ISOM2700 Practice Set4 Question

Fall 2023
Operations Management
Practice Questions Set #4
(Questions)
1. (Forecasting)
Historical demand for a product is given below:
Demand
January 12
February 11
March 15
April 12
May 16
June 15
(i) Using a weighted moving average with weights of 0.6 (for June), 0.3 (for May), and 0.1 (for April),
find the July forecast.
(ii) Using a simple three-month moving average, find the July forecast.
(iii) Using an exponential smoothing with α=0.2 and a June forecast = 13, find the July forecast.
2. (Newsvendor)
An airline offers two fare classes for coach seats on a particular flight: full-fare (H) class at $440/ticket
and discount fare (L) class at $218/ticket. There are 230 coach seats on the aircraft. Discount fare tickets
must be purchased at least three weeks in advance, and these tickets are expected to sell out. The
demand for tickets at full fare is estimated to have the following discrete distribution:
(i) What’s the optimal protection level for full fare tickets?
(ii) What’s the optimal booking limit for low-fare seats?

ISOM2700: Practice Set #3
Demand for tickets

at full price Probability Cum. Prob.
40 0.0200 0.2500
41 0.0600 0.3100
42 0.0400 0.3500
43 0.0100 0.3600
44 0.0600 0.4200
45 0.0700 0.4900
46 0.0200 0.5100
47 0.0300 0.5400
48 0.0300 0.5700
49 0.0500 0.6200
50 0.0300 0.6500
51 0.0500 0.7000
52 0.0400 0.7400
53 0.0600 0.8000
54 0.0900 0.8900
55 0.1100 1.0000
3. (Newsvendor)
A retailer sells a fashion product during a short sales season. Since there is a long production lead time,
the retailer needs to purchase the product in advance and no further inventory replenishment is allowed.
The product costs $70 per unit and the retail price is $100. For units that are not sold by the end of the
main sales season, the retailer can sell the leftover units at a discounted price $30 through clearance sales.
The demand is uncertain and the demand distribution is forecasted as follows.
Demand (units) 500 350 250 150

Probability 0.2 0.4 0.25 0.15
(i) What is the underage cost Cu?
(ii) What is the overage cost Co?
(iii) How many units should the retailer purchase in order to maximize the expected profit?
4. (Newsvendor)
Tom owns a small firm that manufactures “Tom Sunglasses.” He has the opportunity to sell a particular
seasonal model to Land’s End. Tom offers Land’s End two purchasing options:
Option 1. Tom offers a price of $55 for each unit, but returns are no longer accepted. In this case, Land’s
End throws out unsold units at the end of the season.
Option 2. Tom offers to set his price at $65 and agrees to credit Land’s End $53 for each unit Land’s End
returns to Tom at the end of the season.
2
ISOM2700: Practice Set #3
This season’s demand for this model will be normally distributed with mean of 200 and standard
deviation of 125. Land’s End will sell those sunglasses for $110 each.
(i) How much would Land’s End buy if they choose option 1?
(ii) How much would Land’s End buy if they choose option 2? What is the probability that Land’s End
will return sunglasses to Tom at the end of the season?
5. (EOQ) Ace Airline has a need for 100 new flight attendants per month as replacements for those who
leave. Trainees are put through a two-month school for training. The fixed cost of running one session of
this school is $150,000, regardless of the class size. Any number of sessions can be run during the year,
but must be scheduled so that the airline always has enough flight attendants. The cost of having excess
attendants is simply the salary that they receive, which is $15,000 per month. (Excess attendants are
those who have completed training, are being paid, but have not yet been assigned a job.)
(i) What is the optimal class size for each session?
(ii) How many sessions of the school should Ace Airline run each year?
(iii) What is the time interval between two sessions?
6. (Supply Chain Coordination)
Dan’s Independent Book Store is trying to decide on how many copies of a book to purchase at the start
of the upcoming selling season. The publisher produces the book at the cost of $16 per unit and sells it to
Dan at $20. The book retails at $28. Dan will dispose of all of the unsold copies of the book at 50% off the
retail price, at the end of the season. Dan estimates that demand for this book during the season is
Normal with a mean of 1000 and a standard deviation of 250.
(i) What is the quantity that Dan should order to maximize his expected profit?
(ii) Imagine the integrated supply chain where the publisher and Dan make decisions as if they are in a
single firm. What is the quantity that the integrated firm should order to maximize their expected profit?
(iii) The optimal order quantity in part b can be considered as the first-best solution for the supply chain.
However, Dan found the integration with the publisher is not possible due to other financial issues.
Alternatively, Dan is thinking of offering the following scheme to the publisher. At the end of the season,
the publisher will buy back unsold copies at a pre-determined price of $r. How should Dan set the
return price $r so that the optimal order quantity under this scheme is equal to the first-best solution in
part(ii)?

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Fall 2023

Practice Questions Set #4

Historical demand for a product is given below:

(ii) What’s the optimal booking limit for low-fare seats?

Demand for tickets

Demand (units) 500 350 250 150

(i) What is the underage cost Cu?

(ii) What is the overage cost Co?

(i) What is the optimal class size for each session?

(iii) What is the time interval between two sessions?

6. (Supply Chain Coordination)

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