Deck 14: Decision Making

Question 1

Fixed cost is the portion of the total cost that remains constant regardless of changes in levels of output.

Answer 1

True

Question 2

Which one of the following statements about break-even analysis,as we applied it to evaluating products or services,is best?

A)Break-even analysis assumes that the cost function is linear and consists of fixed costs plus variable costs times volume.
B)The break-even quantity will increase when the change in variable cost per unit is identical to the change in unit price.
C)Increasing the price,while keeping the variable cost per unit constant,increases the break-even quantity.
D)Increasing the fixed costs tends to decrease the break-even quantity.

Answer 2

A

Question 3

A new product is being considered that will require $45,000 in fixed costs per year.Variable costs per unit are estimated to be $12.72.The firm wants to break even if 8000 units are produced and sold per year.What should be the price?

A)Less than $16.00
B)Between $16.00 and $16.99
C)Between $17.00 and $17.99
D)Between $18.00 and $18.99

Answer 3

D

Question 4

The break-even point is the volume at which the total revenues equal total cost.

Question 5

By definition,the maximax and maximin criteria cannot result in the selection of a common alternative in decision making under uncertainty.

Question 6

A software company that sells its software pre-installed in personal computers is considering making its own computers instead of purchasing them from the Mega-Chip Company.To assemble their own computers could cost $1,000,000 in fixed costs and $100 per unit in variable costs.The company currently buys PCs for $1200,with no fixed costs.What is the break-even quantity?

A)Greater than or equal to 1800
B)Greater than 900 but fewer than 1800
C)Greater than 450 but fewer than 900
D)Less than 450

Question 7

A new product will sell in the market for $12.It costs $7 (unit variable cost)to manufacture on a new lathe machine.If the break-even quantity is 10,000 units,what is the annual fixed cost involved in acquiring the machine and in paying other fixed costs?

A)Less than $40,000
B)Greater than $40,000 but less than or equal to $55,000
C)Greater than $55,000 but less than or equal to $70,000
D)Greater than $70,000

Question 8

Decision theory is a general approach to decision making when the outcomes associated with alternatives are often in doubt.

Question 9

Which one of the following statements about break-even analysis for evaluating products or services is true?

A)The break-even quantity will tend to increase as the variable cost per unit of production decreases.
B)As sales increase beyond the break-even quantity,total before-tax profits tend to decrease.
C)A restaurant's opening of downsized facilities with only drive-through service is an example of lowering fixed costs and the break-even quantity.
D)Increasing the unit selling price has the effect of increasing the break-even quantity.

Question 10

Which condition would result in invalidating an application of break-even analysis?

A)The variable cost to produce a unit is less than one percent of the fixed cost to run the plant.
B)The purchasing department both offers quantity discounts to customers and receives quantity discounts from suppliers.
C)The variable cost to produce a unit is within one percent of the sale price.
D)The labor to manufacture the item is free.

Question 11

Making a decision under risk using the expected value criterion is the equivalent of using the Laplace decision rule under uncertainty.

Question 12

A preference matrix is a table that allows the manager to rate an alternative according to one performance criterion.

Question 13

Maximax is a decision rule for the pessimist.

Question 14

Minor Video has opened a new store renting videocassettes.Fixed costs are $60,000,and the variable cost per unit is $1.50.The average sale is $5 per customer.Use the following axes to determine the break-even quantity graphically.Next,refine your solution by solving it algebraically.(Show your work for credit. )

A)The break-even quantity is fewer than or equal to 10,000 rentals.
B)The break-even quantity is more than 10,000 rentals and fewer than or equal to 20,000 rentals.
C)The break-even quantity is more than 20,000 rentals and fewer than or equal to 25,000 rentals.
D)The break-even quantity is more than 25,000 rentals.

Question 15

The variable cost is the portion of total cost that remains constant regardless of changes in levels of production.

Question 16

A payoff table shows the amount for each alternative if each possible event occurs.

Question 17

Sensitivity analysis is a technique for systematically changing parameters in a model to determine the effects of such changes.

Question 18

Mantel Incorporated began producing its new line of dolls at its Connecticut plant in December of year 0.In year 1,it produced 30,000 dolls at a total cost of $385,000.In year 2,its production increased to 80,000 dolls at a total cost of $885,000.Assuming the cost structure was the same for both years,what must be the variable cost (c)and the fixed cost (F)per doll?

A)F is less than $80,000,and c is greater than $7.
B)F is greater than $60,000,and c is less than $5.
C)F is less than $100,000,and c is greater than $9.
D)F is greater than $110,000,and c is less than $6.

Question 19

The square nodes in a decision tree represent the alternatives in a sequential decision situation.

Question 20

The break-even quantity for a certain kitchen appliance is 6000 units.The selling price is $10 per unit,and the variable cost is $4 per unit.What must be the fixed cost to break even at 6000 units?

A)Less than $35,000
B)Between $35,000 and $40,000
C)Between $40,001 and $45,000
D)Above $45,000

Question 21

Demron is in serious negotiations to purchase a welding machine that will enable them to perform their own welding.They currently have their welding outsourced at a cost of $1.50 per weld and a fixed cost of $45,000.Their marketing team feel that they can sustain an annual sales volume sufficient to require 35,000 welds.If a fancy new welding rig costs $13,500 what is the maximum variable cost per weld that Demron should be willing to pay in order to bring this process in-house?

A)$3.00 per weld
B)$2.40 per weld
C)$2.00 per weld
D)$1.45 per weld

Question 22

Table A.1
Luvmatics plans to produce a new product.Three different models are planned: the Regular,Large,and Jumbo.The fixed costs depend on which of two locations are used;in San Francisco the fixed costs would be $2.5 million per year,but in Tuttle the fixed costs would be $1.2 million.Sale prices and variable costs for the three models are shown in the table.

Use the information in Table A.1.Assume the fixed costs and sales price in both locations are constants and the variable costs in San Francisco are as shown in the table.By how much would the variable cost in Tuttle have to rise to give both locations an identical break-even point for the Regular model?

A)$0.40
B)$5.40
C)$10.40
D)$15.40

Question 23

California Manufacturing,Inc.is now evaluating two new product ideas,and management has decided to apply the preference matrix method.The following table shows five criteria with different weights and individual scores of each product idea.If management has established a threshold of 800,which product(s)should be accepted for further development?

A)Product A
B)Product B
C)Both products A and B
D)Neither product A nor B

Question 24

Commodore is debating whether to produce the printed circuit boards for a new line of video cameras or outsource their production to a company that specializes in this operation.Strictly from a cost standpoint,production of the circuit boards would definitely be outsourced if

A)the variable cost of producing the circuit boards is lower than the buy option.
B)the production volumes are greater than Commodore's break-even quantity.
C)the production volumes are less than Commodore's break-even quantity.
D)the production volumes are the same for making and buying the circuit boards.

Question 25

Choosing the alternative that is the best weighted payoff using decision making under uncertainty would be

A)maximin.
B)maximax.
C)Laplace.
D)minimax regret.

Question 26

The decision rule in decision making under uncertainty most appropriate for the pessimistic manager would be

A)maximin.
B)maximax.
C)Laplace.
D)minimax regret.

Question 27

Table A.1
Luvmatics plans to produce a new product.Three different models are planned: the Regular,Large,and Jumbo.The fixed costs depend on which of two locations are used;in San Francisco the fixed costs would be $2.5 million per year,but in Tuttle the fixed costs would be $1.2 million.Sale prices and variable costs for the three models are shown in the table.

Use the information in Table A.1.How many units of the Regular size must be sold each year to break even if production is at the San Francisco plant?

A)Fewer than 30,000 units
B)More than 30,000 units but fewer than 80,000 units
C)More than 80,000 units but fewer than 130,000 units
D)More than 130,000 units

Question 28

Choosing the alternative that minimizes lost-opportunity costs using decision making under uncertainty would be

A)maximin.
B)maximax.
C)Laplace.
D)minimax regret.

Question 29

The decision rule in decision making under uncertainty that would be best for the manager who has high expectations would be

A)maximin.
B)maximax.
C)Laplace.
D)minimax regret.

Question 30

The Forsite Company is screening three new product ideas.Resource constraints allow only one idea to be commercialized at the present time.The following estimates have been made for the five performance criteria that management feels are most important.If the five criteria are equally weighted,what are the best and worst alternatives?

A)A is best,and B is worst.
B)B is best,and C is worst.
C)B is best,and A is worst.
D)C is best,and A is worst.

Question 31

A new product that will sell for $75.00 has variable costs of $38.00 per unit.Fixed costs of $75,000 must be incurred every year to manufacture this product.What is the annual volume to break even?

A)Fewer than 1500 units.
B)1500 to 1749 units
C)1750 to 1999 units
D)2000 units or more

Question 32

A poultry farmer with an MBA is debating whether to acquire Rhode Island Reds or Buff Orpingtons to lay the free range eggs he wants to sell.The fixed costs for the Buffs would be $7500 and the variable costs per egg would be a dime per egg.The Reds would have a fixed cost of $6000 and a variable cost of fifteen cents.At what level of egg production would our well-educated poultry farmer be indifferent between Rhode Island Reds and Buff Orpingtons?

A)20,000 eggs
B)30,000 eggs
C)50,000 eggs
D)60,000 eggs

Question 33

The decision rule most appropriate for the realistic manager using decision making under uncertainty would be

A)maximin.
B)maximax.
C)Laplace.
D)minimax regret.

Question 34

Table A.1
Luvmatics plans to produce a new product.Three different models are planned: the Regular,Large,and Jumbo.The fixed costs depend on which of two locations are used;in San Francisco the fixed costs would be $2.5 million per year,but in Tuttle the fixed costs would be $1.2 million.Sale prices and variable costs for the three models are shown in the table.

Use the information in Table A.1.How much does Luvmatics make for each Jumbo unit that is produced in Tuttle and sold at the listed price?

A)$68
B)$58
C)$34
D)This cannot be determined without any information on the production volume.

Question 35

Table A.1
Luvmatics plans to produce a new product.Three different models are planned: the Regular,Large,and Jumbo.The fixed costs depend on which of two locations are used;in San Francisco the fixed costs would be $2.5 million per year,but in Tuttle the fixed costs would be $1.2 million.Sale prices and variable costs for the three models are shown in the table.

Use the information in Table A.1.What is the slope of the fixed-cost line for production in San Francisco?

A)$2,500,000
B)$25
C)$20
D)0

Question 36

Table A.1
Luvmatics plans to produce a new product.Three different models are planned: the Regular,Large,and Jumbo.The fixed costs depend on which of two locations are used;in San Francisco the fixed costs would be $2.5 million per year,but in Tuttle the fixed costs would be $1.2 million.Sale prices and variable costs for the three models are shown in the table.

Use the information in Table A.1.If executives decide to produce at the San Francisco plant but are nervous about sales numbers,which model would provide the greatest profit at the lowest sales volumes?

A)Regular
B)Large
C)Jumbo
D)It doesn't matter because the fixed costs are the same for the same site.

Question 37

Zipco is in serious negotiations to purchase a chunking machine that will enable them to perform their own chunking at $1 per unit.They currently have their chunking outsourced at a cost of $1.50 per unit and a fixed cost of $45,000.Their marketing team feel that they can sustain an annual volume of 10,000 units.What is the maximum fixed cost that Zipco should be willing to bear in order to perform their own chunking?

A)$50,000
B)$45,000
C)$40,000
D)$35,000

Question 38

Table A.1
Luvmatics plans to produce a new product.Three different models are planned: the Regular,Large,and Jumbo.The fixed costs depend on which of two locations are used;in San Francisco the fixed costs would be $2.5 million per year,but in Tuttle the fixed costs would be $1.2 million.Sale prices and variable costs for the three models are shown in the table.

Use the information in Table A.1.What is the difference in break-even points for the Large model between Tuttle and San Francisco?

A)Fewer than 25,000 units
B)Between 25,000 units and 40,000 units
C)Between 40,000 units and 55,000 units
D)More than 55,000 units

Question 39

A company is screening ideas for new services.Five alternative service ideas are being considered.Management identified four criteria and weighted them as follows: A = 30,B = 10,C = 20,and D = 40.They have also come up with scored values for the five alternatives and the four criteria as shown following.Management has decided that if an alternative has less than a total scored value of 600,it should automatically be rejected.Use the preference matrix technique to determine which idea should be accepted.

A)Service #1 or #2
B)Service #3 or #4
C)Service #5
D)None

Question 40

Choosing the alternative that is the "best of the worst" using decision making under uncertainty would be

A)maximin.
B)maximax.
C)Laplace.
D)minimax regret.

Question 41

Table A.2
A company that is introducing a new product has to choose between three different manufacturing methods,referred to as methods A,B,and C.Depending on the demand for the product,they have forecast different levels of revenue for the year (values are in thousands).The company has identified three possible states of nature for economic growth and named them High,Medium,and Low.

Using the information in Table A.2,which alternative is best in accordance with a decision criterion of maximin?

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

Question 42

When using decision tree analysis

A)the sum of the expected payoffs must always equal zero.
B)round nodes represent decision points.
C)there must be more square nodes than round nodes.
D)probabilities for all branches leaving a chance node must sum to 1.0.

Question 43

Table A.2
A company that is introducing a new product has to choose between three different manufacturing methods,referred to as methods A,B,and C.Depending on the demand for the product,they have forecast different levels of revenue for the year (values are in thousands).The company has identified three possible states of nature for economic growth and named them High,Medium,and Low.

Using the information in Table A.2,which alternative is best in accordance with a decision criterion of minimax regret?

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

Question 44

Erasmus Valero must decide among four alternatives for a oil exploration project.He estimates that the probability of high demand is 0.3 and the probability of low demand is 0.7.What is the best choice with the payoffs shown in the tree?

A)Alternative A
B)Alternative B
C)Alternative C
D)Alternative D

Question 45

Table A.3
In choosing between three new jobs,Joe MBA considers the potential payoffs over the next three years.The following table contains the payoffs,given the speed of promotion in each of the organizations.The probability of fast promotion is 0.6,and the probability of slow promotion is 0.4.

Use the information in Table A.3.Which alternative is best,given the matrix payoff?

A)The A alternative would be chosen using the maximin decision rule.
B)The B alternative would be chosen using the maximax decision rule.
C)The C alternative would be chosen using the Laplace decision rule.
D)The C alternative would be chosen using the maximin decision rule.

Question 46

In order for a decision tree to be a valuable decision tool,the decision-maker should be in a condition of

A)certainty.
B)risk.
C)uncertainty.
D)equilibrium.

Question 47

In decision theory,the different courses of action that a decision maker can choose are called ________.

Question 48

________ is a technique for systematically changing parameters in a model to determine the effects of such changes.

Question 49

A crafty operations manager has developed this decision tree to evaluate the alternatives for a planned expansion.If the probability of high demand is 0.6,what is the best course of action?

A)Alternative A
B)Alternative B
C)Alternative C
D)Alternative D

Question 50

Table A.2
A company that is introducing a new product has to choose between three different manufacturing methods,referred to as methods A,B,and C.Depending on the demand for the product,they have forecast different levels of revenue for the year (values are in thousands).The company has identified three possible states of nature for economic growth and named them High,Medium,and Low.

Using the information in Table A.2,which alternative is best in accordance with a decision criterion of Laplace?

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

Question 51

The ________ is the volume at which total revenues equal total costs.

Question 52

________ is the portion of total cost that remains constant regardless of changes in levels of output.

Question 53

________ is a general approach to decision making when the outcomes associated with alternatives are often in doubt.

Question 54

Table A.3
In choosing between three new jobs,Joe MBA considers the potential payoffs over the next three years.The following table contains the payoffs,given the speed of promotion in each of the organizations.The probability of fast promotion is 0.6,and the probability of slow promotion is 0.4.

Use the information in Table A.3 and the Laplace decision rule.The weighted payoff is

A)less than $200,000 if the high-flying consultant job is selected.
B)more than $280,000 if the Research Assistant job is selected.
C)more than $280,000 if the utility analyst job is selected.
D)highest for the research assistant position.

Question 55

A wily marketing director must decide among four alternatives for a new marketing campaign.She ascertains that the probability of high demand is 0.8 and the probability of low demand is 0.2.What is the best choice with the payoffs shown in the tree?

A)Alternative A
B)Alternative B
C)Alternative C
D)Alternative D

Question 56

Table A.2
A company that is introducing a new product has to choose between three different manufacturing methods,referred to as methods A,B,and C.Depending on the demand for the product,they have forecast different levels of revenue for the year (values are in thousands).The company has identified three possible states of nature for economic growth and named them High,Medium,and Low.

Using the information in Table A.2,which alternative is best if further study revealed that the probability of high growth is 0.2,the probability of medium growth is 0.5,and the probability of low growth is 0.3?

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

Question 57

Table A.3
In choosing between three new jobs,Joe MBA considers the potential payoffs over the next three years.The following table contains the payoffs,given the speed of promotion in each of the organizations.The probability of fast promotion is 0.6,and the probability of slow promotion is 0.4.

Use the information in Table A.3 and the expected-value rule.Which statement is TRUE?

A)The expected value of the consultant job is more than $300,000.
B)The expected value of the utility analyst job is more than $300,000.
C)The expected value of the research assistant job is less than $250,000.
D)The job with the highest expected value is the research assistant.

Question 58

A wily marketing director must decide among four alternatives for a new marketing campaign.She ascertains that the probability of high demand is 0.45 and the probability of low demand is 0.55.What is the best choice with the payoffs shown in the tree?

A)Alternative A
B)Alternative B
C)Alternative C
D)Alternative D

Question 59

Table A.2
A company that is introducing a new product has to choose between three different manufacturing methods,referred to as methods A,B,and C.Depending on the demand for the product,they have forecast different levels of revenue for the year (values are in thousands).The company has identified three possible states of nature for economic growth and named them High,Medium,and Low.

Using the information in Table A.2,which alternative is best in accordance with a decision criterion of maximax?

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

Question 60

Table A.3
In choosing between three new jobs,Joe MBA considers the potential payoffs over the next three years.The following table contains the payoffs,given the speed of promotion in each of the organizations.The probability of fast promotion is 0.6,and the probability of slow promotion is 0.4.

Use the information in Table A.3 and the minimax regret decision rule.The maximum regret is

A)less than $300,000 if the high-flying consultant job is selected.
B)less than $300,000 if the utility analyst job is selected.
C)less than $300,000 if the research assistant job is selected.
D)lowest for the research assistant job.

Question 61

A(n)________ is a schematic model of alternatives available to the decision maker,along with their possible consequences.

Question 62

The decision rule ________ chooses the alternative with the best weighted payoff.

Question 63

List and describe decision rules that are used for decision making under uncertainty.

Question 64

The decision rule ________ is also referred to as the pessimist's criterion.

Question 65

A(n)________ is the difference between a given payoff and the best payoff for a given state of nature.

Question 66

If probabilities for events can be estimated,then the situation faced by the decision maker is called ________.

Question 67

The site selection team you formed last quarter meets with you in the conference room to present the results of their thoughtful analysis.They have collectively logged 200,000 frequent flyer miles while conducting their investigation.The conference room table sags under the weight of their massive report and all team members sport deep tans.As the leader drones on about their completely objective approach to the problem,he projects a slide containing the following information about their location of choice.
Rio de Janeiro Weight (A)Score (B)Weighted Score (A x B)
Infrastructure 20 8 160
Utility Costs 25 5 125
Labor Skill 25 6 150
Labor Cost 20 7 140
Political climate 10 4 40
Final Weighted Score 615
What questions do you,a conscientious vice-president level executive,have for the team about this portion of their analysis?

Question 68

Under what conditions can decision trees be useful?

Question 69

Why should a decision maker engage in sensitivity analysis?

Question 70

What assumptions are made when using break-even analysis?

Question 71

The decision rule ________ chooses the alternative that is the "best of the best."

Question 72

A(n)________ shows the amount of revenue for each alternative if each possible event occurs.

Question 73

A chance event that has an impact on the outcome of the choice but is not under the manager's control is called a(n)________.