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# CD-ROM MODULE 3 Decision Theory and the Normal Distribution

TRUE/F L!E

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## Decision Theory and the Normal Distribution l CD-ROM MODULE 3

ANSWER: TR E :M3.13 T\$e unit normal loss inte0ral can #e used to compute E.,. ANSWER: TR E :M3.1( E);3 and E., are equi"alent. ANSWER: +A,SE :M3.1- E"en if demand appears as s%etc\$ed #elo', 'e can use t\$e normal distri#ution to represent it.

MULT"#LE C\$O"CE
M3.1/ T\$e price<unit minus t\$e fixed cost is 5a6 5#6 5c6 5d6 5e6 loss<unit '\$en sales are #elo' t\$e #rea%&e"en point. t\$e #rea%&e"en point. t\$e 8 "alue. E.,. none of t\$e a#o"e

ANSWER: e M3.11 3f fixed costs 'ere to dou#le unexpectedl*, t\$e #rea%&e"en point 'ould #e 5a6 5#6 5c6 5d6 5e6 unaffected. dou#led. \$al"ed. increased #* a factor of (. none of t\$e a#o"e

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## Decision Theory and the Normal Distribution l CD-ROM MODULE 3

M3.12

3f t\$e price<unit 'ere dou#led at t\$e same time t\$at t\$e "aria#le cost<unit dou#led, t\$e #rea%&e"en point 'ould #e 5a6 5#6 5c6 5d6 5e6 unaffected. dou#led. \$al"ed. increased #* a factor of (. none of t\$e a#o"e

ANSWER: c M3.17 +or "olumes 0reater t\$an t\$e #rea%&e"en point, t\$e opportunit* loss function is 5a6 5#6 5c6 5d6 5e6 a function of =, t\$e loss per unit. 9. dependent on \$o' muc\$ t\$e "olume is 0reater t\$an t\$e #rea%&e"en point. 8!. none of t\$e a#o"e

ANSWER: # M3.!9 W\$en usin0 t\$e normal distri#ution to estimate demand, one assumes 5a6 5#6 5c6 5d6 5e6 s*mmetr* of demand around a mean. t'ice t\$e "alue of . \$alf t\$e "alue of . 8. none of t\$e a#o"e

ANSWER: a M3.!1 E., can #e approximated #* 5a6 5#6 5c6 5d6 5e6 = N546. = . 5 &#rea%&e"en point6<. =! 4. none of t\$e a#o"e

ANSWER: a M3.!! 3n determinin0 t\$e E., 'it\$ t\$e normal distri#ution, as 4 increases, N546 5a6 5#6 5c6 5d6 5e6 M3.!3 increases #* a factor of 4. increases. decreases. is unaffected. none of t\$e a#o"e

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## 1.99999. 9.9233!. 9.3-979. none of t\$e a#o"e

ANSWER: c M3.!( 4emand is estimated to #e 1/99 units. 3f 8 is ta%en to #e 1.-, '\$en t\$e estimated a"era0e demand is !999 units, determine for t\$is data. 5a6 11,111 5#6 11,111 5c6 !// 5d6 !// 5e6 none of t\$e a#o"e ANSWER: c M3.!T\$e computed E);3 'ill #e t\$e same as t\$e computed 5a6 5#6 5c6 5d6 5e6 EM). ,.E. #rea%&e"en point. E.,. none of t\$e a#o"e

ANSWER: d M3.!/ ?i"en t\$e follo'in0 opportunit* loss function, determine t\$e loss '\$en (99 units are sold. .pportunit* loss > 3 51999 @6 for @ 1999, ot\$er'ise 9. 5a6 5#6 5c6 5d6 5e6 9 1!99 1299 3 /99

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## Decision Theory and the Normal Distribution l CD-ROM MODULE 3

M3.!1

?i"en t\$e follo'in0 opportunit* loss function, determine t\$e loss '\$en /99 units are sold. .pportunit* loss > 3 51999 @6 for @ 1999, ot\$er'ise 9. 5a6 5#6 5c6 5d6 5e6 9 299 1!99 3 /99

ANSWER: c M3.!2 ?i"en t\$e follo'in0 opportunit* loss function, determine t\$e loss '\$en 1999 units are sold. .pportunit* loss > 3 51999 @6 for @ 1999, ot\$er'ise 9. 5a6 5#6 5c6 5d6 5e6 3 /99 299 9 1!99

ANSWER: d M3.!7 ?i"en t\$e follo'in0 opportunit* loss function, determine t\$e loss '\$en 1!99 units are sold. .pportunit* loss > 3 51999 @6 for @ 1999, ot\$er'ise 9. 5a6 5#6 5c6 5d6 5e6 1!99 9 /99 3 299

ANSWER: # M3.39 +ixed costs include 5a6 5#6 5c6 5d6 5e6 insurance. li0\$tin0. la#or. materials. 5a6 A 5#6

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## Decision Theory and the Normal Distribution l CD-ROM MODULE 3

M3.31

3f fixed costs are B!-,999, "aria#le costs<unit are B-, and t\$e sellin0 price per unit is B19, t\$e #rea%&e"en point is 5a6 5#6 5c6 5d6 5e6 3/,999 units. !-9,999 units. !-,999 units. -,999 units. none of t\$e a#o"e

ANSWER: d M3.3! 3f "aria#le cost<unit rises, t\$e fixed cost falls, and t\$e sellin0 price<unit remains constant, t\$e #rea%&e"en point 5a6 5#6 5c6 5d6 5e6 sta*s t\$e same. decreases. increases. none of t\$e a#o"e una#le to sa* 'it\$out more information

ANSWER: e M3.33 3f t\$e "aria#le cost<unit dou#les, '\$ile t\$e fixed cost and sellin0 price<unit remain constant, t\$e #rea%&e"en point 5a6 5#6 5c6 5d6 5e6 dou#les. increases #* fift* percent. remains t\$e same. none of t\$e a#o"e una#le to sa* 'it\$out more information

ANSWER: e M3.3( 3f t\$e sellin0 price<unit rises, '\$ile t\$e fixed cost remains at B-9,999 and "aria#le cost<unit remains at B-<unit, t\$e #rea%&e"en point 5a6 5#6 5c6 5d6 5e6 increases proportional to t\$e fractional increase in sellin0 price. decreases proportional to t\$e fractional increase in sellin0 price. decreases. none of t\$e a#o"e una#le to sa* 'it\$out more information

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## Decision Theory and the Normal Distribution l CD-ROM MODULE 3

M3.3-

,oss<unit '\$en sales are #elo' t\$e #rea%&e"en point is equal to 5a6 5#6 5c6 5d6 5e6 5total re"enue & total cost6<num#er of units. sellin0 price. price<unit minus "aria#le cost per unit. E.,. none of t\$e a#o"e

ANSWER: c :M3.3/ 3f t\$e #rea%&e"en "olume dou#les, t\$is su00ests t\$at 5a6 5#6 5c6 5d6 5e6 "aria#le cost \$as increased. fixed cost \$as increase. sellin0 price \$as decreased. an* one of 5a6, 5#6, or 5c6 none of t\$e a#o"e

ANSWER: d :M3.31 Crea%&e"en anal*sis 0i"es us information a#out 5a6 5#6 5c6 5d6 5e6 t\$e "aria#le costs 'e s\$ould expect to incur. cost and re"enues as a function of demand. t\$e num#er of products 'e s\$ould expect to sell. all of t\$e a#o"e none of t\$e a#o"e

ANSWER: # :M3.32 Ton* C. is attemptin0 to start up a ne' landscapin0 #usiness. De estimates t\$at to #rea%&e"en, \$e 'ill need a#out 1-9 customers. De #elie"es t\$at \$e 'ill lose approximatel* B-99 per customer for eac\$ customer fe'er t\$an t\$e 1-9. At t\$e moment, \$e #elie"es t\$at t\$ere is an 29E pro#a#ilit* t\$at \$e 'ill #e a#le to secure #et'een 139 and 119 customers, and t\$at t\$ere is a -9<-9 c\$ance t\$at demand 'ill #e 0reater t\$an 1/9 customers. W\$at is t\$e mean or expected num#er of salesF 5a6 5#6 5c6 5d6 5e6 139 1-9 1/9 119 none of t\$e a#o"e

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## Decision Theory and the Normal Distribution l CD-ROM MODULE 3

:M3.37 Ton* C. is attemptin0 to start up a ne' landscapin0 #usiness. De estimates t\$at to #rea%&e"en, \$e 'ill need a#out 1-9 customers. De #elie"es t\$at \$e 'ill lose approximatel* B-99 per customer for eac\$ customer fe'er t\$an t\$e 1-9. At t\$e moment, \$e #elie"es t\$at t\$ere is an 29E pro#a#ilit* t\$at \$e 'ill #e a#le to secure #et'een 139 and 119 customers, and t\$at t\$ere is a -9<-9 c\$ance t\$at demand 'ill #e 0reater t\$an 1/9 customers. De \$as se"eral mar%etin0 researc\$ firms offerin0 5for a price, of course6 to conduct a sur"e* t\$at 'ill pro"ide additional information re0ardin0 t\$e pro#a#ilit* of demand. Do' muc\$ s\$ould \$e #e 'illin0 to spend if \$e decides to \$a"e a sur"e* madeF 5a6 5#6 5c6 5d6 5e6 B1,999 B3,999 B-,999 B!,999 none of t\$e a#o"e

ANSWER: # :M3.(9 T\$e R Gompan* manufactures traditional 'ooden toot\$pic%s. T\$e* \$a"e determined t\$eir "aria#le cost<unit to #e B9.9991 <toot\$pic%. +ixed costs, \$o'e"er, are quite \$i0\$ due to t\$e old equipment t\$at is emplo*ed in t\$e process and t\$e costl* pac%a0in0 needed to mar%et t\$e toot\$pic%s. T\$e fixed costs are estimated at B11,999 <mont\$. 3R sells t\$eir toot\$pic%s at a price of B!.1-<0ross of 199 toot\$pic% pac%a0es. Do' man* 0ross of pac%a0es of toot\$pic%s must #e sold annuall* to #rea% e"enF 5a6 5#6 5c6 5d6 5e6 1,999 pac%a0es 2,199 pac%a0es 2,199 pac%a0es 2,(99 pac%a0es none of t\$e a#o"e

ANSWER: d :M3.(1 T\$e #rea%&e"en point is 3999 units<mont\$. Next mont\$ #e0ins an increase in ad"ertisin0 cost of B-,999 per mont\$. T\$e o"erall effect 'ill #e to increase t\$e fixed costs #* -E. Do' 'ill t\$e #rea%&e"en point #e affectedF 5a6 5#6 5c6 5d6 5e6 #rea%&e"en 'ill rise to 3,-99 units per mont\$ #rea%&e"en 'ill fall to !,299 units per mont\$ #rea%&e"en 'ill rise #* -E #rea%&e"en 'ill rise #* 3E none of t\$e a#o"e

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## Decision Theory and the Normal Distribution l CD-ROM MODULE 3

:M3.(! 3f 4 > 1.31, s > 1199, => 1!, and t\$e sellin0 price<unit > 1, t\$e E., is: 5a6 5#6 5c6 5d6 5e6 1!3( !(31 1-917 1/-12 none of t\$e a#o"e

ANSWER: e :M3.(3 ?i"en t\$e follo'in0 opportunit* loss function, determine t\$e loss '\$en 1999 units are sold. .pportunit* loss: 3519-99 & @6 for @ 7999. 5a6 5#6 5c6 5d6 5e6 19-99 13-99 7999 11999 none of t\$e a#o"e

ANSWER: a :M3.(( Darr* Spra0ue ma%es custom #o'lin0 #alls. Dis fixed cost is B!--,999, "aria#le cost is B(-.-9, and sellin0 price is B--.-9. To '\$at "alue must \$e reduce \$is "aria#le cost if \$e 'ants a #rea%& e"en point of 19999 unitsF 5a6 5#6 5c6 5d6 5e6 B37 B31 B3B39 none of t\$e a#o"e

ANSWER: d :M3.(- Darr* Spra0ue ma%es custom #o'lin0 #alls. Dis fixed cost is B!--,999, "aria#le cost is B(-.-9, and sellin0 price, B--.-9. To '\$at "alue must \$e reduce \$is fixed cost if \$e 'ants a #rea%&e"en point of 19999 unitsF 5a6 5#6 5c6 5d6 5e6 B119,999 B199,999 B19-,999 B29,999 none of t\$e a#o"e

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## Decision Theory and the Normal Distribution l CD-ROM MODULE 3

#RO%LEM!
M3.(/ T\$e 3R Gompan* manufactures traditional 'ooden pencils. T\$e* \$a"e determined t\$eir "aria#le cost<unit to #e B9.91! <pencil. +ixed costs, \$o'e"er, are quite \$i0\$ due to t\$e old equipment t\$at is emplo*ed in t\$e process and t\$e costl* pac%a0in0 needed to mar%et t\$e pencils. T\$e fixed costs are estimated at B1(9,999 <mont\$. 3R sells t\$eir pencils at a price of B13.!(2<0ross. Do' man* 0ross of pencils must #e sold annuall* to #rea% e"enF ANSWER: sellin0 price<pencil > 13.!(2<1(( > 9.97! B<pencil #rea%&e"en point > 1(9,999<59.97!&9.91!6 > 1,1-9,999 pencils<mont\$ > 1(-,233 0ross<*ear M3.(1 T\$e #rea%&e"en point 'as determined to #e 3999 units<mont\$. Next mont\$ #e0ins an increased lease pa*ment for t\$e production facilit*. T\$e o"erall effect 'ill #e to increase t\$e fixed costs #* 19E. Do' 'ill t\$e #rea%&e"en point #e affectedF ANSWER: #rea%&e"en point5NEW6 > #rea%&e"en point5.,46 51.16 > 3,399 M3.(2 3f t\$e #rea%&e"en point 'as estimated to #e -99 units '\$en fixed costs are estimated at B1!99<mont\$, '\$at 'ould t\$e EM) #e if a"era0e demand is estimated at 1-9F ANSWER: -99 > 1!99<5; )6, t\$erefore 5; )6 > !.( M3.(7 EM) > 5!.(651-96 51!996 > /99

A"era0e demand is estimated at 1!99 units<mont\$. 3t is #elie"ed t\$ere is a !9E c\$ance for for demand to #e \$i0\$er t\$an 1299. 4etermine t\$e and of a normal distri#ution t\$at estimates demand. ANSWER: > 1!99, > 51299 1!996< 59.2(6 > 11(

M3.-9

?i"en t\$e follo'in0 opportunit* loss function, determine t\$e loss '\$en 3999 units are sold. .pportunit* loss > 19 51999 @6 for @ 1999, ot\$er'ise 9. ANSWER: (9999

M3.-1

4etermine N546 for t\$e follo'in0 4 "alues: 9.91, 9.!1, 9.11, and 1.!9. ANSWER: N546 > 9.37(9, 9.39!1, 9.1!/1, 9.9-/19

M3.-!

3f 4 > 1.99, s > 1999, => 19, and t\$e sellin0 price<unit > (, determine t\$e E.,. ANSWER: E., > 19 519996 59.9233!6 > 233

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## Decision Theory and the Normal Distribution l CD-ROM MODULE 3

M3.-3

Hac% Spratt is producin0 candlestic%s. Dis fixed cost is B-,999, "aria#le cost<unit, B3.-9, and sellin0 price, B2.-9. At '\$at num#er of units does \$e #rea% e"enF ANSWER: Crea%&e"en 5units6 > -999<52.-9 & 3.-96 > 1999 units

M3.-(

?i"en t\$e follo'in0 opportunit* loss function, determine t\$e loss '\$en 1999 units are sold. .pportunit* loss: /57999 & @6 for @ 7999. ANSWER: ., > /57999 & 19996 > 1!999

M3.--

3f 4 > 9.1-, s > -99, = > /, and t\$e sellin0 price<unit > -, determine E.,. ANSWER: E., > = N546 > / 5-996 N59.1-6 > / 5-99659.131!6 > 37(

M3.-/

Hac% Spratt ma%es candlestic%s. Dis fixed cost is B-,999, "aria#le cost is B3.-9, and sellin0 price, B2.-9. To '\$at "alue must \$e reduce \$is "aria#le cost if \$e 'ants a #rea%&e"en point of 799 unitsF ANSWER: )aria#le cost > 5799:2.-9 & -9996<799 > B!.7(

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