Chapter 16 - Other Quantitative Approaches D. OTHER QUANTITATIVE APPROACHES ) Multiple Choice Questions Quantitative methods are important to the management accountant for all except which ‘of the following reasons (a) Familiarity with quantitative methods will permit the management accountant to recognize possible application, (b) Quantitative methods utilize accounting data. ‘The management accountant needs to be able to make an appropriate judgment regarding the use of accounting data, (c) The management accountant can use quantitative methods to make subjective decisions about employees, (d) Quantitative methods may significantly reduce the cost of decision making within the company. 2. Which of the following is not an advantage of using mathematics in quantitative data analysis methods? (a) To permit repetition of rational decisions, (b) To discover solutions that suppoft casual observation and/or contrast to casual observation, (c) To provide understanding in complex issues, (d) To quantify the decision making factors, (©) None of these. 3, Which is the false statement about quantitative methods? (a) Quantitative models are generally oversimplifications, (b) It is impossible to include all relevant variables in each model, (c) The techniques may not be justifiable on a cost/benefit basis, (d) Every decision may be modeled mathematically and will always permit a deterministic solution, (¢) Behavioral considerations should not be taken into account in analyzing quantitative methods. 4, A decision model designed to help its user find the best altemative or decision rule according to some criteria is said to be (a) Bayesian, (b) Probabilistic, (c) Satisficing, (@ Optimizing. 5, The accountants for OEM Inc. have proposed that sensitivity analysis be incorporated into the company's capital budgeting program, This proposal is based on the fact that the major contribution of sensitivity analysis will be the determination of (a) A measure of the probabilistic distribution of cash outflows, (b) A financial measure of the new investment from alternative values for the parameters, (c) A financial measure of the value of the new investment, (4) A measure of the probability of the calculated outcome, (e) a measure of the probable maximum rate of return. 6. A manager wants to know the effect of a possible change in cash flows on the net present value of a project. ‘The technique used to do this is (a) Sensitivity analysis, (b) Risk analysis, (c) cost behavior analysis, (4) Variance analysis, (e) Retum on investment analysis. 535Chapter 16 - Other Quantitative Approaches 7. Ifa company wishes to asses the effect of changing the contribution margin of product Z upon its optimum product mix and profitability, the most relevant quantitative technique is (2) correlation analysis, (b) cost/volume/profit analysis, (c) Queuing analysis, (d) Sensitivity analysis, (e) time series or trend regression analysis. 8. Proxy Company is a foundry which specializes in custom orders. The company employs a job shop manufacturing facility. Due to the nature of its business, Proxy seldom does the same job more than once and each job has a separate set and sequence of operations. ‘The company has to consider the cost of idle machine and labor capacity, the cost of carrying in-process inventory, and the importance of meeting specified order-completion due dates. Proxy management wants to develop a model which incorporates the operating characteristics of the job-shop, including random events and occurrences that affect operations. ‘The methodology Proxy would find most useful is (a) dynamic programming, (b) linear programming, (c) simulation techniques, (d) Cost/volume/profit analysis. (e) markov analysis. 9. The computer simulation has been advocated as an important tool to assist management in decision making. Which of the following is not a correct assessment of computer simulation ? (a) it can only be used on large computers, (b) it can be used to ascertain the sensitivity of an outcome to changes in components, (c) the relationships of variables in the computer model can be changed over time, (d) the models can be refined as more evidence from results becomes available, (e) it can be used for both. production and finance problems, 10. ZorbaCo has developed a comprehensive budget using a microcomputer spreadsheet. ZrobaCo's sales manager wishes to study the effects of: (1) decreasing selling price in ‘order to increase sales volume, and (2) putting salespersons on commissions instead of fixed salaries. These options can best be studies on the microcomputer by using (a) linear programming, (b) decision tree analysis, (c) simulation, (4) expected value analysis, (¢) markov analysis. 1k A construction company in the process of building a simulation model for cost estimation purposes They have identified all relevant variable and relationships and have gathered data on past projects. Their next step should be model (a) implementation, (b) design, (c) validation, (4) experimentation. 12. Probability (tisk) analysis (a) ignores probability weights under 50%, (b) is only for situations in which there are three or fewer possible outcomes, (c) does not enhance the usefulness of sensitivity analysis data, (d) is an extension of sensitivity analysis. 13. Practical use of most mathematical decisions models requires the estimation of one or more parameters in the model. A technique which helps the decision maker understand the extent to which the outcome described by the decision model depends on the parameter estimates is (a) parametric statistics, (b) differential calculus, (¢) nonparametric statistics, (d) dynamic programming, (¢) sensitivity analysis. 536Chapter 16 - Other Quantitative Approaches 14. 15. 16. 17. 18. 19. 20. Parker Company is concemed about customer loyalty and has accumulated data on the extent that customers switch among brands. Parker can best analyze the data on brand switching by using (a) linear programming, (b) queuing theory, (c) differential calculus, (d) Markov analysis, (¢) decision tree analysis. ‘The branch of decision theory which deals with decision making when facing a live opponent is called, (a) catastrophe theory, (b) negotiation theory, (c) game theory, (d) conflict theory. ‘A. company wishes to compare the effects of using a new labor-saving machine with present direct labor methods, These comparisons will be made over a wide variety of operations on several typical days. The demand placed upon each operation as well as the sequence of individual operations can be described by probability distributions. The most relevant quantitative technique is (a) cost/volume/profit analysis, (b) Monte Carlo simulation, (c) Program evaluation and review technique (PERT), (d) statistical sampling, (€) time series or trend regression analysis. ‘A quantitative method that deals with the problem of supplying sufficient facilities to ‘meet the needs of production lines or individuals that demand service unevenly is (a) regression analysis, (b) PERT, (c) queuing theory, (d) nonlinear analysis. ‘A bank has changed from a system where lines are formed in front of each teller to a one-line multiple-server system. When a teller is free, the person at the head of the line goes to that teller. Implementing the new system would (a) decrease the banks! wage expenses since the new system uses fewer tellers, (b) decrease time customers spend in the fine, (c) increase accuracy in teller reconciliations at the end of the day ‘due to fewer customers, per teller, (d) improve on-the-job training for bank employees since each teller would perform different duties. ‘The drive-through service at a fast-food restaurant consists of driving up to place an order, advancing to a window to pay for the order, and then advancing to another window to receive the items ordered. This type of waiting-line system would be called (a) single channel, single phase, (b) single channel, multiple phase, (c) multiple channel, single phase, (d) multiple channel, multiple phase. ‘A post office serves customers in a single line at one service window. During peak periods, the rate of arrivals has a Poisson distribution with an average of 100 customers per hour and service times that are exponentially distributed with an average of 60 seconds per customer. From this one can conclude that the (a). queue will expand to infinity, (b) server will be idle one-sixth of the time, (c) average rate of service is 100 customer per hour, (4) average customer waiting time is 2.5 minutes. 537Chapter 16 - Other Quantitative Approaches 21. A highway department plans to open a newly constructed toll bridge. Determining how 22. 23. 24, 25. 26. By 28. 29. ‘many toll booth attendants should be on duty at different hours of the day requires the application of (a) statistical sampling, (b) correlation analysis, (c) operations research, (@ queuing theory, (¢) variance analysis. ‘A-company is designing @ new regional distribution warehouse. To minimize delays in Joading and unloading trucks, an adequate number of loading docks must be built. The most relevant technique to assist in determining the proper number of docks is (a) correlation and regression analysis, (b) cost/volume/profit analysis, (c) PERT/CPM analysis, (4) linear programming, (e) queuing theory. The technique used to obtain a probabilistic estimate of the completion time for a project is (a) a GANTT chart, (b) the critical path method (CPM) (c) a time-cost performance chart, (d) the program evaluation review technique (PERT), (E) the ‘Markov chain. ‘The most appropriate technique for determining the longest time required to complete a particular project would be (a) regression analysis, (b) integer programming, (c) game theory, (d) queuing theory, (e) program evaluation and review technique (PERT). Program evaluation and review technique (PERT) is a system which uses (a) least squares method, (b) linear programming, (c) economic order quantity formula, (4) network analysis and critical path methods (CPM). Ina program evaluation review technique (PERT) system, activities along the critical path (a) follow the line of best fit, (b) have a slack of zero, (c) have a positive slack, (@ intersect at a comer point described by the feasible area. ‘What is the appropriate technique for defining the critical path when the completion of a total project is dependent upon the completion of various subunits at specific times to enable the work to progress? (a) linear programming, (b) multiple regression analysis, (¢) program evaluation and review technique, (d) queuing theory. Owens University is planning to install a microcomputer laboratory for use by faculty and students. Project steps include needs assessment, remodeling a classroom to accommodate the facility, system selection, purchasing hardware and software, and recruiting and training laboratory staff. Owens can best schedule the microcomputer laboratory project by using (2) critical path analysis, (b) EOQ modeling, (c) decision tree analysis, (4) linear programming, (e) Markov analysis. The use of PERT or CPM might apply in the case of planning for (a) the construction of a new office building, (b) the installation of a new computer system, (0) the development of a new product, (d) all of the above, (¢) none of the above.Chapter 16 - Other Quantitative Approaches 30. Critical path method (CPM) is a technique for analyzing, planning , and scheduling large, complex projects by determining the critical path from a single time estimate for each event in a project. The critical path, (a) isithe maximum amount of time an activity may be delayed without delaying the total project beyond its target time, (b) is the earliest starting time that an activity for a project can begin, (c) is the pessimistic time estimate for an activity of a project, (d) is the shortest time path from the first event to the last event for a project, (c) is the longest time path from the first event to the last event for a project. 31. Ridgefield, Inc, considering a three-phase research project. The time estimate for completion of Phase | of the project are Optimistic 4 months Most likely 8 months Pessimistic 18 months: ‘The formula for the expected time of a particular project is A+ 4M + B where A = Optimistic estimate Pessimistic estimate M = Most likely estimate Using the program evaluation and review technique (PERT) , the expected time for completion of Phase 1 should be (a) 8 months, (b) 9 months, (c) 10 months, (@) 18 months, 32. PERT is widely used to plan and measure progress toward scheduled events. PERT is combined with cost data to produce a PERT-Cost analysis in order to (a) calculate the total project cost inclusive of the additional slack time, (b) evaluate and optimize trade-off between time ‘of an event's completion and its cost to complete, (0) implement computer-integrated manufacturing concepts, (d) avoid the problem of time variance analysis, (e) calculate expected activity times 33, PERT diagram was drawn showing the fifleen activities required for the implementation of a new computer system at a particular company. With activities identified by letters, the five paths through the network and their lengths were: Path 1: 10 weeks 2 15 weeks a 12 weeks 4: 10 weeks 5; A-C-K-L-M 13 weeks The critical path(s) is (are) (a) path 1 and path 4 , (b) path 2, (c) path 3, (d) path 5. 539Chapter 16 - Other Quantitative Approaches 34. Red company had bid on a contract to build a prototype personal computer for Black Company . Parts for this prototype will be obtained from outside vendors. ‘The table below presents the activities involved in this project and the’ various number of days involved in each event. Event Optimistic Time Most likely Time _ Pessimistic Time 1. Bid awarded - : = 2. Order parts 4 3 12 3. Prepare space production 3 8 13 4, Receive and inspect parts 10 14 24 5, Assemble prototype 1 10 19 6. Quality assurance testing 3 5 7 7. Ship to customer 3 How much time is the total project expected to take? (a) 34 days, (b) 37 days, (c) 42 days, (d) 45 days. 35. The following diagram represents various project activities and the sequencing requirement in days. Define the critical path. ¢. path 1-3-4-5-7 d. path 1-3-4-6-7 540Chapter 16 - Other Quantitative Approaches Items 36 and 37 are based on the following information . During an operational audit, an internal auditing team discovers the following document, entitled Project Analysis. Project analysis Activity ‘Time in Weeks Preceding Activity A 3 - B 3 A ie 7 A D 4 A E 2 B F 4 B G 1 CE H 5 D Using the Project Analysis document, the audit supervisor prepared the following diagram 36. What is the earliest completion time that is indicated by the project analysis? (a) 9 weeks (b) 10 weeks (c) 11 weeks (d) 12 weeks. 37. What is the earliest time by which Node 4 would be reached ? (a) 6 weeks (b) 7 weeks (c) 8 weeks (d) 10 weeks. 38. The Gantt chart below shows that the project is Now = Times | Activity. 12 ee ! (oer a, complete ¢. op schedule b, ahead of schedule d, behind scheduleChapter 16 - Other Quantitative Approaches 39. 40. 41, 42. 43. 542 If a cost function behaves such that the average costs per unit of output decline systematically as cumulative production rises, the cost function is referred to as a (a) quantity discount curve, (b) variable cost curve, (c) linear cost curve, (d) learning curve, (e) growth curve, Robinson Company began manufacturing a new product at one of its plants last year. ‘An analysis of production information indicated that the time spent to produce a unit of this product was considerably more than standard but kept decreasing steadily until it reached standard. After that, there was little change. This pattern was probably due to (a) the standards being too tight, (b) the standards being to loose, (c) a favorable labor efficiency variance, (d) the leaming curve effect, (¢) a favorable labor rate variance, A learning curve of 80% assumes that production unit costs are reduced by 20% for each doubling of output. What is the cost of the sixteenth unit produced as an approximate percent of the first unit produced (a) 30% (b) 40% (c) 50% (4) 60%. A.75% learning curve is applied to the following consecutive lots as follows: Number of Units _ Average Time/Uni A 50 6.0 B. 100 x Cc. 200 2 D. 400 2 The average time per unit for lots B through D is (a) 4.5,3.4,2.5 (b) 4.5 each, (c) 6.0 each, (d) 7.5 each. If a company is considering the use of learning curvé analysis in the determination of labor cost standards for a new product, it should be advised that this technique generally is most relevant to situations in which the production time per unit decreases as additional units are produced and the unit cost (a) decreases, (b) does not change, (©) increases or decreases in an unpredictable manner, (4) increases slightly, (e) increases substantially. . A company has developed a leaming (improvement) curve for one of its newer processes from its accounting and production records. Management asked internal audit to review the curve. Which of the following events would tend to mitigate the effects of the learning curve? (a) labor costs incurred for overtime hours were charged to an overhead account, (b) the number of preassembled purchased parts used exceeded the plan, (c) the number of skilled, higher-paid workers used in production exceeded the plan, (d) newly developed processing equipment with improved operating characteristics were used, (¢) all of the above.Chapter 16 - Other Quantitative Approaches 45. 46. 47. 48. 49, 50. ‘A construction company has just completed a bridge over the Mississippi River. This is the first bridge the company ever built and it required 100 weeks to complete. Now having hired a bridge construction crew with some experience, the company would like to continue building bridges. Because of the investment in heavy machinery needed continuously by this crew, the company believes it would have to bring the average construction time to less than 1 year (52 weeks) per bridge to ear a sufficient return on investment, ‘The average construction time will follow an 80% learning curve. To bring the average construction time (over all bridges constructed) below I year per bridge, the crew would have to build approximately (a) 2 additional bridges (b) 3 additional bridges (c) 7 additional bridges, (a) 8 additional bridges, (e) 15 additional bridges. ‘You are performing an intemal audit in a factory which has established an improvement (learning) curve 70%. Unit number one of the current mode! being produced requires 8,000 labor hours to construct. How many cumulative average labor hours per unit should be required to construct eight units (a) 3,920, (b) 7,250, (©) 1,921, @ 2,744, (©) 5,600 Which of the following may be scheduled in production planning by the use of learning curves? (a) labor assignments (b) purchases of materials, (c) subassembly production, (d) delivery dates of finished products, (e) all of the above. Mori Company plans to begin production of a new product on July 1. an 80% learning curve is applicable to Mori's manufacturing operations. If it is expected to take 1,000 direct labor hours to produce the first unit, how many direct labor hours should it take to produce the third and fourth units? (a) 640, (b) 960 (c) 1,600 (d) 2,560. The forecasting procedure known as exponential smoothing is a special kind of weighted moving average in which the assignment of weights is based on the same mathematical process which is the basis for describing the growth of an amount invested at a fixed interest rate with annual compounding. This mathematical process is known as the (a) Markov process, (b) Bernoulli process, (c) Geometric progression, (@) Poisson distribution, (¢) Arithmetic progression. Operations research is a (a) discipline using quantitative methods oriented to planning, (b) set of generally accepted manufacturing methods, (c) review of operating techniques within an industry, (4) method used to analyze financial data, (e) term describing an area of pure research,Chapter 164_- Other Quantitative Approaches (Suggested Answers) ‘Chapter 16d - OTHER QUANTITATIVE APPROACHES (Surgested Answers) Problems (0-50) 1. C The management accountant must recognize the importance of quantitative methods in the ‘orgmization. By being familiar with these methods and their uses, the management accountant can recognized possible applications within the company and advise ‘management on their use. ‘The management accountant can also judge whether the accounting data are being used correctly in the quantitative methods, Finally, quantitative methods can reduce the cost of obtaining information concerning the operation of the business and aid in forecasting business operations. They should not, however, take the place of qualitative decision making, which must take intangible data into account. 2. E Each item listed in an advantage of using quantitative methods. ‘The decision process is improved by the precision of the quantitative approach. Rational decision scan be modeled and replicated, usually using a computer. Increased understanding of complex problems is also facilitated. 3. E Its virtually impossible to include all relevant variables in a mathematical model. Thus, the ‘model must be reviewed in light of behavioral considerations as well as other considerations. 4. D Optimizing is @ technique used to find the most valuable or best solution given a set of alternatives, 5. B_ Sensitivity analysis allows the evaluation of the effect of changes in variables. In this.case, the company’s capital budgeting program will produced results that can be evaluated subject to the sensitivity of certain parameters. Thus sensitivity analysis permits "what if" questions to be examined. 6. A Sensitivity analysis isa technique to evaluate a model in terms of the effect of changing the values of the parameters. It answers "what if questions. In capital budgeting models, sensitivity analysis isthe examination of alternative outcomes under different assumptions. 7D Sensitivity analysis permits the examination of a variety of outcomes depending on a change in parameters of chosen assumptions. Changing the contribution margin of product Z in performing cost/volume/profit analysis is an example of sensitivity analysis. 8. C Simulation techniques would be most useful in this situation because they can be used to develop a quantitative model of business as well as to answer “what if" questions about possible outcomes, Simulation models can then be used to evaluate various outcomes if functions are changed by trial and errors. 9. A Computer simulations are used to examine "what if* situations. Variables may be changed, assumptions modified, and models refined. Computer simulation may be used in various types of problems including production and financial: models. Simulation techniques can be used on microcomputers as well as larger installations.Chapter 16d_- Other Quantitative Approaches (Suggested Answers) 10. Te 17, 20. © ‘Simulation analysis is appropriate. Simulation involves developing an environment (economy) in mathematical form. Changes. in assumptions can then be made and the results ‘will flow through the mnodel economy. The first step to build a simulation model is to define the objectives ofthe project. The next step is to formulate the model, that is, to determine the variables to be included, their behavior, and their interelationships. in precise, logical mathematical terms. ‘The third step is to validate the model. Some assurance is needed thatthe reslts of the experiment will be realistic. This assurance requires validation of the model, often with historical data. If the model gives results equivalent to what actually happened, the model is historically valid. ‘There is still some risk, however, the changes could make the model vali forthe future. Probability (ris) analysis is used to examine the array of possible outcomes given alternative parameters. Sensitivity analysis answers "what if" questions when alternative parameters are changed. Thus risk (probability) analysis is similar to sensitivity analysis: both evaluate the probability and effect of differing inputs or outputs. Refer to No. 5, No. 6 and No. 7. In a Markov chain, the probability of an event is conditioned upon the previously event. Many card games reflect the markov process because the probabilities are altered by the cards already played. Markov analysis is thus an appropriate technique for forecasting consumer ‘buying habits because it relies on. recent evidence rather than on average of all evidence. Game (or decision) theory is a mathematical approach to decision making when confronted with an “enemy or competitor. Games are elasified according to the number of player and the algebraic sum of the payoffs. In a two-person game, if the payoff is given by the loser to ‘the winner, the algebraic sum is zero and the game is called a zero-sum game, If it is possible for both players to profit. however, the game is a positive-sum game. Mathematical ‘models have been develoned to select optimum strategies for specific simple games. Monte Carlo simulation is used in conjunction with random number tables to simulate 3 process or project upon which data are unavailable or for which the cost of test run would be prohibitive Queuing theory examines the cost of waiting in lines and costs of servicing waiting lines. It is usefull whenever units or variables randomly arrive at a point in the process where service is sequential, To minimize total cost, queuing theory balances the costs of waiting (e.g. wages for an employee standing idle while waiting for the copy machine) against the costs of providing the service (e.g. providing a second machine.) When all customers. must wait in a single queue, it is possible to decrease waiting time if there are multiple servers. This would have the added effect of increasing customer satisfaction. ‘The drive-through represents a single queue (channel). Since this waiting line has three services in series , it may be said to be multiple phase. Another example is the typical factory assembly line, ‘Thus terminology (channel, phase), however is not used by all writers ‘on queuing theory. One hundred customers arrive in line per hour and only 60 are serviced per hour. Accordingly, the queue will expand to infinity during peak periods. 877Chapter 16d_- Other Quantitative Approaches (Suggested Answers) 21. D Queuing. theory is usefidl whenever an item randomly arrives at a point in a process where items are serviced one at a time. To minimize total cost, queuing theory balances the cost of ‘waiting against the cost of providing service. 22. E Queuing theory minimizes the total cost of providing services against the cost of additional capacity for work flows that arrive randomly at the service facility. 23. D PERT is used to obtain a probabilistic estimate of the completion time for a project. ‘The PERT method is sometimes known as the 1-4-1 three estimate method because the ‘most optimistic and pessimistic estimates are each weighted by one and the most likely is ‘weighted by four. ‘The sum of these three weighted estimates is then divided by six to arrive at the probable completion time. 24, E PERT is used for analyzing , planning, and scheduling large, complex projects by forecasting the time of completion, monitoring progress, and identifying parts ofthe project critical for the project to be completed on time. 25. _A PERT system shows the interrelationship of a complex time network of activities and identifies any critical paths. e The critical path (the longest path through the system when completing total project) is dependent upon completing various subunits at specific times to enable the work ‘to progress, 26.B A. PERT system shows the interrelationship of a complex time series of activities and identifies any critical paths in those series of activities. ‘The critical path is the longest path through the nctwork and therefore includes no i slack time. Reducing the critical path through the system is the only way to reduce total time. 27.C Refer to No. 25 and No, 26. 28. A Refer toNo, 25 and No. 26. 29.D Both PERT and CPM are useful in the planning and control ofa large system or process. PERT and CPM both construct a network of time relationship between each subunit oF subproject to identify the subprojects that, have a direct effect on the completion date of the project 30, E The critical path is the longest time path from the first event to the last event for a project. if there are any delays on the critical path, the total time for the entire project will increase. 31. B_ PERT isa technique to identify the paths to complete a complicated process: ‘The critical path is the longest path from the beginning to the end. Expected time of completion = 4+ 4(8) +18 + 6 months 32. B Combining PERT with cost data permits decisions as to whether the benefits of earlier completion of a project are justified in terms of the additional costs of completion. For this purpose, activity times and costs must be estimated for both normal and crash efforts. 33. B_ The critical path (path 2) isthe longest path in time through the network. It is critical in that if any activity on the critical path takes Jonger than expected, the entire project will be delayed. Every network has at least one critical path. Some have more than one, 878Chapter 16d_- Other Quantitative Approaches (Suggested Answers) 34. B 35. D 36. D 37. D 38. B 39. D 40. D ALB 28 Preparation - space for production a Received and inspect parts 4 Assembly. 10 Quality assurance testing 25 Total at ‘Note that ordering can be accomplished afier preparation of space for production had begun, Note also that this planning method totals the most likely time estimates rather than the optimistic or pessimistic estimates, ‘The critical path is the longest path. Path 1-3-4-6-7 is the critical path because it requires 16 days (G+2+4+7) ‘The critical (longest) path through the diagram provides the estimate of the carliest completion time, assuming all activities must be completed. The critical path is thus 1-2-5-6 (path ADH), which requires 12. weeks. ‘The network diagram contains two paths leading to Node 4: | -2-3-4 (path ABE) and 1-2-4 (path AC). The firmer requires 8 weeks and the latter 10 weeks. Accordingly, the earliest time by which all activities preceding Node 4 can be completed is 10 weeks. Thus, the critical path is 1-2-4 (path AC) ‘Assuming that each of the bars represents the expected time necessary 10 complete an ‘activity and that the shaded regions represent the portions completed, it can be seen that activity A has been completed as scheduled and activities B and C are ahead of schedule. Therefore, the project is ahead of schedule. ‘The learning curve effect occurs during the early stages of production. It reflects the decrease in time needed to perform tasks as workers gain experience and economies of scale are achieved z ‘The average cost per unit and the time required to produce one unit both decrease. For example, an 80% leaning curve means that each time cumulative production doubles (up to a point), cumulative average costs will decrease by 20%. The learning curve states that, as production increases, the time it takes to complete each product will decrease due to economies of scale and experience of the production personne}. ‘The learning curve is exponential in form; it drops sharply and then changes very littl, A learning curve model is based on one of two assumptions: |. Cumulative average time per unit is reduced by a constant percentage when cumulative production doubles, 2. The time to produce the last unit is reduced by a constant percentage when cumulative production doubles. Under the second assumptions, the labor time (and labor cost ) of unit 16 should be 40.96%. [080% x 100%) x (80%) x (80%) x (80%)] ~ 4096 Learning curve reflect the increased rate at which people perform tasks as they gain experience, ‘The time required to perform a given task becomes progressively shorter. ‘This technique is only applicable to the early stages of production or of any new task. Usually, the curve is expressed in a percentage of reduced time to complete a task for each doubling of cumulative production, Average time per unit could be 879Chapter 16d_- Other Quantitative Approaches (Suggested Answers) B- 60 x 75% = 45 C- 45 x 7% = 34 D- 34 x 15% 25 ‘This calculation assumes that the ‘number of units” column in the problem statement is for cumulative units, 43. A The learning curve is a cost fimetion which shows that the average cost per unit and time required to produce one unit both decrease as'production rises. 44, E ‘The leaming curve is developed with a plan of all the factors of production. Any changes in the skill level of workers, processing equipment, part used, or method of labor cost allocation ‘will make the predesigned learning curve less useful. 45. C An 80% learning curve means that the average production time will be 80% of the previous ‘average each time production is doubled. ‘Thus, to lower the time per bridge below I year, calculate the per bridge time savings as follows: given 100 weeks (100 x 80%) 80 weeks (80 x 80%) 64 weeks (64 x 80%) 51.2 weeks Tikes ie lean a bridge has already been built) bridges would have to be built to get the average construction item below 1 year. 46, D The 70% learning curve means that every time production is doubled, the cumulative average time per unit required for production will be 70% of the average time required for the prior production level. To determine the cumulative average number of labor hours to construct eight unit requires the caleulation of the average time to construct units two , four, eight : ‘Cumulative Average hours 1 given 8,000 2 $,000x 70% = 3,000 4 5,600 x 70% = 3,920 8 3,920 x 70% = 2148 . 47. E Learning curves are used to described the increase in production efficiencies reSulting from experience. Answer (a) through (4) are all activities which would be more efficient as experience increases. 48. 8 Average hours required to produet the first 2 units [(1,000 hrs x 80%) x2] 1,600 ‘Average hours required to produce the first 4 units [(800 hrs x 80%) x 4] 2,560 ‘Number of hours for the 3rd @ 4th units 960 49. C Geometric progression means that each term in a service is a multiple of the previous term. In ‘a compound interest calculation, the amount of money is calculated by taking the amount at the end of the last period and multiplying it by the current interest rate plus one. In exponential smoothing , the procedure is reversed in that the effect of events in the past is discounted based upon a multiple (the more time that has elapsed since given event, the less effect it has on the current figure). It thus, constitutes a moving average of the figure 9950, A. Operation research is 2 quantitative method oriented to planning 880