3.3

Question 1

What is quantitative sales forecasting?

Answer 1

Using statistical techniques to analyse existing data in order to make decisions for the future.

Two types:
Time series analysis
Scatter graph

Question 2

What is time series analysis?

Answer 2

It looks at existing short and long term data over a period of time in order to provide information on likely current and future trends

Question 3

What is a scatter graph?

Answer 3

Shows the degree of correlation between two variables by plotting them against each other on a diagram

Question 4

What does correlation measure?

Answer 4

Measures how closely related one set of data is with other sets of data.

Question 5

What does extrapolation mean?

Answer 5

That future trends are predicted by analysing past data and making assumptions about its continuing behaviour

Question 6

Advantages of quantitative sales forecasting techniques?

Answer 6

Numerical - easier to interpret
Graphs can reveal hidden correlations
Based on data so less bias than other methods such as focus groups

Question 7

Disadvantages of quantitative sales forecasting techniques?

Answer 7

Can be too simple and miss out details
Apparent correlations may not show cause and effect e.g. ice cream and murders
Identification of past trends is no guarantee they will continue in the future

Question 8

What is investment appraisal?

Answer 8

It covers a range of analytical techniques designed to aid decision making. They help businesses decide on the relative merits of different investment projects

Question 9

What is the payback period?

Answer 9

Measures the length of time it takes to get the cost of the investment back from the net cash flow that it generates.

Question 10

How is payback calculated?

Answer 10

Cost of initial investment / net cash earned per time period

Question 11

Advantages of pay back?

Answer 11

Easy to understand
Quick
Useful for projects where speed of return is paramount
Helps if cash flow could present problems

Question 12

Disadvantages of pay back?

Answer 12

Ignores relatives rates of return
Ignores the time value of money - money now is worth more than money coming in later
Takes a short term view - ignores possible revenue earned after payback period is over

Question 13

What is the average rate of return? (ARR)

Answer 13

It’s a method of comparing the average annual level of profit with the original cost of the investment

Question 14

How to calculate ARR?

Answer 14

Average annual profit/cost of investment x100

Question 15

Advantages and disadvantages of ARR?

Answer 15

Easy to calculate and use for comparisons
Takes into account relative rates of return

Ignores timing of cash flows
Ignores the time value of the money

Question 16

What is the discounted cash flow? (DCF)

Answer 16

It takes into account the future or time value of money. Discounting is the process of adjusting the value of money recurved in the future to its present value.

Question 17

What is the net present value?

Advantages and disadvantages?

Answer 17

The sales revenue generated by the investment, less the other costs of production, all discounted from the year they are received to give their present value today.

Takes into account opportunity cost of money
Takes into account time value of money

Can be hard to calculate and interpret
The further ahead it is calculated the more inaccurate it becomes

Question 18

What are decision trees?

What do they do?

Answer 18

Mathematical models that use probability as a way of determining the best outcome.

The probability of a number of different events happening is estimated
The expected outcome or income expected from each of these events is considered
The expected value from each event can be calculated by multiplying the profitability by the expected outcome

Question 19

Advantages of decision trees?

Answer 19

Managers have to think carefully about costs, revenues & outcomes
Based on quantitative and objective data
Info is clearly shown in simple format
Sales estimates can be based on good market research

Question 20

Disadvantages of decision trees?

Answer 20

Based on quantitative data - may ignore important qualitative factors
Figures are based on edginess - inaccuracy
Outcomes in real life are more complex

Question 21

What is critical path analysis? (CPA)

Answer 21

A technique used to work out the shortest and most cost effective way to complete a project. Identifies the processes that take the longest time to complete, where avoiding delay is paramount.

Question 22

What is the earliest start time (EST)?

Why is it important?

Answer 22

Earlier possible day of the project that a task can be started on.

Important because…
Some tasks cannot be started until others have been completed.
Gives the earliest date that materials and equipment will be needed; avoids tying up working capital unnecessarily

Question 23

What is the latest finish time? (LFT)

Why is it important?

Answer 23

The latest time that a task can be completed without holding up the next task.

Important because…
Tells managers deadlines that they must meet along the way
It identifies those activities that have float time
It shows the critical path

Question 24

What is float time?

Answer 24

The spare time available between the time an activity takes place and the time it must be completed by. Activities on the critical path have no float time.

Question 25

What is free float?

Answer 25

The amount of time that an activity can be delayed without affecting the EST of the next activity.

Question 26

What is total float?

Answer 26

The total time by which an activity can be delayed without delaying the scheduled end date of the project.

Question 27

Advantages of CPA?

Answer 27

Helps to find the shortest completion time
Helps to plan most efficient use of resources and improve cash flow
Identifies the most important activities that need to be supervised closely
Encourages JIT & lean production
Clear visual aid to help managers

Question 28

Disadvantages of CPA?

Answer 28

Based on estimates > inaccurate
Without close supervision and monitoring problems can occur
CPA cannot decide how good or worthwhile a project is
Quality can be comprised to meet deadlines
Takes a lot of time and careful planning