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
=
=
=
= = =
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
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%0."-
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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
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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:
<ernati'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 $!0
<ernati'e 2 2eight 5A6 (core 5B6 2eighted (core 5A 4 B6
& !0
8
20
/ 0 7 210
C 20 5 100
0 10 5 "0
+inal 2eighted (core #80
<ernati'e 2eight 5A6 (core 5B6 2eighted (core 5A 4 B6
& !0
4
1#0
/ 0 5 1"0
C 20 8 1#0
0 10 9 90
+inal 2eighted (core "#0
<ernati'e ! 2eight 5A6 (core 5B6 2eighted (core 5A 4 B6
& !0
3
120
/ 0 10 00
C 20 6 120
0 10 8 80
+inal 2eighted (core #20
Therefore, select Alternative 1, with a weihte! score of ,&/.
Reference: )reference %atri$
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