CD-ROM MODULE 3 Decision Theory and the Normal Distribution

TRUE/F L!E
M3.1 Examples of fixed costs are insurance, rent, equipment, etc. ANSWER: TR E M3.! Examples of "aria#le costs are la#or and material costs related to production "olume. ANSWER: TR E M3.3 T$e #rea%&e"en point is t$e "olume '$ere re"enues equal costs. ANSWER: TR E M3.( EM) t*picall* is not useful in #rea%&e"en anal*sis. ANSWER: +A,SE M3.E., t*picall* is not useful in #rea%&e"en anal*sis. ANSWER: +A,SE M3./ A lar0e num#er of possi#le "olume "alues need to #e assumed to ena#le one to use a unit normal loss inte0ral. ANSWER: TR E M3.1 sin0 E., requires one to identif* t$e loss per unit '$en sales are #elo' t$e #rea%&e"en point. ANSWER: TR E M3.2 3n determinin0 t$e E., 'it$ t$e normal distri#ution, as 4 increases, t$e unit normal loss inte0ral, N546, also increases. ANSWER: +A,SE M3.7 W$en computin0 8 for a #rea%&e"en anal*sis: as increases, 8 decreases. ANSWER: TR E M3.19 descri#es t$e dispersion or spread of t$e normal distri#ution. ANSWER: TR E :M3.11 3n #rea%e"en anal*sis, 'e 'ill use t$e normal distri#ution e"en if suc$ use is not 'arranted. ANSWER: +A,SE :M3.1! 3f a "aria#le ot$er t$an demand is random 5price, fixed or "aria#le cost, etc.6 t$e pro#lem of #rea%e"en&anal*sis #ecomes muc$ more complex.

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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.

ANSWER: +A,SE

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

ANSWER: #

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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

ANSWER: c 3f 4 > 1.99, t$en N51.996 is approximatel* 5a6 9.

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

5#6 5c6 5d6 5e6

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

ANSWER: c

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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

ANSWER: e

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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

ANSWER: c

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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

ANSWER: c

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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

ANSWER: c

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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

ANSWER: #

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

!$ORT N!&ER/F"LL "N T$E %L N'

M3.-1 Crea%&e"en anal*sis ans'ers '$at common mana0ement questionF ANSWER: At '$at point do re"enues equal costsF M3.-2 Criefl* descri#e t$e opportunit* loss function. ANSWER: a function t$at relates opportunit* loss in dollars to sales in units M3.-7 3n terms of fixed costs, "aria#le cost<unit, and t$e sellin0 price<unit, '$at is t$e #rea%&e"en pointF ANSWER: #rea%&e"en point > fixed cost < 5sellin0 price<unit "aria#le cost<unit6 M3./9 At #rea%&e"en, IIIIIII re"enues equal IIIIIIIII costs. ANSWER: total, total M3./1 Expected opportunit* loss $as t$e same "alue as IIIIIIII. ANSWER: E);3 M3./! As increases, t$e spread of a distri#ution IIIIIIII. ANSWER: increases M3./3 3n decision&ma%in0, 'e use t$e normal distri#ution '$en t$ere are IIIIIIII. ANSWER: "er* man* alternati"es and t$e distri#ution is #ell&s$aped M3./( T$e mean of a distri#ution locates t$e IIIIIIIII of t$e distri#ution. ANSWER: center or expected "alue M3./EM) tells us t$e IIIIIIIII if a decision 'as IIIIIIIIII. ANSWER: a"era0e monetar* "alue of a decision, made man* times M3.// E., and E);3 are t$e IIIIIIIII one 'ould #e 'illin0 to spend to 0at$er additional information. ANSWER: maximum amount

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