Question #1
A production manager has obtained the following estimates of costs/revenues for radios. Their plan is to produce this model of radio for 10 years.
Yearly sales = 3,000 units/year (steady state/no growth expected)
Sales Price = $80/unit
Variable Cost = $31.52/unit
Initial Investment = $125,000
A. How many units does the company need to produce/sell to breakeven?
B. Does the company break even during year 1?
C. How much PROFIT does the company make over the 10-year production run?
D. Suppose the company can reduce the Variable Costs by $2.00 per unit if they invested in the "latest technology" for $175,000 (vice $125,000). Based upon the potential profitability over the 10 year period only, should the company invest in the latest technology?
Question #2
Given the initial cost of $500.00, determine the Learning Rate (LR) that "best fits" the actual observed data in GREY Fill by changing the LR value in YELLOW Fill/RED Text.
What is the LR Value in cell with YELLOW Fill/RED Text that best fits the "Actual" data observed in with GREY Fill? Refer to Chart A for initial visual indicators...
If employee turnover significantly increases, what do you suspect will happen to the learning rate for your company? Will it drift towards 99% or towards 85%? Explain in less than 50 words.
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Initial Cost estimated at
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$500.00
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LR
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95.00%
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Initially set to 0.95
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b =
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-0.074000581
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-0.01449957
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-0.234465254
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Test LR
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95.00%
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99%
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85%
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Unit
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Actual
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Predicted LR
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LR too low
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LR too high
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10
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$341.07
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$421.67
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$483.58
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$291.41
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20
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$303.97
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$400.58
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$478.75
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$247.70
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30
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$284.17
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$388.74
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$475.94
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$225.24
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40
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$270.91
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$380.55
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$473.96
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$210.54
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50
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$261.05
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$374.32
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$472.43
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$199.81
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60
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$253.26
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$369.31
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$471.18
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$191.45
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70
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$246.86
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$365.12
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$470.13
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$184.65
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80
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$241.44
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$361.53
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$469.22
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$178.96
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90
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$236.76
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$358.39
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$468.42
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$174.09
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100
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$232.65
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$355.61
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$467.70
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$169.84
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Question #3 Overhead Allocation
The lead accountant has compiled the following data in preparation for allocating overhead to three cost drivers.
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Overhead Costs
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Utilities
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$80,000
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Utilities (phone, electric, water, gas, etc.)
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Admin/MGMT
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$150,000
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CEO, VPs, Supervisors, Secretary staff costs
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Factory Costs
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$220,000
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Building lease & equipment
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$450,000.00
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A. Allocate the $450,000 of monthly overhead costs to the following three cost drivers : 1) Units Produced 2) Direct Labor Hours
3) Raw Material Costs to determine the final product cost per unit (which includes Direct Labor, Raw Materials, and Overhead)
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Labor Hrs Per Widget
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Direct Labor Cost per Widget
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Widget-1
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3
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$75.00
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Widget-2
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6
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$150.00
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Widget-3
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12
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$300.00
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Drivers
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Units Produced in Factory (all inclusive)
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25,500
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Widget-1
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10,000
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units per month
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Widget-2
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15,000
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units per month
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Widget-3
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500
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units per month
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Direct Labor Hours
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126,000
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Widget-1
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30,000
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hours per month
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Widget-2
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90,000
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hours per month
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Widget-3
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6,000
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hours per month
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Raw Material Costs
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$5.00
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per unit of Widget-1
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$20.00
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per unit of Widget-2
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$200.00
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per unit of Widget-3
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B. Which of the three methods causes the Final Product Cost of Widget-3 to exceed $600? In 50 words or less, why did this occur?
C. If the current sales price of Widget-3 is only $600, as the lead accountant, name at least TWO strategies you should consider to make Widget-3 a viable product to sell/produce?
Question #4
Below is the average 30-year mortgage rate over the last 44 years, as graphically shown in Chart A below. In addition, there is a "Linear' trend line provided. Unfortunately, this "Linear" trend line includes significant error as evidenced by the low R2 value of 0.521
A. Tasking: Using the data provided, creat your own chart, with linear trend line. (Show final chart)
B. Select the trend line that best fits the overall data by choosing ONE of the following: 1) Exponential 2) Linear 3) Logarithmic 4) Polynomial (order 2 thru 6) 5) Power 6) Moving Average (periods 2 thru x)
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Year
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30 Year (%)
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1972
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7.29%
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1973
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7.54%
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1974
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8.58%
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1975
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8.82%
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1976
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8.73%
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1977
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8.75%
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1978
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9.35%
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1979
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10.50%
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1980
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16.32%
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1981
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15.58%
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1982
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16.89%
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1983
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12.78%
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1984
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13.65%
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1985
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13.20%
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1986
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9.94%
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1987
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9.83%
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1988
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10.20%
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1989
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11.05%
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1990
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10.37%
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1991
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9.50%
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1992
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8.85%
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1993
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7.46%
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1994
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8.32%
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1995
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8.32%
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1996
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7.93%
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1997
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8.14%
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1998
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7.14%
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1999
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6.92%
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2000
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8.15%
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2001
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7.08%
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2002
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6.99%
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2003
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5.81%
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2004
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5.83%
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2005
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5.86%
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2006
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6.51%
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2007
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6.18%
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2008
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5.92%
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2009
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4.81%
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2010
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5.10%
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2011
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4.84%
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2012
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3.91%
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2013
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3.45%
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2014
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4.34%
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2015
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3.67%
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2016
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3.61%
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C. In Chart B below, the average 30-year mortgage rate over the last 10 years are shown. A "Linear" trend line is added to "forecast" years 2017 thru 2021.
Through observation, provide TWO key reasons this forecast can/should be considered "flawed."
D: Forecast the 30-year mortgage rate over the next five years (2017 thru 2021) utilizing the method that you believe represents the historical trend and best reflects mortgage interest rates going into the future. Show your results both graphically & in tabular forms.
Question #5
Answer the following True/False questions:
- Parametric cost estimates utilize a "bottom-up" approach
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True False
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- Engineering cost estimates require detailed designs
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True False
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- "Rough order of magnitude" estimates are most often associated with Parametric cost estimating
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True False
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- Engineering cost estimates are quick and easy to develop
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True False
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- Class 1 estimates are the initial/basic estimate, usually involving the largest range of error
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True False
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- According to Standish, more than 50% of all IT projects experience cost overruns of 51% or more
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True False
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- Tetlock believes Hedgehogs make better forecasters due to their cognitive style that is biased towards a single idea or approach.
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True False
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- When developing a cost estimate, determining the estimates "purpose" is one of the most important steps
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True False
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- Updating an estimate is recommended only when it is easily achieved
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True False
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- Analogy estimatesare based upon years of highly accurate data, therefore is the gold standard whenever possible
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True False
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Extra Credit (2):
A. The list below are examples of Cognitive Bias in forecasting (according to Tetlock). Which of the below are NOT forms of bias cited by Tetlock:
Selective Perception Normalcy Availability
Overconfidence Anchoring Search for Supportive Evidence
Recency Conservatism
Understanding Uncertainty Halo Effect
B.
Tetlock determined that Expert Judgement has no role in forecasting. True or False