3.3 - Decision making techniques

Question 1

Define Quantitative sales forecasting

Answer 1

Is a statistical technique which uses past data to make predictions about the future, in terms of sales

Question 2

What does Quantitative sales forecasting allow a business to do

Answer 2

Prepare for potential increases and decreases in demand
Organise production
Organise resources (employees, premises and raw materials)
Organise marketing

Question 3

Explain what a moving average is and what it consists of

Answer 3

Is a succession of averages derived from successive segments of a series of value. There are three period moving averages (sales average over 3 years) and four quarter moving averages (average sales over 4 quarters of the year)

Question 4

Explain the use of a line of best fit for QSF

Answer 4

Can be drawn on a QSF graph to see the general trend in sales over the time period to show an overall change in sales

Question 5

Explain what a scatter graph is

Answer 5

Shows the performance of one variable against another independent variable on a variety of occasions, used to show whether a correlation exists

Question 6

What are the limitations of quantitative sales forecasts (6)

Answer 6

Past performance is no guarantee of future sales

Businesses also need to take into account SWOT and PESTLE factors which can effect future predictions

Use of moving averages can be outdated

Extrapolating can be inaccurate and unreliable

Is a Time consuming and complex process

In dynamic markets there is rapid change and products have short life cycles , extrapolating may not be appropriate

Question 7

What is a correlation coefficient

Answer 7

Is used to show the relationship in correlation between two variables.
A +1 means a positive relationship in correlation between the two variables and -1 means a negative relationship

Question 8

Define a decision tree

Answer 8

Is a technique which shows all possible outcomes of a decision , to analyse the probability of success. Is a quantitative approach

Question 9

When may a business use a decision tree (3)

Answer 9

A new product launch
A new marketing campaign
Relocation to a new building

Question 10

Explain a decision point as part of a decision tree

Answer 10

Are points at the start of a decision tree where decisions have to be made, represented by squares

Question 11

Explain a chance node as part of a decision tree

Answer 11

Are the points where there are different possible outcomes in a decision tree, represented by circles

Question 12

Explain a probability/chance as part of the decision tree

Answer 12

Is the likelihood of possible outcomes happening , represented by a probability, sourced from backdata

Question 13

Explain the expected monetary values as part of the decision tree

Give the formula for the expected value

Answer 13

Is the financial outcome of a decision, based on predicted profits or loss

Expected value = success + failure

Question 14

Give the formula for the net gain in a decision tree

Answer 14

Expected value - cost

Question 15

Explain the advantages of decision trees for businesses (3)

Answer 15

Constructing the tree diagram may show possible causes of action not previously considered
Involves placing numerical values on decisions, improving results
Force management to take account of the risks involved in decisions

Question 16

Explain the limitations of decision trees for businesses (5)

Answer 16

Based on predicted data
Does not take into account unforeseen circumstances
Risk of bias when attaching probabilities to outcomes
Time consuming process
Time lags often occur, some numerical information may be out of date

Question 17

Define critical path analysis

Answer 17

Is a method of calculating the minimum time required to complete a project, identifying delays which could be critical to it’s completion

Question 18

Explain the critical path

Answer 18

Is the tasks involved in a project which, if delayed, could delay the project. Has no float.

Question 19

Define the Earliest Start Time for critical path analysis

How is it calculated

Answer 19

Is how soon a task in a project can begin. It is influenced by the length of time taken by tasks which must be completed before it can begin.

Is calculated by using the top right nodes.

Question 20

Define the Latest Finish Time for critical path analysis

How is it calculated

Answer 20

Is the latest time that a task in a project can finish.

Calculated using the bottom right node

Question 21

Define a free float for critical path analysis

Answer 21

Is the time by which a task can be delayed without affecting the following task

Question 22

Define a total float for critical path analysis

Answer 22

Is the time by which a task can be delayed without affecting the project, is not on the critical path.

Question 23

Define Nodes for Critical Path Analysis

Answer 23

Are positions in a network diagram which indicate the start and finish times of a task

Question 24

Explain the uses of Critical path analysis (4)

Answer 24

Efficiency- shows tasks can be completed at the same time, saving production and instillation time and use of resources. Highlighting exact delays can help a business to meet deadlines on time and avoid the costs of missing them.

Decision making- is a more scientific and objective way of making decisions. Estimating the time a project will take can be based on past information, the implications of delays can be identified, assessed and prevented.

Time based management - CPA is helpful when managing larger projects that may take weeks, months or years to complete with hundreds or thousands of tasks. Aids planning, organisation and time management.

Working capital control- CPA allows a firm to identify exactly when materials and equipment will be used in a project, allowing them to be purchased when required rather than holding costly stocks, especially important for a JIT production firm.

Question 25

Explain the limitations of Critical Path Analysis (4)

Answer 25

Information used to estimate times may be incorrect.
Changes can occur during the project which need to be taken into account when producing a network.
With very large projects CPA can become complex with hundreds of thousands of tasks to take into account.
Resources may be inflexible

Question 26

Give the formula for calculating variation in quantitative sales forecasting

Answer 26

Variation= actual sales/moving average

Question 27

Define investment

Answer 27

Refers to the purchase of capital goods and expenditure that is likely to yield a return in the future

Question 28

Define Investment Appraisal

How may it be calculated

Answer 28

Describes how a business might objectively evaluate an investment project to determine whether or not it is likely to be profitable.

There are quantitative methods that a firm might use when evaluating the return of investment that all involve comparing the capital cost of the project with the net cash flow

Question 29

Define Payback period as a method of investment appraisal

How do you find it

Answer 29

Is a method referring to the time it takes for a project to repay it’s initial investment.

1. Find initial cost of investment
2. Calculate or find net cash generated from the investment each year
3. Calculate cumulative net cash flow
4. Identify which year the investment is paid off in
5. Find month the investment is paid off in

Question 30

Give the formula for the payback period

Answer 30

Previous year cumulative net cash flow/ current year net cash/12

Question 31

Explain the advantages and disadvantages of payback period as a method of investment appraisal

Answer 31

A
Is simple to use and less time consuming
Firms can adopt to this method if they have cash flow problems
Has a focus on risk, compares risk between investments

D
Is not realistic, most investments require further investment
Ignores cash flow which arise of the payback has been reached
May encourage short term thinking

Question 32

Defined the average rate of return

Answer 32

Measures the net return each year as a percentage of the capital cost of the investment

Question 33

Give the formula for the average rate of return

Explain the steps to find it

Answer 33

Net return (profit) per year / cost of investment x 100%

1. Add all net cash flows over the years
2. Minus the original cost of the project
3. Divide this number by the number of years the project runs for
4. Divide by the cost of the project

Question 34

Explain the advantages and disadvantages of average rate of return as a method of investment appraisal

Answer 34

A
Looks at the whole profitability of the project, unlike the payback period
Focuses on the profitability of a project
Can be compared to other uses of investment funds (bank savings)
Easier to identify the opportunity cost of investment

D
Ignores the time value of money
Does not consider external factors that can affect profitability of a project

Question 35

Define Net present value

Answer 35

Is the present value of future income from an investment project, as the value of money decreases over time

Question 36

Define a discount table

Answer 36

Is used when calculating the NPV, shows by how much a future value must be multiplied to calculate it’s present value

Question 37

Explain the advantages and disadvantages of Net Present Value as a investment appraisal method

Answer 37

A
Correctly accounts for the value of future earnings by calculating present values
Shareholders are clearly able to see how much a project will make in the long term
Takes into account how external factors can change each year

D
The discount rate is critical in order to be accurate
A higher NPV does not necessarily mean a better investment