Deck 18: Decision Theory and the Normal Distribution

Question 1

If the break-even volume doubles,this suggests that

A)variable cost has increased.
B)fixed cost has increased.
C)selling price has decreased.
D)Any of the above
E)None of the above

Answer 1

D

Question 2

EVPI and minimum EOL are equivalent.

Answer 2

True

Question 3

If fixed costs were to double unexpectedly,the break-even point would be

A)unaffected.
B)doubled.
C)halved.
D)increased by a factor of four.
E)None of the above

Answer 3

B

Question 4

Loss/unit when sales are below the break-even point is equal to

A)(total revenue - total cost)/number of units.
B)selling price.
C)price/unit minus variable cost per unit.
D)EOL.
E)None of the above

Question 5

If the price/unit were doubled at the same time that the variable cost/unit doubled,the break-even point would be

A)unaffected.
B)doubled.
C)halved.
D)increased by a factor of four.
E)None of the above

Question 6

If a variable other than demand is random (price,fixed or variable cost,etc. )the problem of break-even analysis becomes much more complex.

Question 7

In many business decisions,there are numerous states of nature and/or alternatives.These problems are best handled by

A)constructing a large decision table and using Excel.
B)constructing a large decision tree.
C)using the normal distribution.
D)using the integral loss distribution.
E)None of the above

Question 8

In determining the EOL with the normal distribution,as D increases,the unit normal loss integral,N(D),also increases.

Question 9

If the fixed costs are $10,000 and the variable cost/unit is $10 and the break-even is 100 units,what is the selling price per unit?

A)$200.
B)$110.
C)$59.
D)None of the above
E)Unable to say without more information

Question 10

The unit normal loss integral can be used to compute EOL.

Question 11

Harry Sprague makes custom bowling balls.His fixed cost is $255,000,variable cost is $45.50,and selling price is $55.50.To what value must he reduce his variable cost if he wants a break-even point of 10,000 units?

A)$39
B)$37
C)$35
D)$30
E)None of the above

Question 12

The Truck Toys Company manufactures traditional wooden toy trucks.It has determined its variable cost/unit to be $1.50/truck.Fixed costs,however,are quite high because old equipment is used in the manufacturing process and costly packaging is needed to market the toy trucks.The fixed costs are estimated at $11,000/month.The company sells their toy trucks at a price of $7.75/each.How many toy trucks must be sold annually to break even?

A)1,760 toy trucks
B)5500 toy trucks
C)20,000 toy trucks
D)1,879 toy trucks
E)None of the above

Question 13

The binomial distribution can be used when there are a small number of states of nature and/or alternatives.

Question 14

Cost volume analysis deals only with costs while break-even analysis deals with both costs and revenues.

Question 15

When computing Z for a break-even analysis: as σ increases,Z decreases.

Question 16

σ describes the dispersion or spread of the normal distribution.

Question 17

In many business break-even analyses,the normal distribution can be used to estimate demand.

Question 18

If variable cost/unit falls,the fixed cost rises,and the selling price/unit remains constant,the break-even point

A)stays the same.
B)decreases.
C)increases.
D)None of the above
E)Unable to say without more information

Question 19

The price/unit minus the variable cost/unit is

A)loss/unit when sales are below the break-even point.
B)the break-even point.
C)the Z value.
D)EOL.
E)None of the above

Question 20

Using EOL requires one to identify the loss per unit when sales are below the break-even point.

Question 21

If D = 1.00,then N(1.00)is approximately

A)0.69000.
B)1.00000.
C)0.08332.
D)0.35090.
E)None of the above

Question 22

The opportunity loss function gives us information about

A)the variable costs we should expect to incur.
B)cost and revenues as a function of demand.
C)the number of products we should expect to sell.
D)profits lost if demand is less than the break-even point.
E)None of the above

Question 23

For volumes greater than the break-even point,the opportunity loss function is

A)a function of K,the loss per unit.
B)0.
C)dependent on how much the volume is greater than the break-even point.
D)halved.
E)None of the above

Question 24

Given the following opportunity loss function,determine the loss when 400 units are sold. Opportunity loss = 3 (1,000 - X)for X ≤ 1,000,otherwise 0.

A)1,200
B)0
C)600
D)3
E)1,800

Question 25

Given the following opportunity loss function,determine the loss when 600 units are sold. Opportunity loss = 2 (600 - X)for X ≤ 600,otherwise 0.

A)2
B)600
C)1,200
D)0
E)300

Question 26

Given the following opportunity loss function,determine the loss when 1,100 units are sold. Opportunity loss = 3 (1,000 - X)for X ≤ 1,000,otherwise 0.

A)0
B)-300
C)300
D)3
E)600

Question 27

To determine the EOL with the normal distribution,

A)one must compute D.
B)one must compute Z.
C)one must use the standard normal table.
D)All of the above
E)None of the above

Question 28

The IRU Company manufactures traditional wooden pencils.They have determined their variable cost/unit to be $0.012/pencil.Fixed costs,however,are quite high because of old processing equipment and costly packaging.The fixed costs are estimated at $140,000/month.IRU sells their pencils at a price of $13.248/gross.(There are 144 pencils in a gross. )How many grosses of pencils must be sold annually to break even?

Question 29

If D = 1.01,s = 900,K = 10,and the selling price is $11,the EOL is

A)≅ 10,000.
B)≅ 9,100.
C)≅ 736.
D)≅ 810.
E)None of the above

Question 30

Given the following opportunity loss function,determine the loss when 7,000 units are sold.Opportunity loss: 6(9,000 - X)for X ≤ 9,000.

Question 31

Determine N(D)for the following D values: 0.01,0.21,0.77,and 1.20.

Question 32

Average demand is estimated at 1,200 units/month.It is believed there is a 20% chance for demand to be higher than 1,800.Determine the μ and σ of a normal distribution that estimates demand.

Question 33

If the break-even point was estimated to be 500 units when fixed costs are estimated at $1,200/month,what would the EMV be if average demand is estimated at 750?

Question 34

Jack Spratt makes candlesticks.His fixed cost is $5,000,variable cost is $3.50,and selling price,$8.50.To what value must he reduce his variable cost if he wants a break-even point of 900 units?

Question 35

The computed EOL will be the same as the computed

A)EMV.
B)unit normal loss.
C)break-even point.
D)EVPI.
E)None of the above

Question 36

When using the normal distribution to approximate demand,which of the following is not true?

A)We assume demand is normally distributed.
B)We assume demand is a random variable.
C)We assume 50 percent of the time demand is less than the mean.
D)We assume the fixed cost follows a normal distribution.
E)All of the above are true.

Question 37

Tony B.is attempting to start a landscaping business.He estimates that to break-even,he will need about 140 customers.He believes he will lose approximately $500 per customer for each customer fewer than the 140.At the moment,he believes that there is an 80% probability that he will be able to secure at least 130 customers and that there is a 50/50 chance that demand will be greater than 150 customers.He has several marketing research firms offering (for a price,of course)to conduct a survey that will provide additional information regarding the probability of demand.How much should he be willing to spend if he decides to have a survey made?

A)≅ $4,000
B)≅ $3,000
C)≅ $5,000
D)≅ $2,700
E)None of the above

Question 38

Demand is estimated to be 800 units.If Z is taken to be 1.5,when the estimated average demand is 400 units,determine σ for these data.

A)71,111
B)-71,111
C)266
D)-266
E)None of the above

Question 39

The break-even point was determined to be 3,000 units/month.Next month begins an increased lease payment for the production facility.The overall effect will be to increase the fixed costs by 10%.How will the break-even point be affected?

Question 40

Tony B.is attempting to start a landscaping business.He estimates that to break-even,he will need about 150 customers.He believes that he will lose approximately $500 per customer for each customer fewer than the 150.At the moment,he believes there is an 80% probability that he will be able to secure between 130 and 170 customers,and that there is a 50/50 chance that demand will be greater than 160 customers.What is the mean or expected number of sales?

A)130
B)150
C)160
D)170
E)None of the above

Question 41

Complete this mathematical statement: ________ = P(demand > break-even).

Question 42

Break-even analysis answers what common management question?

Question 43

Expected opportunity loss has the same value as ________.

Question 44

In terms of fixed costs,variable cost/unit,and the selling price/unit,what is the break-even point?

Question 45

If D = 0.75,s = 500,K = 6,and the selling price/unit = 5,determine EOL.

Question 46

Complete this mathematical statement: P(loss)= ________

Question 47

The mean of a distribution locates the ________ of the distribution.

Question 48

As σ increases,the spread of a distribution ________.

Question 49

Briefly describe the opportunity loss function.

Question 50

In decision-making,we use the normal distribution when there are ________.