Operation Management Midterm Sampple

|Midterm Example Test v2 | |

1. A manufacturing firm is considering three alternatives for automation. They anticipate annual production volume to be 75,000 units. The costs for each alternative are as shown:

| |Alternative |
| |1 |2 |3 |
|Annual Fixed Costs |60,000 |$180,000 |$300,000 |
|Variable Cost/Unit |$0.65 |$0.55 |$0.40 |
| | | | |

|a. |What sales price must be charged for Alternative 1 to break even? |
|b. |What sales price must be charged for Alternative 2 to break even? |
|c. |What sales price must be charged for Alternative 3 to break even? |
| | |

Correct Answer:
|a. |$60,000 + ($.65)(75,000) = 75000S => S = $1.45 |
| | |
|b. |$180,000 + ($.55)(75,000) = 75000S => S = $2.95 |
| | |
|c. |$300, 000 + ($.40)(75,000) = 75000S => S = $4.40 |
| | |

2. An ATM machine provides four sequential steps in processing a transaction. Over the last quarter, the reliability of each of these steps was 0.92, 0.97, 0.95 and 0.90. What is the overall reliability of the machine? How much can reliability be improved if the reliability of the fourth step is increased to 0.98?

Correct Answer:
RS = (0.92)(0.97)(0.95)(0.90) = 0.7630
If the reliability of the fourth step is increased to 0.98, RS = (0.92)(0.97)(0.95)(0.98) =