Practice_Set_1_with_Solution.pdf

Operations Management - 1 Term II Practice Set 1 November 6, 2023 Session 1 Q.1.1 A manufacturing company producing medical devices reported $60,000,000 in sales over the last year. At the end of the same year, the company had $20,000,000 wo...

Operations Management - 1 Term II Practice Set 1 November 6, 2023 Session 1 Q.1.1 A manufacturing company producing medical devices reported $60,000,000 in sales over the last year. At the end of the same year, the company had $20,000,000 worth of inventory of ready-to-ship devices. (a) Assuming that units in inventory are valued (based on COGS) at $1,000 per unit and are sold for $2,000 per unit, how fast does the company turn its inventory? The company uses a 25 percent per year cost of inventory. That is, for the hypothetical case that one unit of $1,000 would sit exactly one year in inventory, the company charges its operations division a $250 inventory cost. (b) What—in absolute terms—is the per unit inventory cost for a product that costs $1,000? Solution: (a) Sales = $60,000,000 per year / $2000 per unit = 30,000 units sold per year Inventory = $20,000,000 / $1000 per unit = 20,000 units in inventory Flow Time = Inventory / Flow Rate = 20,000 / 30,000 per year = 2/3 year = 8 months Turns = 1 / Flow Time = 1 / (2/3 year) = 1.5 turns per year Note: we can also get this number directly by writing: Inventory turns=COGS/ Inventory (b) Cost of Inventory: 25% per year / 1.5 turns=16.66%. For a $1000 product, this would make an absolute inventory cost of $166.66. Q.1.2 Penne Pesto is a small restaurant in the financial district of San Francisco. Customers order from a variety of pasta dishes. The restaurant has 50 seats and is always full during the four hours in the evening. It is not possible to make reservations at Penne; most guests show up spontaneously on their way home from work. If there is no available seat, guests simply move on to another place. On average, a guest spends 50 minutes in the restaurant, which includes 5 minutes until the guest is seated and the waiter has taken the order, an additional 10 minutes until the food is served, 30 minutes to eat, and 5 minutes to handle the check-out (including waiting for the check, paying, and leaving). It takes the restaurant another 10 minutes to clean the table and have it be ready for the next guests (of which there are always plenty). The average guest leaves $20 at Penne, including food, drink, and tip (all tips are collected by the restaurant, employees get a fixed salary). The restaurant has 10 waiters and 10 kitchen employees, each earning $90 per evening (including any preparation, the 4 hours the restaurant is open, and clean-up). The average order costs $5.50 in materials, including $4.50 for the food and $1 for the 1