PM - Risk & Uncertainty and Throughput

The following statements have been made about the use of expected values in decision making:

1. (1) Expected values ignore the risk associated with decisions.

2. (2) Expected values are most useful for recurring rather than one-off events.

Which of the above statements is/are true?

• 1. 1 only

• 1. 2 only

• 1. Neither 1 nor 2

• 1. Both 1 and 2

Which of the following decision rules would suit a risk-averse investor?

1. 1. Maximax

2. 2. Maximin

3. 3. Minimax regret

4. 4. Expected value

• 1. 1 and 3

• 1. 2 and 3

• 1. 3 and 4

• 1. 2 and 4

The following statements have been made about expected values:

1. Expected value is of limited use for decisions regarding outcomes which will be repeated often

2. Using expected value in decision-making can lead to the worst possible outcome being ignored

3. The reliability of expected value calculations is heavily influenced by the accuracy of the probabilities assigned to outcomes

Which of the statements are correct?

• 1. 1, 2 and 3

• 1. 1 and 2 only

• 1. 1 and 3 only

• 1. 2 and 3 only

A company is considering whether to develop and market a new product. The cost of developing the product is estimated to be $150,000. There is a 70% probability that the development will succeed and a 30% probability that the development will be unsuccessful.

If the development is successful, the product will be marketed. There is a 50% chance that the marketing will be very successful and the product will make a profit of $250,000. There is a 30% chance that the marketing will be reasonably successful and the product will make a profit of $150,000 and a 20% chance that the marketing will be unsuccessful and the product will make a loss of $80,000. These profit and loss amounts take account of the $150,000 development cost.

What is the expected value of the decision to develop and market the product?

• 1. $154,000

• 1. $107,800

• 1. $62,800

• 1. $4,000

Tree Co is considering employing a sales manager. Market research has shown that a good sales manager can increase profit by 30%, an average one by 20% and a poor one by 10%. Experience has shown that the company has attracted a good sales manager 35% of the time, an average one 45% of the time and a poor one 20% of the time.

The company’s normal profits are $180,000 per year and the sales manager’s salary would be $40,000 per year.

Based on the expected value criterion, which of the following represents the correct advice which Tree Co should be given?

• 1. Do not employ a sales manager as profits would be expected to fall by $1,300

• 1. Employ a sales manager as profits will increase by $38,700

• 1. Employ a sales manager as profits are expected to increase by $100

• 1. Do not employ a sales manager as profits are expected to fall by $39,900

The Mobile Sandwich Co prepares sandwiches which it delivers and sells to employees at local businesses each day.

Demand varies between 325 and 400 sandwiches each day. As the day progresses, the price of the sandwiches is reduced and, at the end of the day, any sandwiches not sold are thrown away. The company has prepared a regret table to show the amount of profit which would be foregone each day at each supply level, given the varying daily levels of demand.

Applying the decision criterion of minimax regret, how many sandwiches should the company decide to supply each day?

• 1. 325

• 1. 350

• 1. 375

• 1. 400

FP can choose from three mutually exclusive projects. The net cash flows from the projects will depend on market demand. All of the projects will last for only one year. The forecast net cash flows and their associated probabilities are given below:

FP can commission a forecast that would tell it with certainty what demand conditions will be before the decision is made about which project to invest in.

What is the maximum amount that FP should pay for the forecast?

• 1. $530

• 1. $505

• 1. $25

• 1. $0

NG is deciding which of four potential venues should be used to stage an entertainment event. Demand for the event may be low, medium or high depending on weather conditions on the day. The management accountant has estimated the contribution that would be earned for each of the possible outcomes and has produced the following regret matrix:

If the company applies the minimax regret criterion, which venue would be chosen?

• 1. Ayefield

• 1. Beefield

• 1. Ceefield

• 1. Deefield

The committee of a new golf club is setting the annual membership fee. The number of members depends on the membership fee charged and economic conditions. The forecast annual cash inflows from membership fees are shown below:

Applying the minimax regret criterion, what fee would be set by the committee?

• 1. $600

• 1. $800

• 1. $900

• 1. $1,000

A company operates a throughput accounting system. The details per unit of Product C are:

What is the throughput contribution per hour for Product C?

• 1. $50.00

• 1. $122.85

• 1. $121.15

• 1. $148.08