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Flashcards in STUDY UNIT SIX FORECASTING ANALYSIS Deck (15):
1

The statistical relationships revealed by regression and correlation analysis can be extrapolated outside the range of the data in the sample.
True.
False.

False.
Your answer is correct.
The statistical relationships revealed by regression and correlation analysis are valid only for the range of the data in the sample.

2

Regression analysis does not assume that past relationships can be validly projected into the future.
True.
False.

False.
Your answer is correct.
One of the assumptions of the linear regression model is that regression analysis assumes that past relationships can be validly projected into the future.

3

Expected value in decision analysis is
A The square root of the squared deviations.
B An arithmetic mean using the probabilities as weights.
C A measure of the difference between the best possible outcome and the outcome of the original decision.
D A standard deviation using the probabilities as weights.

B An arithmetic mean using the probabilities as weights.
This answer is correct.
Expected value analysis is an estimate of future monetary value based on forecasts and their related probabilities of occurrence. The expected value is found by multiplying the probability of each outcome by its payoff and summing the products. Expected value is thus an arithmetic mean using probabilities as weights.

4

Given demand in excess of capacity, no spoilage or waste, and full use of a constant number of assembly hours, the number of components needed for an assembly operation with an 80% learning curve should

I Increase for successive periods.
II Decrease per unit of output.

A Both I and II.
B II only.
C I only.
D Neither I nor II.

C I only.

This answer is correct.
Learning curves reflect the increased rate at which people perform tasks as they gain experience. An 80% learning curve means that the cumulative average time required to complete a unit (or the time required to produce the last unit) declines by 20% when unit output doubles in the early stages of production. Thus, as the cumulative average time per unit (or the time to complete the last unit) declines, the number of units produced per period of time increases. As more units are produced, more components are needed for the production. The number of components per unit of output is not affected by an increase in output.

5

In decision theory, those uncontrollable future events that can affect the outcome of a decision are
A Payoffs.
B States of nature.
C Nodes.
D Probabilities.

B States of nature.
This answer is correct.
Applying decision theory requires the decision maker to develop an exhaustive list of possible future events. All possible future events that might occur must be included, even though the decision maker will likely be very unsure as to which specific events will occur. These future uncontrollable events are referred to as states of nature.

6


A management accountant performs a linear regression of maintenance cost vs. production using a computer spreadsheet. The regression output shows an “intercept” value of $322,897. How should the accountant interpret this information?
A The value of y is $322,897 when x equals zero.
B The value of x is $322,897 when y equals zero.
C Maintenance cost has an average value of $322,897.
D The residual error of the regression is $322,897.

A The value of y is $322,897 when x equals zero.
This answer is correct.
In the simple regression equation y = a + bx + e, y is the dependent variable, a is the y-axis intercept (the fixed cost in a cost function), b is the slope of the regression line (the variable cost in a cost function), x is the independent variable, and e is the error term. Thus, when production (x, the independent variable) is zero, the total cost of maintenance (y, the dependent variable) is equal to fixed cost.

7

Which of the following may be used to estimate how inventory warehouse costs are affected by both the number of shipments and the weight of materials handled?
A Economic order quantity analysis.
B Correlation analysis.
C Multiple regression analysis.
D Probability analysis.

C Multiple regression analysis
This answer is correct.
Multiple regression analysis involves the use of a linear equation. This equation consists of one dependent variable and more than one independent variable. Accordingly, estimating inventory warehouse costs involves both a dependent variable and independent variables. Hence, multiple regression should be used to estimate these costs.

8

Cook Co.’s total costs of operating five sales offices last year were $500,000, of which $70,000 represented fixed costs. Cook has determined that total costs are significantly influenced by the number of sales offices operated. Last year’s costs and number of sales offices can be used as the bases for predicting annual costs. What would be the budgeted cost for the coming year if Cook were to operate seven sales offices?
A $602,000
B $700,000
C $672,000
D $586,000

C $672,000
This answer is correct.
Using the formula y = a + bx, y is the total budgeted cost, a is the fixed costs, b is the variable cost per unit, and x is the number of budgeted sales offices. The fixed costs are $70,000, the variable cost per unit is $86,000 [($500,000 – $70,000) ÷ 5], and the number of budgeted sales offices is 7. Thus, the budgeted cost for the coming year assuming seven sales offices is $672,000 [$70,000 + (7 × $86,000)].

9

If a firm is considering the use of learning curve analysis in the determination of labor cost standards for a new product, it should be advised that this technique ordinarily is most relevant to situations in which the production time per unit decreases as additional units are produced and the unit cost
A Increases slightly.
B Decreases.
C Increases or decreases in an unpredictable manner.
D Does not change.

B Decreases.
This answer is correct.
The learning curve is a cost function showing that the time required for production and therefore the average cost per unit decrease as production rises.
View Subunit 6.3 Outline

10

Under frost-free conditions, Cal Cultivators expects its strawberry crop to have a $60,000 market value. An unprotected crop subject to frost has an expected market value of $40,000. If Cal protects the strawberries against frost, then the market value of the crop is still expected to be $60,000 under frost-free conditions and $90,000 if there is a frost. What must be the probability of a frost for Cal to be indifferent to spending $10,000 for frost protection?

A. .167
B. .333
C. .200
D. .250

Answer (C) is correct.
If there is a frost, Cal will make $90,000 if protected and $40,000 if not protected. The $50,000 difference divided into the $10,000 spending for protection results in a .200 probability of frost at which Cal is indifferent.
(6.4.46)

11

Fact Pattern: Aerosub, Inc., has developed a new product for spacecraft that includes the production of a complex part. The manufacture of this part requires a high degree of technical skill. Management believes there is a good opportunity for its technical force to learn and improve as they become accustomed to the production process. The production of the first unit requires 10,000 direct labor hours. Management projects an 80% learning curve and wants to produce a total of eight units.

Question: 20 After completing the first unit, the estimated total direct labor hours Aerosub will require to produce the seven additional units will be

A. 56,000 hours.
B. 30,960 hours.
C. 40,960 hours.
D. 70,000 hours.

B. 30,960 hours.
Answer (B) is correct.
The cumulative total hours spent on the units can be calculated as follows:

Cumulative

Cumulative

Cumulative

Units

Average

Total
Batch

Produced

Labor Hours

Labor Hours



1

1

10,000

10,000
2

2

8,000 (10,000 × 80%)

16,000
3

4

6,400 (8,000 × 80%)

25,600
4

8

5,120 (6,400 × 80%)

40,960
Since it took a total of 40,960 hours to complete all eight units and 10,000 to complete the first one, units 2 through 8 took 30,960 hours (40,960 – 10,000).
(6.3.32)

12

A company is conducting a risk analysis on a project. One task has a risk probability estimated to be 0.15. The task has a budget of $35,000. If the risk occurs, it will cost $6,000 to correct the problem caused by the risk event. What is the expected monetary value of the risk event?

A. $6,150
B. $5,250
C. $4,350
D. $900

D. $900
Answer (D) is correct.
The expected monetary value of the risk event is the probability associated with the event multiplied by the cash flows from the event. Thus, the risk event has an expected monetary value of $900 ($6,000 × 15%).
(6.4.71)

13

In using regression analysis, which measure indicates the extent to which a change in the independent variable explains a change in the dependent variable?

A. R-squared.
B. t-statistic.
C. Standard error.
D. p-value.

A. R-squared.
Answer (A) is correct.
R-squared is also known as the coefficient of determination. It is a measure of how good the fit between the independent and dependent variable is.
(6.2.31)

14

A widely used approach that managers use to recognize uncertainty about individual items and to obtain an immediate financial estimate of the consequences of possible prediction errors is

A. Regression analysis.
B. Expected value analysis.
C. Learning curve analysis.
D. Sensitivity analysis.

D. Sensitivity analysis.
Answer (D) is correct.
After a problem has been formulated into any mathematical model, it may be subjected to sensitivity analysis. Sensitivity analysis examines how the model’s outcomes change as the parameters change.
(6.5.78)

15

Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs $2 and sells for $3 through regular stores. Any boxes not sold through regular stores are sold through Dough’s thrift store for $1. Dough assigns the following probabilities to selling additional boxes:
Additional Sales

Probability

60

.6
100

.4
What is the expected value of Dough’s decision to buy 100 additional boxes of muffins?

A. $40
B. $68
C. $28
D. $52

D. $52
Answer (D) is correct.
The expected value is determined by multiplying the probability of each outcome by its payoff and summing the products. If Dough sells 60 boxes of muffins, the profit will be $20 [(60 boxes × $1 profit) – (40 boxes × $1 loss)]. If Dough sells 100 boxes, the profit will be $100 (100 boxes × $1 profit). The expected value is
60 boxes:

$20 × .6

=

$12
100 boxes:

$100 × .4

=

40






$52