8.

Supply, Demand and Profit 8.03 – 8.04

Return on Investment 8.05 – 8.05
Stock and Balance 8.06 – 8.07
Service 8.08 – 8.10
Rain And Defect 8.11– 8.11
Simulation And Critical Path Method 8.12– 8.12
Evaluation of Investment Project 8.13 - 8.13
1. BOOST IMMUNITY SYSTEM 2. WASH YOUR HAND FREQUENTLY AND
CAREFULLY.

3. TAKE BATH AFTER REACHING HOME IF 4. AVOID TOUCHING YOUR FACE

YOU WENT OUTSIDE.

5. DO NAMSKAR AND STOP SHAKING 6. DON’T SHARE PERSONAL ITEMS

HANDS AND HUGGING PEOPLE.

7. AVOID EATING OR DRINKING IN PUBLIC 8. COVER YOUR MOUTH AND NOSE WHEN YOU
PLACES COUGH AND SNEEZE

9. CLEAN AND DISINFECT SURFACES 10. TAKE SOCIAL DISTANCING SERIOUSLY

11. DO NOT GATHER IN GROUPS 12. WASH FRESH GROCERIES

13. WEAR A (HOMEMADE) MASK 14. SELF-QUARANTINE IF SICK

GILOY, NEEM, TULSI AND YOGA AMLA IN ANY FORM
OTHER AYURVEDIC
BEVERAGE

EXERCISE OR ANY SPORT GREEN VEGETABLES HOMEMADE FOOD

JAGGERY (GUD) ANY PURE OIL (EXCEPT FRUITS (ESPECIALLY CITRUS)

REFINED)

MILK, CURD, LASSI, GHEE PULSES

ETC.

FLOUR (THE MOST DESTRUCTIVE SUGAR, JUNK FOOD

SUBSTANCE LIKE BREAD, NAN,
BHATURE, BURGER, PIZZA, JALEBI,
SAMOSA, KACHAURI, PAAV),
 SIMULATION
THEORY
1. Meaning: [2006(N)]
 Simulation is a quantitative procedure which describes a process by developing a model
of that process and then conducting a series of organised trial and error experiments to
predict the behaviour of the process over time.
 Simulation is a numerical solution method that seeks optimal alternatives (strategies)
through a trial and error process. The simulation approach can be used to study almost
any problem.
 Instead of using hunches and intuition to determine what may happen, the analyst using
simulation test and evaluation various alternative and select any one that gives best result.
i.e. estimation of future event on the past experience basis.

2. STEPS IN THE SIMULATION PROCESS: [2006(N), 2011(N)] (4 Marks)

1) Define the problem or system you intend to simulate.
2) Formulate the model you intend to use.
3) Test the model, compare its behavior with the behavior of the actual problem
environment.
4) Identify and collect the data needed to test the model.
5) Run the simulation.
6) Analyze the results of the simulation and, if desired, change the solution you are
evaluating.
7) Rerun the simulation to test the new solution.
8) Validate the simulation, that is, increase the chances that any inferences you draw about
the real situation from running the simulation will be valid.

3. ADVANTAGES OF SIMULATION: [Imp]

(i) Simulation techniques allow experimentation with a model of the system rather than the
actual operating system. Sometimes experimenting with the actual system itself could
prove to be too costly and in many cases too disruptive.
(ii) The non-technical manage can comprehend simulation more easily than a complex
mathematical model.
(iii) Simulation does not require simplification and assumptions to the extent required in
analytical solutions.
(iv) Simulation model is easier to easier to explain to management personnel since it is a
description of the behavior of some system or process.
(v) Sometimes there is not sufficient time to allow the actual system to operate extensively.

8. | 1
 (vi) Simulation allows a user to analyse these large complex problems for which analytical
result are not available.

4. MONTE CARLO SIMULATION: [2001(N), 2003(N)] (5 Marks)

 Monte Carlo simulation is a special technique of simulation which involves the selection
of random observation within the simulation model.
 It is used to some problems that depend upon probability, where physical experimentation
is virtually impracticable and it is practically impossible to create mathematical formula.

5. STEPS OF MONTE CARLO SIMULATION: [2010(N)] (4 Marks)

1) Select the measure of effectiveness of the problem.
2) Identify the variables which influence the measure of effectiveness significantly.
3) Determine the proper cumulative probability distribution of each variable selected under
step (ii). Plot these, with the probability on the vertical axis and the values of variables on
horizontal axis.
4) Get a set of random numbers.
5) Consider each random number as a decimal value of the cumulative probability
distribution. With the decimal, enter the cumulative distribution plot from the vertical
axis. Project this point horizontally, until it intersects cumulative probability distribution
curve. Then project the point of intersection down into the vertical axis.
6) Record the value (or values if several variables are being simulated) generated in step (v)
into the formula derived from the chosen measure of effectiveness. Solve and record the
value. This value is the measure of effectiveness for that simulated value.
7) Repeat steps (v) and (vi) until sample is large enough for the satisfaction of the decision
maker.

6. APPLICATION OF MONTE CARLO SIMULATION:

[2003(N), 2008(M), 2010(N), 2016(M)] (5 Marks)
 In order to provide efficient service to the
customers it is necessary to choose to re-
order point with proper consideration of
demand during lead time.
 If the lead time and demand of inventory
per unit time both are random variables
then, the simulation technique can be
applied to determine the effect & alternate
inventory policy on a stochastic inventory
system.
 The basic approach under this system is to
find the probability distribution of the
input and output functions of the past data.

8. | 2
7. REASONS FOR USING SIMULATION TECHNIQUE TO SOLVE PROBLEM/
SHORTCOMING IN THE USE OF SIMULATION APPROACH IN SOLVING OR
PROBLEMS: [2004(M)] (3 Marks)

(a) It is not possible to develop a mathematical model and solutions without some basic
assumptions.
(b) It may be too costly to actually observe a system.
(c) Sufficient time may not be available to allow the system to operate for a very long time.
(d) Actual operation and observation of a real system may be too disruptive.

8. LIMITATION OF SIMULATION: [2002(N)] (4 Marks)

(i) It is not an optimization problem. It provides only a set of response to the system under
different operating conditions.
(ii) Simulation is a time consuming process.
(iii) Simulation does not create or generate solution techniques.
(iv) All simulation cannot be evaluated by using simulation approach.

Too many of us are not living our dreams because we are living our fears.

8. | 3
 PRACTICAL
SUPPLY, DEMAND AND PROFIT
1. A cake vendor buys pieces of cake every morning at ₹ 4.50 each by placing his order one day in
advance and sale them at ₹ 7.00 each. Unsold cake can be sold next day at ₹ 2 per price and there
after it should be treated as no value. The pattern for demand of cake is given below:
Fresh Cake:
Daily Sale 100 101 102 103 104 105 106 107 108 109 110
Probability .01 .03 .04 .07 .09 .11 .15 .21 .18 .09 .02
One day old cake:
Daily Sale 0 1 2 3
Probability .70 .20 .08 .02
Use the following set of random numbers:
Fresh Cake 37 73 14 17 24 35 29 37 33 68
One day old cake 17 28 69 38 50 57 82 44 89 60
The vendor adopts the following rule.
If there is no stock of cake with him at the end of previous day, he order for 110 pieces otherwise
he order 100 or 105 pieces whichever is nearest actual fresh cake sale on the previous day.
Starting with zero stock and a pending order of 105 pieces, simulate for 10 days and calculate
vendor’s profit.
[2014(N)] (7 Marks) {Ans: ₹ 2,567}

2. A Publishing house has bought out a new monthly magazine, which sells at ₹ 37.5 per copy. The
cost of producing it is ₹ 30 per copy. A Newsstand estimates the sales pattern of the magazine as
follows:
Demand Copies Probability
0 < 300 0.18
300 < 600 0.32
600 < 900 0.25
900 < 1200 0.15
1200 < 1500 0.06
1500 < 1800 0.04
The newsstand has contracted for 750 copies of the magazine per month from the publisher.
The unsold copies are returnable to the publisher who will take them back at cost less ₹ 4 per
copy for handling charges.

8. | 4
 The newsstand manager wants to simulate of the demand and profitability. The of following
random number may be used for simulation:
27, 15, 56, 17, 98, 71, 51, 32, 62, 83, 96, 69.
You are required to-
(i) Allocate random numbers to the demand patter forecast by the newsstand.
(ii) Simulate twelve months sales and calculate the monthly and annual profit/loss.
(iii)Calculate the loss on lost sales.

[2005(N)] (8 Marks) {Answer: ₹ 15,750, ₹ 46,800}

3. MN Ltd. is a confectionery company and it sells confectionery items. Past data of demand per
day with frequency is given below :
Demand (in kgs) 0 5 10 15 20 25
No, of days 4 22 16 42 10 6
The company has scope to meet 12 kg demand per day, the life of the product is one day/ it will
be produced according to demand. It cannot hold as inventory. The contribution is ₹ 10 per day.
Using the following random numbers, simulate 10 days demand for the confectionary items.
35, 52, 90, 13, 23, 73, 34, 57, 35, 57, 35, 83

Required :
(i) Allocate random number and simulate for 10 days.
(ii) Calculate average demand of confectionery items per day fulfilled.
(iii) Calculate amount of loss (Due to not fulfilling the demand). 2017 (N) 6 Marks

8. | 5
RETURN ON INVESTMENT

4. An Investment Corporation wants to study the investment projects based on three factors: market
demand in units, price per unit minus cost per unit, and the investment required. These factors are
felt to be independent of each other. In analysing a new consumer product, the corporation
estimates the following probability distributions:
Annual Probability (Price-cost) Probability Investment Required
demand per unit (₹) (₹) Probability
Units
25,000 0.05 3.00 0.10 27,50,000 0.25
30,000 0.10 5.00 0.20 30,00,000 0.50
35,000 0.20 7.00 0.40 35,00,000 0.25
40,000 0.30 9.00 0.20
45,000 0.20 10.00 0.10
50,000 0.10
55,000 0.05
Using simulation process, repeat the trial 10 times, compute the return on investment for each
trial, taking these three factors into account. Approximately, what is the most likely return? Use
the following random numbers for annual demand, (price-cost) and the investment required:
28, 57, 60, 17, 64, 20, 27, 58, 61, 30; 19, 07, 90, 02,
57, 28, 29, 83, 58, 41; 18, 67, 16, 71, 43, 68, 47,
24, 19, 97
[2001(M)] {Ans: 14.6%}

STOCK AND BALANCE

5. ABC Cooperation Bank receives and disburses different amount cash in each month. The bank has an
opening cash Balance of ₹ 15 crores in the first month. Pattern of receipts and disbursement from past data
is as follows:
Monthly Cash receipts Monthly Cash disbursements
Rs in Crores Probability Rs in Crores Probability
30 0.20 33 0.15
42 0.40 60 0.20
36 0.25 39 0.40
99 0.15 57 0.25
Simulate the cash position over a period of 12 months.

8. | 6
 Required:
(i) Calculate probability that the ABC Cooperation Bank will fall short in payments.
(ii) Calculate average monthly shortfall.
(iii) If ABC Bank can get an overdraft facility of ₹ 45 Cores from other Nationalisedbank.What is
the probability that will fall short in monthly payments?
Use the following sequence (row wise) of paired random numbers.
{17, 78}, {43, 16}, {74, 35}, {31, 23}, {72, 44}, {46, 92}, {51, 58}, {68, 08}, {93. 58}, {57, 78}, {96,
54}, {09, 77}
[2010(M)] (7 Marks) [Ans: 0.83]

6. A book-store wishes to carry Systems Analysis and Design in stock. Demand is probabilistic and
replenishment of stock takes 2 days (i.e., if an order is placed in March 1, it will be delivered at
the end of the day on March 3). The probabilities of demand are given below:
Demand (daily): 0 1 2 3 4
Probability: 0.05 0.10 0.30 0.45 0.10

Each time an order is placed, the store incurs an ordering cost of ₹10 per order. The store also
incurs a carrying cost of ₹0.50 per book per day. The inventory carrying cost is calculated on the
basis of stock at the end of each day. The manger of the book-store wishes to compare two
options for his inventory decision:
1. Order 5 books, when the inventory at the beginning of the day plus orders outstanding is
less than 8 books.
2. Order 8 books, when the inventory at the beginning of the day plus orders outstanding is
less than 8 books.
Currently (beginning of the 1st day) the store has stock of 8 books plus 6 books plus 6 books
ordered 2 days ago and expected to arrive next day. Using Monte-Carlo simulation for 10 cycles,
recommend which option the manager should choose?
The two digits random numbers are given below:
89, 34, 78, 63, 61, 81, 39, 16, 13, 73
[2000(M)] (10 Marks) {Ans: ₹ 59.50, ₹ 42.50}

“i have not failed. i’ve just found 10,000 ways that won’t work.”
You become what you believe.

8. | 7
7. A book-store wishes to carry Systems Analysis and Design in stock. Demand is probabilistic and
replenishment of stock takes 2 days (i.e., if an order is placed in March 1, it will be delivered at
the end of the day on March 3).
The probabilities of demand are given below:
Demand (daily): 0 1 2 3 4
Probability: 0.05 0.10 0.30 0.45 0.10
Each time an order is placed, the store incurs an ordering cost of ₹100 per order. The store also
incurs a carrying cost of ₹ 5.00 per book per day. The inventory carrying cost is calculated on the
basis of stock at the end of each day. The manger of the book-store wishes to compare two
options for his inventory decision:

1. Order 5 books, when the inventory at the beginning of the day plus orders outstanding is
less than 8 books.
2. Order 8 books, when the inventory at the beginning of the day plus orders outstanding is
less than 8 books.
Currently (beginning of the first day) the store has stock of 8 books plus 6 books ordered 2 days
ago and expected to arrive next day. Further it can be assumed that the demand occurring during
the day can be met out of stock received at the end of the day.
Required:
Using Monte-Carlo simulation for 10 days, recommend which option the manager should choose?
The two digits random numbers are given below:
89, 34, 78, 63, 61, 81, 39, 16, 13, 73
2016(N) (8 Marks) {Ans: ₹ 59.50, ₹ 42.50}

8. | 8
SERVICE

8. A refreshment centre in a railway station has two counters – (i) self-service (opted by 60% of
the customers) and (ii) attended service (opted 40%of the customers). Both counters can serve
one person at a time. The arrival rate a customers is given by the following probability
distribution:
No. of arrivals 1 3 4 0 2
Probability 0.1 0.3 0.05 0.2 0.35
Formulate the associated interval of 2 digit random numbers for generating.
(i) The type of service and
(ii) The arrival rate
[2012(M)] (4 Marks)

9. Ramu and Raju are workers on a two-station assembly line. The distribution of activity times at
their stations is as follows:–
Time in Sec. Time frequency for Ramu Time frequency for Raju

10 4 4
20 6 5
30 10 6
40 20 7
50 40 10
60 11 8
70 5 6
80 4 4

(a) Simulate operation of the line for eight times. Use the random number given below:
Operation 1 Operation 2
14 61 36 97
01 82 76 41
96 00 55 56
44 03 25 34

(b) Assuming Raju must wait until Ramu completes the first item before starting work, will
he have to wait to process any of the other eight items? Explain your answer, based upon
your simulation.
[S.M] [Ans: 30,10]

8. | 9
10. Dr. STRONG is a dentist who schedules all her patients for 30 minutes appointments. Some of
the patients take more or less than 30 minutes depending on the type of dental work to be done.
The following summary shows the various categories of work, their probabilities and the time
needed to complete the work:
Category Time required Probability of category
Filling 45 minutes 0.40
Crown 60 minutes 0.15
Cleaning 15 minutes 0.15
Extraction 45 mintus 0.10
Checkup 15 mintues 0.20
Simulate the dentist’s clinic for four hours and determine the average waiting time for the
patients as well as the idleness of the doctor. Assume that all the patients show up at the clinic
at exactly their scheduled arrival time starting at 8.00 a.m. Use the following random numbers
for handling the above problem:
40 82 11 34 25 66 17 79
[S.M] {Average waiting time: 35.625}

11. An international tourist company deals with numerous personal callers each day and prides
itself on its level of service. The time to deal with each caller depends on the client's
requirements which range from, say, a request for a brochure to booking a roundthe- world
cruise. If a client has to wait for more than 10 minutes for attention, it is company's policy for
the manager to see him personally and to give him a holiday voucher worth ₹15.
The company's observations have shown that the time taken to deal with clients and the arrival
pattern of their calls follow the following distribution pattern:
Time to Deal with Clients Minutes 2 4 6 10 14 20 30
Probability 0.05 0.10 0.15 0.30 0.25 0.10 0.05

Time between Call arrivals Minutes 1 8 15 25

Probability 0.2 0.4 0.3 0.1
Required:
(i) Describe how you would simulation the operation of the travel agency based on the
use of random tables.
(ii) Simulate the arrival and serving of 12 clients and show the number of clients
whoreceive a voucher (use line 1 of the random numbers below to derive the arrival
pattern and line 2 for serving times); and
(iii) Calculate the weekly cost of vouchers; assuming the proportion of clients receiving
vouchers derived from (ii) applies throughout a week of 75 operating hours.

8. | 10
 Random Numbers:
Line-1 03 47 43 73 86 36 96 47 36 61 41 98
Line-2 63 71 62 33 26 16 80 45 60 11 14 10
[2012(N)] (7 Marks) {Ans: 433 Minutes, 10.4 Minutes, ₹ 912.50; ₹1083 }

12. A dietician wants to simulate arrivals of her patients and her consultation time with the
following random numbers. Her assistant has already prepared the random number allocation
tables.
The dietician wants to have an idea of her idle time and patients waiting time. She starts her
consultation at 10:00 a.m. and wants to give an appointment an interval of 20 minutes. The
Random Number table is as follows:
Arrival of patient 15 4 35 67 75 86 25
Consultation time 17 15 12 58 60 72 30

Random Number Allocation Table: 1

Patient Punctuality Probability Cumulative Probability Random No.
Minutes early 3 0.05 0.05 00-04
2 0.18 0.23 05-22
1 0.40 0.63 23-62
On time 0.25 0.88 63-87
Minutes late 2 0.08 0.96 88-95
4 0.04 1.00 96-99

Random Number Allocation Table: 2

Consultation Time Probability Cumulative Random No.
Probability
15 0.13 0.13 00-12
18 0.15 0.28 13-27
20 0.28 0.56 28-55
25 0.34 0.90 56-89
30 0.10 1.00 90-99

8. | 11
 (i) Simulate the arrival and consultation times and find out the dietician’s idle times and
patients’ waiting times.
(ii) If clients are sensitive to waiting, how would you advise the dietician as a Management
Accountant, based on the results of your exercise?

[2015(N)] (8 Marks)

“Consider how hard it is to Change yourself and you’ll understand and what little.”

8. | 12
RAIN AND DEFECTS

13. The occurrence of rain in a city on a day is dependent upon whether or not it rained on the
previous day. If it rained on the previous day, the rain distribution is given by:
Event Probability
No rain 0.50
1 cm. rain 0.25
2 cm. rain 0.15
3 cm. rain 0.05
4 cm. rain 0.03
5 cm. rain 0.02
If it did not rain the previous day, the rain distribution is given below:
Event Probability
No rain 0.75
1 cm. rain 0.15
2 cm. rain 0.06
3 cm. rain 0.04
Simulate the city weather for 10 days and determine by simulation the total days without rain as
well as total rainfall during the period. Use the following random number for simulation:
67 63 39 55 29 78 70 06 78 76
Assume that for the first day of the simulation it had not rained the day before.
[S.M]

14. The output of a production line is checked by an inspector for one or more of three different types
of defects, called defects A, B and C. If defect A occurs, the item is scrapped. If defect B or C
occurs, the item must be reworked. The time required to rework a B defect is 15 minutes and the
time required to rework a C defect is 30 minutes. The probabilities of an A, B and C defects are
0.15, 0.20 and 0.10 respectively. For ten items coming off the assembly line, determine total
number of items without any defects, the number scrapped and the total minutes of rework time.
Use the following random numbers,
RN for defect A
48 55 91 40 93 01 83 63 47 52
RN for defect B
47 36 57 04 79 55 10 13 57 09
RN for defect
82 95 18 96 20 84 56 11 52 03
[2004(M)] [S.M] {Ans: 5 items, 1 items, 90 minutes}

8. | 13
SIMULATION AND CRITICAL PATH METHOD

15. The following table gives the activities in a construction project and the time durations with
associated probability of each activity:
Activity Predecessors Time (in Days) Probability
A ---- 6 0.50
8 0.50
---- 4 0.30
B 5 0.20
6 0.50
C A 8 0.50
16 0.50
D A, B 8 0.30
10 0.70
E C, D 2 0.20
4 0.80

To simulate the project, use the following random numbers taking the first five random numbers
digits (representing the five activities) for each trial and so on:
11, 16, 23, 72, 94, 83, 83, 02, 97, 99, 83, 10, 93, 04, 33, 53, 49, 94, 37, 07

Required
Determine the ‘Critical Path’ and the ‘Project Duration’ for each trial.
[NPM] {Ans: 20, 22, 28, 26}

you where they are going, what they plan to do along the way, and who will
be sharing the adventure with them.

8. | 14
EVALUATION OF INVESTMENT PROJECTS

16. The MC Company is evaluation an investment proposal which has uncertainly associated with
the three important aspects: the original cost, the useful life, and the annual net cash flows. The
three probability distributions for these variables are shown below:
Original Cost Useful Life Annual Net Cash Inflows
Value Probability Period Probability Value Probability
₹ 60,000 0.30 5 Year 0.40 ₹ 10,000 0,10
₹ 70,000 0.60 6 Year 0.40 ₹ 15,000 0.30
₹ 90,000 0.10 7 Year 0.20 ₹ 25,000 0.40
₹ 25,000 0.20

The firm wants to perform simulation runs of this project’s life. The firm’s cost of capital is 15%
and the risk-free rate is 6%; for simplicity it is assumed that these two values are known for
certain and will remain constant over the life of the project.
To simulate the probability distributions of original cost, Useful life and annual net cash inflows,
use the following sets of random numbers 09, 84, 41, 92, 65; 24, 38, 73, 07, 04, 07, 48, 57, 64, 72
respectively. Determine the NPV and payback period for each of the five simulation runs.
[NPM] {Ans: - ₹ 17,880, ₹ 14,240, ₹ 28,340, ₹ 5,760, ₹ 14,240}

17. JCB Ltd. is considering a new project which will require an initial investment of ₹ 25,000. The
company has determined the following probabilities for net cash flows for three years generated
by this project:
Annual Net Cash Flows
Year 1 Year 2 Year 3
CF Prob. CF Prob. CF Prob.
7,500 0.20 10,000 0.10 7,500 0.10
10,000 0.50 12,500 0.30 10,000 0.20
12,500 0.30 15,000 0.20 12,500 0.50
17,500 0.40 15,000 0.20
The firm wants to perform 5 simulation runs of this project’s life. The firm’s cost of capital is
10%.
To simulate the probability distributions of annual net cash flows, use the following sets of
random numbers
4, 4, 2; 9, 6, 3; 5, 7, 8; 0, 1, 6; 3, 1, 5
Required
Using simulation results. Calculate the average NPV.
Note
Assign a value ranging from 0 to 9 (in digits) to each year’s cash flow in such a way that the
number of digits assigned is proportionate to the probability of cash flow.
{Ans:-5,868.} [RTP 2016 (N)]

8. | 15
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इसमें सबकु छ है ₹ 4,000/-

इसमें सबकु छ है ₹ 6,000/-

इसमें सबकु छ है
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