C Section C Theory

Question 1

How to assure investment fability (NPV)

Answer 1

Using NPV

Question 2

When analysing research (background)

Answer 2

Is the data reliable and where did it come from

Question 3

When should a business stay open? (new business)

Answer 3

When it’s a new business and it is building a customer base

Question 4

What type of costs are costs incurred to bring products to the separation point?

Answer 4

Sunk costs

Question 5

What are the only relevant costs in a further processing decision?

Answer 5

Costs which are incurred after the separation points

Question 6

Why are joint processing costs relevant to assessing whether the whole process is viable?

Answer 6

Total costs to ready the products for sale need to compare to the revenue earned to determine overall process generates a profit

Question 7

What is an ERP?

Answer 7

Enterprise resources systems are software package which integrate key functions of an organisation into one software sustem that serves all needs of an organisation

Question 8

Major benefit of ERP? (visible)

Answer 8

Information is visible and can be shared across the organisation

Question 9

Major benefit of ERP? (real-time)

Answer 9

Works in real-time, meaning exact status of all key variables will be available to users at all times

Question 10

Major benefit of ERP? (reports)

Answer 10

ERP systems allow reports to be run across departments which allows company to analyse and compare functions

Question 11

Major benefit of ERP? (manual)

Answer 11

Eliminate manual tasks which can free up managers to focus on value-adding activities

Question 12

Disadvantage of ERP? (expensive)

Answer 12

ERP systems can be very expensive to set up, but costs can outweigh this

Question 13

What does the maximin decision rule involve?

Answer 13

Choosing the outcome that offers the least unattractive worst outcome

Question 14

Reasons in the external environment that cause uncertainty (technological)

Answer 14

Technological advances may take place which lead a company’s products or services to become out-dated

Question 15

Reasons in the external environment that cause uncertainty (social)

Answer 15

Social/political unrest could affect productivity

Question 16

Reasons in the external environment that cause uncertainty (inflation)

Answer 16

Inflation can cause the price of all inputs to increase or decrease

Question 17

Reasons in the external environment that cause uncertainty (workforce)

Answer 17

The workforce may not perform as well as expected

Question 18

Reasons in the external environment that cause uncertainty (exchange)

Answer 18

If company imports or exports, may suffer from adverse exchange rates

Question 19

What happens in CVP analysis if the more profitable products are sold first (fixed costs)

Answer 19

The company will cover its fixed costs more quickly

Question 20

What if breakeven point is reached earlier in CVP analysis?

Answer 20

Breakeven point will be lower

Question 21

Limitations of CVP analysis (fixed costs)

Answer 21

Fixed costs are the same in total and variable costs are the same per unit of output. This is a simplification

Question 22

When do fixed costs change in CVP analysis (output)

Answer 22

If output falls or increases substantially

Question 23

When do variable costs change in CVP analysis (scale)

Answer 23

Variable cost per unit will decrease where economies of scale are made at higher output volumes

Question 24

Limitations of CVP analysis (sales price)

Answer 24

Assumed that sales prices will be constant at all levels of activity. Price could be reduced to win extra sales at higher volumes of output

Question 25

Limitations of CVP analysis (uncertainty)

Answer 25

Uncertainty in estimates of fixed costs and unit variable costs are ignored

Question 26

What is penetration pricing?

Answer 26

A low price would be initally charged to get the product on the market and attract many customers

Question 27

When is penetration pricing favourable (elastic)

Answer 27

Highly elastic demand (e.g. the lower the price, the higher the demand

Question 28

When is penetration pricing favourable (discourage)

Answer 28

Actively trying to discourage new entrants into the market

Question 29

When is penetration pricing favourable (shorten)

Answer 29

Shortern the inital period of drug's life-cycle so as to enter the growth and maturity stages quickly

Question 30

What is market skimming?

Answer 30

High charges would initially be charged for the drug rather than low prices

Question 31

When is market skimming favourable (life cycle)

Answer 31

The product has a short life cycle and high development costs which need to be recovered

Question 32

When is market skimming favourable (barriers)

Answer 32

Barriers to entry if competitors are to be deterred

Question 33

When is market skimming favourable (high prices)

Answer 33

Where high prices in the early stages of a product's life cycle are expected to generate high initial cash flows

Question 34

What is expected value?

Answer 34

A long-run weighted average of the outcomes of a decision which is repeated time and time again

Question 35

Which criteria is most useful for a risk averse maanger?

Answer 35

Criterion such as maximin

Question 36

Issues with outsourcing (quality)

Answer 36

The quality of work that the outsourcer produces needs to be considered. Cheaper products can often be at the expense of poor quality of materials or assembly

Question 37

Issues with outsourcing (cost)

Answer 37

The cost of manufacture should be compared to cost of buying in from the outsourcer

Question 38

What are future costs?

Answer 38

Any costs which have already been incurred are regarded as “sunk” costs and will prevent a cost from being considered relevant.

Question 39

What is an opportunity cost?

Answer 39

The value of the best alternative that is foregone as a result of making a decision

Question 40

Issues with outsourcing (reliability)

Answer 40

Establish how reliable the supplier is with meeting promises for delivery times

Question 41

How to determine if a company should feel confident about covering its fixed costs and making a profit?

Answer 41

Can be gauged by comparing them to the expected/actual amount

Question 42

Issue with jsut closing a business (customers)

Answer 42

Customers will be upset

Question 43

Issues with outsourcing (new company)

Answer 43

New company is extremely risky to rely on it for continuity of supplies

Question 44

What does the shadow price represent?

Answer 44

Maximum premium above the normal rate a business should be willing to pay for more of a scarce resource

Question 45

Would managers usually like time-off?

Answer 45

Yes

Question 46

What is usually done when a new product is launched?

Answer 46

Some form of market stimulant is often necessary

Question 47

When there's a low price, what does this usually say about a product's quality?

Answer 47

It is low

Question 48

issues with theoretical pricing model (competition)

Answer 48

Depends on the market structure being one which there is perfect competition and monopoly

Question 49

issues with theoretical pricing model (linear relationship)

Answer 49

Model assumes that costs and demand follow a linear relationship and that there are no step changes in fixed costs

Question 50

issues with theoretical pricing model (knowledge)

Answer 50

Model can only be used if company has detailed knowledge of demand and cost curves

Question 51

What is meant by maximax?

Answer 51

Maximising the maximum return an investor might expect. Gives the best possible return and ivnestor is a risk-taker