Briefly describe decision tree analysis.
define the problem, draw the tree, assign the probabilities to the states of nature, estimate payoffs for
each alternative, compute EMV
Briefly describe EVSI.
EVSI = EMV (best decision with sample information) - EMV (of best decision without sample information)
Describe the utility curve of a risk seeker.
utility increasing at an increasing rate as the monetary value increases
Describe the utility curve of a risk avoider.
utility increasing at a decreasing rate as the monetary value increases
List the five major decision criteria used when making decisions under uncertainty.
Answer: (1) maximax (optimistic), (2) maximin (pessimistic), (3) criterion of realism (Hurwicz), (4) equally
likely (Laplace), and (5) minimax regret
Which of the following statements is not correct about cost-volume-profit analysis?
CVP analysis is a decision-making tool for managers.
CVP analysis focuses on the relationship among volume and mix of units sold, prices, variable costs, fixed
costs, and profit.
CVP analysis works best when all variables are changed concurrently.
Managers use CVP analysis to evaluate how changing one key variable will impact profitability, while
holding everything else constant.
CVP analysis works best when all variables are changed concurrently.
CVP analysis works best when managers change one key variable to determine the impact on
profitability, while holding everything else constant (not while changing all variables concurrently).
Cost-volume-profit analysis assumes that total costs behave in a ________fashion.
Curvilinear
Linear
Exponential
Linear
Cost-volume-profit analysis assumes that total costs behave in a linear fashion.
Which of the following is not a key assumption of cost-volume-profit?
Costs must be fixed.
Production and sales are equal.
Changes in total cost are strictly due to changes in activity.
Total costs and revenues can be depicted with a straight line.
Costs must be fixed.
CVP assumes that all costs must be classified (or classifiable) as either fixed or variable.
Profit is indicated on a cost-volume-profit graph by:
the vertical difference between zero and the break-even point.
the horizontal difference between the revenue line and the cost line.
the vertical difference between the revenue line and the cost line.
the horizontal distance between zero and the break-even point.
the vertical difference between the revenue line and the cost line.
The vertical difference between the revenue line and the cost line is revenue minus cost, which equals
profit. The horizontal difference between these lines is the change in volume, which isn't equal to profit.
The distance between zero and the break-even point (horizontally or vertically) does not indicate profit,
since it would be less than the break-even point (indicating a loss).
Which of the following statements is correct about the break-even point?
The break-even point is the point where a company achieves its target profit.
The break-even point is the point where all variable costs are covered (but fixed costs are not).
The break-even point is the point where all fixed costs are covered (but variable costs are not).
The break-even point quantifies the number of units that must be sold to cover total costs with zero
profit.
The break-even point quantifies the number of units that must be sold to cover total costs with zero
profit.
The break-even point is the number of units that must be sold for the company to cover total costs yet
not generate a profit (i.e., profit equals zero).