Question 1

In a decision tree the boxes refer to:

Accepted Answer

A)  The point at which decisions have to be taken. 
B)  Possible alternative courses of action. 
C)  The point at which environmental changes occur that affect the consequences of prior decisions. 
D)  The possible types of environment that may occur. 
A)  The point at which decisions have to be taken. 
B)  Possible alternative courses of action. 
C)  The point at which environmental changes occur that affect the consequences of prior decisions. 
D)  The possible types of environment that may occur. A

Question 2

Which of the following statements is untrue regarding a probability distribution?

Accepted Answer

A)  it will show all possible outcomes and their probabilities 
B)  it can be used to provide an indication of the risk of undertaking a possible course of action. 
C)  it will show the average outcome that is expected to occur 
D)  it will enable an estimate of the most likely outcome to be derived 
A)  it will show all possible outcomes and their probabilities 
B)  it can be used to provide an indication of the risk of undertaking a possible course of action. 
C)  it will show the average outcome that is expected to occur 
D)  it will enable an estimate of the most likely outcome to be derived C

Question 3

The following represent the expected values and standard deviations for alternatives W-Z:   Which of the following statements are true?

Accepted Answer

A)  Alternative Z has the highest amount of relative risk. 
B)  Alternative W has the lowest amount of relative risk. 
C)  All of the alternatives have an equal amount of relative risk. 
D)  None of the above statements are true. 
A)  Alternative Z has the highest amount of relative risk. 
B)  Alternative W has the lowest amount of relative risk. 
C)  All of the alternatives have an equal amount of relative risk. 
D)  None of the above statements are true. C

Question 4

Figure 12-1
Joe Bloggs is considering the following three alternatives that are estimated to yield the following potential monetary benefits:   It is estimated that all of the outcomes are equally likely.
-Refer to Figure 12-1. Assume that Joe is a risk seeker. Which alternative is Joe likely to choose?

Accepted Answer

A)  Alternative A 
B)  Alternative B 
C)  Alternative C 
D)  He will be indifferent between the three alternatives. 
A)  Alternative A 
B)  Alternative B 
C)  Alternative C 
D)  He will be indifferent between the three alternatives.

Question 5

Jackson is considering launching a new product which it believes has an 80% probability of success. The company, however, is considering undertaking an advertising campaign at a cost of £40,000 which would increase the probability of success to 90%. If successful the product would generate income of £840,000 otherwise £294,000 would be received.
What will be the expected loss or gain from obtaining the additional information?

Accepted Answer

A)  a loss of £40,000 
B)  a gain of £14,600 
C)  a gain of £54,600 
D)  None of the above 
A)  a loss of £40,000 
B)  a gain of £14,600 
C)  a gain of £54,600 
D)  None of the above

Question 6

The following represent the expected values and standard deviations for alternatives a-d. Which alternative has the highest absolute risk?

Accepted Answer

A)  Alternative A has an expected profit of £100,000 and a standard deviation of £18,000 
B)  Alternative B has an expected profit of £300,000 and a standard deviation of £75,000 
C)  Alternative C has an expected profit of £500,000 and a standard deviation of £70,000 
D)  Alternative D has an expected profit of £700,000 and a standard deviation of £60,000 
A)  Alternative A has an expected profit of £100,000 and a standard deviation of £18,000 
B)  Alternative B has an expected profit of £300,000 and a standard deviation of £75,000 
C)  Alternative C has an expected profit of £500,000 and a standard deviation of £70,000 
D)  Alternative D has an expected profit of £700,000 and a standard deviation of £60,000

Question 7

The joint probability of two events occurring together is:

Accepted Answer

A)  the sum of the probabilities of the two events. 
B)  the higher probability of the two events. 
C)  the average of the probability for the two events. 
D)  the probability of one event times the probability of the other event. 
A)  the sum of the probabilities of the two events. 
B)  the higher probability of the two events. 
C)  the average of the probability for the two events. 
D)  the probability of one event times the probability of the other event.

Question 8

The maximum amount that is worth paying to obtain additional information consists of:

Accepted Answer

A)  the expected price of the information. 
B)  the difference between the expected value if the information is acquired compared with the expected value with the absence of the information. 
C)  an amount equal to the most likely benefit that the information will provide. 
D)  an amount equal to the highest benefit that the information will provide. 
A)  the expected price of the information. 
B)  the difference between the expected value if the information is acquired compared with the expected value with the absence of the information. 
C)  an amount equal to the most likely benefit that the information will provide. 
D)  an amount equal to the highest benefit that the information will provide.

Question 9

The decision rule under the maximin criterion is to:

Accepted Answer

A)  Select the alternative that has the best outcome should the worst event occur. 
B)  Select the alternative that has the best average outcome. 
C)  Select the alternative that has the best outcome should the best event occur. 
D)  Select the alternative that has the best chance of maximising the return. 
A)  Select the alternative that has the best outcome should the worst event occur. 
B)  Select the alternative that has the best average outcome. 
C)  Select the alternative that has the best outcome should the best event occur. 
D)  Select the alternative that has the best chance of maximising the return.

Question 10

Figure 12-3
The Lee Company must choose between two mutually exclusive alternatives. With alternative 1 an inferior product will be marketed that is best suited to low levels of demand whereas alternative 2 is a superior product that is best suited to high levels of demand. There are only two possible levels of demand - high and low and the probabilities of each event occurring is 0.5. The predicted profits for each alterative are:  
-Refer to Figure 12-3. Which alternative should the company choose using the maximax criterion?

Accepted Answer

A)  Neither alternative 
B)  Alternative 1 
C)  Alternative 2 
D)  There is insufficient data to use the maximin criterion. 
A)  Neither alternative 
B)  Alternative 1 
C)  Alternative 2 
D)  There is insufficient data to use the maximin criterion.

Question 11

Figure 12-3
The Lee Company must choose between two mutually exclusive alternatives. With alternative 1 an inferior product will be marketed that is best suited to low levels of demand whereas alternative 2 is a superior product that is best suited to high levels of demand. There are only two possible levels of demand - high and low and the probabilities of each event occurring is 0.5. The predicted profits for each alterative are:  
-Refer to Figure 12-3. Using the data above relating to the Lee Company, what is the amount of regret that is used to determine the choice of alternatives under consideration?

Accepted Answer

A)  £140,000 
B)  £210,000 
C)  £665,000 
D)  £315,000 
E)  It is not possible to apply the regret criterion to the data given. 
A)  £140,000 
B)  £210,000 
C)  £665,000 
D)  £315,000 
E)  It is not possible to apply the regret criterion to the data given.

Question 12

Figure 12-1
Joe Bloggs is considering the following three alternatives that are estimated to yield the following potential monetary benefits:   It is estimated that all of the outcomes are equally likely.
-Refer to Figure 12-1. Assume that Joe is a risk neutral. Which alternative is Joe likely to choose?

Accepted Answer

A)  Alternative A 
B)  Alternative B 
C)  Alternative C 
D)  He will be indifferent between the three alternatives. 
A)  Alternative A 
B)  Alternative B 
C)  Alternative C 
D)  He will be indifferent between the three alternatives.

Question 13

Sentosa Company is considering launching a new product which it believes has a 70% probability of success. The company is, however, considering undertaking an advertising campaign costing £60,000, which would increase the probability of success to 95%. If successful the product would generate income of £240,000 otherwise £84,000 would be received.
What is the maximum amount that the company should be prepared to pay for advertising?

Accepted Answer

A)  £34,800 
B)  £21,000 
C)  £39,000 
D)  £60, 000 
A)  £34,800 
B)  £21,000 
C)  £39,000 
D)  £60, 000

Question 14

Figure 12-2
ZX Company is faced with choosing from the following four mutually exclusive alternatives. Each project has the same duration and the cash flows are expected to occur at the same point in time. Their net cash inflows will be determined by the prevailing market conditions. The forecast net cash inflows and their associated probabilities are shown below:  
-Refer to Figure 12-2. The expected value of Project D is:

Accepted Answer

A)  £472,000. 
B)  £480,000. 
C)  £477,600. 
D)  None of the above. 
A)  £472,000. 
B)  £480,000. 
C)  £477,600. 
D)  None of the above.

Question 15

The most likely outcome represents:

Accepted Answer

A)  the expected value. 
B)  the actual outcome. 
C)  the average outcome that is expected to occur. 
D)  the outcome with the highest probability. 
A)  the expected value. 
B)  the actual outcome. 
C)  the average outcome that is expected to occur. 
D)  the outcome with the highest probability.

Question 16

Figure 12-2
ZX Company is faced with choosing from the following four mutually exclusive alternatives. Each project has the same duration and the cash flows are expected to occur at the same point in time. Their net cash inflows will be determined by the prevailing market conditions. The forecast net cash inflows and their associated probabilities are shown below:  
-Refer to Figure 12-2. Based on the expected value of net cash flows, which project should be undertaken?

Accepted Answer

A)  Project A 
B)  Project B 
C)  Project C 
D)  Project D 
A)  Project A 
B)  Project B 
C)  Project C 
D)  Project D

Question 17

The Tamesek Company is considering purchasing one of two mutually exclusive machines. Machine A is most suited to low levels of demand whereas machine B is suited to high-level demand. There are only two possible outcomes and each has the same level of probability. The estimated profits for each demand level are as follows:   There is a possibility of employing a firm of management consultants who would be able to provide a perfect prediction of actual demand. What is the maximum amount that the company would be prepared to pay for the additional information?

Accepted Answer

A)  £98,000 
B)  £14,000 
C)  £70,000 
D)  None of the above 
A)  £98,000 
B)  £14,000 
C)  £70,000 
D)  None of the above

Question 18

Figure 12-3
The Lee Company must choose between two mutually exclusive alternatives. With alternative 1 an inferior product will be marketed that is best suited to low levels of demand whereas alternative 2 is a superior product that is best suited to high levels of demand. There are only two possible levels of demand - high and low and the probabilities of each event occurring is 0.5. The predicted profits for each alterative are:  
-Under what circumstances can risk reduction NOT be achieved from combining investments?

Accepted Answer

A)  Where the projects are perfectly positively correlated 
B)  Where the projects are perfectly negatively correlated 
C)  Where the projects have low levels of positive correlation 
D)  Where the projects have low levels of negative correlation 
A)  Where the projects are perfectly positively correlated 
B)  Where the projects are perfectly negatively correlated 
C)  Where the projects have low levels of positive correlation 
D)  Where the projects have low levels of negative correlation

Question 19

Which of the following is NOT a measure of uncertainty?

Accepted Answer

A)  the standard deviation of the probability distribution 
B)  an examination of the probability distribution 
C)  the expected value 
D)  the coefficient of variation 
A)  the standard deviation of the probability distribution 
B)  an examination of the probability distribution 
C)  the expected value 
D)  the coefficient of variation

Question 20

Figure 12-3
The Lee Company must choose between two mutually exclusive alternatives. With alternative 1 an inferior product will be marketed that is best suited to low levels of demand whereas alternative 2 is a superior product that is best suited to high levels of demand. There are only two possible levels of demand - high and low and the probabilities of each event occurring is 0.5. The predicted profits for each alterative are:  
-Refer to Figure 12-3 and assume that the probabilities of 0.5 for high and 0.5 for low demand are changed to 0.6 and 0.4 respectively. How would the change in probabilities change the values used to apply the maximax, maximin and regret criteria?

Accepted Answer

A)  All of the values would increase. 
B)  All of the values would decrease. 
C)  Some values would increase and others would decrease. 
D)  The values would remain unchanged. 
E)  None of the above because it is not possible to apply any of the criteria from the data given. 
A)  All of the values would increase. 
B)  All of the values would decrease. 
C)  Some values would increase and others would decrease. 
D)  The values would remain unchanged. 
E)  None of the above because it is not possible to apply any of the criteria from the data given.

In a decision tree the boxes refer to:

Which of the following statements is untrue regarding a probability distribution?

The following represent the expected values and standard deviations for alternatives W-Z: Which of the following statements are true?

The following represent the expected values and standard deviations for alternatives a-d. Which alternative has the highest absolute risk?

The joint probability of two events occurring together is:

The maximum amount that is worth paying to obtain additional information consists of:

The decision rule under the maximin criterion is to:

The most likely outcome represents:

Which of the following is NOT a measure of uncertainty?

Introduction to Management Accounting

An Introduction to Cost Terms and Concepts

Cost Assignment

Accounting Entries for a Job Costing System

Process Costing

Joint and By-Product Costing

Income Effects of Alternative Cost Accumulation Systems

Cost-Volume-Profit Analysis

Measuring Relevant Costs and Revenues for Decision-Making

Activity-Based Costing

Pricing Decisions and Profitability Analysis

Capital Investment Decisions: Appraisal Methods

Capital Investment Decisions: the Impact of Capital Rationing, Taxation, Inflation and Risk

The Budgeting Process

Management Control Systems

Standard Costing and Variance Analysis 1

Standard Costing and Variance Analysis 2: Further Aspects

Divisional Financial Performance Measures

Transfer Pricing in Divisionalized Companies

Cost Management

Strategic Management Accounting

Cost Estimation and Cost Behaviour

Quantitative Models for the Planning and Control of Stocks

The Application of Linear Programming to Management Accounting

Filters

Exam 12: Decision-Making Under Conditions of Risk and Uncertainty

In a decision tree the boxes refer to:

Which of the following statements is untrue regarding a probability distribution?

The following represent the expected values and standard deviations for alternatives W-Z: Which of the following statements are true?

The following represent the expected values and standard deviations for alternatives a-d. Which alternative has the highest absolute risk?

The joint probability of two events occurring together is:

The maximum amount that is worth paying to obtain additional information consists of:

The decision rule under the maximin criterion is to:

The most likely outcome represents:

Which of the following is NOT a measure of uncertainty?

Introduction to Management Accounting

An Introduction to Cost Terms and Concepts

Cost Assignment

Accounting Entries for a Job Costing System

Process Costing

Joint and By-Product Costing

Income Effects of Alternative Cost Accumulation Systems

Cost-Volume-Profit Analysis

Measuring Relevant Costs and Revenues for Decision-Making

Activity-Based Costing

Pricing Decisions and Profitability Analysis

Capital Investment Decisions: Appraisal Methods

Capital Investment Decisions: the Impact of Capital Rationing, Taxation, Inflation and Risk

The Budgeting Process

Management Control Systems

Standard Costing and Variance Analysis 1

Standard Costing and Variance Analysis 2: Further Aspects

Divisional Financial Performance Measures

Transfer Pricing in Divisionalized Companies

Cost Management

Strategic Management Accounting

Cost Estimation and Cost Behaviour

Quantitative Models for the Planning and Control of Stocks

The Application of Linear Programming to Management Accounting

Filters