QUESTION 1 Decision Analysis
Show all calculations to support your answers. You may follow the methods shown in the mp4 on Decision Analysis for a way to do part (b) of this question if you wish.
(a) Describe four criteria that may be used for decision making under complete uncertainty involving conditional profits and how they work.
(b) Joe White is considering investing some money that he inherited. Joe is considering investing three types of investment, A, B or C. The conditional profits from each given a Good Economy or a Poor Economy are as follows:
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Investment Good Economy Poor Economy
A $80,000 -$20,000
B $30,000 $20,000
C $23,000 $23.000
(i) If Joe is an optimist which type of investment should he select?
(ii) If Joe is a pessimist which type of investment should he select?
(iii) Following the criterion of regret which type of investment should he select?
(iv) If Joe believes that there is a 60% chance of a good economy which type of investment should he select?
(c) Harry Harrison was invited by a friend to put up $20 000 to join a syndicate planning a single joint venture. The syndicate planned to import a container load of personal computers from Taiwan, to be sold before a major company launched its new Super PC. If the imports arrived before the rival Super PCs were launched Harry would receive a net return of $40 000; otherwise he would lose one half of his original investment.
Required:
Based on expected monetary values what is the minimum probability Harry would require for timely arrival of the imported PCs for the investment opportunity to be worthwhile?
QUESTION 2 Value of information
Show all calculations to support your answers. You may follow the methods shown in the mp4 on Value of info for a way to answer this question if you wish.
A manufacturer is trying to choose between two production methods (a1 and a2) for a new product. He considers that the probability of demand for the product being poor (s1) is 07 and the probability of demand being good (s2) is 0.3.
In evaluating the two production methods the manufacturer has calculated the following table of conditional profits:
s1 s2
a1 $6,000 $10,000
a2 -1,000 25,000
(i) What is the optimum action?
(ii) What is the expected value of perfect information?
In the past the manufacturer has sometimes obtained from a marketing consultant an opinion about whether demand for a product will be poor or good. From previous experience, when the consultant has indicated that demand will be poor he has been right 80% of the time, and when he has indicated that demand will be good he has been right 70% of the time.
(iii) Suppose that the consultant would charge $3,000 for an opinion. Should the manufacturer pay for an opinion? Why?
QUESTION 3 Simulation
This is a work integrated assessment item. The tasks are similar to what would be carried out in the workplace.
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The Wallabies Football Club gains significant revenue from ticket sales at each game played at home during the season. The sale of programs for these games also adds to profitability. Each program costs $2.00 to produce and sells for $5.00. Any programs unsold at the end of any game are sent to a recycling centre and do not produce any revenue.
Records of the programs sold for each game show the following:
Number of Programs Sold Probability
2300 0.10
2400 0.20
2500 0.30
2600 0.25
2700 0.15
(a) Your manager has asked you as the management accountant for the club to determine the profitability of program production. In particular you have been asked to investigate two strategies where the number of programs to be printed are either (i) the number demanded the previous match, or (ii) 2500 every match. You decide to use Excel to simulate the sale of programs at 10 games in a season together with the profit or loss on programs for each game under scenarios (i) and (ii). Include a calculation of the total profit/loss for the season and the average profit/loss per game.
Hints: Your model should have 8 columns: Game #, RN Sales, Demand, Print #, Sales Units, Sales Revenue, Production Costs, Profit/Loss. The model must be completely formula driven - there must be no data in the model or the model formulas - all data should be in a data input section above the model. An IF or MIN function is required in the formulas in the Sales Units column. After completing the model you can vary the results by pressing F9 (recalculate) a number of times to view such variations resulting from changes in the random numbers generated.
Because there are two scenarios to simulate you must have two copies of your simulations. Under scenario (i) you will have to generate a dummy sales demand to kick start the process. This would not be necessary under scenario (ii).
Show the data and the model in two printouts: (1) the results, and (2) the formulas. Both printouts must show row and column numbers and be copied from Excel into Word. See Spreadsheet Advice in Interact Resources for guidance.
(b) To check on your simulation conclusions use marginal analysis to determine the optimum number of programs to print.
(c) Write a report to your manager explaining which of the two production strategies you would recommend and why. You may support your report by including reference to the profits under each strategy, noting any limitations to the methods you have adopted to analyse the situations.
The report must be dated, addressed to the Manager and signed off by you. (Word limit: No more than 150 words)
QUESTION 4 Regression Analysis and Cost Estimation
A local real estate agent asks you to help estimate the sale prices of homes. The agent believes that the floor space area of the house and the number of bedrooms help explain selling prices, and has collected the following data from past sales.
House Price m2 Bedrooms
1 $304,000 200 3
2 600,000 370 4
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3 456,000 270 3
4 344,000 250 3
5 704,000 400 5
6 356,000 260 3
7 320,000 230 2
8 336,000 180 2
9 560,000 350 5
10 584,000 330 4
11 440,000 290 3
12 448,000 300 4
(a) Using the high-low method to estimate a selling price function based on square metres of floor space, what would be the estimated selling price (to the nearest $) for a house with 275 m2 of floor space?
(b) Using Excel, perform three regression analyses to regress selling price against square metres (m2), then number of bedrooms, then against both of them simultaneously. State the cost equation from each. Analyse and comment on the results of each regression as you perform it and determine the best one to use as a basis for future use.
(c) Using the best regression what would be the predicted selling price in a month when there were 300 m2 of floor space and 3 bedrooms?
QUESTION 5 CVP Analysis
(a) College Pizza delivers pizzas to the residential colleges and flats near a Bathurst campus of CSU. Annual fixed costs are $40,000. Pizzas sell for $10 and it costs $5 to make and deliver a pizza.
Required:
(i) Calculate the breakeven point in units.
(ii) Calculate the breakeven point in sales dollars using the contribution margin ratio approach.
(iii) How many pizzas must be sold to earn $60,000 profit per annum before tax?
(b) A company makes two products, X and Y. At present the sales mix is 1 unit of X to 2 units of Y. Fixed costs per period are $11,000. Selling prices and variable costs per unit for each product are:
X Y
Unit selling price $19 $15
Unit variable cost $10 $9
Required:
i How many units of each product must be sold in a period to make a profit of $10,000?
ii If in a period the sales mix changed to 2 units of X to 2 units of Y, and the total number of units sold in the period were 12,000, how much net profit would be earned in the period?
(c) Alpha Company produces a single product, Beta, which has the following unit selling price and costs:
Selling price per unit $4,000
Variable costs per unit $3,500
Fixed costs per annum $2,000,000
Prices and costs are certain, but annual demand is uncertain. It is thought that annual demand is normally distributed with expected sales of 12,000 units and a standard deviation of 4,000 units.
Required:
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i Calculate expected annual profit.
ii What is the standard deviation of expected profit?
iii Calculate the probability of at least breaking even using the probability distribution of profits.
Rationale
This assessment task covers topics 3,4,5,6 and 8: Decision analysis: uncertainty and risk, value of information, Simulation, Regression analysis and cost-volume-profit analysis. It has been designed to ensure that you continue to engage with the subject content on a regular basis. More specifically, it seeks to assess your ability to:
apply decision theory and probability concepts to business situations use simulation to analyse decisions
understand statistical hypothesis testing to interpret the significance of regression coefficients
apply CVP analysis to product mix decisions
Marking criteria
The criteria described below will not apply to all parts of all questions but describe the standards expected where the question requirements are appropriate. It is expected that al students will complete their own work with no collusion with other students.
Criteria High Distinction Distinction Credit Pass
Apply decision Apply decision criteria
Apply decision criteria appropriately to Apply decision criteria
criteria correctly to
mostly correctly to situations of varying somewhat correctly to
Apply situations of varying
situations of varying degrees of uncertainty, situations of varying
decision degrees of
degrees of uncertainty, and some correct degrees of uncertainty,
theory to uncertainty, and
and mostly correct revisions of but minimal ability to
business correct revisions of
revisions of probabilities probabilities to assess revise probabilities to
situations. probabilities to assess
the value of to assess the value of the value of assess the value of
information. information. information.
information.
Completely correct Mostly correct use of Few errors in use of Some weakness in use
Use use of Excel to
Excel to simulate Excel to simulate of Excel to simulate simulation simulate decision decision situations decision situations decision situations n complex situations involving involving probabilistic involving probabilistic involving probabilistic decisions. probabilistic states of states of nature. states of nature. states of nature. nature Completely correct Mostly correct Some difficulty in Weakness exhibited in Hypothesis understanding the application of t-tests application of t-tests to correctly applying testing in to determine determine significance t-tests to determine application of t-tests to regressions determine significance significance of of independent significance of analysis. independent variables variables. independent variables. of independent variables.
Correct use of CVP Correct use of CVP Correct use of CVP Correct use of CVP
Apply analysis to single and analysis to single analysis to single and analysis to single and CVP multiple product product firms, but less multiple product firms, multiple product firms, analysis to firms, and confident confident with and some ability to but little ability to product ability to analyse multi-product firms, or analyse problems where analyse problems where mix problems where sales sales is a normal random sales is a normal problems where sales is decisions. is a normal random a normal random variable. random variable. variable. variable.
Presentation
Charles Sturt University Subject Outline
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The assignment should be word processed with any Excel files pasted into Word with row and column numbers.
Your name and student number should appear on every page as a header or footer.
All calculations must be shown.
All references used should appear at the end in full.
Requirements
Assignments must be submitted through turnitin. Your lecturer will announce if a hard copy submission is required addition to turnitin submission.