Work Book Intermediate

Operations
Management
Paper

9
The Institute of Cost Accountants of India
Statutory Body under an Act of Parliament
www.icmai.in
 WORKBOOK
Operations Management and Strategic Management
INTERMEDIATE

Paper 9

SYLLABUS 2022

The Institute of Cost Accountants of India

CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
www.icmai.in
First Edition : March 2025

Published by :

Directorate of Studies
The Institute of Cost Accountants of India
CMA Bhawan, 12, Sudder Street, Kolkata - 700 016
[email protected]

Copyright of these Study Notes is reserved by the Institute of Cost Accountants of India and prior permis-
sion from the Institute is necessary for reproduction of the whole or any part thereof.
Copyright © 2025 by The Institute of Cost Accountants of India
 Preface

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The Directorate of Studies, The Institute of Cost Accountants of India

The Directorate of Studies,

The Institute of Cost Accountants of India
 INDEX
Sl. No. Module Description Page No.

Section A: Operations Management

1. Operations Planning 1-9

2. Application of Operation Research - Production Planning 10-28

and Control

3. Productivity Management and Quality Management 29-41

4. Project Management, Monitoring and Control 42-60

5. Economies of Maintenance & Spares Management 61-72

 1 Operations Planning
[Study Material - Module 2]

ILLUSTRATION 1:
From the following time series data of sale project, the sales for the next three years.

Year 2019 2020 2021 2022 2023 2024 2025

Sales (‘000 units) 160 180 184 166 188 198 184

Also find out the trend values for the years 2023, 2024 and 2025 and their deviations from the
actual values.

Solution:

Time deviation Sales (‘000 units)

Year X2 XY
from 2022 (X) (Y)
2019 -3 160 9 -480
2020 -2 180 4 -360
2021 -1 184 1 -184
2022 0 166 0 0
2023 1 188 1 188
2024 2 198 4 396
2025 3 184 9 552
Total 0=∑X 1,260 = ∑ Y 28 = ∑ X2 112 = ∑ XY

Let the Trend equation be

Y = a + b.X
We can use the following short-cut method to find out the values of two constants:
∑ Y 1,260 ∑ XY 112
a= = = 180, and b = ∑ = =4
n 7 X² 28
Therefore, the Trend equation is Y = 180 + 4.X

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 1
 Work Book : Operations Management and Strategic Management

Projected sales for the next three years:

Year Value of X Projected sales (‘000 units)

2026 4 180 + 4 × 4 = 196
2027 5 180 + 4 × 5 = 200
2028 6 180 + 4 × 6 = 204

Sales values (‘000 units)

Year Value of X
Trend Values Actual values Deviations
2023 1 180 + 4 × 1 = 184 188 -4
2024 2 180 + 4 × 2 = 188 198 -10
2025 3 180 + 4 × 3 = 192 184 +8

ILLUSTRATION 2:
An investigation into the demand for AC sets in 5 towns has resulted in the following data:

Population of the town (in lakh) 3 7 6 10 12

No. of AC demanded (in ‘000) 7 11 10 15 17

Fit a linear regression of Y on X and estimate the demand for CTV sets for two towns with a
population of 13 lakhs, 15 lakhs and 21 lakhs.

Solution:
Population (X) Demand (Y) X2 XY
3 7 9 21
7 11 49 77
6 10 36 60
10 15 100 150
12 17 144 204
38 60 338 512

Let the Trend equation be

Y = a + b.X
XY = aX + b.X2

2 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

∑Y = 5a + b.
∑XY = a. + b. ∑X2
Putting the values from the above table:
60 = 5a + 38b, i.e., 2,280 = 190a + 1,444b
512 = 38a + 338b, i.e., 2,560 = 190a + 1,690b
Subtracting the above two equations, we get
246b = 280, i.e., b = 1.138
60 – 43.244
∴ 60 = 5a + 38 × 1.138, a = = 3.3512
5
Therefore, the Trend equation is
Y = 3.3512 + 1.138X

Population (X) Demand (Y) = 3.3512 + 1.138X

13 3.3512 + 1.138 × 13 = 18.146
15 3.3512 + 1.138 × 15 = 20.422
21 3.3512 + 1.138 × 21 = 27.250

ILLUSTRATION 3:
GOLDEN MOMENTS LIMITED is a producer of mobile sets. The following data is available from the
recent estimates of the company:

Particulars GOLD SET GOLD PLUS SET

Estimated demand 50,000 sets 40,000 sets
Processing time per unit (hours) 24 minutes 48 minutes
Set up time per lot 5 hours 6 hours
Lot size 100 units 200 units

The factory works for two shifts per day, 8 hours per shift, and 300 days per year. Currently, the
company operates 5 machines and desires a 20% capacity cushion.
(a) How many additional machines should be purchased to meet the upcoming year’s demand
without resorting to any short-term capacity solution?
(b) If the company makes double-shift operation, how many additional machines required to be
purchased?

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 3
 Work Book : Operations Management and Strategic Management

Solution:
(a) Total working hours available = 2 × 8 × 300 = 4,800
Less: Capacity cushion required (20%) 960
Effective working hours 3,840
Total hours required = [50,000 × (24 / 60) + (50,000 / 100) × 5] + [40,000 × (48 / 60) +
(40,000 / 200) × 6] = 22,500 + 33,200 = 55,700.
55,700
No. of machines required = = 14.51 i.e., 15 machines
3,840
Number of additional machines to be bought = 15 – 5 = 10.
55,700
(b) No. of machines required = = 7.25 i.e., 8 machines
3,840 × 2
Number of additional machines to be bought = 8 – 5 = 3.

ILLUSTRATION 4:
Department A of FULLMOON LIMITED works on 8 hours shift, 275 days a year. It uses a special
machine to process four products, the details of which are given below:

Product Processing hours per unit Annual demand (units)

P 5 1,000
Q 8 1,250
R 4 800
S 3 1,500
(a) Compute the number of machines required to satisfy the above demand;
(b) Compute the surplus capacity.
Solution:
(a)

Processing hours per Annual demand Processing hours

Product
unit (units) required
P 5 1,000 5 × 1,000 = 5,000
Q 8 1,250 8 × 1,250 = 10,000
R 4 800 4 × 800 = 3,200
S 3 1,500 3 × 1,500 = 4,500
Total 22,700

4 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Total hours available per machine = 8 × 275 = 2,200

22,700
∴ Number of machines required = = 10.32 i.e., 11 machines.
2,200

(b) Total capacity of 11 machines = 11 × 2,200 = 24,200

Less: Machine-hours required 22,700
Surplus capacity (Processing hours) 1,500

ILLUSTRATION 5:
JANI-DUSHMAN LTD. is redesigning its production process so that it is capable to produce 640
chairs per day. Time estimates reveal that 72 hours of cutting work per day are required for the
production of 640 chairs. 1 chair in every 20 is scrapped due to sub-standard quality which are
sold as scrap by the company. The plant is expected to operate at 90% efficiency on a 2 shift of 8
hours each per day.
(a) Please compute the number of machines required to produce 640 standard quality chairs per
day.
(b) If the cost of each machine is `50,000, find the total amount of investment in the machines.
(c) Compute the surplus capacity.
Solution:
1
(a) Scrap loss = × 100 = 5%.
20
640
Gross number of chairs to be produced = = 673.684, i.e. 674
95%
72
Ideal number of machines required = = 4.5
16
4.5
Actual number of machines required = = 5.26, i.e. 6.
0.95 × 0.90
(b) Total amount of investment = 6 × ` 50,000 = ` 3,00,000.
(c) Surplus capacity = (6 – 5.26) × 72 hours = 53.28 hours.

ILLUSTRATION 6:
The following information is available from the records of WHITE-TEETH LIMITED for the month
of March 2025:

Capacity 10,000 Machine hours

Overhead costs ` 600,000
Machine hours worked 8,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 5
 Work Book : Operations Management and Strategic Management

Machine hours constitute the main constraints on the physical capacity of the company.
Please compute the idle capacity costs.

Solution:
` 6,00,000
Overhead costs per MH = = `. 60
10,000
Idle capacity = (10,000 – 8,000) MH = 2,000 MH
Therefore, Idle capacity costs = 2,000 × `. 60 = `. 120,000.

ILLUSTRATION 7:
The factory at Rourkela of GOOD INDUSTRY LTD has a design capacity of 7,20,000 tons of its
product per day, effective capacity of 6,00,000 tons per day and an actual output of 5,60,000 tons
of per day. Compute the efficiency of the plant and its utilisation.

Solution:
Actual Output 5,60,000
(a) Efficiency of the factory = × 100 = × 100 = 93.33%
Effective Capacity 6,00,000
Actual Output 5,60,000
(b) Capacity utilisation = = × 100 = × 100 = 77.78%
Design Capacity 7,20,000

ILLUSTRATION 8:
ORGANIC COMPOUND LIMITED buys and uses a component for production at `. 40 per piece.
Annual requirement is 80,000 number. Carrying cost of inventory is 10% p.a. and the ordering
cost is `. 400 per order. The purchase manager agrees that as the ordering cost is very high, it is
advantageous to place a single order for the entire annual requirement. He also says that if we
order 80,000 at a time, we get a 3% discount from the supplier. Evaluate this proposal and make
your recommendation.

Solution:

2× A × B 2 × 80,000 × 400
EOQ = = = 4,000 Units
C 4

(a) Ordering quantity 4,000 80,000

(b) No. of orders [80,000 ÷ OQ] 20 1
(c) Price per unit (`.) 40 38.80
(d) Carrying cost per unit per annum [c × 10%] 4 3.88
(e) Total ordering costs [(b) × `. 400] 8,000 400

6 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

OQ
(f) Total carrying costs [ × (d)] 8,000 1,55,200
2

(g) Purchase price [80,000 × Price per unit] 32,00,000 31,04,000

(h) Total inventory costs [e + f + g] (`.) 32,16,000 32,59,600

Recommendation: The Purchase Manager’s proposal should not be accepted. The optimum
ordering quantity is 4,000 units.

ILLUSTRATION 9:
A company planning to manufacture a household cooking range has to decide on the location of
the plant. Three locations are being considered viz., Patna, Ranchi, and Dhanbad. The fixed costs
of the three locations are estimated to be `30 lakh, `50 lakh, and `25 lakh per annum respectively.
The variable costs are `300, `200 and `350 per unit respectively. The expected sales price of the
cooking range is `700 per unit.
Find out:
(i) The range of annual production/sales volume for which each location is most suitable and
(ii) Which one of the three locations is the best location at a production/sales volume of 18,000
units?
Solution:
Change in Fixed Costs
Cost Indifference point (CIP) =
Change in Variable Cost Per Unit
50,00,000 – 30,00,000
(a) Patna V. Ranchi: CIP = = 20,000 Units.
300 – 200
This indicates that above 20,000 units, Ranchi is cheaper and below 20,000 units, Patna is
cheaper.
30,00,000 – 25,00,000
(b) Patna V. Dhanbad: CIP = = 10,000 Units.
350 – 300
This indicates that above 10,000 units, Patna is cheaper and below 10,000 units, Dhanbad is
cheaper.
50,00,000 – 25,00,000
(c ) Ranchi V. Dhanbad: CIP = = 16,667 Units.
350 – 200
This indicates that above 16,667 units, Ranchi is cheaper and below 16,667 units, Dhanbad is
cheaper.
Comments: Combining the above three observations, we can recommend that below 10,000
units, Dhanbad is cheaper. Above 10,000 units but below 20,000 units, Patna is cheaper and above
20,000 units, Ranchi is cheaper.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 7
 Work Book : Operations Management and Strategic Management

ILLUSTRATION 10:
The production schedule for a certain part call for manufacturing approximately740 units per
week. Five operations are to be performed on five different machines. The time requirements for
these operations, adjusted for delays, labour efficiency and expected scrap are as follows:

Operation No. Required time per unit (hour)

1 0.095
2 0.200
3 0.197
4 0.098
5 0.100

(a) Please calculate the number of machines required to perform each operation if each machine
is scheduled to work for 40 hours per week.
(b) Compute the surplus capacity of each operation.
Solution:

Computation of required number of machines & surplus hours

Operation No. (a) Number of machines required (b) Surplus capacity (hours)
1 740 × 0.095 (2 – 1.76) × 40 = 9.6
= 1.76 i.e., 2
40
2 740 × 0.200 (4 – 3.7) × 40 = 12
= 3.7 i.e., 4
40
3 740 × 0.197 (4 – 3.64) × 40 = 14.4
= 3.64 i.e., 4
40
4 740 × 0.098 (2 – 1.813) × 40 = 7.48
= 1.813 i.e., 2
40
5 740 × 0.100 (2 – 1.85) × 40 = 6
= 1.85 i.e., 2
40

ILLUSTRATION 11:
A firm has four work centres, P, Q, R & S, in series with individual capacities in units per day shown
in the figure below.

Raw Material Actual Output

P Q R S 300 Units

450 Units 420 Units 400 Units 460 Units

8 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

(a) Identify the bottle neck centre.

(b) What is the system capacity?
(c) What is the system efficiency?
Solution:
(a) The bottle neck centre is the work centre having the minimum capacity. Hence, work centre
‘R’ is the bottleneck centre.

(b) System capacity is the maximum units that are possible to produce in the system as a whole.
Hence, system capacity is the capacity of the bottle neck centre i.e., 400 units.

Actual Output 300

(c) System efficiency = × 100 = × 100 = 75% (approx.)
System Capacity 400

ILLUSTRATION 12:
A metal processing firm desires to install sufficient number of automatic moulders to produce
2,00,000 good parts every year. The firm operates 2,000 hours per annum but the Moulding
equipment is part of a production line which will be used only 60% of the time and its output is
about 3% defective. A moulding operation takes 90 seconds per part. Although the temperature
adjustments and maintenance downtime the moulders are about 80% efficient.
How many moulders are required to satisfy the production demand of 2,00,000 good parts per
annum ?

Solution:
Actual Output 2,00,000
Required system capacity = = = 2,06,186 parts per annum,
System Capacity 97%
2,06,186 × 90
Total Moulding hours needed to produce gross output of 2,06,186 units =
60 × 60
= 5,154.65.
Capacity utilization per Moulding equipment = 2,000 × 60% × 80% = 960 hours.

5,154.65
Therefore, number of Moulding machines needed = = 5.40 i.e., 6 machines.
960

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 9
 2
Application of Operation Research -
Production Planning and Control
[Study Material - Module 4]

ILLUSTRATION 1:
The time study of a work operation yields a cycle time of 10 minutes. The analyst rated the worker
observed at 80%. The firm uses a 15% allowance factor. Please compute the normal time and
standard time for this operation.

Solution:
Average Cycle Time (ACT) = 10 Minutes
Performance rating (PR) = 80%
Therefore, Normal time (NT) = ACT × PR = 10 Minutes × 80% = 8 Minutes
Normal Time 8
Standard time = = = 9.41 Minutes
(1 – Allowance Fraction) (1 – 0.15)

ILLUSTRATION 2:
A work measurement study was conducted in a company for 80 hours and the following results
were obtained:
● Units produced : 3200
● Idle time : 15%
● Performance rating : 120%
● Allowance time : 12% of standard time
Compute the standard time for the task.

Solution:
Computation of Standard time:

Total time (80 × 60) 4,800 Minutes

Less: Idle time 15% 720 Minutes
Effective time 4,080 Minutes

10 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Units produced 3,200 units

ACT 1.275 Minutes
Performance Rating 120%
Normal time (ACT × PR) 1.53 Minutes
Standard time (ST) = NT/(1 – AF) 1.53/(1 – 0.12) = 1.74 Minutes

ILLUSTRATION 3:
A time study of a shop worker revealed the actual times shown below. The analyst rated the worker
at 90% rating factor and the company allows the following per 8-hour day:

Worker Machine time (minute / cycle) Total

2.30 0.80 3.10
1.80 0.80 2.60
2.00 0.80 2.80
2.20 0.80 3.00
1.90 0.80 2.70
10.20* 0.80 11.00
2.20 0.80 3.00
1.80 0.80 2.60

Personal time : 20 minutes and delay time : 30 minutes.

*Unusual non-recurring situation.

Please compute the standard time.

Solution:
Step 1: Computation of normal time (NT)

ACT PR NT = ACT × PR
Average Cycle Time (ACT):
● Worker: (2.30 + 1.80 + 2.00 + 2.20 + 1.90 + 2.20 + 2.0286 90% 1.8257
1.80) / 7
● Machine 0.8000 100% 0.8000
Total Normal Time 2.6257

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 11
 Work Book : Operations Management and Strategic Management

Allowance Fraction (AF) = (20 + 30) / (8 × 60) = 0.1042

Standard Time (ST) = NT / (1 – AF) = 2.6257 / (1 – 0.1042) = 2.93 Minutes (Approx.)

ILLUSTRATION 4:
A time study was conducted for a worker in shipping department in a factory. The observations (in
minutes) are as under:

Elements A B C D Performance rating

P: Obtain the case 0.15 0.25 0.20 0.17 90%
Q: Place 3 dozen bottles in case 1.56 * 1.80 1.75 105%
R: Set case aside 0.20 0.10 0.10 0.15 95%

* Dropped the bottle.

Please compute the following:
(i) Normal time;
(ii) Standard time if the allowance factor is 10%.
Solution:
Elements ACT ACT PR NT = ACT × PR
P (0.15+0.25+0.20+0.17) /4 0.1925 90% 0.1733
Q (1.56+1.80+1.75) / 3 1.7033 105% 1.7885
R (0.20+0.10+0.10+0.15) / 4 0.1375 95% 0.1306
Total 2.0924

Standard Time (ST) = NT / (1 – AF) = 2.0924 / (1 – 0.10) = 2.32 Minutes

ILLUSTRATION 5:
MR. SUNIL GAVASKAR has recently constructed his house and after completing the construction
he discovered that 100 sq. ft. of plywood scrap and 80 sq. ft. of pine scrap are in usable form for
the construction of tables and book cases. It takes 16 sq. ft. of plywood and 8 sq. ft. of white pine
to make a table and 12 sq. ft. of plywood and 16 sq. ft. of white pine to make a book case. By selling
the finished products to the nearest furniture store, he can realize a profit of `25 on each table and
20 on each book case.
Formulate the L.P.P. and find out the optimum solution. [Ans.: 4 tables, 3 book cases; Z = `160]

12 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Solution:
Tables (x1) Book cases (x2) Capacity
Plywood scrap (sq. ft.) 16 12 100
Pine scrap (sq. ft.) 8 16 80
Profit per unit (`.) 25 20

Let x1 number of Tables and x2 number of Book cases should be made to make maximum amount
of profit.
Let Z = Total amount of profit
The formulation of LPP is as follows:
Maximise Z = 25x1 + 20x2
Subject to —
16x1 + 12x2 ≤ 100
8x1 + 16x2 ≤ 80
x1, x2 ≥ 0
Applying Simplex Method or Graphical Method, the optimum solution will be as follows: -
Number of tables = 4 and number of book cases = 3; Maximum amount of profit = `. 160.

ILLUSTRATION 6:
A company produces three products P, Q and R from three raw materials A, B and C. One unit
of product P requires 2 units of A and 3 units of B. One unit of product Q requires 2 units of B
and 5 units of C and one unit of product R requires 3 units of A, 2 units of B and 4 units of C. The
company has 8 units of material A, 10 units of material B and 15 units of material C available to
it. Profits per unit of products P, Q and R are `. 3, `. 5 and `. 4 respectively. Formulate the question
mathematically to maximize the profit.

ILLUSTRATION 7:
SOURAV GANGULY & CO. is manufacturing two products A & B. The manufactured time required to
make them, the profit and the capacity available at each work center is given as follows:

Products Machining (hours) Fabrication (hours) Assembly (hours) Profit per unit (`)
A 1 5 3 80
B 2 4 1 100
Capacity 720 1800 990
(hours)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 13
 Work Book : Operations Management and Strategic Management

Please determine the product mix that will maximize the profit by using—
(a) Simplex Method: and (b) Graphical Method. [Ans.: A = 120 units, B = 300 units & Z = `39,600]

Solution:
A (x1) B (x2) Capacity
Machine hours 1 2 720
Fabrication hours 5 4 1,800
Assembly hours 3 1 990
Profit per unit (`.) 80 100

Let x1 number of product A and x2 number of product B should be made to make maximum amount
of profit.
Let Z = Total amount of profit
The formulation of LPP is as follows:
Maximise Z = 80x1 + 100x2
Subject to —
1x1 + 2x2 ≤ 720
5x1 + 4x2 ≤ 1,800
3x1 + 1x2 ≤ 990
x1, x2 ≥ 0
Applying Simplex Method or Graphical Method, the optimum solution will be as follows: -
Product A = 120 and Product B = 300; Maximum amount of profit = `. 39,600.

ILLUSTRATION 8:
MR. SHARAD POWER, a scrap metal dealer has received an order from a customer for at least 2,000
kg of scrap metal. The customer requires that at least 1,000 kg of the shipment of the metal must be
of high-quality copper that can be melted down and used to produce copper tubings. Furthermore,
the customer will not accept delivery of the order if it contains more than 175 kg. of metal that he
thinks unfit for commercial use, i.e. metal that contains excessive amount of impurities and cannot
be melted down and refined profitably.
The dealer can purchase scrap metal from two different suppliers in unlimited quantities with the
following percentage (by weight) of high-quality copper and unfit scrap.

14 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Supplier A Supplier B
Copper 25% 75%
Unfit copper 5% 10%
The cost ` per kg of metal purchased from supplier A and supplier B are `10 and `40 respectively.
Please determine the optimal quantities of metal for the dealer to purchase from each of the two
suppliers.
[Ans.: 2,500 kg from Supplier A and 500 kg from Supplier B. Z = `45,000]

[ Hints: Maximise Z (Total costs) = x1 + 4x2

Subject to
0.25x1 + 0.75x2 ≥ 1,000
0.05x1 + 0.10x2 ≤ 175
x1 + x2 ≥ 2,000]

ILLUSTRATION 9:
A pension fund manager is considering investing in two shares A and B. It is estimated that:
(i) Share A will earn a dividend of 12% per annum and share B 4% per annum.
(ii) Growth in the market value in one year of share A will be 10 paise per `.1 invested and in B
paise per `.1 invested.

He requires investing the minimum total sum which will give: Dividend income of at least `600 per
annum and growth in one year of at least `1,000 on the initial investment.
You are required to State the mathematical formulation of the problem which will facilitate
computation of the minimum sum to be invested to meet the manager’s objective.

Solution:
Let the manager should invest `x1 in share A and `x2 in share B

Share
Minimum Income (`)
Share A Share B
Dividend 12% 4% 600
Growth 0.10 0.40 1,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 15
 Work Book : Operations Management and Strategic Management

Formulation:
Minimise Z = x1 + x2
Subject to:
0.12 x1 + 0.04 x2 = 600
0.10 x1 + 0.40 x2 = 1,000
x1 + x2 ≥ 0.

ILLUSTRATION 10:
SURESH RAINA & CO. has two grades of inspectors—Grade 1 & Grade 2 to undertake quality
control inspection. At least 3,500 pieces must be inspected in an 8 hour day. Grade 1 inspector
can check 50 pieces in an hour with an accuracy of 95% whereas Grade 2 inspectors can check 25
pieces with an accuracy of 90%.
The daily wages of Grade 1 inspector are `6 per hour while those of Grade 2 are `5 per hour. Any
error made by an inspector cost `4 to the company. If there are in all 20 Grade 1 inspectors and 25
Grade 2 inspectors in the company, formulate the linear programming problem to determine the
optimal assignment of inspectors that minimises the daily inspection costs.

Solution:
Let x1 be the number of Grade 1 inspectors and x2 be the number of Grade 2 inspectors.
Z = Daily inspection costs.
∴ Cost per hour for Grade 1 inspectors = `. (6 + 50 × 5% × 4) = `. 16
For Grade 2 inspectors = `. (5 + 25 × 10% × 4) = `. 15

The LPP formulation is as follows:

Minimise Z = 8 × (16x1 + 15x2)
Subject to:
50 × 8x1 + 25 × 8x2 ≥ 3,500
x1 ≤ 20
x2 ≤ 25
x1, x2 ≥ 0

16 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

ILLUSTRATION 11:
From the following transportation cost matrix, find the initial feasible solution using North-West
corner Rule:

WAREHOUSES
FACTORIES W1 W2 W3 W4 Capacity
F1 47 59 55 57 150
F2 44 54 52 59 270
F3 49 64 59 61 370
F4 51 63 54 60 230
Requirement 210 330 260 220

Solution:

North-West Corner Rule

WAREHOUSES

FACTORIES W1 W2 W3 W4 Capacity
F1 47 59 55 57 150
150

F2 44 54 52 59 270
60 210
210
F3 49 64 59 61 370
120 250
250
F4 51 63 54 60 230
10 220 220
Requirement 210 330 260 220
60 120 10

Total transportation costs = `. (47×150 + 44×60 + 54×210 + 64×120 + 59×250 + 54×10 + 60×220
= `. 57,200

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 17
 Work Book : Operations Management and Strategic Management

ILLUSTRATION 12:
The Transportation problem of CO. RAJ & RAJ is given as follows:

WAREHOUSES
FACTORIES W1 W2 W3 W4 Capacity
F1 21 16 25 13 11
F2 17 18 14 23 13
F3 32 27 18 41 19
Requirement 6 10 12 15

Please find out the Basic Feasible solution and total transportation cost under—
(a) North-West Corner Rule;
(b) Least Cost Method;
Solution:
(a) North-West Cornet Rule

WAREHOUSES

FACTORIES W1 W2 W3 W4 Capacity
F1 21 16 25 13 11
6 5

F2 17 18 14 23 13
5 8

F3 32 27 18 41 19
4 1

Requirement 6 10 12 15

Total Transportation costs = `. 1,095

(b) Least Cost Method

18 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

WAREHOUSES

FACTORIES W1 W2 W3 W4 Capacity
F1 21 16 25 13 11
1

F2 17 18 14 23 13
1 1
1
F3 32 27 18 41 19
5 1 4
9
Requirement 6 10 12 15
5 4

Total Transportation costs = `. 922

ILLUSTRATION 13:
The Transportation problem of MORNING WALK LTD. is given as follows:

WAREHOUSES
FACTORIES W1 W2 W3 W4 Capacity
F1 21 16 25 13 11
F2 17 18 14 23 13
F3 32 27 18 41 19
Requirement 6 10 12 15

Using Vogel’s Approximation Method (VAM), please find out the—

(a) Basic Feasible solution;
(b) Optimum solution; and
(c) Total transportation cost

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 19
 Work Book : Operations Management and Strategic Management

Solution:
(a)
WAREHOUSES

FACTORIES W1 W2 W3 W4 Capacity
F1 21 16 25 13 11
1

F2 17 18 14 23 13
6 3 4
5
F3 32 27 18 41 19
7 1

Requirement 6 10 12 15

(b) Optimality Test [Stepping Stone Method]

Square evaluation of the unoccupied cells:
F1W1 = 21 – 13 + 23 – 17 = + 14
F1W2 = 16 – 13 + 23 – 18 = + 8
F1W3 = 25 – 13 + 23 – 18 + 27 – 18 = + 26
F2W3 = 14 – 18 + 27 – 18 = + 5
F3W1 = 32 – 27 + 18 – 17 = + 6
F3W4 = 41 – 23 + 18 – 27 = + 9
As all the square evaluations are non-negative, the above solution is optimal solution.
(C) Total Transportation costs = `. 796

ILLUSTRATION 14:
DELICIOUS FOOD LTD has 3 plants P1, P2 & P3 each producing 50, 100 and 150 units of a similar
products. There are 5 Warehouses—W1, W2, W3, W4 & W5 having demand of 100,70, 50, 40 & 40
units respectively. The cost of transporting a unit from various plants to the warehouses differs as
given by the following cost matrix:

Warehouses
Plants W1 W2 W3 W4 W5
P1 20 28 32 55 70
P2 48 36 40 44 25
P3 35 55 22 45 48

20 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Using North-West Corner Rule & Stepping Stone method, please determine the optimum
transportation schedule.

Solution:

Step 1: North-West Corner Rule:

Warehouses
Plants W1 W2 W3 W4 W5 Supply
P1 20 28 32 55 70 50
50

P2 48 36 40 44 25 100
50 50

P3 35 55 22 45 48 150
20 50 40 40

Demand 100 70 50 40 40

Step 2: After applying the Stepping Stone Method, the optimum solution is as follows:

Warehouses
Plants W1 W2 W3 W4 W5
P1 20 28 32 55 70
40 10

P2 48 36 40 44 25
60 40

P3 35 55 22 45 48
60 50 40

Total Transportation costs = `. (20×40 + 28×10 + 36×60 + 25×40 + 35×60 + 22×50 + 45×40)
= `. 9,240

ILLUSTRATION 15:
SOUTH INDIAN DISH LTD has 3 factories F1, F2 & F3 each producing 100, 200 and 300 units of a
similar products. There are 5 Warehouses—W1, W2, W3, W4 & W5 having demand of 200,140, 100,
80 & 80 units respectively. The cost of transporting a unit from various plants to the warehouses
differs as given by the following cost matrix:

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 21
 Work Book : Operations Management and Strategic Management

Warehouses
Plants W1 W2 W3 W4 W5
F1 40 56 64 110 140
F2 96 72 80 88 50
F3 70 110 44 90 96

Find out the minimum transportation costs using VAM.

Solution:
Using Vogel’s Approximation Method, the allocation is as follows:

Warehouses
Plants W1 W2 W3 W4 W5 Supply
F1 40 56 64 110 140 100
80 20

F2 96 72 80 88 50 200
120 80

F3 70 110 44 90 96 300
120 100 80

Demand 200 140 100 80 80

The application of Stepping stone method gives the following result:

F1W3 = 64 – 44 + 70 – 40 = + 54
F1W4 = 110 – 90 + 70 – 40 = + 50
F1W5 = 140 – 50 + 72 – 56 = + 106
F2W1 = 96 – 72 + 56 – 40 = + 40
F2W3 = 80 – 44 + 70 – 40 + 56 – 72 = + 50
F2W4 = 88 – 90 + 70 – 40 + 56 – 72 = + 12
F3W2 = 110 – 56 + 40 – 70 = + 24
F3W5= 96 – 70 + 40 – 56 + 72 – 50 = + 32
As all the square evaluations are non-negative, the above solution is optimum solution.
Total transportation costs = `. 36,960

22 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

ILLUSTRATION 16:
The transportation cost per unit, availability of supply from the warehouses, requirements of
market are given below:

Market
Warehouse P Q R S Supply
A 6 3 5 4 22
B 5 9 2 7 15
C 5 7 8 6 8
Requirement 7 12 17 9

The shipping clerk has worked out the following schedule from experience:
12 units from A to Q, 1 unit from A to R, 9 units from A to S, 15 units from B to R, 7units from C to
P and 1 unit from C to R.
(i) Check and see if the clerk has the optimal schedule;
(ii) Find the optimal schedule and minimum total transportation cost;
(iii) If the clerk is approached by a carrier of route C to Q who offers to reduce his rate in the hope
of getting more business, by how much the rate should be reduced before the clerk will offer
him the business? [ICWA-FINAL]
[Ans.: (i) No. Total cost = `150, (ii) `149 (iii) `2 per unit.]

Solution:
(i) Schedule made by the shipping clerk is as follows:

Market
Warehouse P Q R S Supply
A 6 3 5 4 22
12 1 9

B 5 9 2 7 15
15

C 5 7 8 6 8
7 1

Requirement 7 12 17 9

Total Transportation costs = `. (3×12 + 5×1 + 4×9 + 2×15 + 5×7 + 8×1) = `. 150

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 23
 Work Book : Operations Management and Strategic Management

Checking of optimal solution: Square evaluation of the unoccupied cells (Stepping Stone Method):
AP = 6 – 5 + 8 – 5 = + 3
BP = 5 – 2 + 8 – 5 = + 6
BQ = 9 – 3 + 5 – 2 = + 9
BS = 7 – 2 + 5 – 4 = + 6
CQ = 7 – 8 + 5 – 3 = = + 1
CS = 6 – 4 + 5 – 8 = - 1 (Negative)
As square evaluation shows negative result, the above solution is not optimum solution.
(ii) After making the adjustment, the following table gives the optimum solution:

Market
Warehouse P Q R S
A 6 3 5 4
12 2 8

B 5 9 2 7
15

C 5 7 8 6
7 1

Total Transportation costs = `. 149.

(iii) CQ = 7 – 3 + 4 – 6 = + 2
The rate should be reduced by at least `. 2 to offer him the business.

ILLUSTRATION 17:
The processing times for five jobs and their due dates are given for a single scheduling below:

Job A B C D E
Processing time (Days) 9 7 5 11 6
Due dates (days) 16 20 25 15 40

The jobs may be sequenced according to any one of the following rules:
(a) Minimum processing time (MINPRT);
(b) First come first served (FCFS);

24 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

(c) Longest processing time (LPT);

(d) Earliest due dates (EDD).

For the above set of jobs, please compute the following:

(1) Total completion time;
(2) Average completion time;
(3) Average number of jobs in the system;
(4) Average job lateness.
Solution:
Minimum processing time rule

Process time Flow time Due date Job lateness

Job sequence
(days) (days) (days from now) (days late)
C 5 5 25 0
E 6 11 40 0
B 7 18 20 0
A 9 27 16 11
D 11 38 15 23
Total 38 99 34

(1) Total completion time = 38 days for all the jobs.

(2) Average completion time = Total flow times ÷ No. of jobs = (99 ÷ 5) days = 19.8 days.
Total of flow times 99
(3) Average no. of jobs in the system = = = 2.61.
Total of process times 38
The same result can be obtained as follows:

Process time Jobs in sequence

First 5 days 5
Next 6 days 4
Next 7 days 3
Next 9 days 2
Final 11 days 1
The total process time for this sequence is 38 days.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 25
 Work Book : Operations Management and Strategic Management

5 × 5 + 6 × 4 + 7 × 3 + 9 × 2 + 11 × 1 99
Average jobs in the system = = = 2.61
38 38

Total Job Lateness 99

(4) Average job lateness = = = 6.8 days.
Total of process times 38
The above rules are ‘static’ rules. A more dynamic rule is the “Minimum Critical Ratio” rule.

Time remaining for due date of the job Time remaining

Critical Ratio = =
Time needed to complete the job Work remaining

ILLUSTRATION 18:
Jobs waiting to be processed at the Milling Shop today (the July 23) are as follows:

Jobs Due dates Time needed to complete the job i.e., processing time (days)
A July 31 9
B August 2 6
C August 16 24
D July 29 5
E August 30 30

Sequence the jobs at the Milling shop based on minimum critical ratio.

Solution:

Time remaining Time needed Critical Ratio Ranking as

Jobs Due date from the due date to complete the TR
= per min. CR
in days (TR) job in days (TN) TN

A July 31 8 9 0.89 1
B August 2 10 6 1.67 5
C August 16 24 24 1.00 2
D July 29 6 5 1.20 3
E August 30 38 30 1.27 4

As per the minimum critical ratio, the job sequence is as follows: A, C, D, E, B

26 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

ILLUSTRATION 19:
The following jobs have to be shipped a week from now(week has 5 working days):

Job A B C D E F
No. of days work remaining 4 5 8 7 6 3

Sequence the jobs according to priority established by:

(i) Least slack rule
(ii) Critical ratio rule
Solution:
(i) Least slack rule (ii) Critical ratio rule
Job Slack (Days) Ranking Critical ratio Ranking
A 5–4=1 5 5/4 = 1.250 5
B 5–5=0 4 5/5 = 1.000 4
C 5 – 8 = -3 1 5/8 = 0.625 1
D 5 – 7 = -2 2 5/7 = 0.714 2
E 5 – 6 = -1 3 5/6 = 0.833 3
F 5–3=2 6 5/3 = 1.667 6

ILLUSTRATION 20:
CO. CLOUDY Ltd is setting an assembly line to produce 192 units per 8-hour shift. The work
elements in terms of time and immediate predecessors are given below:

Work element Time (sec.) Immediate predecessors

A 40 None
B 80 A
C 30 D, E, F
D 25 B
E 20 B
F 15 B
G 120 A
H 145 G
I 130 H
J 115 C, I
Total 720

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 27
 Work Book : Operations Management and Strategic Management

What is the desired cycle time (or average cycle time)?

(i) What is the theoretical number of stations?
(ii) Use largest work element rule to work out a solution on a precedence diagram.
(iii) What are the efficiency and balance delay of the solution obtained?
Solution:
(i) Average cycle time (ACT) = (8 × 60 × 60 sec.) ÷ 192 units = 150 sec. per unit.
(ii) Theoretical number of work stations = 720 sec. ÷ 150 sec. = 4.8 i.e. 5.
(iii) Diagram [Flow Chart]
120 145 130

G H I

25
D

40 C J
20
115
A B E 30

80

F
15

Work stations Work elements Cumulative time (sec.) Idle time for station (Sec.)
W1 A(40), B(80) & D(25) 145 5
W2 G(120) & E(20) 140 10
W3 H 145 5
W4 I(130) & F(15) 145 5
W5 C(30) & J(115) 145 5

(iv) Efficiency =
∑t × 100 =
720
× 100 = 96%
n × ACT 5 × 150

Balance delay = 100% ̶ 96% = 4%.

28 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 3
Productivity Management and Quality
Management
[Study Material - Module 5]

ILLUSTRATION 1:
In a particular plant of ANTIBIOTIC LIMITED, there are 20 workers manufacturing a single product
and the output per month consisting of 25 days of that particular product is 4000.
(a) How much is the monthly productivity per worker?
(b) Compute the productivity per day per worker.
Solution:
Output 4,000 units
(a) Monthly productivity per worker = = = 200 units.
Number of Workers 20
Output 4,000 units
(b) Productivity per day per worker = = = 8 units
Number of man – days 20 × 25
ILLUSTRATION 2:
The capital employed of BIG-TREE LIMITED is `. 500 crores, comprising `. 350 crores on net fixed
assets and `. 150 crores in net working capital. The sales turnover is `. 2,000 crores and the net
profit ratio is 16%.
(a) Compute the capital productivity of the company for the year.
(b) What is the use of this productivity?
Solution:
Net Profit 2,000 × 16%
(a) Capital productivity = × 100 = × 100 = 64%.
Capital employed 500
(b) This ratio of net profit to capital employed is a valuable means of measuring the performance
of divisions, sections, plants, products and other components of a business.

ILLUSTRATION 3:
There are two industries SMALL LTD and BIG LTD manufacturing ball-bearings for machines.
The standard time per piece is 10 minutes per worker. There are 24 workers in SMALL LTD and
25 workers in BIG LTD involved in the production process of ball-bearings. The output of two
companies is 1,000 units and 1,500 units respectively per shift of 8 hours.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 29
 Work Book : Operations Management and Strategic Management

(a) Find the labour productivity of each per shift of 8 hours.

(b) What is the expected production of each industry per month of 25 working days?
(c) Compute the efficiency of both the companies.

Solution:
Particulars SMALL LTD BIG LTD
(a) Actual output (units) (P) 1,000 1,500
Total Labour-hours per shift (Q) 8 × 24 = 192 8 × 25 = 200
Labour productivity [P / Q] 5.21 units per LH 7.50 per LH

(b) Production per LH (units) 6 6

Expected production per month (6 × 8 × 25)×24 = 28,800 (6 × 8 × 25)×25 = 30,000
(units)

(c) Actual output per shift (units) 1,000 1,500

Standard output per shift of 8 hours (6 × 8) × 24 = 1,152 (6 × 8) × 25 = 1,200
Actual Output 86.81% 125%
Efficiency [ ×100]
Standard output

ILLUSTRATION 4:
Studies conducted by a management consultant in ABC Company indicate that annual office air-
conditioning costs are 1% of the annual payroll for each 100 square meter of air-conditioned floor
space per worker. Each sales personnel require an average of 200 square meter of floor space. The
total annual costs include depreciation also. It is estimated that air-conditioning may boost output
by 5% when it is effective. Air-conditioning will be effective between May and October only.
(a) Please find out the proposed productivity.
(b) Suggest whether the office should be air-conditioned or not.

Solution:
Output
(a) Productivity = × 100 = 100% (say)
Input

Proposed input = 100 + 1 × 

200 
= 102
 100 

30 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

6
Proposed output = 100 + × 5 = 102.5
12

Output 102.5
Therefore, Proposed Productivity = × 100 = × 100 = 100.49%.
Input 102

(b) The office should be air-conditioned as it increases the productivity.

ILLUSTRATION 5:
The following data is available for a manufacturing unit:
No. of operators : 30
Daily working hours :8
No. of days per month : 25
Standard production per month : 600 units
Standard Labour hours per unit :8

The following information was obtained for January 2020:

Man-days lost due to absenteeism : 60
Unit produced : 480
Idle Time : 552 man-hours
Find the following: —
(a) Percent absenteeism
(b) Efficiency of utilisation of labour
(c) Productive efficiency of labour
(d) Overall productivity of labour in terms of units produced per man per month.

Solution:
Man – days lost due to absenteeism 60
(a) Percent Absenteeism = × 100 = × 100 = 8%
Total man – days 30 × 25
(b) Total man-hours (30 × 25 × 8) = 6,000
Less: man-hours lost due to absenteeism (60 × 8) = 480
Man-hours available = 5,520

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 31
 Work Book : Operations Management and Strategic Management

Less: Idle man-hours = 552

Man-hours utilised = 4,968

4,968
Efficiency of utilisation of labour = × 100 = 90%
5,520
Standard man – hours for actual production
(c) Productive efficiency of labour = × 100
Actual man – hours worked
480 × 8
= × 100 = 77.29%
4,968
(d) Overall productivity of labour in terms of units produced per man per month
Actual production 480
= = = 17.39 i.e., 17.39 units per man per month
Man – month 27.6
[Note: Man-days available – man-days lost due to absenteeism = 30 × 25 – 60 = 690
690
Therefore, man-month = = 27.6]
25

ILLUSTRATION 6:
Compute the productivity per machine hour with the following data. Also draw your interpretation.

Month Number of machines involved Working hours Production units

April 400 220 99,000
May 550 180 1,00,000
June 580 220 1,25,000

Solution:
Number of Working Machine Production Productivity
Month
machines involved hours hours units (Units per MH)
April 400 220 88,000 99,000 1.125
May 550 180 99,000 1,00,000 1.0101
June 580 220 1,27,600 1,25,000 0.9796

Output
Formula used in the above table: Productivity per machine hour =
Machine hours

32 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

ILLUSTRATION 7:
An incentive scheme allows proportionate production bonus beyond 100% performance level.
Please calculate the amount of –
(i) Incentive bonus and
(ii) Total payment received by an operator on a particular day during which the following
particulars apply:
Operation : Assembling pocket transistor radio set
Work Content : 30 Standard minutes per assembled set
Attended Time : 8 Hours
Time spent on unmeasured work : 2 Hours
Numbers of sets assembled during the day : 15
Wage rate : `75 per hour
(iii) What is the net labour productivity achieved by the operator during the day?

Solution:
Total standard minutes worked during the day = 30 × 15 = 450,
working time = 8 – 2 = 6 = 360 minutes.
Performance = (450 × 100) /360 = 125% i.e. incentive is payable on 25% which is above 100%
(i) Incentive bonus = 0.25 × 6 × `75 = `112.50 for six hours on measured work
(ii) Guaranteed wage for 8 hours = 8 × `75 = `600;
Total earnings for the days = ` (112.50 + 600) = `712.50.
Output 15
(iii) Net labour productivity = = = 2.5 sets per hour.
Measured Man hours 6

ILLUSTRATION 8:
The following data is available for a machine in a manufacturing unit:

Hours worked per day 8

Working days per month 25
Number of operators 1

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 33
 Work Book : Operations Management and Strategic Management

Standard minutes per unit of production :

Machine time 22
Operator time 8
Total time 30

You are requested to answer the following:

(a) If plant is operated at 75% efficiency, and the operator is working at 100% efficiency, what is
the output per month?
(b) If machine productivity is increased by 10% over the existing level, what will be the output
per month?
(c) If operator efficiency is reduced by 20% over the existing level, what will be the output per
month?
Solution:
Total man-hours per month = (8 × 25 × 1) × 60 = 12,000 minutes.
Output per month = 12,000 ÷ Actual time per unit.

(a) (b) (c )
Machine time 22 ÷ 75% = 29.33 22 ÷ 110% = 20 22
Operator time 8.00 8 8 / 80% = 10
Actual time per unit (minutes) 37.33 30 32
Output per month (units) 321.46 400 375

ILLUSTRATION 9:
CO. JAI HO Ltd. requests you to construct both ‘Mean’ ( X ) and ‘Range’ ( R ) chart from the following
data assuming each sub-group contains 4 samples:

Sub-group number X R Sub-group number X R

1 6.36 0.10 11 6.32 0.18
2 6.38 0.18 12 6.30 0.10
3 6.35 0.17 13 6.34 0.11
4 6.39 0.20 14 6.39 0.14
5 6.32 0.15 15 6.37 0.17

34 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Sub-group number X R Sub-group number X R

6 6.34 0.16 16 6.36 0.15
7 6.40 0.13 17 6.35 0.18
8 6.33 0.18 18 6.35 0.13
9 6.37 0.16 19 6.34 0.18
10 6.33 0.13 20 6.34 0.16

The constant values are given below:

Sub-group size A2 D3 D4
2 1.88 0 3.27
3 1.02 0 2.57
4 0.73 0 2.28
10 0.31 0.22 1.78

Solution:
(i) ∑ X = 127.03,
Therefore, Central value X = ∑ =
()X 127.03 3.06
= 6.351, and R = = 0.153
n 20 20
As the sub-group size is 4, the value of A2 = 0.73
∴ Upper Control Limit (UCL) = X + A2 R = 6.351 + 0.73 × 0.153 = 6.463
Central Value (CV) = 6.351
Lower Control Limit (LCL) = X – A2 R = 6.351 – 0.73 × 0.153 = 6.239
The Mean chart is drawn below:
______________________________________ UCL = 6.463
..................................................................... CV = 6.351
______________________________________ LCL = 6.239

(ii) For Range Chart, D3 = 0 and D4 = 2.28

Therefore,
UCL = D4 R = 2.28 × 0.153 = 0.349
LCL = D3 R = 0 × 0.153 = 0

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 35
 Work Book : Operations Management and Strategic Management

The Range Chart can be shown as below:

______________________________________ UCL = 0.349
..................................................................... CV = 0.153
______________________________________ LCL = 0

ILLUSTRATION 10:
An Automatic Continuous Blending Process needs to be controlled for the acidity of the output,
measured in pH. The pH levels are very fine-tuned and measured to a hundredth of a unit. The
following 10 samples of three readings each were taken this morning when the process was
running smoothly.

Sample No. Values of pH Sample No. Values of pH

1 5.32 5.29 5.38 6 5.34 5.27 5.29
2 5.28 5.41 5.40 7 5.35 5.33 5.31
3 5.33 5.37 5.30 8 5.27 5.38 5.36
4 5.40 5.29 5.32 9 5.40 5.41 5.38
5 5.31 5.40 5.39 10 5.33 5.37 5.42

Please design—(i) Sample means chart and (ii) Range chart for the statistical quality control of the
process. Given, D3 = 0; D4 = 2.575.

Solution:
First calculate the sample means and Range for each of the samples and then calculate the mean of
the sample means and the mean of the ranges for use in the design of the process control charts.

Sample No. Values of pH Mean Range

1 5.32 5.29 5.38 5.33 0.09
2 5.28 5.41 5.4 5.36 0.13
3 5.33 5.37 5.3 5.33 0.07
4 5.4 5.29 5.32 5.34 0.11
5 5.31 5.4 5.39 5.37 0.09
6 5.34 5.27 5.29 5.30 0.07
7 5.35 5.33 5.31 5.33 0.04
8 5.27 5.38 5.36 5.34 0.11

36 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Sample No. Values of pH Mean Range

9 5.4 5.41 5.38 5.40 0.03
10 5.33 5.37 5.42 5.37 0.09
Total 53.47 0.83
53.47
Mean of the sample means = = 5.347 = Central Value (CV)
10
Mean Chart:
For 3-sigma control limits of Mean,
UCL = 5.347 + 3 σ = 5.347 + 3 × 0.0293308 = 5.435;
LCL = 5.347 – 3 σ = 5.347 3 × 0.0293308 = 5.259.

Range chart: -
0.83
Central Value = = 0.083
10
UCL = D4 R = 2.575 × 0.083 = 0.2137;
LCL = D3 R = 0.

ILLUSTRATION 11:
Ten pieces of cloth out of different rolls of equal length contained the following number of defects:
3, 0, 2, 8, 4, 2, 1, 3, 7, 1.
Please prepare a C-chart and state whether the production process is in a state of statistical control.

Solution:
Here, 3-sigma central limit is to be formed as follows:
(3+0+2+8+4+2+1+3+7+1)
Central Value = C = = 3.1
10

UCL = C + 3. C = 8.38;

LCL = C –3. C = – 2.18 i.e.0

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 37
 Work Book : Operations Management and Strategic Management

The C-Chart is shown as below:

______________________________________ UCL = 8.38
..................................................................... CV = 3.1
______________________________________ LCL = 0

ILLUSTRATION 12:
MR. MRITYUNJAY DUTTA THE GREAT Ltd. is monitored for quality as it arrives to be rolled on to a
beam. Usually, a meter of the cloth is taken as a sample and checked for defects of different kinds
such as-
(1) Knots,
(2) Oily or greasy patches or spots,
(3) Missed weave,
(4) Cotton seed shell particles.
The sample may have a number of these defects. For instance, if it has one knot, two oil marks and
one missed weave, then the number of defects is counted as (1+ 2+ 1 = 4).
During the first shift on Thursday, 20 beams have been woven. The quality control record is given
in the following table:

Sample no. No. of Defects Sample no. No. of Defects Sample no. No. of Defects
1 4 8 2 15 2
2 9 9 1 16 2
3 3 10 9 17 1
4 12 11 12 18 3
5 5 12 9 19 1
6 3 13 3 20 4
7 2 14 9

Please design an appropriate control chart. Was the process in control in the first shift on Thursday?

Solution:
Here ‘c’ chart should be drawn. c = Mean no. of defects = 4.8
For 3-s control limit, UCL = c + 3 c and
LCL = c ― 3 c.
Mean value = c = 4.8;

38 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

UCL = 11.4 &

LCL = 0 as control limit cannot be negative.
Note: The no. of defects in sample no. 4 and 11 exceeds the UCL, thus, these two samples should be
ignored and the control limits should be recalculated.
Revised UCL = 10 & LCL = 0, as it cannot be negative.

ILLUSTRATION 13:
Draw the control chart for X (mean) and R (range) from the following data relating to 20 samples
of size 5:

Sample No. X R Sample No. X R

1 38.2 15 11 32.6 30
2 33.8 11 12 22.8 12
3 24.4 22 13 21.6 29
4 36.6 24 14 28.8 22
5 27.4 18 15 28.8 16
6 30.6 25 16 24.4 19
7 31.2 21 17 30.4 20
8 27.0 29 18 25.4 24
9 24.0 29 19 37.8 19
10 29.4 18 20 31.4 17

[For sample of size 5, d2 = 2.326; d3 = 0.864]

Solution:

For Mean Chart

Central line = X =
∑ X = 587 = 29.35; σ P =
R 420 ÷ 20
= = 9.028375
N 20 d2 2.326

3.σ P
Upper control limit (UCL) = X + = = 29.35 + 3 × (9.028375 ÷ 5 ) = 41.46
n

3.σ P
Lower control limit (LCL) = X − = 29.35 – 3 × (9.028375 ÷ 5 ) = 17.24
n

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 39
 Work Book : Operations Management and Strategic Management

For Range chart

R=
∑ R = 420 = 21; σ R =
R
× d3 = 9.028375 × 0.864 = 7.800516
N 20 d2

● UCL = R + 3. σ R = 21 + 3 × 7.800516 = 44.40

● LCL = R – 3. σ R = 21 – 3 × 7.800516 = – 2.40 i.e. Nil.

ILLUSTRATION 14:
The following table gives the result of inspection of 20 samples of 100 items each taken in 20
working days. Please draw a P – chart.

Sample No. No. of defectives Sample No. No. of defectives

1 6 11 10
2 2 12 4
3 4 13 6
4 1 14 11
5 20 15 22
6 6 16 8
7 10 17 10
8 19 18 3
9 4 19 23
10 21 20 10

What conclusion can you draw from the above data? For revising the control limits what is to be
done?

Solution:
Total no. items inspected = 20 × 100 = 2,000; total no. of defectives = 200
Average fraction defectives (i.e. proportion of defectives) = p = (200 ÷ 2,000) = 0.10
1 ─ p = 1 ̶ 0.1 = 0.9
Central line (CL) = p = 0.1

UCL = p + 3 ×
p
n
(
1− p ) = 0.1 + 3 ×
0.1 × 0.9
100
= 0.19

40 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

LCL = p ─ 3 ×
p
n
(
1− p ) = 0.1 – 3 ×
0.1 × 0.9
100
= 0.01

Conclusion:
Four samples numbered 5, 10, 15 & 19 lie outside the control limits of 0.01 to 0.19.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 41
 4
Project Management, Monitoring and
Control
[Study Material - Module 6]

NETWORK ANALYSIS
CPM (Critical Path Method)

PRACTICAL PROBLEMS

ILLUSTRATION 1:
The following table gives the activities in a construction project and other relevant information:
Activity : 1—2 1—3 2—3 2—4 3—4 4—5
Duration (Days) : 20 25 10 12 6 10
(a) Please draw the network diagram for the project.
(b) Find the critical path and normal duration of the project.
(c) Find the total float, free float and independent float for each activity.
Solution:
(a)

20 20 36 36 46 46
12 10
2 4 5
20
6
1 10

0 0 25 3
30 30

(b) Critical path: 1 – 2 – 3 – 4 – 5

Normal duration of the project: 46 days

42 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

(c) Computation of Floats:

Total Float Free Float Independent Float = FF

Activity
= LF – ES - t = TF – Head slack – Tail slack
1–2 20 – 0 – 20 = 0 0–0=0 0–0=0
1–3 30 – 0 – 25 = 5 5–0=5 5–0=5
2–3 30 – 20 – 10 = 0 0–0=0 0–0=0
2–4 36 – 20 – 12 = 4 4–0=4 4–0=4
3–4 36 – 30 – 6 = 0 0–0=0 0–0=0
4–5 46 – 36 – 10 = 0 0–0=0 0–0=0

ILLUSTRATION 2:
For the following activities of a repair works find—
(a) The critical path and normal duration of the project;
(b) The total, free & independent floats of the activities.

Activity Duration (Days) Activity Duration (Days)

1—2 1 4—6 5
2—3 5 4—7 9
2—4 3 5—7 4
3—5 4 6—7 2
4—5 2 7—8 2

Solution:
6 6 10 10
4
0 0 1 1 5 3 5
12
1 2
2 16 16
4 14 14
3 2 8
4 7
9
4 5
5 2
6
9 12

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 43
 Work Book : Operations Management and Strategic Management

Here, the Critical path is 1—2—3—5—7—8

Normal duration of the project is 16 days.
(b) Computation of Floats:

Total Float Free Float Independent Float =

Activity
= LF – ES - t = TF – Head slack FF – Tail slack
1—2 0 0 0
2—3 0 0 0
2—4 5–1–3=1 1–1=0 0–0=0
3—5 0 0 0
4—5 10 – 4 – 2 = 4 4–0=4 4–1=3
4—6 12 – 4 – 5 = 3 3–3=0 0 – 1 = - 1 i.e., 0
4—7 14 – 4 – 9 = 1 1–0=1 1–1=0
5—7 0 0 0
6—7 14 – 9 – 2 = 3 3–0=3 3–3=0
7—8 0 0 0

Note: All the floats of the critical activities are zero.

ILLUSTRATION 3:
A new project has the following activities—
Activity : 1—2 1—3 1—4 2—4 2—5 3—6 4—6 5—6
Duration (Days) : 6 8 5 3 5 12 8 6
(a) Please draw the network diagram;
(b) Find out the critical path and normal duration of the project;
(c) Compute the floats of the activities.
Solution:

8 3 12
0 0 6 9 11 14 20 20
8 8
1 6 2 5 6 6
9 12 5
3
5 4 8

44 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

(c) Computation of Floats:

Total Float = Free Float = Independent Float =

Activity
LF – ES - t TF – Head slack FF – Tail slack
1—2 9–0–6=3 3–3-0 0–0=0
1–3 0 0 0
1–4 12 – 0 – 5 = 7 7–3=4 4–0=4
2–4 12 – 6 – 3 = 3 3–3=0 0 – 3 = - 3 i.e., 0
2–5 14 – 6 – 5 = 3 3–3=0 0 – 3 = - 3 i.e., 0
3–6 0 0 0
4–6 20 – 9 – 8 = 3 3–0=3 3–3=0
5–6 20 – 11 – 6 = 3 3–0=3 3–3=0

ILLUSTRATION 4:
Draw the network and find the critical path from the following data:

Activity Predecessor Duration (weeks) Cost (`)

A NIL 2 50
B NIL 4 50
C A 1 40
D B 2 100
E C, D 3 100
F E 2 60

(a) Draw the network diagram and find out the critical path of the project.
(b) What is the normal duration of the project?
(c) Draw a Gantt chart for early start schedule.
Solution:
(a)
1 E F
2 C 4 5 7
2 3 2
A
1
B 2
D
4 3

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 45
 Work Book : Operations Management and Strategic Management

Paths Duration (Weeks)

1—2—4—5—7 8
1—3—4—5—7 11

Critical path is the path with longest duration of the project.

Here, Critical path is 1—3—4—5—7
(b) The normal duration of the project is 11 weeks.

ILLUSTRATION 5:
Draw network diagram from following activities and find critical path and slacks of the activities:
Job : A B C D E F G H I J K
Days : 13 8 10 9 11 10 8 6 7 14 18
Immediate
Predecessor : A B C B E D, F E H G, I J

Solution:
32 32 38 43
H
11 5 7
0 0 13 13 21 21 6 82 82
A B E
1 2 3 10
13 8
F 10 I 7
10 K
C 18
9 8 J
4 6 8 9
D G 14
31 33 42 42 50 50 64 64

(b) Computation of Floats:

Total Float Free Float Independent Float =

Activity
= LF – ES - t = TF – Head slack FF – Tail slack

1—2 0 0 0
2—3 0 0 0
3–4 33 – 21 – 10 = 2 2–2=0 0–0=0

46 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Total Float Free Float Independent Float =

Activity
= LF – ES - t = TF – Head slack FF – Tail slack

3–5 0 0 0
4–6 42 – 31 – 9 = 2 2–0=2 2–2=0
5–6 0 0 0
5–7 43 – 32 – 6 = 5 5–5=0 0–0=0
6–8 0 0 0
7–8 50 – 38 –7 = 5 5–0=5 5–5=0
8–9 0 0 0
9 – 10 0 0 0

Note: All the floats of the critical activities are zero.

ILLUSTRATION 6:
A company manufacturing plant and equipment for chemical processing is in the process of
quoting a tender called by a public sector undertaking. Delivery data once promised is very crucial
and penalty clause is applicable. The winning of tender also depends on how soon the company
can deliver the goods. Project Manager has listed down the activities in the project as under:

Activity Predecessor Duration (Week)

A -- 3
B -- 4
C A 5
D A 6
E C 7
F D 8
G B 9
H E, F, G 3

(a) Please calculate the delivery week from the date of acceptance of quotation.
(b) Find out the Total float, Free float and Independent float for each activity.
(c) Do you think the float of critical activity is always nil? Why?

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 47
 Work Book : Operations Management and Strategic Management

Solution:
(a)
4
3 3 D6
9 9
0 0 A3 2 F8

1 C5 8 10

B4 5 E7 20 20

4 8 H3
6 7
G9
3 17 17

(b) Computation of Floats:

Total Float Free Float Independent Float =

Activity
= LF – ES - t = TF – Head slack FF – Tail slack
A 0 0 0
B 8–0–4=4 4–4=0 0–0=0
C 10 – 3 – 5 = 2 2–2=0 0–0=0
D 0 0 0
E 17 – 8 – 7 = 2 2–0=2 2–2=0
F 0 0 0
G 17 – 4 – 9 = 4 4–0=4 4–4=0
H 0 0 0

(c) Yes, the floats of the critical activities are always zero. The critical activities are the activities
with longest duration when all the activities relating to that point is completed. If float is
considered that means if rest is taken, then the duration of the project will be delayed.

ILLUSTRATION 7:
A project consists of the following activities and following three-time estimates (days)—

Activity Optimistic time (to) Pessimistic time (tp) Most likely time (tm)
1—2 3 15 6
1—3 2 14 5

48 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Activity Optimistic time (to) Pessimistic time (tp) Most likely time (tm)
1—4 6 30 12
2—5 2 8 5
2—6 5 17 11
3—6 3 15 6
4—7 3 27 9
5—7 1 7 4
6—7 2 8 5

(a) Draw the network diagram;

(b) Determine the expected task times and their variances;
(c) Find the critical path;
(d) Compute the floats of the activities;
(e) What is the probability that the project will be completed by 27 days?
Solution:
First, we have to compute the expected time and variance of each activity applying the following
formula:
(1 × Optimistic time + 1 × Pessimistic time + 4 × Most likely time)
Expected time =
6
2
 Pessimistic Time - Optimistic Time 
Variance =  
 6

Activity Expected time Variance

1—2 7 4
1—3 6 4
1—4 14 16
2—5 5 1
2—6 11 4
3—6 7 4
4—7 11 16
5—7 4 1
6—7 5 1

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 49
 Work Book : Operations Management and Strategic Management

Solution:

(a), (b) & (c )

6 17

3
6 7
0 0 18 24 25 25
11 1
1 2 6 7
7
7 13
4
5 12 21

14 5
11
14 14

The critical path is 1 – 4 – 7 and the normal project duration is 25 days.

(d) Computation of Floats:

Total Float Free Float Independent Float =

Activity
= LF – ES - t = TF – Head slack FF – Tail slack
1–2 13 – 0 – 7 = 6 6–6=0 0–0=0
1–3 17 – 0 – 6 = 11 11 – 11 = 0 0–0=0
1–4 0 0 0
2–5 21 – 7 – 5 = 9 9–9=0 0 – 6 = - 6 i.e., 0
2–6 24 – 7 – 11 = 6 6–6=0 0 – 6 = - 6 i.e., 0
3–6 24 – 6 – 7 = 11 11 – 6 = 5 5 – 11 = - 6 i.e., 0
4–7 0 0 0
5–7 25 – 12 –4 = 9 9–0=9 9–9=0
6–7 25 – 18 – 1= 6 6 – 0 =6 6–6=0

(e) Normal duration = x = 25 days. x = required duration of the project

x−x
Z= ; where, = Standard deviation of the project = 16 + 16 = 32 = 5.657
σ

50 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management


P ( x ≤ 27) = P  Z ≤
(27 − 25)  = P z ≤ 0.35
( )
 5.657 

= 0.50 + 0.1368 [From Normal Distribution Table] = 0.6368 i.e., 63.68%.

ILLUSTRATION 8:
A company manufacturing plant and equipment for chemical processing is in the process of
quoting a tender called by a public sector undertaking. Delivery data once promised is very crucial
and penalty clause is applicable. The winning of tender also depends on how soon the company
is able to deliver the goods. Project Manager has listed down the activities in the project as under:

Optimistic time Most likely time Pessimistic time

Activity Predecessor
(week) (week) (week)
A -- 1 3 5
B -- 2 4 6
C A 3 5 7
D A 5 6 7
E C 5 7 9
F D 6 8 10
G B 7 9 11
H E, F, G 2 3 4

(a) Please calculate the delivery week from the date of acceptance of quotation.
(b) Find out the Total float, Free float and Independent float for each activity.
Solution:
Activity Expected Duration (Week)
A 3
B 4
C 5
D 6
E 7
F 8
G 9
H 3

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 51
 Work Book : Operations Management and Strategic Management

9 9

3 3 D6 4
F8
0 0 A3 2 20 20
C5 E7 H3
1 5 6 7
8 10 17 17

B4
G9
3
4 8

Computation of Floats:

Total Float Free Float Independent Float =

Activity
= LF – ES - t = TF – Head slack FF – Tail slack
A 0 0 0
B 8–0–4=4 4–4=0 0–0=0
C 10 – 3 – 5 = 2 2–2=0 0–0=0
D 0 0 0
E 17 – 8 – 7 = 2 2–0=2 2–2=0
F 0 0 0
G 17 – 4 – 9 = 4 4–0=4 4–4=0
H 0 0 0

ILLUSTRATION 9:
A project is composed of 7 activities whose time estimates are listed in the time below—

Activity Optimistic time (to) Pessimistic time (tp) Most likely time (tm)
1—2 1 7 1
1—3 1 7 4
1—4 2 8 2
2—5 1 1 1
3—5 2 14 5

52 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Activity Optimistic time (to) Pessimistic time (tp) Most likely time (tm)
4—6 2 8 5
5—6 3 15 6

(a) Draw the network diagram;

(b) Determine the expected task times and their variances;
(c) Find the critical path;
(d) Compute the floats of the activities;
(e) What is the probability that the project will be completed—
(i) At least 4 weeks earlier than expected time?
(ii) No more than 4 weeks later than expected time?
(f) If the project due date is 19 weeks, what is the probability of not meeting the due date?
Solution:
(a), (b) and (c ):

Activity Expected time (weeks) Variance

1—2 2 1
1—3 4 1
1—4 2 1
2—5 1 0
3—5 6 4
4—6 5 1
5—6 7 4

4 4

3
4 6
0 0 10 10 17 17

2 1 7
1 5 6
2
2 9

2
4 5

2 12

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 53
 Work Book : Operations Management and Strategic Management

The critical path is 1 – 3 – 5 – 6 and the normal project duration is 17 weeks.

(d) Computation of Floats:

Total Float Free Float Independent Float =

Activity
= LF – ES - t = TF – Head slack FF – Tail slack
1–2 9–0–2=7 7–7=0 0–0=0
1–3 0 0 0
1–4 12 – 0 – 2 = 10 10 – 10 = 0 0–0=0
2–5 10 – 2 – 1 = 7 7–0=7 7–7=0
3–5 0 0 0
4–6 17 – 2 – 5 = 10 10 – 0 = 10 10 – 10 = 0
5–6 0 0 0

(e) Variance of the project = 1 + 4 + 4 = 9

Therefore, Standard deviation of the project = σ = 9 =3

P ( x ≤ 13) = P  Z ≤
(13 − 17)  = P z ≤ −1.33
(i)  ( )
 3

= 0.50 - 0.4082 [From Normal Distribution Table] = 0.0918 i.e., 9.18%


(ii) P ( x ≤ 21) = P  Z ≤
(21 − 17)  = P z ≤ 1.33
 ( )
 3
= 0.50 + 0.4082 [From Normal Distribution Table] = 0.9082 i.e., 90.82%.

ILLUSTRATION 10:
Following data are available from the records of a construction project:

Normal Crash
Activity
Time (Days) Cost (`) Time (Days) Cost (`)
1—2 8 100 6 200
1—3 4 150 2 350
2—4 2 50 1 90
2—5 10 100 5 400

54 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Normal Crash
Activity
Time (Days) Cost (`) Time (Days) Cost (`)
3—4 5 100 1 200
4—5 3 80 1 100

Indirect cost is `70 per day.

(a) Draw the network diagram;
(b) Find out the critical path and determine the normal project duration and associated project
cost.
(c) Crash the activities systematically and find out the optimum duration, crash duration and
their associated costs.
Solution:
(a) 18 18

8 8 5
10
0 0 2
8
1 10 15 3
2
4
4
5
3
4 10

(b) Critical path: 1 – 2 – 5

Normal duration of the project: 18 days
Project cost for 18 days = Direct costs + Indirect costs = `. (580 + 18 × 70) = `. 1,840
Crash Cost – Normal Cost
(c) Table 1: Slope =
Normal Duration – Crash Duration

Activity Slope (`.) Days that can be crashed

1–2 50 2 0
1–3 100 2

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 55
 Work Book : Operations Management and Strategic Management

Activity Slope (`.) Days that can be crashed

2–4 40 1
2–5 60 5 1
3–4 25 4
4–5 10 2 0

Table 2:

Paths Duration (Weeks)

1–2–5 18 16 12 11
1–2–4–5 13 11 11 10
1-3–4–5 12 12 12 11

Table 3: Schedule of time and associated cost of the project:

Activities crashed Duration (days) Total costs (`)

NIL 18 1,840
1 – 2 by 2 days 16 1,840 + (50 – 70) × 2 = 1,800
2 – 5 by 4 days 12 1,800 + (60– 70) × 4 = 1,760
2 – 5 & 4 – 5 by 1 day each 11 1,760 + (60 + 10 – 70) × 1= 1,760

ILLUSTRATION 11:
The normal and crash duration with costs for various activities relating to a repair work are given
below:

Normal Crash
Activity
Time (Days) Cost (`) Time (Days) Cost (`)
1—2 6 4,000 2 12,000
1—3 8 3,000 3 6,000
2—4 7 2,800 4 4,000
3—4 12 9,000 8 11,000
4—6 3 10,000 1 13,000
5—6 5 4,900 2 7,000

56 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Normal Crash
Activity
Time (Days) Cost (`) Time (Days) Cost (`)
3—5 7 1,800 3 5,000
5—7 11 6,600 5 12,000
6—7 10 4,000 6 8,400
Indirect cost is `2,000 per day.
(a) Draw the network diagram;
(b) Find out the critical path and determine the normal project duration and associated project
cost.
(c) Crash the activities systematically and find out the optimum duration, crash duration and
their associated costs.
Solution:
(a) 6 3 20 20 23 23 33 33

2 7 4 3 6 10 7
0 0
6
1
12 5 11
8

3 7 5
8 8 15 18

Critical path is 1 – 3 – 4 – 6 – 7 and normal project duration is 33 days.

Crash Cost – Normal Cost

(c) Table 1: Slope =
Normal Duration – Crash Duration

Activity Slope (`) Days that can be crashed

1–2 2,000 4
1–3 600 5 1 0
2–4 400 3 2 1
3–4 500 4 1 0

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 Work Book : Operations Management and Strategic Management

Activity Slope (`) Days that can be crashed

4–6 1,500 2 0
5–6 700 3
3–5 800 4 3 1
5–7 900 6
6–7 1,100 4 0

Table 2:

Paths Duration (Weeks)

1–2–4–6–7 26 26 26 25 21 20 18
1–3–4–6–7 33 30 26 25 21 20 18
1-3–5–6–7 30 30 26 25 21 20 18
1–3–5–7 26 26 22 21 21 20 18

Table 3: Schedule of time and associated cost of the project:

Activities crashed Duration (days) Total costs (`)

NIL 33 (normal) 46,100 + 33 × 2,000 = 1,12,100
3 – 4 by 3 days 30 1,12,100 + (500 – 2,000) × 3 =
1.07,600
1 – 3 by 4 days 26 1,07,600 + (600 – 2,000) × 4 =
1,02,000
1 – 3 & 2 – 4 by 1 day each 25 1,02,000 + (600 + 400 – 2,000)
× 1 = 1,01,000
6 – 7 by 4 days 21 1,01,000 + (1,100 – 2,000) × 4
= 97,400
2 – 4, 3 – 4 & 3 – 5 by 1 day each 20 (Optimum) 97,400 + (400 + 500 + 800 –
2,000) × 1
= 97,100
4 – 6 & 3 – 5 by 2 days each 18 (Minimum) 97,100 + (1,500 + 800 – 2,000)
× 2 = 97,700

58 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

ILLUSTRATION 12:
A Marketing Manager wants to launch a new product. He furnishes the following estimates of time
and cost of the project:

Normal Crash
Activity
Time (Days) Cost (`) Time (Days) Cost (`)
1—2 6 1,400 4 1,900
1—3 8 2,000 5 2,800
2—3 4 1,000 2 1,500
2—4 3 800 2 1,400
3—4 Dummy NIL Dummy NIL
3—5 6 900 3 1,600
4—6 10 2,500 6 3,500
5—6 3 500 2 800

Indirect cost for the project is `300 per day.

(a) Draw the network diagram.
(b) What is the normal duration and cost of the project ?
(c) If all activities are crashed, what will be the project duration and cost of the project ?
(d) Please find out the optimum duration and corresponding cost of the project.
Solution:
(a) 6 6 10 10 20 20

2 3 4 10 6
0 0
6

1 4 0 3

3 6 5
10 11 16 17

(b) Normal duration of the project is 20 days.

Total cost of the project = Direct costs + Indirect costs = 9,100 + 20 × 300 = 15,100.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 59
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(c) & (d):

Table 1:

Days that can be crashed

Activity Slope (`)
1st 2nd 3rd 4th 5th
1–2 250 2 0
1–3 267 3 1
2–3 250 2 0
2–4 600 1
3–4 0 0
3–5 233 3 0
4–6 250 4 3 0
5–6 300 1

Table 2:

Paths Duration (Weeks)

1–2–4–6 19 17 16 13 13
1–2–3–4–6 20 18 17 14 13
1–2–3–5–6 19 17 17 14 13
1–3–4–6 18 18 17 14 13
1–3–5–6 17 17 17 14 13

Table 3: Schedule of time and associated cost of the project:

Activities crashed Duration (days) Total costs (`.)

NIL 20 (Normal) 15,100
1 – 2 by 2 days 18 15,100 + (250 – 300) × 2 = 15,000
4 – 6 by 1 day 17 (Optimum) 15,000 + (250 – 300) × 1 = 14,950 =
3 – 5 & 4 – 6 by 3 days each 14 14,950 + (233 + 250 – 300) × 3 = 15,499
1 – 3 & 2 – 3 by 1 day each 13 (Minimum) 15,499 + (267 + 250 – 300) × 1 = 15,716

60 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 5
Economies of Maintenance & Spares
Management
[Study Material - Module 7]

ILLUSTRATION 1:
A workshop has 25 identical machines. The failure pattern of the machine is given below:-

Elapsed time after maintenance attention (month) Probability of failure

1 0.12
2 0.15
3 0,23
4 0.25
5 0.10
6 0.05

The workshop incurs `. 3,250 to attend and rectify a failed machine.

Please compute the yearly cost of servicing the broken-down machines.

Solution:
Expected life of the machines (i.e., Expected time before failure)
= (1 × 0.12 + 2 × 0.15 + 3 × 0.23 + 4 × 0.25 + 5 × 0.10 + 6 × 0.05) = 2.91 Months.
 12 
∴ Yearly cost of servicing = 25 ×  × ` 3,250 = ` 3,35,052
 2.91 
ILLUSTRATION 2:
The breakdown probability of an equipment is given below:

Month 1 2 3 4 5
Probability of failure 0.05 0.15 0.30 0.30 0.20

There are 50 such equipments in the plant. The cost of individual preventive maintenance is
`1,500 per equipment and the cost of breakdown maintenance is `3,000 per equipment.

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 61
 Work Book : Operations Management and Strategic Management

Which is the most suitable maintenance policy in this – preventive maintenance or breakdown
maintenance ?
50
[Ans.: MTTF = 3.45 Months; mean number of breakdown per month = = 14.49.
3.45

50
Averaage individual breakdown maintenance cost per month = × ` 3,000 = `43,478.26.
3.45
Average cost of individual preventive maintenance policy:

Average cost per month (`)

Every 1 month 78,750
Every 2 months 46,154
Every 3 months 40,909
Every 4 months 41,538
Therefore, individual preventive maintenance policy after every 3 months is the most economical
option]

ILLUSTRATION 3:
A plant is utilizing 6 types of machines. If one machine breaks down, the entire assembly line
comes to a halt unless the breakdown machine is repaired or replaced. It takes 5 hours to replace
or repair a machine out of which 1 hour is variable. The mechanic’s wage rate is `250 per hour.
Repair material cost is `2,000 and downtime cost is `1,000 per hour.
Which of the two maintenance strategies should the company adopt?—
(a) Replace only the defective machine;
(b) Replace the defective machine as also all other machines.
Solution:
Particulars Strategy 1 Strategy 2
Total downtime hours 4 + 1× 1 = 5 4 + 6 × 1 =10
Downtime costs @ `. 1,000 per hour `. 5,000 `. 10,000
Mechanic’s wages @ `250 per hour `. 1,250 `. 2,500
Material costs @ ` 2,000 per machine `. 2,000 `. 12,000
Total costs `. 8,250 `. 24,500

Recommendation:
Strategy 1 is more economical than Strategy 2. Thus Strategy 1 should be adopted.]

62 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

ILLUSTRATION 4:
COOL-BREEZE LTD, a laptop assembling company is experiencing the following number of
breakdowns of laptop for over the past 24 months:

Number of breakdowns of laptop 0 1 2 3 4

Number of months that occurred 4 7 9 3 1

Each break down of laptop costs the company an average of `3,200. For a cost of `2,500 per
month, preventive maintenance can be carried out to limit the breakdowns to an average of one
laptop per month.
Which policy is suitable for the firm – Breakdown maintenance policy or Preventive maintenance
policy?

Solution:
Breakdown Maintenance Policy:
(0×4+1×7+2×9+3×3+4×1)
Expected number of breakdowns per month = = 1.583.
24
Expected Breakdown cost per month = Expected no. of breakdowns per month × cost of each
breakdown = 1.583 × `3,200 = `5,065.60.

Preventive Maintenance Policy:

Average cost of one breakdown/month = ` 3,200
Maintenance contract cost/month = ` 2,500
Preventive maintenance cost per month = ` 5,700

Recommendation: Preventive maintenance policy is suitable for the company.

ILLUSTRATION 5:
The main shaft of an equipment has a very high reliability of 0.98. The equipment comes from
Canada and has a high downtime cost associated with the failure of this shaft. This is estimated at
`300 lakh as the costs of sales lost and other relevant costs. However, this spare is quoted at `8.25
lakh at present.
Should the shaft spare be procured along with the equipment and kept or not?

Solution:
The expected cost of down-time = (Probability of failure) × (Cost when break-down occurs)

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 63
 Work Book : Operations Management and Strategic Management

= (1 - 0.98) × (` 300 lakh) = `6 lakh.

Therefore, expected cost of downtime (`. 6 lakh) is less than the cost of shaft spare (`. 8.25 lakh).
Recommendation: The company should not buy the shaft spare along with the equipment.

ILLUSTRATION 6:
Product A has a Mean Time Between Failures (MTBF) of 50 hours and has a Mean Time To Repairs
(MTTR) of 10 hours. Product B has a MTBF of 60 hours and has a MTTR of 5 hours.
You are requested to calculate—
(i) Which product has the higher reliability?
(ii) Which product has greater maintainability?
(iii) Which product has greater availability?
Solution:
(i) Product B, with higher MTBF (i.e., 60 hours) than Product A (i.e., 50 hours), is more reliable
since it has lesser chance of failure during servicing.
(ii) By MTTR we mean the time taken to repair a machine and put it into operation. Thus, Product
B, with lesser MTTR (i.e., 5 hours) than Product A (i.e., 10hours), has greater maintainability.
MTBF
(iii) Availability of a machine/product = × 100
(MTBF + MTTR)

50
Therefore, Availability of Product A = × 100 = 83.33%
(50+10)

60
Availability of Product B = × 100 = 92.31% > 83.33% of Product A.
(60+5)

Hence, Product B has more availability.

ILLUSTRATION 7:
CO. DILLI KA LADDU LTD. purchases a machine for ` 65,000. The following table gives the running
costs per year and resale value of the machine in different years:

Year 1 2 3 4 5 6 7 8
Running Costs (`) 14,000 15,000 17,000 20,000 24,000 28,000 33,000 39,000
Resale Value (`) 40,000 30,000 22,000 17,000 13,000 10,000 10,000 10,000

Please find out the optimum replacement period.

64 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Solution:
Cumulative Capital Average Annual
Year Running Total Costs
Running Costs Costs Costs
Costs
[A] [B] [C] [B + C] = [D] [D / A]
1 14,000 14,000 25,000 39,000 39,000
2 15,000 29,000 35,000 64,000 32,000
3 17,000 46,000 43,000 89,000 29,667
4 20,000 66,000 48,000 1,14,000 28,500
5 24,000 90,000 52,000 1,42,000 28,400
6 28,000 1,18,000 55,000 1,73,000 28,833
7 33,000 1,51,000 55,000 2,06,000 29,429
8 39,000 1,90,000 55,000 2,45,000 30,625

Recommendation: The machine should be replaced at the end of 5th year.

ILLUSTRATION 8:
The following table gives the age of cars and its annual maintenance costs of STRATEGY LTD:

Age of cars in years (x) 2 4 6 8

Maintenance costs in thousand ` (y) 10 20 25 30

Required:
(a) Fit a regression equation of y on x;
(b) Estimate: (i) maintenance cost for age of cars of 10 years.
(ii) Age of cars in years for maintenance costs of `. 50,000
[Ans.: (a) y = 5 + 3.25x; (b) maintenance cost for age of cars of 10 years is `. 37,500 (ii) Age of cars
in years for maintenance costs of `. 50,000 is 13.85 years (approx.).]

Solution: (a)
Age of cars (X) Maintenance costs (Y) X2 XY
2 10 4 20
4 20 16 80
6 25 36 150

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 65
 Work Book : Operations Management and Strategic Management

Age of cars (X) Maintenance costs (Y) X2 XY

8 30 64 240
20 85 120 490
Let the Trend equation be
Y = a + b.X

XY = aX + b.X2

∑Y = 4a + b. ∑X

∑XY = a. ∑X + b. ∑X2

Putting the values from the above table:

85 = 4a + 20b, i.e., 425 = 20a + 100b
490 = 20a + 120b,
Subtracting the above two equations, we get
20b = 65, i.e., b = 3.25
85 – 65
∴ 85 = 4a + 20 × 3.25, a= =5
4
Therefore, the Trend equation is
Y = 5 + 3.25X

ILLUSTRATION 9:
MR. GREG CHAPPEL, a taxi owner estimates from his past records that the costs per year for
operating a taxi are as follows:

Age 1 2 3 4 5
Operating Costs (`) 1,00,000 1,20,000 1,50,000 1,80,000 2,00,000

After 5 years, the operating costs become `. 60,000K, where K = 6, 7, 8, 9, 10; K denotes age in
years.
The purchase price of a new taxi is `. 6,00,000. The resale value of the taxi decreases by 10% of
purchase price each year. Please compute the optimum replacement policy.

66 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Solution:
Cumulative Capital Average Annual
Year Running Total Costs
Running Costs Costs Costs
Costs
[A] [B] [C] [B + C] = [D] [D / A]
1 1,00,000 1,00,000 60,000 1,60,000 1,60,000
2 1,20,000 2,20,000 1,20,000 3,40,000 1,70,000
3 1,50,000 3,70,000 1,80,000 5,50,000 1,83,333
4 1,80,000 5,50,000 2,40,000 7,90,000 1,97,500
5 2,00,000 7,50,000 3,00,000 10,50,000 2,10,000
6 3,60,000 11,10,000 3,60,000 14,70,000 2,45,000
7 4,20,000 15,30,000 4,20,000 19,50,000 2,78,571
8 4,80,000 20,10,000 4,80,000 24,90,000 3,11,250

Recommendation: The taxi should be replaced after each 1 year as it will be cheaper.

ILLUSTRATION 10:
MR. SACHIN TENDULKAR, the great cricketer furnishes the following data about a new generation
car:

Year of service 1 2 3 4 5
Year-end trade-in-value (`) 1,90,000 1,05,000 60,000 50,000 50,000
Annual operating costs (`) 1,50,000 1,80,000 2,10,000 2,40,000 2,70,000
Annual Maintenance costs (`) 30,000 40,000 60,000 80,000 1,00,000

The purchase price is `.3,50,000 and the trade-in-value drops as time passes until it reaches a
constant value of `.50,000. Please determine the proper length of service before the car should be
replaced.

Cumulative Capital Average Annual

Year Running Total Costs
Running Costs Costs Costs
Costs
[A] [B] [C] [B + C] = [D] [D / A]
1 1,80,000 1,80,000 1,60,000 3,40,000 3,40,000
2 2,20,000 4,00,000 2,45,000 6,45,000 3,22,500
3 2,70,000 6,70,000 2,90,000 9,60,000 3,20,000

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 67
 Work Book : Operations Management and Strategic Management

Cumulative Capital Average Annual

Year Running Total Costs
Running Costs Costs Costs
Costs
[A] [B] [C] [B + C] = [D] [D / A]
4 3,20,000 9,90,000 3,00,000 12,90,000 3,22,500
5 3,70,000 13,60,000 3,00,000 16,60,000 3,32,000

Recommendation: The car should be replaced after 3rd year.

ILLUSTRATION 11:
MR. DING DONG BING BONG gives the following data relating to machine A, whose purchase price
is `1,00,000:

Year 1 2 3 4 5 6 7
Operating costs (`) 15,000 19,000 23,000 29,000 36,000 45,000 55,000
Resale value (`) 50,000 25,000 12,500 6,000 4,000 4,000 4,000

(a) Please compute the optimum period for replacement.

(b) When machine A is 2 years old, machine B which is a new model for the same usage is available.
The optimum period of replacement is 4 years with an average cost of `.36,000. Should we
change machine A with that of machine B? If so, when?
Solution:
Resale value Depreciation Operating Total Cumulative Average cost
Year
(`) (`) cost (`) cost (`) cost (`) per year (`)
1 50,000 50,000 15,000 65,000 65,000 65,000
2 25,000 25,000 19,000 44,000 1,09,000 54,500
3 12,500 12,500 23,000 35,500 1,44,500 48,167
4 6,000 6,500 29,000 35,500 1,80,000 45,000
5 4,000 2,000 36,000 38,000 2,18,000 43,600
6 4,000 Nil 45,000 45,000 2,63,000 43,833
7 4,000 Nil 55,000 55,000 3,18,000 45,429

As the average cost per year is minimum in the 5th year, the optimum period of replacement of
machine A is 5th year.
(b) When the machine A is 2 years old, the calculation is done as follows:

68 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

Year Depreciation Operating costs Total costs Cum. Costs Avg. cost per year
3 12,500 23,000 35,500 35,500 35,500
4 6,500 29,000 35,500 71,000 35,500
5 2,000 36,000 38,000 1,09,000 36,333
6 Nil 45,000 45,000 1,54,000 38,500
7 Nil 55,000 55,000 2,09,000 41,800

Machine A should be changed with machine B when machine A is 4 years old, since the average
cost per year for Machine A in 5th year is `36,333 which is more than `36,000.

ILLUSTRATION 12:
CO. NON-STOP LTD. supplies the following information:
● The cost of a new machine is `5,00,000.
● The maintenance cost during the n-th year is given as Rn = 50,000 × (n ─ 1).
● Cost of capital is 5%.
Please compute after how many years it will be economical to replace the machine by a new one.

Solution:
Discounted Discounted.
Maintenance Discount Discounted
Year total cost average. cost p.a.
cost factor maintenance cost
(`) (`)
1 0 1.0000 0 5,00,000 5,00,000
2 50,000 0.9523 47,615 5,47,615 2,80,497
3 1,00,000 0.9070 90,700 6,38,315 2,23,242
4 1,50,000 0.8638 1,29,570 7,67,885 2,06,249
5 2,00,000 0.8227 1,64,540 9,32,425 2,05,118
6 2,50,000 0.7835 1,95,875 11,28,300 2,11,716

The machine should be replaced after 5th year.

ILLUSTRATION 13:
MISS SLIGHT CONFUSION is considering purchasing a machine for her own factory. Relevant data
about alternative machines are as follows:

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 69
 Work Book : Operations Management and Strategic Management

Particulars Machine A Machine B Machine C

Present investment (`) 1,00,000 1,20,000 1,50,000
Total annual costs (`) 20,000 15,000 12,000
Life 10 10 10
Salvage value (`) 5,000 10,000 12,000

As an advisor to the buyer, you have been requested to select the best machine, considering 12%
rate of return. Given that PVIF (12%, 10th year) = 0.322 & PVIFA (12%, 10 years) = 5.650.
[Ans.: Machine B should be selected.]

Solution:
Particulars Machine A Machine B Machine C
Present investment (`) 1,00,000 1,20,000 1,50,000
PV of annual costs for the life of 20,000 × 5.650 15,000 × 5.650 12,000 × 5.650
machine = 1,13,000 = 84.750 = 67,800
PV of Total costs (`) 2,13,000 2,04,750 2,17,800
Less: PV of salvage value 5,000 × 0.322 10,000 × 0.322 12,000 × 0.322
= 1,610 = 3,220 = 1,932
PV of Net Total costs 2,11,390 2,01,530 2,15,868

Recommendation: Machine B should be selected as it is cheaper.

ILLUSTRATION 14:
The management of HOTEL KOLKATA INTERNATIONAL is considering the period of replacement
of light bulbs fitted in its rooms. There are 500 rooms in the hotel and each room has 6 bulbs. The
management is now following the policy of replacing the bulbs as they fail at a total cost of `30 per
bulb. The management feels that this cost can be reduced to `10 per bulb by adopting the periodic
replacement policy. On the basis of the information given below, evaluate the alternative and make
a recommendation to the management:

Months of use 1 2 3 4 5
Percent of bulb failing by that month 10 25 50 80 100

Solution:
For solving this problem, the following assumptions are made:

70 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Operations Management and Strategic Management

● Bulbs that fail during a month are replaced just before the end of that month,
● The actual percentage of failures during a month as for a subpopulation of bulbs with the same
age is the same as the expected percentage of failures during the month of that subpopulation.
The probability of failures can be arranged as follows:

End of month 1 2 3 4 5
Percentage of failures 10 15 25 30 20

Let N0 represents the number of original bulbs and Fi denotes the number of bulbs failed
and replaced at the end of the i-th month. i = 1,2,3,4,5.
N0 = 500 × 6 = 3,000
F1 = N0P1 = 3,000 × 0.1 = 300.
F2 = N0P2 + F1P1 = 3,000 × 0.15 + 300 × 0.10 = 480.
F3 = N0P3 + F1P2 + F2P1 = 3,000 × 0.25 + 300 × 0.15 + 480 × 0.10 = 843.
F4 = N0P4 + F1P3 + F2P2 + F3P1 = 3,000 × 0.30 + 300 × 0.25 + 480 × 0.15 + 843 × 0.10 = 1,131.
F5 = N0P5 + F1P4 + F2P3 + F3P2 + F4P1 = 3,000 × 0.20 + 300 × 0.30 + 480 × 0.25 + 843 × 0.15 +
1,131 × 0.10 = 1,049.
Note: F2: 15% of the original set of 3,000 bulbs and 10% of the bulbs replaced at the end of 1st
month as at the end of second month, these are one month old.
F3: 25% of the original set of 3,000 bulbs, 10% of the bulbs replaced at the end of 2nd month as
these are one month old and 15% of the bulbs replaced at the end of 1st month as these are 2
months old.
And so on.

Group Replacement policy:

End of No. of bulbs Cumulative no. Cost of replacement Total Average cost
month failed of bulbs failed @ `30 per bulb cost per month
1 300 300 9,000 39,000 39,000
2 480 780 23,400 53,400 26,700
3 843 1,623 48,690 78,690 26,230
4 1,131 2,754 82,620 1,12,620 28,155
5 1,049 3,803 1,14,090 1,44,090 28,818

Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) 71
 Work Book : Operations Management and Strategic Management

The minimum average cost per under group replacement is `.26,230 at the end of 3rd month.

Individual Replacement policy:

Expected life of each bulb = 1 × 0.10 + 2 × 0.15 + 3 × 0.25 + 4 × 0.30 + 5 × 0.20 = 3.35 months.
Average no. of failure and replacement per month = 3,000 ÷ 3.35 = 896.
Average cost of individual replacement = 896 × ` 30 = ` 26,880.
Comment: The average cost of group replacement is lower than individual replacement. Hence, it
is cheaper to have a group replacement after every 3rd month and individually any that fails before
that.

72 Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
 Work Book : Cost and Management Audit

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