error is
will follow an 80% learning curve. To bring the average construction time (over all bridges

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A. 0.50 C. 0.20
constructed) below one year per bridge, the crew would have to build approximately B. 0.33 D. 0.25

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A. 2 additional bridges. C. 3 additional bridges.

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B. 7 additional bridges. D. 8 additional bridges. xii. 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

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ix. Moss Point Manufacturing recently completed and sold an order of 50 units that had the P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is
following costs: cold, the profit will be P2,000. The probability of cold weather on a given day at this time is
Direct materials P 1,500 60%. The expected payoff if the vendor has perfect information is

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Direct labor (1,000 hours @ P8.50) 8,500 A. P3,900 C. P2,200
Variable overhead (1,000 hours at P4.00) 4,000 B. P1,360 D. P1,960

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Fixed overhead 1,400
P15,400 xiii. The Teeners’ Club sells fresh hot cider at Recto football games. The frequency distribution
*Applied on the basis of direct labor hours. of the demand for cups of hot cider per game is presented below:
*Applied at the rate of 10% of variable cost.
m e Unit sales volume Probability
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The company has now been requested to prepare a bid for 150 units of the same product.
10,000 0.10
If an 80 percent learning curve is applicable, Moss Point’s total cost on this order would be
20,000 0.15
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estimated at
30,000 0.15
A. P26,400 C. P31,790
40,000 0.40
B. P37,950 D. P38,500
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50,000 0.20
Expected Value The hot cider is sold for P35.00 a cup and the cost per cup is P20.00. Any unsold hot cider
x. Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of 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
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muffins costs P2 and sells for P3 through regular stores. Any boxes not sold through regular

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 Financial Management
(E. Quantitative Methods)

approach based on the most likely outcome is used? 140,000 0.30

A. 34,500 C. 16,000 160,000 0.30
B. 40,000 D. 50,000
xvi. The optimal weekly production of the corsage is
xiv. Green Co. is considering the sale of banners in an exhibit fair. Green Co. could purchase A. 120,000 C. 134,000
these banners for P7.50 each. Unsold banners would be unreturnable and worthless after B. 140,000 D. 145,000
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 Green’s prediction proves to be incorrect and only xvii. The value of perfect information is
1,500 banners were sold, the cost of this prediction error would be: A. P14,400 C. P23,800
A. P 6,250 C. P 4,750 B. P16,000 D. P22,100
B. P10,000 D. P 3,750

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Question Nos. 21 through 24 re based on the following information:
xv. The manager of Batanes Company has developed the following probability distribution of Glassco, Inc. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for

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dairy sales of a highly perishable product. The company restocks the product each morning: introduction. However, plant capacity is limited, and only one product can be introduced at
X (Units Sold P (Sales =X) present. Therefore, Glassco has conducted a market study, at a cost of P26,000, to determine

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150 0.20 which product will be more profitable. The results of the study show the following sales patterns.
175 0.40

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Sales of Desserts at P1.80 per unit Sales of Rolls at P1.20 per unit
200 0.15 Volume Probability Volume Probability

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225 0.10 250,000 .30 200,000 .20
250 0.10 300,000 .40 250,000 .50

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275 0.05 350,000 .20 300,000 .20
If the company desires an 85% service level in satisfying sales demand, what should the 400,000 .10 350,000 .10
initial balance be for each day? The costs associated with the two products have been estimated by Glassco’s cost accounting

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A. 191 C. 234 department and are shown below:
B. 225 D. 250 Dessert Rolls

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Ingredients per unit P 0.40 P 0.25
Question Nos. 17 and 18 are based on the following: Direct labor per unit 0.35 0.30
Sampaguita Company makes corsages that it sells through salespeople on the streets. Each

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sells for P2 and has variable production costs of P0.80. The salespeople receive a P0.50
Variable overhead per unit 0.40 0.20
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Production tooling* 48,000.00 25,000.00
commission on each corsage they sell, and the company must spend P0.05 to get rid of each Advertising 30,000.00 20,000.00
unsold corsage. The corsages last for only one week and cannot be carried in inventory.
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*Glassco treats production tooling as a current operating expense rather than capitalizing it as a
The manager of the firm had estimated demand per week and associated probabilities as
fixed asset.
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follows:
Demand Probability xviii. According to Glassco’s market study, the expected value of the sales volume of the breakfast
100,000 0.20 rolls is
120,000 0.20 A. 125,000 units C. 260,000 units
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 Financial Management
(E. Quantitative Methods)

B. 275,000 units D. 250,000 units X Y Z

A. 100 80 100
xix. Applying a deterministic approach, Glassco’s revenue from sales of frozen desserts would be B. 20 80 100
A. P549,000 C. P540,000 C. 100 40 100
B. P195,000 D. P216,000 D. 100 80 73

xx. The expected value of Glassco’s operating profit directly traceable to the sale of frozen Inventory Management
desserts is EOQ, Safety Stock, Reorder Point
A. P198,250 C. P471,000 Question Nos. 25 through 30 are based on the following:
B. P150,250 D. P120,250 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
xxi. In order to recover the costs of production tooling and advertising for the breakfast rolls,

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castings per year at a cost of P8 per casting.
Glassco’s sales of the breakfast rolls would have to be The castings are used evenly throughout the year in the production process on a 360-day-per-year

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A. 37,500 units C. 100,000 units basis. The company estimates that it costs P90 to place a single purchase order and about P3 to
B. 60,000 units D. 54,000 units carry one casting in inventory for a year. The high carrying costs result from the need to keep the

d
castings in carefully controlled temperature and humidity conditions, and from the high cot of
Decision Tree insurance.

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xxii. A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now Delivery from the foundry generally takes 6 days, but it can take as much as 10 days. The days of

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will yield 100,000 bottles of wine netting P2 per bottle. If the wine maker waits and the delivery time and the percentage of their occurrence are shown in the following tabulation:
weather turns cold (probability 0.2), the yield will be cut in half but net P3 per bottle. If the

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weather does not turn cold, the yield will depend on rain. With rain (probability 0.5), a full yield Delivery Time (days) Percentage of Occurrence
netting P4 per bottle will result. Without rain (probability 0.5), there will still be a full 100,000- 6 75
bottle yield, but the net will be only P3 per bottle. 7 10

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The optimal expected value is 8 5
A. P200,000 C. P350,000 9 5

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B. P310,000 D. P400,000 10 5
100
Theory of Constraints

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xxiii. Happy Holidays produces three products: X, Y, and Z. Two machines are used to produce xxiv. What is the economic order quantity for the company.
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the products. The contribution margins, sales demands, and time on each machine (in A. 1,800 C. 2,545
minutes) is as follows: B. 1273 D. 2,700
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Demand CM Time on M1 Time on M2
X 100 P10 5 10 xxv. Assuming that the company will not provide any safety stock units, how much would the
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Y 80 18 10 5 annual inventory costs?

Z 100 25 15 5 A. P2,700 C. P5,400
There are 2,400 minutes available on each machine during the week. How many units should B. P8,100 D. P6,000
be produced and sold maximize the weekly contribution?
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 Financial Management
(E. Quantitative Methods)

xxvi. Assuming that the company is willing to assume a 15% risk of being out of stock, what
would be the number of safety stock? i
. Answer: B
A. 0 C. 300 Formula: (Pessimistic + 4Most likely + Optimistic) / 6
B. 150 D. 450 [24 + (20 x 4) +10] ÷ 6 = 19 weeks

xxvii. Assuming that the company is willing to assume only a 5% risk of being out of stock, what ii
. Answer: A
would be the reorder point?
Units Cumulative Average Time Computation
A. 450 C. 1,200
1 500.00
B. 1,050 D. 1,350
2 425.00 (0.85 x 500.00)
4 361.25 (0.85 x 425.00)
xxviii. Assuming a 5% stock-out risk, what would be the total cost of ordering and carrying
inventory for one year?

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A. 5,850 C. 6,075 . Answer: C

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B. 6,300 D. 6,750 Units Cumulative Average Time Computation
1 1.00
xxix. Assuming that the cost of stock out is P800 per occurrence, which safety stock level is

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2 0.80 (0.8 x 1.00)
necessary in reducing the cost? 4 0.64 (0.8 x 0.80)

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A. 0 C. 300 8 0.51 (0.8 x 0.64)

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B. 150 D. 450 16 0.41 (0.8 x 0.51)
Percentage: 0.41 ÷1.00 = 41.0%

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Just-in-Time
xxx. At the beginning of 2007, Silang Company installed a JIT purchasing and manufacturing iv
. Answer: B
system. The following information has been gathered about one of the company's products Average hours after 4 th batch P3,600 ÷ 10 ÷ 4 units 90

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Theoretical annual capacity 4,000 Hours used by 1 st batch: 90 ÷ 0.80 ÷ 0.80 140.63
Actual production 3,800

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Production hours available 2,500 v
. Answer: C
On-time deliveries 1,500
Total deliveries 1,600 Units Cumulative Average Time Computation
Scrap (lbs.)
m e 400 1 40.00
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Materials used (lbs.) 12,800 2 36.00 (0.9 x 40.00)
Number of defective units 20 4 32.40 (0.9 x 36.00)
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Defective units as a percentage of total units produced is: Total number of hours used by 4 units: 4 x 32.4 129.6
A. 5% C. 0.53% Total labor cost used by 4 units: 129.6 x P15 P1,944
B. 1.05% D. 2.5%
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. Answer: A
ANSWER EXPLANATIONS Learning curve (30 + 18) ÷ 2 ÷ 30 = 80.0%
Cumulative average time after 4 batches: 30 x 0.8 x 0.8 19.2
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Total number of hours used by first 4 batches: 4 x 19.2 76.8

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 Financial Management
(E. Quantitative Methods)

60 (60 x P3) + (40 x P1) – P200 = P 20

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. Answer: B 100 (100 x P3) – P200 = 100
Cumulative average DLH after 4 units: (1,000 x 0.8 x 0.8) 640 Expected Value: (P20 x 0.6) + (P100 x 0.4) = P52
Total DLH after 4 units: 4 x 640 2,560
Less Total DLH used after 2 units (1,000 x 0.8 x 2) 1,600 xi
. Answer: B
Total DLH used by 3 rd and 4th units 960 Dept. Error Weight Probability
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A 0.02 0.010 .01/.03 = 33.00%
. Answer: B B 0.05 0.015 .015/03= 50.00%
No. of Bridges Cumulative Average Weeks Computation C 0.025 0.05 .005/03= 16.67%
1 100.00 0.03
2 80.00 (0.8 x 100.0)

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4 64.00 (0.8 x 80.00) xii
. Answer: C

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8 51.20 (0.8 x 64.00) Expected payoff:
It will take 8 bridges to complete them with cumulative average time in weeks of below 52. Sale of coffee during cold weather 2,000 x 0.6 1,200
The company needs to complete additional 7 bridges to have an average completion time of Sale of soft drinks during hot weather 2,500 x 0.4 1,000

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less than 52 weeks. Total 2,200

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ix xiii
. Answer: A . Answer: B
Cumulative Ave. DHL The expected sales based on the most likely outcome are 40,000. This is based on the

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50 units 20.0 concept that which one with the highest probability is the most likely to happen.
100 units 16.0 ( 20 x 80% )
200 units 12.80 ( 16 x 80% ) xiv
. Answer: D

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Total hrs required by 200 units 128.80 x 2,000 2,560 The cost of prediction error = unsold units x purchase price
Less Hours used by first 50 units 1,000 500 x 7.50 = P3,750

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Additional Hours 1,560
xv
. Answer: B
Costs
Direct materials (1,500 x 3)
m e P 4,500
At the service level of 85%, there is 15% risk that the company runs out of stock. To
co rc achieve 85% level, 225 units must be purchased at the start of day. (0.20 + 0.40 + 0.15 +
Direct labor 1,560 x 8.50 13,260
0.10 = 85%); 225 units corresponds to 85%.
Variable OH 1,560 x 4 6,240
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Total variable Costs 24,000 xvi
Fixed OH 10% x 24,000 2,400 . Answer: B
Total Cost P26,400 Purchases
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Probability Demand 100,000 120,000 140,000 160,000

x 20% 100,000 70,000 53,000 36,000 19,000
. Answer: C
Sales Conditional Profit (Loss) 20% 120,000 70,000 84,000 67,000 50,000
30% 140,000 70,000 84,000 98,000 81,000
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 Financial Management
(E. Quantitative Methods)

30% 160,000 70,000 84,000 98,000 112,000

xxiii
Expected Value 70,000 77,800 79,400 71,700 . Answer: D
Optimal Production is 140,000 because it gives the highest pay off, which is 79,400 First step is to determine which machine has a constraint:
Required usage of Machine:
xvii Machine 1: (100 x 5) + (80 x 10) + (100 x 15) 2,800
. Answer: A
Perfect Information: Machine 2: (100 x 10) + (80 x 5) + (100 x 5) 1,900
(70,000 x.20) + (84,000 x .20) + (98,000 x.3) + (112,000 x .30) = 93,800 Machine 1 has shortage in capacity of (2,800 – 2,400) 400
Value of Perfect Info – 93,800 – 79,400 = P14,400
Value of Perfect Info = Diff. Between payoff of Perfect Info and Optimal production Second step is to determine the order of profitability of the product lines per minute of machine
1.
xviii Product X: P10 ÷ 5 min. P2.00
. Answer: C

a
Product Y: P18 ÷ 10 min. 1.80
EV = (200 x 0.2) + (250 x 0.5) + (300 x 0.2) + (350 x 0.1) 60,000
Product Z: P25 ÷ 15 min. 1.67

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xix
. Answer: C The company should produce product Z last because it is the least profitable per minute of
300,000 x P1.80 = P540,000

d
usage of Machine 1. It is apparent that Choice D is the only possible correct response.
The sales level of 300,000 has the highest probability (40%) and there it the level most likely to

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happen. xxiv
. Answer: A

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

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EV: (250 x 0.3) + (300 x 0.4) + (350 x 0.2) + (400 x 0.1) 305,000
Expected sales (305,000 x P1.80) P549,000 xxv
. Answer: C
Less expected variable costs (305,000 x P1.15) 350,750

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Annual ordering cost: 54,000/1800 x 90 2,700
Contribution margin 198,250
Annual carrying cost: 1,800/2 x 3 2,700
Less fixed costs (P48,000 + P30,000) 78,000
Total cost 5,400

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Expected profit P120,250
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xxi . Answer: B
. Answer: C

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Breakeven units, Glassco: (P45,000 ÷ 0.45) = 100,000
A 15% risk of out-of-stock means a 85% assurance that order will be received on time.
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Without having a safety stock, the company will use a lead time of 6 days (75%). Therefore,
xxii 7-day lead time has 85% assurance or a 15% risk of stockout. The safety stock level is for 1
. Answer: B
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day (7 – 6) or 150 units.
Expected value if immediately harvested: (100,000 x P2) P200,000 Daily requirements: 54,000/360 = 150
Expected value if not harvested immediately:
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Cold weather: (50,000 x P3 x 0.20) P 30,000 xxvii

. Answer: D
Not cold with rain: (100,000 x P4 x 0.8 x 0.5) 160,000
A 5% risk of out-of-stock means a 95% assurance that order will be received on time. This is
Not cold without rain: (100,000 x P3 x 0.8 x. 0.5) 120,000
estimated to have a lead time of 9 days (the total of probability for 9 days is 95%).
Total P310,000
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Reorder point without safety stock 6 days x 150 900

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 Financial Management
(E. Quantitative Methods)

Safety stock (9 – 6) 150 450

Reorder point 1,350
xxviii
. Answer: D
Ordering cost (unchanged) 2,700
Carrying cost
Average inventory (1800/2) + 450 = 1,350
1,350 x 3 4,050
Total 6,750
xxix
. Answer: A

a
Safety units Stock out cost Carrying Cost Total

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0 0.25 x 2,400 = 600 0 600
150 0.15 x 2,400 = 360 150 x 3 = 450 810
300 0.10 x 2,400 = 240 300 x 3 = 900 1,140

d
450 0.05 x 2,400 = 120 450 x 3 = ,350 1,470

e
Annual stockout cost (100% probability) based 30 orders (54,000/1800):

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30 x 800 = 2,400
The probability of stockout is the inverse of assurance, say at zero safety stock, 6 days, its

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75% probable that ordered goods will arrive, therefore, its 25% probable that it won’t.
xxx
. Answer: C

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Defective Units ÷ Actual Units Produced (20 ÷ 3,800) = 0.526%

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