DECISION MAKING UNDER UNCERTAINTY

Cost Accounting by Carter

B 11. Expected value in decision analysis is:

A. a standard deviation using the probabilities as weights

B. an arithmetic mean using the probabilities as weights

C. the square root of the squared deviations

D. the standard deviation divided by the coefficient of variation

E. a measure of the difference between the best possible outcome and the

outcome of the original decision

D 2. A proprietor who just inherited a building is considering using it in a new

business venture. Projections for the business are: revenue of $100,000, fixed cost of $30,000,

and variable cost of $50,000. If the business is not started, the owner will work for a company

for a wage of $23,000. Also, there have been two offers to rent the building, one for $1,000 per

month and one for $1,200 per month. What are the expected annual net economic profits

(losses) to the owner if the new business is started?

A. $20,000

B. $(3,000)

C. $(15,000)

D. $(17,400)

E. none of the above

 DECISION MAKING UNDER UNCERTAINTY
Cost Accounting by Carter
SUPPORTING CALCULATION:

$100,000 - $30,000 - $50,000 - $23,000 - (12 x $1,200) = $(17,400)

C 3. A firm obtained the following data based on the results shown below for 100 runs

simulating the introduction of a new product.

Net Profit Before Tax: ($5,000 ) $0 $5,000 $10,000

$15,000

Frequency: .30 .30 .20 .15 .05

The firm should:

A. expect to break even if the product is introduced

B. not introduce the product

C. expect to make a profit if the product is introduced

D. expect to lose money if the product is introduced

E. none of the above

SUPPORTING CALCULATION:

Profit Probability Expected Value

$(5,000 ) .30 $(1,500 )

0 .30 0
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5,000 .20 1,000

10,000 .15 1,500

15,000 .15 2,250

$3,250

B 4. The Prep Club sells fresh hot cider at Ivy University's home football games. The

frequency distribution of the demand for cups of hot cider per game is presented below.

Unit Sales Volume Probability

10,000 cups .10

20,000 cups .15

30,000 cups .20

40,000 cups .35

50,000 cups .20

1.00

The hot cider is sold for $1.00 a cup, and the cost per cup is $.40. Any unsold hot cider is

discarded because it will spoil before the next home game.

 DECISION MAKING UNDER UNCERTAINTY
Cost Accounting by Carter
The estimated demand for hot cider at the next Ivy University home football game using an

expected value approach is:

A. 30,000 cups

B. 34,000 cups

C. 40,000 cups

D. 50,000 cups

E. some amount other than those given above

SUPPORTING CALCULATION:

10,000 x .10 = 1,000

20,000 x .15 = 3,000

30,000 x .20 = 6,000

40,000 x .35 = 14,000

50,000 x .20 = 10,000

34,000

A 5. The Prep Club sells fresh hot cider at Ivy University's home football games. The

frequency distribution of the demand for cups of hot cider per game is presented below.

Unit Sales Volume Probability

 DECISION MAKING UNDER UNCERTAINTY
Cost Accounting by Carter
10,000 cups .10

20,000 cups .15

30,000 cups .20

40,000 cups .35

50,000 cups .20

1.00

The hot cider is sold for $1.00 a cup, and the cost per cup is $.40. Any unsold hot cider is

discarded because it will spoil before the next home game.

The conditional profit (loss) per game of having 30,000 cups of hot cider available but only

selling 20,000 cups of cider is:

$8,000

$12,000

$18,000

$3,000

E. some amount other than those given above

SUPPORTING CALCULATION:

$1(20,000) - $.40($30,000) = $8,000

 DECISION MAKING UNDER UNCERTAINTY
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C 6. The Prep Club sells fresh hot cider at Ivy University's home football games. The

frequency distribution of the demand for cups of hot cider per game is presented below.

Unit Sales Volume Probability

10,000 cups .10

20,000 cups .15

30,000 cups .20

40,000 cups .35

50,000 cups .20

1.00

The hot cider is sold for $1.00 a cup, and the cost per cup is $.40. Any unsold hot cider is

discarded because it will spoil before the next home game.

The conditional profit (loss) per game of having 30,000 cups of hot cider available but being able

to sell 40,000 cups of hot cider if it were available is:

A. $14,000

B. $12,000
 DECISION MAKING UNDER UNCERTAINTY
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C. $18,000

D. $24,000

E. some amount other than those given above

SUPPORTING CALCULATION:

30,000 ($1 - $.40) = $18,000

E 7. Boyer Company is considering designing an educational computer software

package. Boyer's management is aware that this project may not be feasible, that demand for the

software may be low, and that competitors may offer a similar package before Boyer does.

Boyer can best evaluate the possible payoffs of the computer software project by using:

A. differential calculus

B. critical path analysis

C. linear programming

D. regression analysis

E. decision tree analysis

C 8. A decision tree has been formulated for the possible outcomes of introducing a

new product line.

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Cost Accounting by Carter
.7

/------------- $100,000

#1----------

\------------- $70,000

.3

.8

/------------- $170,000

#2----------

\------------- $80,000

.2

Branches related to Alternative #1 reflect the possible payoffs from introducing the product

without an advertising campaign. The branches for Alternative #2 reflect the possible payoffs

with an advertising campaign costing $40,000. The expected values of Alternatives #1 and #2,

respectively, are:
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A. #1: (.7 x $100,000) + (.3 x $70,000)

#2: (.8 x $170,000) + (.2 x $80,000)

B. #1: (.7 x $100,000) + (.3 x $70,000)

#2: (.8 x $130,000) + (.2 x $40,000)

C. #1: (.7 x $100,000) + (.3 x $70,000)

#2: (.8 x $170,000) + (.2 x $80,000) - $40,000

D. #1: (.7 x $100,000) + (.3 x $70,000) - $40,000

#2: (.8 x $170,000) + (.2 x $80,000) - $40,000

E. none of the above

B 9. A firm 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 demands 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
 DECISION MAKING UNDER UNCERTAINTY
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E. time-series or trend-regression analysis

C 10. When several unit sales volumes are multiplied by the probability of their

occurrence and those products are summed, the result is the:

A. median

B. standard deviation

C. expected value

D. best estimated sales level

E. average sales level