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Supplement A Decision Making

Supplement
A
Decision Making
TRUE/FALSE
1. The break-even quantity is the volume at which the total revenue equals total cost.
Answer: True
Reference: Break-Even Analysis
Difficulty: Easy
Keywords: break-even quantity, total revenue, total cost
2. The variable cost is the portion of total cost that remains constant rear!less of chanes in
levels of pro!uction.
Answer: "alse
Reference: Break-Even Analysis
Difficulty: Easy
Keywords: variable cost, level of output, break-even point
#. "i$e! cost is the portion of the total cost that remains constant rear!less of chanes in levels
of output.
Answer: True
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: fi$e! cost, level of output, break-even quantity
&. 'ensitivity analysis is a technique for systematically chanin parameters in a mo!el to
!etermine the effects of such chanes.
Answer: True
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: sensitivity analysis, parameter, break-even quantity
(. A preference matri$ is a table that allows the manaer to rate an alternative accor!in to one
performance criterion.
Answer: "alse
Reference: )reference %atri$
Difficulty: %o!erate
Keywords: preference matri$, alternative, performance criteria
*. +ecision theory is a eneral approach to !ecision makin when the outcomes associate! with
alternatives are often in !oubt.
Answer: True
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: !ecision theory, uncertainty, risk
28
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
,. A payoff table shows the amount for each alternative if each possible event occurs.
Answer: True
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: payoff table, event
-. %a$ima$ is a !ecision rule for the pessimist.
Answer: "alse
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: ma$ima$, optimist, pessimist
.. By !efinition, the ma$ima$ an! ma$imin criteria cannot result in the selection of a common
alternative in !ecision makin un!er uncertainty.
Answer: "alse
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: !ecision makin, ma$ima$, ma$imin
1/. %akin a !ecision un!er risk usin the e$pecte! value criterion is the equivalent of usin the
0aplace !ecision rule un!er uncertainty.
Answer: True
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: 0aplace !ecision rule, e$pecte! value
11. The square no!es in a !ecision tree represent the alternatives in a sequential !ecision
situation.
Answer: "alse
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: no!e, !ecision tree, sequential !ecisions
MULTIPLE CHOICE
12. 1hich one of the followin statements about break-even analysis for evaluatin pro!ucts or
services is true2
a. The break-even quantity will ten! to increase as the variable cost per unit of pro!uction
!ecreases.
b. As sales increase beyon! the break-even quantity, total before-ta$ profits ten! to !ecrease.
c. A restaurant3s openin of !ownsi4e! facilities with only !rive-throuh service is an
e$ample of lowerin fi$e! costs an! the break-even quantity.
!. 5ncreasin the unit sellin price has the effect of increasin the break-even quantity.
Answer: c
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even, fi$e! cost
29
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
1#. 1hich one of the followin statements about break-even analysis, as we applie! it to
evaluatin pro!ucts or services, is best2
a. Break-even analysis assumes that the cost function is linear an! consists of fi$e! costs plus
variable costs times volume.
b. The break-even quantity will increase when the chane in variable cost per unit is i!entical
to the chane in unit price.
c. 5ncreasin the price, while keepin the variable cost per unit constant, increases the break-
even quantity.
!. 5ncreasin the fi$e! costs ten!s to !ecrease the break-even quantity.
Answer: a
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, fi$e! cost, variable cost
1&. 1hich con!ition woul! result in invali!atin an application of break-even analysis2
a. The variable cost to pro!uce a unit is less than one percent of the fi$e! cost to run the
plant.
b. The purchasin !epartment both offers quantity !iscounts to customers an! receives
quantity !iscounts from suppliers.
c. The variable cost to pro!uce a unit is within one percent of the sale price.
!. The labor to manufacture the item is free.
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, volume, cost
1(. %antel 5ncorporate! bean pro!ucin its new line of !olls at its 6onnecticut plant in
+ecember of year /. 5n year 1, it pro!uce! #/,/// !olls at a total cost of 7#-(,///. 5n year 2,
its pro!uction increase! to -/,/// !olls at a total cost of 7--(,///. Assumin the cost
structure was the same for both years, what must be the variable cost 8c9 an! the fi$e! cost
8F9 per !oll2
a. " is less than 7-/,///, an! c is reater than 7,.
b. " is reater than 7*/,///, an! c is less than 7(.
c. " is less than 71//,///, an! c is reater than 7..
!. " is reater than 711/,///, an! c is less than 7*.
Answer: c
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, variable cost, fi$e! cost
1*. The break-even quantity for a certain kitchen appliance is */// units. The sellin price is 71/
per unit, an! the variable cost is 7& per unit. 1hat must be the fi$e! cost to break even at
*/// units2
a. 0ess than 7#(,///
b. Between 7#(,/// an! 7&/,///
c. Between 7&/,//1 an! 7&(,///
!. Above 7&(,///
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, fi$e! cost
0
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
1,. A :0ittle 'is; restaurant has been opene! as a prototype to test the concept of a smaller
facility with a limite! menu. E$perience !urin the first two years was as follows<
The averae sale is 71/ per customer. =se the followin partially complete! raph to
!etermine the break-even quantity raphically. Then refine your solution by solvin it
alebraically. 8'how your work for cre!it.9

a. The break-even quantity is fewer than or equal to #/,/// customer visits.
b. The break-even quantity is more than #/,/// customer visits an! fewer than or equal to
(/,/// visits.
c. The break-even quantity is more than (/,/// visits an! fewer than or equal to ,/,///
visits.
!. The break-even quantity is more than ,/,/// customer visits.
Answer: !
Reference: Break-Even Analysis
Difficulty: >ar!
Keywords: break-even quantity
1
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
1-. %inor ?i!eo has opene! a new store rentin vi!eocassettes. "i$e! costs are 7*/,///, an! the
variable cost per unit is 71.(/. The averae sale is 7( per customer. =se the followin a$es to
!etermine the break-even quantity raphically. @e$t, refine your solution by solvin it
alebraically. 8'how your work for cre!it.9

a. The break-even quantity is fewer than or equal to 1/,/// rentals.
b. The break-even quantity is more than 1/,/// rentals an! fewer than or equal to 2/,///
rentals.
c. The break-even quantity is more than 2/,/// rentals an! fewer than or equal to 2(,///
rentals.
!. The break-even quantity is more than 2(,/// rentals.
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity
1.. A new pro!uct is bein consi!ere! that will require 7&(,/// in fi$e! costs per year. ?ariable
costs per unit are estimate! to be 712.,2. The firm wants to break even if -/// units are
pro!uce! an! sol! per year. 1hat shoul! be the price2
a. 0ess than 71*.//
b. Between 71*.// an! 71*...
c. Between 71,.// an! 71,...
!. Between 71-.// an! 71-...
Answer: !
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, price per unit
2
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
2/. A software company that sells its software pre-installe! in personal computers is consi!erin
makin its own computers instea! of purchasin them from the %ea-6hip 6ompany. To
assemble their own computers coul! cost 71,///,/// in fi$e! costs an! 71// per unit in
variable costs. The company currently buys )6s for 712//, with no fi$e! costs. 1hat is the
break-even quantity2
a. Areater than or equal to 1-//
b. Areater than .// but fewer than 1-//
c. Areater than &(/ but fewer than .//
!. 0ess than &(/
Answer: b
Reference: Break-Even Analysis
Difficulty: >ar!
Keywords: break-even quantity
21. A new pro!uct will sell in the market for 712. 5t costs 7, 8unit variable cost9 to manufacture
on a new lathe machine. 5f the break-even quantity is 1/,/// units, what is the annual fi$e!
cost involve! in acquirin the machine an! in payin other fi$e! costs2
a. 0ess than 7&/,///
b. Areater than 7&/,/// but less than or equal to 7((,///
c. Areater than 7((,/// but less than or equal to 7,/,///
!. Areater than 7,/,///
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, fi$e! cost
22. A new pro!uct that will sell for 7,(.// has variable costs of 7#-.// per unit. "i$e! costs of
7,(,/// must be incurre! every year to manufacture this pro!uct. 1hat is the annual volume
to break even2
a. "ewer than 1(// units.
b. 1(// to 1,&. units.
c. 1,(/ to 1... units.
!. 2/// units or more.
Answer: !
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity
2#. 6ommo!ore is !ebatin whether to pro!uce the printe! circuit boar!s for a new line of vi!eo
cameras or outsource their pro!uction to a company that speciali4es in this operation. 'trictly
from a cost stan!point, pro!uction of the circuit boar!s woul! !efinitely be outsource! if<
a. the variable cost of pro!ucin the circuit boar!s is lower than the buy option.
b. the pro!uction volumes are reater than 6ommo!ore3s break-even quantity.
c. the pro!uction volumes are less than 6ommo!ore3s break-even quantity.
!. the pro!uction volumes are the same for makin an! buyin the circuit boar!s.
Answer: c
Reference: Break-Even Analysis
Difficulty: Easy
Keywords: break-even quantity

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall


Supplement A Decision Making
2&. A poultry farmer is !ebatin whether to acquire Bho!e 5slan! Be!s or Buff Crpintons to lay
the es he wants to sell. The fi$e! costs for the Buffs woul! be 7,(// an! the variable costs
per e woul! be a !ime per e. The Be!s woul! have a fi$e! cost of 7*/// an! a variable
cost of fifteen cents. At what level of e pro!uction woul! the poultry farmer be in!ifferent
between Bho!e 5slan! Be!s an! Buff Crpintons2
a. 2/,/// es
b. #/,/// es
c. (/,/// es
!. */,/// es
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity
2(. Dipco is in serious neotiations to purchase a chunkin machine that will enable them to
perform their own chunkin at 71 per unit. They currently have their chunkin outsource! at
a cost of 71.(/ per unit an! a fi$e! cost of 7&(,///. Their marketin team feels that they can
sustain an annual volume of 1/,/// units. 1hat is the ma$imum fi$e! cost that Dipco shoul!
be willin to bear in or!er to perform their own chunkin2
a. 7(/,///
b. 7&(,///
c. 7&/,///
!. 7#(,///
Answer: a
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, fi$e! cost
2*. +emron is in serious neotiations to purchase a wel!in machine that will enable them to
perform their own wel!in. They currently have their wel!in outsource! at a cost of 71.(/
per wel! an! a fi$e! cost of 7&(,///. Their marketin team feels that they can sustain an
annual sales volume sufficient to require #(,/// wel!s. 5f a fancy new wel!in ri costs
71#,(// what is the ma$imum variable cost per wel! that +emron shoul! be willin to pay in
or!er to brin this process in-house2
a. 7#.// per wel!
b. 72.&/ per wel!
c. 72.// per wel!
!. 71.&( per wel!
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, variable cost, make-or-buy quantity
!
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
Use the following to answer questions 27 32.
2,. =se the information in Table A.1. >ow many units of the Beular si4e must be sol! each year
to break even if pro!uction is at the 'an "rancisco plant2
a. "ewer than #/,/// units
b. %ore than #/,/// units but fewer than -/,/// units
c. %ore than -/,/// units but fewer than 1#/,/// units
!. %ore than 1#/,/// units
Answer: c
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity
2-. =se the information in Table A.1. 5f e$ecutives !eci!e to pro!uce at the 'an "rancisco plant
but are nervous about sales numbers, which mo!el woul! provi!e the reatest profit at the
lowest sales volumes2
a. Beular
b. 0are
c. Eumbo
!. 5t !oesn3t matter because the fi$e! costs are the same for the same site.
Answer: c
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity
2.. =se the information in Table A.1. 1hat is the !ifference in break-even points for the 0are
mo!el between Tuttle an! 'an "rancisco2
a. "ewer than 2(,/// units
b. Between 2(,/// units an! &/,/// units
c. Between &/,/// units an! ((,/// units
!. %ore than ((,/// units
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity
"
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
0uvmatics plans to pro!uce a new pro!uct. Three !ifferent mo!els are planne!< the Beular,
0are, an! Eumbo. The fi$e! costs !epen! on which of two locations are use!F in 'an "rancisco
the fi$e! costs woul! be 72.( million per year, but in Tuttle the fi$e! costs woul! be 71.2 million.
'ale prices an! variable costs for the three mo!els are shown in the table.
Tale A.!
"odel
Regular #arge $u%o
&ariale 'ost 7(Gunit 7,Gunit 71/Gunit
(ale )rice 72(Gunit 7&1Gunit 7*-Gunit
Supplement A Decision Making
#/. =se the information in Table A.1. >ow much !oes 0uvmatics make for each Eumbo unit that
is pro!uce! in Tuttle an! sol! at the liste! price2
a. 7*-
b. 7(-
c. 7#&
!. This cannot be !etermine! without any information on the pro!uction volume.
Answer: b
Reference: Break-Even Analysis
Difficulty: Easy
Keywords: break-even quantity, slope
#1. =se the information in Table A.1. 1hat is the slope of the fi$e!-cost line for pro!uction in
'an "rancisco2
a. 72,(//,///
b. 72(
c. 72/
!. /
Answer: !
Reference: Break-Even Analysis
Difficulty: Easy
Keywords: break-even quantity, slope
#2. =se the information in Table A.1. Assume the fi$e! costs an! sales price in both locations are
constants an! the variable costs in 'an "rancisco are as shown in the table. By how much
woul! the variable cost in Tuttle have to rise to ive both locations an i!entical break-even
point for the Beular mo!el2
a. 7/.&/
b. 7(.&/
c. 71/.&/
!. 71(.&/
Answer: c
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, variable cost
#
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
Use the following to answer questions 33 3*.
A company must !eci!e if it will make or buy an item it nee!s. The company can make the item
for 71/ per unit, but must invest 71(,/// in toolin to !o so. An outsi!e firm has quote! a total
price of 712 per unit to supply the quantity require! 8assume their fi$e! costs are inclu!e! in the
quote! price9.
##. 1hat is the break-even quantity in this situation2
a. *,(// units
b. ,,/// units
c. ,,2(/ units
!. ,,(// units
Answer: !
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, make-or-buy, fi$e! cost, variable cost
#&. 1hich alternative shoul! be selecte! if annual requirements are (,/// units2
a. %ake
b. Buy
c. Either %ake or BuyF costs are the same for either option at (,/// units
!. 6an3t be !etermine! with information iven
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, break-even volume, make-or-buy, fi$e! cost, variable
cost
#(. 1hat !oes the company save for the year by selectin this low-cost option 8for annual
requirements of (,/// units92
a. 71(,///
b. 7*/,///
c. 7*(,///
!. 7(,///
Answer: !
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, make-or-buy, fi$e! cost, variable cost
$
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
Use the following to answer questions 3+ 3,.
A company is consi!erin two suppliers for the purchase of a part nee!e! for manufacturin.
)articulars are as follows<
'=))05EB A< "i$e! 6osts H 7.,/// G year ?ariable 6ost G =nit H 72
'=))05EB B< "i$e! 6osts H 7#,/// G year ?ariable 6ost G =nit H 7(
#*. 1hat is the annual break-even quantity for choosin between the two suppliers2
a. 1,/// units
b. 2,/// units
c. *,/// units
!. 12,/// units
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, make-or-buy, fi$e! cost, variable cost
#,. "or an annual volume of #,/// units, which supplier shoul! be chosen2
a. 'upplier A
b. 'upplier B
c. Either 'upplier A or 'upplier B, because costs are the same for either option at #,///
units
!. 6an3t be !etermine! with information iven
Answer: a
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even point, break-even volume, make-or-buy, fi$e! cost, variable cost
#-. 1hat !oes the company save for the year by selectin this low-cost option 8for annual
requirements of #,/// units92
a. 71,///
b. 7#,///
c. 7*,///
!. 7(,///
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even point, make-or-buy, fi$e! cost, variable cost
8
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
Use the following infor%ation to answer questions 3- ...
Iou currently make a part on ol! equipment at a cost of 72/ G unit. The annual fi$e! cost for this
equipment is 7(/,///. Iou have foun! an outsi!e supplier who will make the part for 71( G unit if
you will pay their annual fi$e! costs of 72//,/// G year 8see table9.
#.. 1hat is the break even quantity between buyin an! makin2
a. #/,/// units per year
b. &/,/// units per year
c. (/,/// units per year
!. */,/// units per year
Answer: a
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, make-or-buy, fi$e! cost, variable cost
&/. 1hat are total costs to buy an annual quantity of &/,/// units2
a. 7&//,///
b. 7(//,///
c. 7-//,///
!. 7-(/,///
Answer: c
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, break-even volume, make-or-buy, fi$e! cost, variable
cost
&1. 1hat are total costs to make a quantity of &/,/// units per year2
a. 7&//,///
b. 7&(/,///
c. 7-//,///
!. 7-(/,///
Answer: !
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, make-or-buy, total cost, fi$e! cost, variable cost
&2. "or what rane of output woul! you prefer to buy2
a. / - #/,/// units per year
b. #/,/// or more units per year
c. &/,/// or more units per year
!. / J &/,/// units per year
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, rane of output, make-or-buy, fi$e! cost, variable cost
9
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
A0TEB@AT5?E "5KE+ 6C'T ?AB5AB0E 6C'T
Buy 72//,/// per year 71( per unit
%ake 7(/,/// per year 72/ per unit
Supplement A Decision Making
&#. "or what rane of output woul! you prefer to make2
a. #/,/// or more units per year
b. / J #/,/// units per year
c. / J &/,/// units per year
!. &/,/// or more units per year
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, rane of output, make-or-buy, fi$e! cost, variable cost
&&. 1hat !oes the company save for the year by selectin the low-cost option 8for annual
requirements of &/,/// units92
a. 71(/,///
b. 7#//,///
c. 7(/,///
!. 7&/,///
Answer: c
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, make-or-buy, total cost, fi$e! cost, variable cost
Use the following to answer questions .* .7.
A proposal for implementin a new pro!uct line has an annual fi$e! cost of 7*/,///, variable
cost of 7#( per unit of output, an! revenue 8sellin price9 of 7(( per unit of output.
&(. 1hat is the break-even quantity2
a. 2,/// units per year
b. #,/// units per year
c. *,/// units per year
!. 2/,/// units per year
Answer: b
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, total cost, fi$e! cost, variable cost, sellin price per unit
&*. 1hat volume of output will be necessary for an annual profit of 7*/,///2
a. 2,/// units
b. #,/// units
c. *,/// units
!. 2/,/// units
Answer: !
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, volume of output, total cost, fi$e! cost, variable cost,
profit
!0
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
&,. 1hat sellin price woul! be necessary to enerate an annual profit of 7./,///, if e$pecte!
volume is *,/// units per year 8assume fi$e! costs remain at 7*/,///, an! variable cost per
unit at 7#(92
a. 7#/ G unit
b. 7&/ G unit
c. 7(/ G unit
!. 7*/ G unit
Answer: !
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, total cost, fi$e! cost, variable cost, sellin price per unit
&-. A company is screenin i!eas for new services. "ive alternative service i!eas are bein
consi!ere!. %anaement i!entifie! four criteria an! weihte! them as follows< A H #/, B H 1/, 6
H 2/, an! + H &/. They have also come up with score! values for the five alternatives an! the
four criteria as shown followin. %anaement has !eci!e! that if an alternative has less than
a total score! value of *//, it shoul! automatically be reLecte!. =se the preference matri$
technique to !etermine which i!ea shoul! be accepte!.

a. 'ervice M1 or M2
b. 'ervice M# or M&
c. 'ervice M(
!. @one
Answer: !
Reference: )reference %atri$
Difficulty: %o!erate
Keywords: preference matri$
!1
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
&.. The "orsite 6ompany is screenin three new pro!uct i!eas. Besource constraints allow only
one i!ea to be commerciali4e! at the present time. The followin estimates have been ma!e
for the five performance criteria that manaement feels are most important. 5f the five criteria
are equally weihte!, what are the best an! worst alternatives2

a. A is best, an! B is worst.
b. B is best, an! 6 is worst.
c. B is best, an! A is worst.
!. 6 is best, an! A is worst.
Answer: b
Reference: )reference %atri$
Difficulty: %o!erate
Keywords: preference matri$
!2
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
(/. 6alifornia %anufacturin, 5nc. is now evaluatin two new pro!uct i!eas, an! manaement
has !eci!e! to apply the preference matri$ metho!. The followin table shows five criteria
with !ifferent weihts an! in!ivi!ual scores of each pro!uct i!ea. 5f manaement has
establishe! a threshol! of -//, which pro!uct8s9 shoul! be accepte! for further !evelopment2

a. )ro!uct A
b. )ro!uct B
c. Both pro!ucts A an! B
!. @either pro!uct A nor B
Answer: b
Reference: )reference %atri$
Difficulty: %o!erate
Keywords: preference matri$
(1. 6hoosin the alternative that is the :best of the worst; usin !ecision makin un!er
uncertainty woul! be<
a. ma$imin.
b. ma$ima$.
c. 0aplace.
!. minima$ reret.
Answer: a
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: ma$imin !ecision
(2. 6hoosin the alternative that is the best weihte! payoff usin !ecision makin un!er
uncertainty woul! be<
a. ma$imin.
b. ma$ima$.
c. 0aplace.
!. minima$ reret.
Answer: c
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: 0aplace, weihte! payoff
!
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
(#. 6hoosin the alternative that minimi4es lost-opportunity costs usin !ecision makin un!er
uncertainty woul! be<
a. ma$imin.
b. ma$ima$.
c. 0aplace.
!. minima$ reret.
Answer: !
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: opportunity cost, minima$ reret
(&. The !ecision rule in !ecision makin un!er uncertainty that woul! be best for the manaer
who has hih e$pectations woul! be<
a. ma$imin.
b. ma$ima$.
c. 0aplace.
!. minima$ reret.
Answer: b
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: ma$ima$
((. The !ecision rule in !ecision makin un!er uncertainty most appropriate for the pessimistic
manaer woul! be<
a. ma$imin.
b. ma$ima$.
c. 0aplace.
!. minima$ reret.
Answer: a
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: pessimist, ma$imin
(*. The !ecision rule most appropriate for the realistic manaer usin !ecision makin un!er
uncertainty woul! be<
a. ma$imin.
b. ma$ima$.
c. 0aplace.
!. minima$ reret.
Answer: c
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: realist, 0aplace
!!
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
Use the following to answer questions *7 +!.
(,. =sin the information in Table A.2, which alternative is best in accor!ance with a !ecision
criterion of ma$imin2
a. A
b. B
c. 6
!. +
Answer: a
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: ma$imin, !ecision theory
(-. =sin the information in Table A.2, which alternative is best in accor!ance with a !ecision
criterion of ma$ima$2
a. A
b. B
c. 6
!. +
Answer: b
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: ma$ima$, !ecision theory
(.. =sin the information in Table A.2, which alternative is best in accor!ance with a !ecision
criterion of 0aplace2
a. A
b. B
c. 6
!. +
Answer: a
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: 0aplace, !ecision theory
!"
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Tale A.2
A company that is intro!ucin a new pro!uct has to choose between three !ifferent
manufacturin metho!s, referre! to as metho!s A, B, an! 6. +epen!in on the !eman! for the
pro!uct, they have forecast !ifferent levels of revenue for the year 8values are in thousan!s9.
The company has i!entifie! three possible states of nature for economic rowth, an! name!
them >ih, %e!ium, an! 0ow.
High Medium Low
Method A %80 %#1 %8
Method B %22 %!# %100
Method C %9 %1! %"2
Method D %!! %"" %2!
Supplement A Decision Making
*/. =sin the information in Table A.2, which alternative is best in accor!ance with a !ecision
criterion of minima$ reret2
a. A
b. B
c. 6
!. +
Answer: b
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: minima$ reret
*1. =sin the information in Table A.2, which alternative is best if further stu!y reveale! that the
probability of hih rowth is /.2, the probability of me!ium rowth is /.(, an! the probability
of low rowth is /.#2
a. A
b. B
c. 6
!. +
Answer: a
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: !ecision theory, risk
Use the following to answer questions +2 +*.
*2. =se the information in Table A.#. 1hich alternative is best, iven the matri$ payoff2
a. The A alternative woul! be chosen usin the ma$imin !ecision rule.
b. The B alternative woul! be chosen usin the ma$ima$ !ecision rule.
c. The 6 alternative woul! be chosen usin the 0aplace !ecision rule.
!. The 6 alternative woul! be chosen usin the ma$imin !ecision rule.
Answer: !
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: ma$imin, payoff
!#
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
5n choosin between three new Lobs, Eoe %BA consi!ers the potential payoffs over the ne$t
three years. The followin table contains the payoffs, iven the spee! of promotion in each of
the orani4ations. The probability of fast promotion is /.*, an! the probability of slow
promotion is /.&.
Tale A.3
&lternati'e (lo) Pro*otion +ast Pro*otion
A. >ih-flyin consultant 871-/,///9 7*//,///
B. =tility analyst 72//,/// 7&//,///
6. Besearch assistant 72(/,/// 72*/,///
Supplement A Decision Making
*#. =se the information in Table A.# an! the 0aplace !ecision rule. The weihte! payoff is<
a. less than 72//,/// if the hih-flyin consultant Lob is selecte!.
b. more than 72-/,/// if the Besearch Assistant Lob is selecte!.
c. more than 72-/,/// if the utility analyst Lob is selecte!.
!. hihest for the research assistant position.
Answer: c
Reference: +ecision Theory
Difficulty: %o!erate
Keyword: 0aplace
*&. =se the information in Table A.# an! the minima$ reret !ecision rule. The ma$imum reret
is<
a. less than 7#//,/// if the hih-flyin consultant Lob is selecte!.
b. less than 7#//,/// if the utility analyst Lob is selecte!.
c. less than 7#//,/// if the research assistant Lob is selecte!.
!. lowest for the research assistant Lob.
Answer: b
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: minima$ reret
*(. =se the information in Table A.# an! the e$pecte!-value rule. 1hich statement is TB=E2
a. The e$pecte! value of the consultant Lob is more than 7#//,///.
b. The e$pecte! value of the utility analyst Lob is more than 7#//,///.
c. The e$pecte! value of the research assistant Lob is less than 72(/,///.
!. The Lob with the hihest e$pecte! value is the research assistant.
Answer: b
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: e$pecte! value
**. 1hen usin !ecision tree analysis<
a. the sum of the e$pecte! payoffs must always equal 4ero.
b. roun! no!es represent !ecision points.
c. there must be more square no!es than roun! no!es.
!. probabilities for all branches leavin a chance no!e must sum to 1./.
Answer: !
Reference: +ecision Trees
Difficulty: %o!erate
Keywords: !ecision tree, probability, no!es
*,. 5n or!er for a !ecision tree to be a valuable !ecision tool, the !ecision-maker shoul! be in a
con!ition of<
a. certainty.
b. risk.
c. uncertainty.
!. equilibrium.
Answer: b
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: !ecision tree, risk
!$
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
*-. An operations manaer has !evelope! this !ecision tree to evaluate the alternatives for a
planne! e$pansion. 5f the probability of hih !eman! is /.*, what is the best course of action2
a. Alternative A
b. Alternative B
c. Alternative 6
!. Alternative +
Answer: a
Reference: +ecision Trees
Difficulty: %o!erate
Keywords: !ecision tree, risk
!8
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
*.. A marketin !irector must !eci!e amon four alternatives for a new marketin campain. 'he
ascertains that the probability of hih !eman! is /.- an! the probability of low !eman! is /.2.
1hat is the best choice with the payoffs shown in the tree2
a. Alternative A
b. Alternative B
c. Alternative 6
!. Alternative +
Answer: b
Reference: +ecision Trees
Difficulty: %o!erate
Keywords: !ecision tree, risk
!9
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
,/. A marketin !irector must !eci!e amon four alternatives for a new marketin campain. 'he
ascertains that the probability of hih !eman! is /.&( an! the probability of low !eman! is
/.((. 1hat is the best choice with the payoffs shown in the tree2
a. Alternative A
b. Alternative B
c. Alternative 6
!. Alternative +
Answer: c
Reference: +ecision Trees
Difficulty: %o!erate
Keywords: !ecision tree, risk
"0
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
,1. Aeore Bur!ell must !eci!e amon four alternatives for an oil e$ploration proLect. >e
estimates that the probability of hih !eman! is /.# an! the probability of low !eman! is /.,.
1hat is the best choice with the payoffs shown in the tree2
a. Alternative A
b. Alternative B
c. Alternative 6
!. Alternative +
Answer: !
Reference: +ecision Trees
Difficulty: %o!erate
Keywords: !ecision tree, risk
"1
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
72. Analyze the following decision tree. Determine the missing probabilities, and identify the
alternative that maximizes the expected payoff.

8
72/
7#/
8/.,9
71/
7#/
8/.#9
8/.29
72/
7#/
7&/
1
Cption 1
Cption 2

2
#
8/.#9


8/.29
8/.(9
7(/
72/
a. Cption 1, with an e$pecte! payoff of less than 72(
b. Cption 1, with an e$pecte! payoff of 72( or more
c. Cption 2, with an e$pecte! payoff of less than 72(
!. Cption 2, with an e$pecte! payoff of 72( or more
Answer: !
Reference: +ecision Trees
Difficulty: >ih
Keywords: !ecision tree, risk
"2
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
73. Analyze the following decision tree. After determining the missing probabilities, identify
which alternative (Option 1 or Options 2) has the higher expected payoff. What is the
expected payoff?

72/
7#/
8/.&9
72/
7#/
8/.19
8/.29
7&/
71/
71(
1
Cption 1
Cption 2

2
#
8/.*9


8/.#9
8/.19
72/
71/
a. Cption 1, with an e$pecte! payoff of less than 72(
b. Cption 1, with an e$pecte! payoff of 72( or more
c. Cption 2, with an e$pecte! payoff of less than 72(
!. Cption 2, with an e$pecte! payoff of 72( or more
Answer: b
Reference: +ecision Trees
Difficulty: >ih
Keywords: !ecision tree, risk
"
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
74. Analyze the following decision tree. After determining the missing probabilities, identify
which alternative (Option 1 or Options 2) has the higher expected payoff. What is the
expected payoff?

72/
7#/
8/.#9
7#/
7&/
8/.(9
8/.#9
72/
7#/
7&/
1
Cption 1
Cption 2

2
#
8/.&9


8/.&9
8/.29
7(/
7#/
a. Cption 1, with an e$pecte! payoff of less than 7#(
b. Cption 1, with an e$pecte! payoff of no less than 7#(
c. Cption 2, with an e$pecte! payoff of less than 7#(
!. Cption 2, with an e$pecte! payoff of more than 7#(
Answer: !
Reference: +ecision Trees
Difficulty: >ih
Keywords: !ecision tree, risk
"!
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
FILL I THE !LA"
,(. The NNNNNNNNNNNN is the volume at which total revenues equal total costs.
Answer: break-even quantity
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity
,*. NNNNNNNNNNNN is the portion of total cost that remains constant rear!less of chanes in
levels of output.
Answer: "i$e! cost
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: fi$e! cost
,,. NNNNNNNNNNNN is a technique for systematically chanin parameters in a mo!el to !etermine
the effects of such chanes.
Answer: 'ensitivity analysis
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: sensitivity analysis
,-. NNNNNNNNNNNN is a eneral approach to !ecision makin when the outcomes associate! with
alternatives are often in !oubt.
Answer: +ecision theory
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: !ecision theory, alternatives
,.. 5n !ecision theory, the !ifferent courses of action that a !ecision maker can choose are calle!
NNNNNNNNNNNN.
Answer: alternatives
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: alternatives, !ecision theory
-/. A chance event that has an impact on the outcome of the choice but is not un!er the
manaer3s control is calle! a8n9 NNNNNNNNNNNN.
Answer: state of nature
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: event, state of nature
-1. A8n9 NNNNNNNNNNN shows the amount of revenue for each alternative if each possible event
occurs.
Answer: payoff table
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: payoff table, event, alternatives
""
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
-2. The !ecision rule NNNNNNNNNNNN is also referre! to as the pessimist3s criterion.
Answer: ma$imin
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: ma$imin, pessimist, !ecision rule
-#. The !ecision rule NNNNNNNNNNNN chooses the alternative that is the :best of the best.;
Answer: ma$ima$
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: ma$ima$, !ecision rule
-&. The !ecision rule NNNNNNNNNNNN chooses the alternative with the best weihte! payoff.
Answer: 0aplace
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: 0aplace, !ecision rule
-(. A8n9 NNNNNNNNNNNN is the !ifference between a iven payoff an! the best payoff for a iven
state of nature.
Answer: reret
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: minima$, !ecision, reret
-*. 5f probabilities for events can be estimate!, then the situation face! by the !ecision maker is
calle! NNNNNNNNNNNN.
Answer: !ecision makin un!er risk, risk
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: !ecision makin, risk
-,. A8n9 NNNNNNNNNNNN is a schematic mo!el of alternatives available to the !ecision maker,
alon with their possible consequences.
Answer: !ecision tree
Reference: +ecision Tree
Difficulty: %o!erate
Keywords: !ecision tree, alternatives
"#
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
SHORT AS#ERS
--. 1hat assumptions are ma!e when usin break-even analysis2
Answer: Break-even analysis is useful to evaluate new or e$istin pro!ucts or services
an! to compare pro!uction metho!sF however, !ecision makers who use this mo!el make
assumptions. Typically, sinle values are provi!e! for fi$e! an! variable cost an! for
revenues. This results in won!erfully straiht lines that !o not reflect realities such as
start-up costs, economies of scale, price breaks offere! to volume purchasers, an!
!iseconomies of scale.
Reference: Break-Even Analysis
Difficulty: Easy
Keywords: break-even analysis, fi$e! cost, variable cost
-.. 1hy shoul! a !ecision maker enae in sensitivity analysis2
Answer: 'ensitivity analysis is a technique for systematically chanin parameters in a
mo!el to !etermine the effects of such chanes. %o!els are create! with assumptions an!
the results iven by the use of a mo!el are only as oo! as the assumptions that were
ma!e in creatin the mo!el. "or techniques such as the 0aplace criterion, if the
probability for one state of nature or payoff was estimate! incorrectly, the result miht
suest a choice far !ifferent from the choice ma!e if a better estimate were use!.
Reference: +ecision Theory
Difficulty: Easy
Keywords: sensitivity analysis
"$
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
./. The site selection team you forme! last quarter meets with you in the conference room to
present the results of their thouhtful analysis. They have collectively loe! 2//,///
frequent flyer miles while con!uctin their investiation. The conference room table sas
un!er the weiht of their massive report an! all team members sport !eep tans. As the lea!er
!rones on about their completely obLective approach to the problem he proLects a sli!e
containin the followin information about their location of choice.
Bio !e Eaneiro 1eiht 8A9 'core 8B9 1eihte! 'core 8A $ B9
5nfrastructure 2/ - 1*/
=tility 6osts 2( ( 12(
0abor 'kill 2( * 1(/
0abor 6ost 2/ , 1&/
)olitical climate 1/ & &/
"inal 1eihte! 'core *1(
1hat questions !o you, a conscientious vice-presi!ent level e$ecutive, have for the team
about this portion of their analysis2
Answer: The preference matri$ provi!es a vehicle for convertin a subLective !ecision
into a !ecision that appears more obLective. This analysis shoul! be questione! rear!in
the choice of criteria, the weihts assine! to the criteria, an! the scores assine! to each
alternative. >ow !i! the committee settle on infrastructure, utility cost, labor skill, labor
cost, an! political climate as the most important factors2 >ow were weihts an! scores
assine!2 5f this is the only site3s results presente!, then what was the marin of victory
an! what were the other sites2 6omparin scores is also an issueF there is temptation to
treat the scores as havin reater sinificance than they actually carry.
Reference: )reference %atri$
Difficulty: %o!erate
Keywords: preference matri$, criteria, weiht
.1. 0ist an! !escribe !ecision rules that are use! for !ecision makin un!er uncertainty.
Answer: The !ecision rules inclu!e ma$imin, ma$ima$, 0aplace, an! minima$ reret.
%a$imin chooses the :best of the worst; an! is for the pessimist. %a$ima$ chooses the
:best of the best; an! is for the optimist. 0aplace chooses the best weihte! payoff an! is
for the realist. %inima$ reret chooses the best :worst reret.;
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: 0aplace, minima$, ma$ima$, minima$, reret
.2. =n!er what con!itions can !ecision trees be useful2
Answer: +ecision trees are useful when there is uncertainty an! sequential !ecisions are
involve!.
Reference: +ecision Trees
Difficulty: Easy
Keywords: !ecision tree, sequential !ecisions
"8
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
PROBLEMS
.#. A sinle factory pro!uces two !ifferent pro!ucts !urin each half of the year with equivalent
fi$e! costF from Eanuary throuh Eune they pro!uce )ro!uct A an! from Euly throuh
+ecember they pro!uce )ro!uct B. )ro!uct A costs twice as much to pro!uce an! is sol! at
twice the price of )ro!uct B. +erive an e$pression relatin the break-even quantity of
)ro!uct A to that of )ro!uct B.
Answer:
( )
8 9
2 8 9
2 8 9
1 1
2 2 2 2
A
A
A A
B
B
B B
A B
A B
A B
B B
A B
B B B B
F
Q
p c
F
Q
p c
F F same factory
p p A sells for twice as much as B
c c A costs twice as much as B
F F
Q Q
p c p c
=

=
=
=

= = =



The break-even point for )ro!uct A is half the quantity for )ro!uct B.
Reference: Break-Even Analysis
Difficulty: +ifficult
Keywords: break-even quantity, fi$e! cost, variable cost
"9
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
.&. A new minor leaue baseball team is comin to town an! the owners have !eci!e! to buil! a
new sta!ium, either small or lare. The success of the team with rear! to ticket sales will be
either hih or low with probabilities of /.,( an! /.2(, respectively. 5f !eman! for tickets is
hih, the lare sta!ium woul! provi!e a payoff of appro$imately 72/ million. 5f ticket sales
are low, the loss on the lare sta!ium woul! be 7( million. 5f a small sta!ium is constructe!,
an! ticket sales are low, the payoff is 7(//,/// after !e!uctin the cost of construction. 5f
ticket sales are hih, the team can choose to buil! an upper !eck, or to maintain the e$istin
facility. E$pan!in the sta!ium in this scenario has a payoff of 71/ million, whereas
maintainin the same number of seats has a payoff of only 7# million.
a. +raw a !ecision tree for this problem.
b. 1hat shoul! manaement !o to achieve the hihest e$pecte! payoff2
Answer:
'mall 'ta!ium< /.2(87(//,///9 O /.,(871/,///,///9 H 7,,*2(,///
0are 'ta!ium< /.2( 8-7(,///,///9 O /.,(872/,///,///9 H 71#,,(/,///
'elect the lare sta!ium base! on e$pecte! value.
Reference: +ecision Trees
Difficulty: %o!erate
Keywords: !ecision tree, risk
#0
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
,%"-
.o)
%20-
%0."-
%10-
%-
.o)
High
High
.2"
.2"
.$"
.$"
.arge
(*all
/uild
0o
1ot
/uild
2
1
Supplement A Decision Making
.(. The >ill C3Beans 6offee 6ompany operates a chain of coffee shops !owntown an! has
!eci!e! to open a new store. The !eman! will be weak, fair, or stronF probabilities are /.2(,
/.#/, an! /.&(, respectively.
5f the company installs a small booth that sells only coffee, the associate! payoffs are -
72(,///F 2(,///F an! 71//,/// for weak, fair, an! stron !eman!. 5f the company chooses an
e$pan!e! facility that offers san!wiches an! breakfast foo!s, it must buil! a kitchen an! rent
a!!itional space. The payoffs for an e$pan!e! facility are -72//,///, -72(,///, an! 7(//,///.
a. +raw a !ecision tree for this problem.
b. 1hat shoul! manaement !o to achieve the hihest e$pecte! payoff2
Answer:
'mall< .2(8P2(,///Q9 O .#/82(,///9 O .&(81//,///9 H &*,2(/
E$pan!< .2(8P2//,///Q9 O .#/8P2(,///Q9 O .&(8(//,///9 H 1*,,(//
Therefore, e$pan! base! on the e$pecte! value.
Reference: +ecision Trees
Difficulty: %o!erate
Keywords: !ecision tree, risk
#1
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
,%200,000
2ea3
%"00,000
,%2",000
(trong
.2"
.2"
.!"
.!"
E4pand
(*all
%2",000
%100,000
,%2",000
(trong
.0
+air
2ea3
.0
+air
1
Supplement A Decision Making
.*. Reith %onroe is !eci!in amon four alternatives an! fleshes out the !ecision tree shown
below. >e has !evelope! e$cellent estimates of payoffs but a!mits he has no clue about the
probabilities for the two states of nature. >e wants to cover all of his bases, so he woul! like
to calculate the probability of hih !eman! for which each alternative is superior. Analy4e
this situation an! make recommen!ations for him. >e promises to cut you in for #/S of the
profits if you can show him how to calculate the ranes.
Answer: Approaches to this problem may vary. The value for each alternative is iven by
this set of equations<
< -// (//
< .// 2(/
< *(/ *(/
< #// .//
1
< -// (//81 9 #// (//
HIGH LOW A
HIGH LOW B
HIGH LOW C
HIGH LOW D
LOW HIGH
HIGH HIGH A HIGH
Alternative A p p V
Alternative B p p V
Alternative C p p V
Alternative D p p V
p p
Alternative A p p V p
Alter
+ =
+ =
+ =
+ =
=
+ = = +
< .// 2(/81 9 *(/ 2(/
< *(/ *(/81 9 *(/
< #// .//81 9 *// .//
HIGH HIGH B HIGH
HIGH HIGH C
HIGH HIGH D HIGH
native B p p V p
Alternative C p p V
Alternative D p p V p
+ = = +
+ = =
+ = = +
#2
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
The secon! set of equations create lines as !isplaye! in the raph, which shows the
e$pecte! monetary value of the four alternatives plotte! aainst the probability of hih
!eman! as it ranes from / to 1.
The raph shows that Alternative + is initially superior, ivin way to Alternative 6,
which yiel!s to Alternative A, which is supplante! by Alternative B as the probability of
hih !eman! increases from / to 1. These three intersections on the raph can be
!etermine! by settin up three sets of simultaneous equations.
T
*// .// *(/
*// 2(/
.&1*
D HIGH C
HIGH
HIGH
D C
V p V
p
p
= + = =
=
=
T
*(/ #// (//
1(/ #//
.(
C HIGH A
HIGH
HIGH
C A
V p V
p
p
= = + =
=
=
T
#// (// *(/ 2(/
2(/ #(/
.,1&2-*
A HIGH HIGH B
HIGH
HIGH
A B
V p p V
p
p
= + = + =
=
=
To summari4e<
Range /est Alternati0e
/./ - /.&1*, +
/.&1*, - /.( 6
/.( - /.,1&# A
/.,1&# - 1./ B
Reference: +ecision Trees
Difficulty: +ifficult
Keywords: !ecision tree, risk
.,. A company is screenin i!eas for new services. "our alternative service i!eas are bein
consi!ere!. %anaement i!entifie! four criteria an! weihte! them as follows< A H &/, B H #/, 6
H 2/, an! + H 1/. They have also come up with score! values for the five alternatives an! the
#
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
four criteria as shown followin. %anaement has !eci!e! that if an alternative has less than
a total score! value of *//, it shoul! automatically be reLecte!. =se the preference matri$
technique to !etermine which i!ea shoul! be accepte!.
Alternative
6riteria
1 2 # &
A . - & #
B * , ( 1/
6 . ( - *
+ 2 ( . -
Answer:
&lternati'e 1 2eight 5A6 (core 5B6 2eighted (core 5A 4 B6
& !0
9
#0
/ 0
6
180
C 20
9
180
0 10
2
20
+inal 2eighted (core $!0
&lternati'e 2 2eight 5A6 (core 5B6 2eighted (core 5A 4 B6
& !0
8
20
/ 0 7 210
C 20 5 100
0 10 5 "0
+inal 2eighted (core #80
&lternati'e 2eight 5A6 (core 5B6 2eighted (core 5A 4 B6
& !0
4
1#0
/ 0 5 1"0
C 20 8 1#0
0 10 9 90
+inal 2eighted (core "#0
&lternati'e ! 2eight 5A6 (core 5B6 2eighted (core 5A 4 B6
& !0
3
120
/ 0 10 00
C 20 6 120
0 10 8 80
+inal 2eighted (core #20
Therefore, select Alternative 1, with a weihte! score of ,&/.
Reference: )reference %atri$
Difficulty: %o!erate
Keywords: preference matri$
#!
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
.-. A manufacturin firm is consi!erin an entirely new pro!uct that will require a!!itional
capital equipment, trainin, an! an a!!ition to their e$istin facility that will cost 7(/,/// per
year. The proLecte! retail price is 7&( per unit, an! the variable cost of pro!uction is 712.(/.
1hat is the break-even for this pro!uct2 'olve usin both the raphical an! alebraic
approaches.
Answer:
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, fi$e! cost, variable cost, total cost
#"
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
7(/, ///G year
1(#-.&* unitsGyear
7&(G unit 712.(/G unit
F
Q
p c
= = =

Supplement A Decision Making
... A manufacturin firm is consi!erin whether to pro!uce or outsource the pro!uction of a new
pro!uct. 5f they pro!uce the item themselves, they will incur a fi$e! cost of 7.(/,/// per
year, but if they outsource overseas there will be a 71.( million cost per year. The a!vantae
of outsourcin overseas is the variable cost of .(U per unit, which is a fraction of their
7&#Gunit cost in their own union shop. Bear!less where these !evices are ma!e, they will
sell for 7.- each. 1hat is the break-even quantity for each alternative2 'olve this problem
raphically an! alebraically.
Answer:
Reference: Break-Even Analysis
Difficulty: %o!erate
Keywords: break-even quantity, fi$e! cost, variable cost, total cost
##
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
71, (//, ///G year
Cverseas < 1(, &((..( units
7.-G unit 7/..(G unit
F
p c
= =

7.(/, ///G year
5n-house < 1,, 2,2.,# units
7.-G unit 7&#G unit
F
p c
= =

Supplement A Decision Making
1//. A company that is intro!ucin a new pro!uct has to choose between four marketin plans,
A throuh +. The marketin plans are forecaste! to have varyin payoffs, !epen!in on
the level of a!vertisin. The probability of hih !eman! is /.* an! of low !eman! /.&. =se
the followin !ecision rules to select the marketin plan< ma$imin, ma$ima$, minima$
reret, 0aplace, an! e$pecte! value.
)ayoff 8+ollars9
%arketin )lan >ih +eman! 0ow +eman!
A 1//,/// 2(,///
B (/,/// &(,///
6 ,(,/// #(,///
+ 12(,/// 1/,///
Answer:
#$
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall
Supplement A Decision Making
Reference: +ecision Theory
Difficulty: %o!erate
Keywords: ma$imin, ma$ima$, 0aplace, minima$ reret, e$pecte! value
#8
Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall

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