Part 4C Quantitative Methods For Decision Analysis 354
Part 4C Quantitative Methods For Decision Analysis 354
Part 4C Quantitative Methods For Decision Analysis 354
D. Risk.
[2] Source: CMA 0683 5-16
Two firms share customers in the same market. Firm A
sampled its customers' buying habits and found that about [8] Source: CMA 1286 5-1
70% of its customers were repeat customers each week, Management accountants help develop and maintain
while 30% went to Firm B. Firm B found that 80% of its reporting systems that are aligned with organizational
customers remained loyal each week, while 20% switched structures and that provide useful information on an
to Firm A. If this retention and loss of customers continues organization's performance. Management decision
for a long period, the percentage of customers Firm A will processes fall into three categories:
have is
A. Nonrepetitive, nonprogrammed, and nonstrategic.
A. 70%.
B. Repetitive, nonprogrammed, and strategic.
B. 80%.
C. Repetitive, nonprogrammed, and nonstrategic.
C. 60%.
D. Nonrepetitive, nonprogrammed, and strategic.
D. 40%.
A. 300. B. $320,000.
B. 100. C. $240,000.
C. 160. D. $360,000.
choices based on past sales data. The assignments are as
follows.
[10] Source: CMA 1285 5-18
(Refers to Fact Pattern #2) Model Random Numbers
Mulvey's predetermined fixed manufacturing overhead rate --------- -----------------
would be P104 0-1
X104 2-6
A. $1.60 per machine hour. A104 7-8
S104 9
B. $3.20 per machine hour.
[15] Source: CMA 0688 5-25
C. $4.00 per machine hour. (Refers to Fact Pattern #3)
The probability that a customer will select model P104 is
D. $4.80 per machine hour.
A. 10%.
B. Model X104.
D. Means of two distributions. A. The sum of the probabilities of the events is less
than one.
C. Minimum regret.
[18] Source: CMA 1288 5-14
D. Expected monetary value. Ron Bagley is contemplating whether to investigate a labor
efficiency variance in the Assembly Department. It will cost
$6,000 to undertake the investigation and another $18,000
[14] Source: CMA 0688 5-18 to correct operations if the department is found to be
A decision maker is operating in an environment in which operating improperly. If the department is operating
all the facts surrounding a decision are known exactly, and improperly and Bagley failed to make the investigation,
each alternative is associated with only one possible operating costs from the various inefficiencies are expected
outcome. The environment is known as to amount to $33,000. Bagley would be indifferent
between investigating and not investigating the variance if
A. Certainty. the probability of improper operation is
B. Risk. A. 0.29.
C. Uncertainty. B. 0.40.
D. Conflict. C. 0.60.
D. 0.71.
[Fact Pattern #3]
A computer store sells four computer models designated as
P104, X104, A104, and S104. The store manager has [Fact Pattern #4]
made random number assignments to represent customer The management at Altron Corporation is evaluating two
new products to undertake during the next 1-year period, product has the lesser risk.
digital clocks and calculators. For each product, the
Marketing Department has estimated the possible net cash
flows and the probability of each cash flow. [22] Source: CMA 0689 5-17
A quantitative technique useful in projecting a firm's sales
Digital Clocks Calculators and profits is
------------------------ -----------------------
Probability Cash Flow Probability Cash Flow
----------- --------- ----------- ---------- A. Probability distribution theory.
25% $4,000 10% $ 0
50 5,000 50 3,000 B. Gantt charting.
25 8,000 40 10,000
Since both products have equal expected values of $5,500, C. Learning curves.
management is still undecided. John Wills, a financial
analyst, has suggested that the calculation of the standard D. Queuing theory.
deviation for each product's cash flows may aid in the
decision. He used the following data.
[Fact Pattern #5]
1/2 A company is considering three alternative machines to
レ ソ produce a new product. The cost structures (unit variable
ウn _ ウ costs plus avoidable fixed costs) for the three machines are
S = ウ・X - X)イ P ウ shown as follows. The selling price is unaffected by the
ウ e eウ machine used.
タ ル
e =1 Single purpose machine $.60x + $20,000
X = individual cash flows. Semiautomatic machine $.40x + $50,000
e Automatic machine $.20x + $120,000
_ The demand for units of the new product is described by
X = expected value of all cash flows. the following probability distribution.
P = probabilities assigned to each cash flow.
e Demand Probability
------------ ------------
200,000 0.4
[19] Source: CMA 1288 5-25 300,000 0.3
(Refers to Fact Pattern #4) 400,000 0.2
John Wills is using the standard deviation to assist in the 500,000 0.1
decision process because he is
[23] Source: CMA 0689 5-26
A. Measuring the size of the constraints. (Refers to Fact Pattern #5)
Ignoring the time value of money, the expected cost of
B. Determining the frequency of an event. using the semiautomatic machine is
[27] Source: CMA 0689 5-30 D. Some amount other than those given.
(Refers to Fact Pattern #6)
The price one is willing to pay for perfect information is
[31] Source: CMA 1289 5-21
A. $68. (Refers to Fact Pattern #7)
The estimated demand for pretzels at the next home
B. $40. football game using a deterministic approach based on the
most likely outcome is
C. $48.
A. 4,000 pretzels.
D. $104.
B. 4,400 pretzels.
A. Most appropriate when the relationship between [32] Source: CMA 1289 5-22
the two variables is expressed by an exponential (Refers to Fact Pattern #7)
(non-linear) graph. The conditional profit per game of having 4,000 pretzels
available but only selling 3,000 pretzels is
B. Based on a two-dimensional model and the
A. $1,800.
formula, y = a + bx.
B. $2,100.
C. Useful in determining variable costs per unit
produced, but is not related to fixed costs. C. $2,800.
D. Quantitative, but is not expressed graphically. D. Some amount other than those given.
[29] Source: CMA 1289 5-15 [33] Source: CMA 1289 5-23
Statistical quality control often involves the use of control (Refers to Fact Pattern #7)
charts whose basic purpose is to The conditional profit per game of having 4,000 pretzels
available and selling all 4,000 pretzels is
A. Determine when accounting control procedures
are not working. A. $1,200.
D. $30.00. A. $3,900.
B. $2,200.
[37] Source: CMA 0690 5-19
Alsen Company is in the process of preparing its budget. C. $1,360.
As part of the process, the company has prepared sales
estimates and estimated the probability associated with D. $1,960.
each sales estimate. Which one of the following techniques
should be used by Alsen to determine sales for budgeting
purposes? [42] Source: CMA 1292 4-23
(Refers to Fact Pattern #9)
A. Linear programming. If the probability of hot weather given a hot weather
forecast is 50%, how much would the vendor be willing to
B. Minimax regret criteria. pay for the forecast?
A. $600.
[47] Source: CMA 1293 4-29
B. $300. The modeling technique to be employed in a situation
involving a sequence of events with several possible
C. $1,000. outcomes associated with each event is
[45] Source: CMA 1293 4-26 [50] Source: CMA 1286 5-5
The expected value of perfect information is the The average amount of change in a dependent variable that
is associated with a change in an independent variable is
A. Same as the expected profit under certainty. determined through
B. Sum of the conditional profit (loss) for the best A. Factor analysis.
event of each act times the probability of each event
occurring. B. Normal analysis.
B. y. A. Under risk.
C. b. B. Under uncertainty.
D. x. C. Under certainty.
D. Through satisficing.
[63] Source: Publisher
(Refers to Fact Pattern #11)
The error term is [68] Source: CIA 1194 III-60
A company uses two major material inputs in its
A. a. production. To prepare its manufacturing operations
budget, the company has to project the cost changes of
these material inputs. The cost changes are independent of
B. y. one another. The purchasing department provides the
following probabilities associated with projected cost
C. b. changes:
[65] Source: Publisher A. The total probability associated with all possible
In a simple linear regression, constant variance means occurrences equals 1.
A. A range of values constructed from the regression B. It can be modeled by means of a formula or graph
equation results for a specified level of probability. that provides the probability for every possible
outcome.
B. A variability about the least squares line that is
uniform for all values of the independent variable in C. Only one outcome is possible.
the sample.
D. It concerns a random variable.
C. The underlying assumptions of the regression
equation that are not met.
[70] Source: CIA 1189 III-19
D. That errors in successive observations are not Flowcharts and decision trees both show flow or
independent. sequencing. Unlike the flowchart, however, a decision tree
shows
[71] Source: CIA 1195 II-14 D. Under conditions of uncertainty, the first task is to
In a large computer manufacturer, there has been much establish subjective probabilities of occurrence for the
concern about the consistency across departments in multiple outcomes.
adhering to new and unpopular purchasing guidelines. An
auditor has a list that rank-orders all departments according
to the percentage of purchases that are consistent with the [75] Source: Publisher
guidelines and indicates which division the department is The least exact method for separating fixed and variable
from. The auditor performs a t-test for differences in means costs is
on the average rank of departments in divisions A and B to
see if there is any difference in compliance with the policy A. The least squares method.
and finds that division A (which has more departments) has
a significantly higher (i.e., better) average rank than division B. Computer simulation.
B. Which one of the following conclusions should be drawn
from this analysis? C. The high-low method.
D. A t-test is inappropriate for this data, and another B. Internal allocations of costs to different segments
type of analysis should be used. of the firm.
A. I/(L - C) - 1. Ho: オ ・1
Ha: オ > 1
B. (I + C)/L.
C.
C. 1 - I/(L - C).
Ho: オ = 1
D. Greater than I/C. Ha: オ > 1
D.
[80] Source: CIA 0587 III-44
The statistical quality control department prepares a control Ho: オ = 0
chart showing the percentages of defective production. Ha: オ < 1
Simple statistical calculations provide control limits that
indicate whether assignable causes of variation are
explainable on chance grounds. The chart is particularly [84] Source: Publisher
valuable in determining whether the quality of materials (Refers to Fact Pattern #14)
received from outside vendors is consistent from month to The appropriate means for testing this hypothesis is
month. What is the best term for this chart?
A. A z-statistic.
A. C chart.
B. A t-statistic.
B. P chart.
C. An F-statistic.
C. R chart.
D. A Q-statistic.
D. X-bar chart.
C. 400
[Fact Pattern #17]
D. 800 Brown Maintenance Services has been performing
technical maintenance service on a wide variety of business
machines for small businesses in a large metropolitan area
[Fact Pattern #16] for many years. Brown has been considering a change in its
The table below shows the estimated probabilities of the fee structure. The analysis requires a probability distribution
proportions of defective units resulting from a production for each week for the number of anticipated service calls
run. Each defective unit costs the company $100, and each related to each of several different types of equipment.
production run consists of 100 units.
[99] Source: Publisher
Percentage Defective Probability (Refers to Fact Pattern #17)
-------------------- ----------- Phil Brown suggested establishing the distribution using the
1% 20% relative frequency of various numbers of weekly service
2% 20% calls over the last 4 years. The following tabulation was
3% 30% prepared:
4% 20%
5% 10% Number of Calls Number of Occurrences
--------------- ---------------------
[95] Source: Publisher 801-850 4
(Refers to Fact Pattern #16) 851-900 10
The expected percentage of defective units is 901-950 80
951-1,000 40
A. 2.80% 1,001-1,050 20
1,051-1,100 12
B. 3.00% 1,101-1,150 12
1,151-1,200 10
C. 0.90% 1,201-1,250 8
1,251-1,300 4
D. 3.45% Based on this probability distribution, the probability of
more than 1,150 calls for service during a given week is
A. 0.00% C. .17
B. 3.16% D. .11
C. 10.20%
[100] Source: Publisher
D. 1.56% (Refers to Fact Pattern #17)
Billy Brown disagreed with his brother, arguing that the
number and size of the companies with which they held
[97] Source: Publisher maintenance contracts had changed recently. He concluded
(Refers to Fact Pattern #16) that this past experience was not relevant, and the firm
The company hires a worker to oversee the machinery and would be better off recognizing their ignorance of the future
assure that no defective units are produced. What is the in the rate restructuring. Billy proposed the assumption of a
breakeven amount per production run to be paid to the uniform distribution with every possible number of calls
worker? from 801 to 1,300 being equally likely. Based on this
uniform distribution, the probability of more than 1,150
A. $100 calls during a week is
B. $200 A. .40
C. $280 B. .30
D. $295 C. .70
D. .20
[98] Source: CIA 1191 II-39
An audit of accounts payable was made to determine if the
error rate was within the stated policy of 0.5%. One [101] Source: Publisher
hundred of the 10,000 accounts payable transactions were Two projects are going to be implemented. The probability
randomly selected using a 95% confidence level. No errors for positive cash flows in each one is 1/2, and the
were found. With 95% certainty, one can conclude that the probability for negative cash flows in each one is 1/2. What
sample results is the probability that at least one of the projects will have
positive cash flows?
A. Indicate another sample is needed.
A. 0.5
B. Prove there are no errors in accounts payable.
B. 0.67
C. Indicate the null hypothesis is false.
C. 0.75
D. $366.67
D. 0.95
D. $283,333 A. $854,758
B. $223,111,000,000
[103] Source: Publisher
Bobby, a market analyst for Investing Magazine, is C. $576,272,000,000
analyzing the stock of Vandelay Industries. Bobby decides
to use the market data for the year to date to approximate D. $730,611,000,000
the standard deviation on monthly returns for Vandelay.
Given the following, what should Bobby estimate the
standard deviation to be? [107] Source: CMA Samp Q1-3
A U.S. company currently has domestic operations only. It
Month Return is considering an equal-size investment in either Canada or
-------- --------- Britain. The data on expected rate of return and the risk
January 10% associated with each of these proposed investments are
February 2% given below.
March 19%
April 25% Mean Standard
May 13% Proposed Investment Return Deviation
June 9% ------------------- ------ ---------
A. 4.79 British Investment 22% 10%
Canadian Investment 28% 15%
B. 8.07 The mean return on the company's current (domestic only)
business is 20%, with a standard deviation of 15%. Using
C. 14.53 the above data and the correlation coefficients, the
company calculated the following portfolio risk and return
D. 22.91 (based on a ratio of 50% U.S. domestic operations and
50% international operations).
No Yes B. $8 + $0.01x.
D.
C. $8 + $0.02x.
No No
D. $8 ・$0.02x.
A. Matrix algebra.
[115] Source: CMA 0681 5-13
B. Boolean algebra. (Refers to Fact Pattern #19)
What would the profit (loss) be if the company
C. Simulation techniques. manufactured and sold 300,000 gallons of cleaning fluid?
[116] Source: CMA 0683 5-5 [120] Source: CMA 1287 5-23
The personnel manager has just completed a survey on (Refers to Fact Pattern #20)
employee attitudes, working conditions, and productivity. If
He would like to analyze data subject to the constraints of
his company (i.e., salary structure, capital equipment, etc.). Pc - Py > b (R), then
The stated objectives of this company are to (1) maximize t t t-1
profits, (2) maximize safety, and (3) promote positive
employee attitudes. The decision analysis technique that A. Saving would occur.
could accomplish this analysis is
B. Earned income would exceed interest income.
A. Linear programming.
C.
B. Statistical analysis.
m would be negative.
C. Goal programming. t
D. Investments and/or stock of money would decline.
D. Dynamic programming.
A. Opportunity costs. A.
C. Simulation.
[Fact Pattern #21]
D. Matrix algebra. Merlin Company has excess capacity on two machines, 24
hours on Machine 105 and 16 hours on Machine 107. To
utilize this excess capacity, the company has two products,
[Fact Pattern #20] known as Product D and Product F, that must use both
The equality between a household's total sources and uses machines in manufacturing. Both have excess product
of funds can be represented in the form of the budget demand, and the company can sell as many units as it can
constraint model presented as follows. manufacture. The company's objective is to maximize
profits.
Py + b (1 + R) + m = Pc + b + m
t t-1 t-1 t t t Product D has an incremental profit of $6 per unit, and
If each unit utilizes 2 hours of time on Machine 105 and then
Py = earned income during time period t. 2 hours of time on Machine 107. Product F has an
t incremental profit of $7 per unit, and each unit utilizes 3
Pc = consumption spending during time period t. hours of time on Machine 105 and then 1 hour of time on
Machine 107. Let D be the number of units for Product D,
F be the number of units for Product F, and P be the C. Develop the technological matrix.
company's profit.
D. Determine how the optimal solution would react to
[123] Source: CMA 1288 5-8 changes in parameters.
(Refers to Fact Pattern #21)
The objective function for Merlin Company is
[Fact Pattern #22]
A. P = $6(4D) + $7(4F). Harrington Corporation produces three products: anchor
bolts, bearings, and casters.
B. P = (2D + 3F ・24) + (2D + F ・16).
There are 150 direct labor hours available. Machine hour
C. P = $6(2D + 3F ・24) + $7(2D + F ・16). capacity allows 100 anchor bolts, only; 50 bearings, only;
40 casters, only; or any combination of the three that does
D. P = $6D + $7F. not exceed the capacity.
D. Constraints.
[130] Source: CMA 0689 5-19
(Refers to Fact Pattern #22)
[126] Source: CMA 1288 5-11 The direct labor constraint for Harrington's linear program
(Refers to Fact Pattern #21) is
A feasible solution for Merlin Company is
A. A + B + C ・150.
A. D = 2 and F = 8.
B. Min Z = 2A + 2B + 3C.
B. D = 6 and F = 4.
C. Max Z = 2A + 2B + 3C - 150.
C. D = 12 and F = 0.
D. 2A + 2B + 3C ・150.
D. D = 8 and F = 3.
[135] Source: CMA 1291 4-24 D. Contribution margin per machine hour.
A small company makes only two products with the
following production constraints representing two machines
and their maximum availability: [139] Source: CMA 1293 4-30
A transportation model is a special case of the
2X + 3Y ・18
2X + Y ・10 A. Economic order quantity model.
X ・0; Y ・0
If B. Markov model.
X = the units of the first product.
Y = the units of the second product. C. Linear programming model.
If the profit equation is Z = $4X + $2Y, the maximum D. Dynamic programming model.
possible profit is
D. 1A + 1.5B ・600,000.
[147] Source: CMA 1285 5-11
(Refers to Fact Pattern #25)
[143] Source: CMA 1283 5-18 The algebraic formulation of the monthly nonnegativity
(Refers to Fact Pattern #24) constraints is
The constraint function for the machine capacity is
A. S, G > 0.
A. 6A + 24B ・200,000.
B. S, G < 0.
B. 1/.5A + 1.5/2.0B ・800,000.
C. S, G ・0.
C. .5A + 2B ・200,000.
D. S, G ・0.
D. (.5 + .5)A + (2 + 2)B ・200,000.
D. Queuing theory.
[Fact Pattern #25]
Belmont Company manufactures and sells shirts and gloves
in its two-department plant. Belmont employs linear [Fact Pattern #26]
programming to determine its optimum product mix. The terminology and techniques used in linear programming
Economic data pertaining to the two products are are as follows. Linear programming is a mathematical
presented as follows. technique that is designed to assist an organization in
allocating its resources. A linear programming problem
Shirt(S) Gloves, Pair (G) takes the form of
-------- ----------------
Selling price per unit $22 $40 f = A X + A X + ... + A X
Cost data per unit 11 22 nn
Variable manufacturing cost 8 12
Variable selling expense 2 4 subject to
Fixed manufacturing cost 5 9 B X + B X + ... + B X ・C1
Fixed selling expense 1 2 11 22 nn
Direct Labor Data
----------------------------
Cutting Finishing [149] Source: CMA 1286 5-25
---------- ----------- (Refers to Fact Pattern #26)
Shirt(S) 10 minutes 15 minutes The following function is the
Gloves, pair(G) 6 minutes 30 minutes
Monthly capacity 960 hours 1,920 hours f = A X + A X + ... + A X
11 22 nn
[145] Source: CMA 1285 5-9 A. Revenue function.
(Refers to Fact Pattern #25)
The algebraic formulation of Belmont's objective function is
B. Constraint function.
A. MAX Z = 10S + 16G.
C. Linear function.
B. MAX Z = 14S + 28G.
D. Objective function. C. Conditions.
D. Shadow prices.
[150] Source: CMA 1286 5-26
(Refers to Fact Pattern #26)
The following function is the [154] Source: CMA 1287 5-20
(Refers to Fact Pattern #28)
B X + B X + ... + B X ・C1 The point where N = 2 and S = 3 would
11 22 nn
A. Be the optimal solution point.
A. Variable function.
B. Be a feasible point.
B. Constraint function.
C. Lie in a corner.
C. Linear function.
D. Minimize cost.
D. Objective function.
[151] Source: CMA 0687 5-19 [156] Source: CMA 1288 5-7
(Refers to Fact Pattern #27) In linear programming, the increase in profit if one more unit
One of the constraints on Pleasant Valley's objective of a limited resource is made available is indicated by
function would be
A. The feasible solution.
A. 2V + 2B ・60.
B. Constraints.
B. 3V + B ・60.
C. Shadow prices.
C. V + 3B ・100.
D. The objective function.
D. $8V + $8B ・$600.
A. Parametric model. hours of time on Machine 105 and then 1 hour of time on
Machine 107. Let D be the number of units for Product D,
B. Present value model. F be the number of units for Product F, and P be the
company's profit. A feasible solution for Merlin Company
C. Economic order quantity model. is where
B. D = 6 and F = 4.
[153] Source: CMA 1287 5-19
(Refers to Fact Pattern #28) C. D = 12 and F = 0.
The two inequality functions are
D. D = 8 and F = 3.
A. Constraints.
[159] Source: CMA 1291 4-20 [164] Source: CMA 0695 4-10
A transportation model is a special case of the The Mix and Match Company has two products, Product
X and Product Y, that it manufactures through its
A. Markov model. production facilities. The contribution margin for Product X
is $15 per unit, whereas Product Y's contribution is $25.
B. Linear programming model. Each product uses Materials A and B. Product X uses 3
pounds of Material A, and Product Y uses 6 pounds.
C. Dynamic programming model. Product X requires 6 feet of Material B and Product Y
uses 4 feet. The company can only purchase 600 pounds
D. Critical path method. of Material A and 880 feet of Material B. The optimal mix
of products to manufacture is
[161] Source: CMA 0694 4-11 B. Marginal change in profit associated with a change
(Refers to Fact Pattern #29) in the contribution margin of one of the variables.
The two inequality functions are
C. Unused capacity available once the optimal
A. Contributions. solution is obtained.
C. Be a feasible point.
[Fact Pattern #30]
D. Be an infeasible point. A financial analyst has been asked to forecast net income
over the next 3 years using the computer spreadsheet
below. The actual results for year 1 are shown in column B.
Net sales and cost of goods sold are projected to increase
at the rate of 20% each year. Selling and administrative [171] Source: CIA 1191 III-38
expenses are projected to increase at an annual rate of A company has two production and two service
10%. However, several mistakes have been made in the departments. Each service department provides service to
spreadsheet below. the two production departments and to the other service
department. In allocating service department costs, the
A B C D E company would like to account for the service provided by
--------------------------------------------------------- each service department to the other. To do so, it could
1 Year 1 Year 2 Year 3 Year 4 use
-------- -------- -------- --------
2 Net sales $400,000 $480,000 $480,000 $576,000 A. Matrix algebra.
3 Cost of goods sold 310,000 372,000 372,000
446,400 B. Regression analysis.
4 Gross profit 90,000 108,000 108,000 129,600
5 Selling expenses 30,000 33,000 36,300 39,930 C. Game theory.
6 Administrative
expenses 40,000 44,000 48,400 58,080 D. Sensitivity analysis.
7 Income before taxes 20,000 31,000 23,300 31,590
8 Income taxes at 40% 8,000 12,400 9,320 12,636
9 Net income 12,000 18,600 13,980 18,954 [172] Source: CIA 1187 III-45
A set of simultaneous equations reads:
[167] Source: CMA 0696 4-8
(Refers to Fact Pattern #30) 6X + 3X = 49
A correct formula for cell D2 is 1 2
12X + 2X = 17
A. +C2 x 1.2 1 2
If the equations were placed in a matrix format it would be
B. +B2 x 1.2
A.
C. +C2 + (.2 x B2)
レ ソレ ソ
D. +B2 + (.2 x B2) ウ x ウ ウ 6 3 49 ウ
ウ 1ウ ウ ウ
ウ x ウ ウ 12 2 17 ウ
[168] Source: CMA 0696 4-9 ウ 2ウ ウ ウ
(Refers to Fact Pattern #30) タ ルタ ル
Which one of the cells listed below contains an incorrect
formula? B.
A. D4 レ ソレ ソレ ソ
ウ 6 3 ウ ウ x ウ ウ 49 ウ
B. D8 ウ ウ ウ 1ウ ウ ウ
ウ 12 2 ウ ウ x ウ ウ 17 ウ
C. E6 ウ ウ ウ 2ウ ウ ウ
タ ルタ ルタ ル
D. C1
C.
レ ソレ ソレ ソ
[169] Source: CMA 0696 4-10 ウ 6 3 ウ ウ 49 ウ ウ x ウ
(Refers to Fact Pattern #30) ウ ウ ウ ウ ウ 1ウ
If all of the errors in the formulas in the spreadsheet were ウ 12 2 ウ ウ 17 ウ ウ x ウ
corrected, the correct projected net income for year 4 ウ ウ ウ ウ ウ 2ウ
would be タ ルタ ルタ ル
A. $21,858 D.
B. $37,410 レ ソレ ソレ ソ
ウ x ウ ウ 6 3 ウ ウ 49 ウ
C. $90,978 ウ 1ウ ウ ウ ウ ウ
ウ x ウ ウ 12 2 ウ ウ 17 ウ
D. $88,074 ウ 2ウ ウ ウ ウ ウ
タ ルタ ルタ ル
C. Differential calculus.
[174] Source: CIA 1189 III-47
What process is used when calculus is employed to D. Integral calculus.
determine a firm's maximum profit for a given revenue
function?
[179] Source: CIA 1194 III-58
A. Integration. An investment company is attempting to allocate its
available funds between two investment alternatives, stocks
B. Differentiation. and bonds, which differ in terms of expected return and
risk. The company would like to minimize its risk while
C. Operations research. earning an expected return of at least 10% and investing no
more than 70% in either of the investment alternatives. An
D. Regression analysis. appropriate technique for allocating its funds between
stocks and bonds is
B. Differential cost.
[176] Source: CIA 1195 III-11
Quality control programs employ many tools for problem C. Alternative costs.
definition and analysis. A scatter diagram is one of these
tools. The objective of a scatter diagram is to D. Opportunity costs.
D. Show the vital trend and separate trivial items. Maintenance = $40,000 + .25C
Cleaning = $60,000 + .2M
Food Service = $50,000 + .1M + .45C
[177] Source: Publisher In addition, there are two production departments:
Heniser Pet Foods manufactures two products, X and Y. Assembly and Finishing. Maintenance workers spend
about 35% of their time in each of the two production (Refer to Figure 7.) Using the information collected, the
departments. Cleaning employees spend about 15% of organization should focus on
their time in each production department. Food service
devotes 90% of its efforts to Assembly and 10% to A. The total number of personal computer complaints
Finishing. that occurred.
C. $20,264
[186] Source: CIA 1195 III-16
D. $28,948 (Refers to Fact Pattern #32)
(Refer to Figure 7.) The chart displays
D. $83,211 A. 3, 4, 6, and 7.
B. 1, 5, 6, and 8.
[184] Source: Publisher
Yummy-for-Your-Tummy, Inc. is introducing a new line of C. 2, 4, 5, 6, and 8.
diet specialty dog food composed of genetically altered
corn and wheat. There will be two types of dog food, D. 3, 5, 6, and 7.
"Puppy" and "Inactive Dog," with expected unit profits of
$10 and $15, respectively. The number of pounds of corn
and wheat needed per unit of Puppy food is 2 and 3, [188] Source: CIA 1192 III-42
respectively. The number of pounds of corn and wheat (Refers to Fact Pattern #33)
needed per unit of Inactive Dog food is 4 and 2, (Refer to Figure 8.) If a series of profit lines for X and Y
respectively. A local mill delivers 100 pounds of corn and are drawn on the graph, the mix of X and Y that will result
80 pounds of wheat weekly. What is the optimal weekly in the maximum profit can be determined from
production schedule?
A. The last point in the feasible solution region
A. 0 Puppy; 25 Inactive Dog
touched by a profit line.
B. 20 Puppy; 10 Inactive Dog
B. Any point on the boundary of the feasible solution
C. 10 Puppy; 20 Inactive Dog region touched by a profit line.
D. 15 Puppy; 17.5 Inactive Dog C. The first point on the feasible solution region
boundary that intersects a profit line.
[Fact Pattern #32] D. Any point on the demand constraint that intersects
An organization has collected data on the complaints made a profit line.
by personal computer users and has categorized the
complaints.
[189] Source: Publisher
[185] Source: CIA 1195 III-15 Yummy-for-Your-Tummy, Inc. is introducing a new line of
(Refers to Fact Pattern #32) diet specialty dog food composed of genetically altered
corn and wheat. There will be two types of dog food,
"Puppy" and "Inactive Dog," with expected unit profits of B. Funz-N-Oonz Inc.
$10 and $15, respectively. The number of pounds of corn
and wheat needed per unit of Puppy food is 2 and 3, C. Moonsammy and Associates.
respectively. The number of pounds of corn and wheat
needed per unit of Inactive Dog food is 4 and 2, D. Step-N-Wolf Intl.
respectively. A local mill delivers 100 pounds of corn and
80 pounds of wheat weekly. What is the optimal weekly
production schedule? [193] Source: CPA 0591 I-44
On January 1, 2001, Hooks Oil Co. sold equipment with a
A. 0 Puppy; 25 Inactive Dog carrying amount of $100,000 and a remaining useful life of
10 years to Maco Drilling for $150,000. Hooks
B. 20 Puppy; 10 Inactive Dog immediately leased the equipment back under a 10-year
capital lease with a present value of $150,000. It will
C. 10 Puppy; 20 Inactive Dog depreciate the equipment using the straight-line method.
Hooks made the first annual lease payment of $24,412 in
D. 15 Puppy; 17.5 Inactive Dog December 2001. In Hooks's December 31, 2001 balance
sheet, the unearned gain on the equipment sale should be
D. $0
[192] Source: Publisher
(Refers to Fact Pattern #34)
If each of the four companies manufactured and sold [196] Source: CPA 0593 I-31
100,000 gallons of cleaning fluid, which firm would have On December 31, 2001, Dirk Corp. sold Smith Co. two
the largest profits? airplanes and simultaneously leased them back. Additional
information pertaining to the sale-leasebacks follows:
A. Redler Company.
Plane #1 Plane #2 PRODUCT
-------- ---------- -------
Sales price $600,000 $1,000,000 A B C
Carrying amount, 12/31/01 $100,000 $550,000 -- -- --
Remaining useful life, Selling price per unit $7 $6 $5
12/31/01 10 years 35 years Variable cost per unit 5 3 1
Lease term 8 years 3 years Fixed cost per unit 1 1 2
Annual lease payments $100,000 $200,000 Management used linear programming to generate the
In its December 31, 2001 balance sheet, what amount following solution:
should Dirk report as deferred gain on these transactions?
PRODUCT VALUE REDUCED VALUE
A. $950,000 ------- ----- -------------
A 100 8
B. $500,000 B ? 2
C 150 0
C. $450,000 CONSTRAINT VALUE SHADOW PRICE
---------- ----- ------------
D. $0
Machine X 0 ?
Machine Y 400 0
[197] Source: CPA 0592 T-32 Machine Z 500 0
Rig Co. sold its factory at a gain, and simultaneously leased Demand A 100 0
it back for 10 years. The factory's remaining economic life Demand C 150 0
is 20 years. The lease was reported as an operating lease.
At the time of sale, Rig should report the gain as a(n) [199] Source: Publisher
(Refers to Fact Pattern #35)
A. Extraordinary item, net of income tax. How many available machine hours for the production of B
does machine X have?
B. Asset valuation allowance.
A. 600 hours.
C. Separate component of stockholders' equity.
B. 800 hours.
D. Deferred credit.
C. 1,150 hours.
D. $0
[201] Source: Publisher
(Refers to Fact Pattern #35)
[Fact Pattern #35] If management has decided to maximize the number of units
A company produces three products, A, B, and C, using of B, what is the combined total contribution margin of
three different machines, X, Y, and Z. Management has products A, B, and C produced by machine Z?
decided that at least 100 units of product A must be
manufactured. Marketing research indicates that the A. $550
company's maximum market share for product C is 150
units. B. $1,000
C. $885,800.
[205] Source: CMA 0688 5-1
Jay Vee Enterprises is evaluating whether to introduce a D. $708,640.
new product in its sports equipment product line. The
company has had significant experience in marketing new
sports products and has obtained a number of sales [209] Source: CMA 0688 5-14
estimates from its sales force. An appropriate method to When using PERT, the expected time for an activity, given
analyze the anticipated sales level for the new product an optimistic time (A), a pessimistic time (B), and a most
would be likely time (m), is calculated by which of the following
formulas?
A. Queuing theory.
A. (4a + m + 4b)/6.
B. Expected value analysis.
B. (a + 4m + b)/6.
C. The Markov process.
C. (a + b)/2.
D. Contribution margin analysis.
D. (b - a)/2.
Cumulative Total Cumulative Costs B. Shortest path through the network with the least
Units Produced Materials Labor amount of slack.
-------------- --------- --------
10 $ 60,000 $120,000 C. Shortest path through the network.
20 120,000 192,000
40 240,000 307,200 D. Most costly path through the network.
At LCB, variable overhead is applied on the basis of $1.00
per direct labor dollar. Based on historical costs, LCB
knows that the production of 40 engines will incur [211] Source: CMA 0688 5-16
When making a cost/time trade-off in PERT analysis, the
first activity that should be crashed is the activity
[216] Source: CMA 1291 4-22
A. With the least amount of slack. Huron Company plans to bid on a special project that calls
for a total of 24,000 units. The units will be produced in
B. On the critical path with the lowest unit crash cost. lots, with the first lot consisting of 750 units. Based on prior
experience, the direct labor time needed per unit of product
C. On the critical path with the maximum possible will be progressively smaller by a constant percentage rate
time reduction. as experience is gained in the manufacturing process. The
quantitative method that would best estimate Huron's total
D. With the lowest unit crash cost. cost for the project is
A. Determine the degree that the constraints vary. C. Discounted cash flow techniques.
D. Gantt charting.
[218] Source: CMA 1280 5-6
A university has several small construction and repair
[214] Source: CMA 0690 5-20 projects for the maintenance crew to perform. There are a
Pallis Enterprises has a warehouse with a loading dock that limited number of painters, woodworkers, and electricians.
is used to unload railroad freight cars. Pallis maintains The method that will help provide the fastest completion of
records of daily incoming cars that are delivered to the all jobs is
warehouse during the night. On any given night, zero to six
freight cars could be delivered. It takes the dock workers 4 A. Queuing theory.
hours to unload each car. The company would like to
analyze the wait time (delay) involved when more than two B. Time series analysis.
freight cars are delivered. The appropriate technique to
analyze the arrival of the freight cars is C. PERT/CPM analysis.
A. Iterative analysis.
[215] Source: CMA 1291 4-17
A company is planning a multi-phase construction project. B. Regression analysis.
The time estimates for a particular phase of the project are
C. Sensitivity analysis.
Optimistic 2 months
Most likely 4 months D. Matrix analysis.
Pessimistic 9 months
Using the Program Evaluation Review Technique (PERT),
the expected completion time for this particular phase [220] Source: CMA 1284 5-9
would be Which one of the following statements best describes a
difference between basic PERT and the Critical Path
A. 4 months. Method (CPM) of network analysis?
A. A process of modeling whereby real activities are [226] Source: CMA 0688 5-6
represented in mathematical or other form. Value Supply Ltd. is implementing a new integrated
computerized accounting system. The systems development
B. A technique used to pinpoint random deviations in department has analyzed the various steps involved in
industrial processes and other repetitive operations. implementing the system and has assigned time and cost
estimates to complete the project. The method used to
C. A technique used to separate costs into fixed and monitor the installation process is
variable portions.
A. Queuing theory.
D. An inventory management model that is used to
calculate the optimum order quantity. B. Regression analysis.
B. Queuing models.
[223] Source: CMA 1285 5-23
ZorbaCo has developed a comprehensive budget using a C. Internal rate of return.
microcomputer spreadsheet. ZorbaCo's sales manager
wishes to study the effects of: (1) decreasing selling price in D. An expected value table.
order to increase sales volume, and (2) putting
salespersons on commission instead of fixed salaries.
These [228] Source: CMA 0690 5-22
options can best be studied on the microcomputer by using High Tech Industries, Inc. is in the process of preparing a
competitive bid for the sale of a customized product. High
A. Linear programming. Tech is currently manufacturing a comparable specialized
component that is labor intensive with a long production
B. Decision tree analysis. run. The method that High Tech should use to project the
cost of manufacturing the proposed new customized
C. Simulation. product is
B. The critical path method (CPM). [229] Source: CMA 1291 4-16
The critical path through a network is
C. The performance evaluation and review technique
(PERT). A. The shortest path through the network.
C. The models can be refined as more evidence from [235] Source: CIA 0592 III-69
results becomes available. Activity scheduling information for the installation of a new
computer system is given below.
D. The simulation can solve for the desired levels of
several key variables given the model criteria. Activity Immediate Duration
Predecessor (Days)
-------- ----------- --------
[231] Source: CIA 0589 III-44 A - 4
Management would like to project the company's ending B - 3
cash balance. Because of the large number of variables that C A 9
could affect the ending cash balance, the wide ranges of D A 6
values that these variables may take, and the probabilities E B, D 5
associated with these values, it is not feasible to use analytic For this project, the critical path is
models to estimate the cash balance. The company plans to A. A-C.
develop a computerized model for projecting cash flows.
By varying the inputs to the model, various possible ending B. B-E.
cash balances can be estimated. This method of estimating
the distribution of the ending cash balance is C. A-D-E.
A. Simulation. D. B-D-C.
[232] Source: CMA 1287 5-26 B. Is a backup activity to replace a main activity
PERT is widely used to plan and measure progress toward should it fail.
scheduled events. PERT is combined with cost data to
produce a PERT-Cost analysis to C. Could be delayed without delaying the overall
project.
A. Calculate the total project cost inclusive of the
additional slack time. D. Involves essentially no time to complete.
D. Activity DE 2 weeks.
[244] Source: CMA 0683 5-8
A company is simulating the actions of a government
[240] Source: CMA 1291 4-17 agency in which 50% of the time a recall of a product is
A company is planning a multi-phase construction project. required, 40% of the time only notification of the buyer
The time estimates for a particular phase of the project are about a potential defect is required, and 10% of the time no
action on its part is required. Random numbers of 1 to 100
Optimistic 2 months are being used. An appropriate assignment of random
Most likely 4 months numbers for the recall category would be
Pessimistic 9 months
Using the Program Evaluation Review Technique (PERT), A. 1-40.
the expected completion time for this particular phase is
B. 40-90.
A. 2 months.
C. 61-100.
B. 4 months.
D. 11-60.
C. 4 ス months.
D. The rate of arrival is greater than the rate of [246] Source: CMA 0688 5-17
service. A PERT network has only two activities on its critical path.
These activities have standard deviations of 6 and 8,
respectively. The standard deviation of the project
[242] Source: CMA 0692 4-5 completion time is
time of Job #181 and, at the same time, report the highest
A. 7. possible income for the year. California Building should
crash
B. 10.
A. Activity BC 1 week and activity EF 1 week.
C. 14.
B. Activity BC 2 weeks.
D. 48.
C. Activity EF 2 weeks.
D. $41,800.
[252] Source: CMA 0689 5-25
A Gantt chart
[248] Source: CMA 1288 5-20
(Refers to Fact Pattern #37) A. Shows the critical path for a project.
If Moss Point had experienced a 70% learning curve, the
bid for the 150 units would B. Is used for determining an optimal product mix.
A. Show a 30% reduction in the total direct labor C. Shows only the activities along the critical path of
hours required with no learning curve. a network.
B. Include increased fixed overhead costs. D. Does not necessarily show the critical path
through a network.
C. Be 10% lower than the total bid at an 80%
learning curve.
[253] Source: CMA 0690 5-21
D. Include 6.40 direct labor hours per unit at $8.50 Through the use of decision models, managers thoroughly
analyze many alternatives and decide on the best
per hour. alternative
for the company. Often the actual results achieved from a
particular decision are not what was expected when the
[249] Source: CMA 1288 5-24 decision was made. In addition, an alternative that was not
California Building Corporation uses the critical path selected would have actually been the best decision for the
method to monitor construction jobs. The company is company. The appropriate technique to analyze the
currently 2 weeks behind schedule on Job #181, which is alternatives by using expected inputs and altering them
subject to a $10,500-per-week completion penalty. Path before a decision is made is
A-B- C-F-G-H-I has a normal completion time of 20
weeks, and critical path A-D-E-F-G-H-I has a normal A. Expected value analysis.
completion time of 22 weeks. The following activities can
be crashed: B. Linear programming.
[256] Source: CMA 1291 4-23 D. Longest path through the network with the least
Manning Corporation is preparing a proposal for the amount of slack.
government to produce a steam generator to be used in
nuclear submarines. Manning has three factories that can
initiate and complete the generator; however, completion [261] Source: CMA 0694 4-3
times vary due to different technologies and older When making a cost/time trade-off in PERT (Program
equipment within each of the three factories. The decision Evaluation Review Technique) analysis, the first activity that
tool that would best assist Manning in its factory selection is should be crashed is the activity
C. Path that has the largest amount of time associated A. Is always positive.
with it.
B. Interprets variances in terms of the independent
D. Number of days an activity can be delayed variable.
without forcing a delay for the entire project.
C. Ranges in size from negative infinity to positive
infinity.
[264] Source: CMA 1291 4-26
Automite Company is an automobile replacement parts D. Is a measure of the relative relationship between
dealer in a large metropolitan community. Automite is two variables.
preparing its sales forecast for the coming year. Data
regarding both Automite's and industry sales of
replacement parts as well as both the used and new [269] Source: CMA 1291 4-27
automobile sales in the community for the last 10 years Automite Company is an automobile replacement parts
have been accumulated. If Automite wants to determine if dealer in a large metropolitan community. Automite is
there is a historical trend in the growth of its sales as well as preparing its sales forecast for the coming year. Data
the growth of industry sales of replacement parts, the regarding both Automite's and industry sales of
company would employ replacement parts as well as both the used and new
automobile sales in the community for the last 10 years
A. Simulation techniques. have been accumulated. If Automite wants to determine if
its sales of replacement parts are patterned after the
B. Queuing theory. industry sales of replacement parts or to the sales of used
and new automobiles, the company would employ
C. Statistical sampling.
A. Simulation techniques.
D. Time series analysis.
B. Correlation and regression analysis.
A. Multiplying the data by a seasonality factor. [270] Source: CIA 0593 III-64
What coefficient of correlation results from the following
B. Ignoring it. data?
A. -0.73 C. -.89
B. -0.11 D. .75
C. 0.12
[272] Source: CIA 0595 II-46
D. 0.35 The internal auditor of a bank has developed a multiple
regression model which has been used for a number of
years to estimate the amount of interest income from
commercial loans. During the current year, the auditor C. Constant coefficient.
applies the model and discovers that the r イ value has
decreased dramatically, but the model otherwise seems to D. Variable coefficient.
be working okay. Which of the following conclusions are
justified by the change?
[274] Source: CMA 1290 4-28
A. Changing to a cross-sectional regression analysis (Refers to Fact Pattern #38)
should cause r イ to increase. The letter x in the standard regression equation is best
described as a(n)
B. Regression analysis is no longer an appropriate
technique to estimate interest income. A. Independent variable.
C. Some new factors, not included in the model, are B. Dependent variable.
causing interest income to change.
C. Constant coefficient.
D. A linear regression analysis would increase the
model's reliability. D. Coefficient of determination.
A. 0-2 minutes.
B. Server will be idle one-sixth of the time.
B. 3 minutes.
C. Average rate is 100 customers per hour.
C. 4 minutes.
D. Average customer waiting time is 2.5 minutes.
D. 5+ minutes.
B. When monthly advertising is at its average level, B. Alpha, cyclical, seasonal, and irregular.
product sales will be $800,000.
C. Alpha, cyclical, seasonal, and repetitive.
C. On average, for every additional dollar in
advertising you get $0.80 in additional sales. D. Trend, cyclical, seasonal, and repetitive.
C. Linear programming.
[298] Source: CIA 1191 III-100
The decision rule that selects the strategy with the highest D. Sensitivity analysis.
utility payoff if the worst state of nature occurs is the
B. Econometric theory.
[306] Source: CIA 1191 III-97
(Refers to Fact Pattern #40) C. Monte Carlo analysis.
If the bank uses the minimax regret criterion for selecting
the location of the branch, it will select D. Dynamic programming.
A. L2
[Fact Pattern #41]
B. L3 The following are the times required for various sequences
of activities (paths through the network) shown in a PERT
C. L4 diagram:
D. 38 days.
[319] Source: CMA 0688 5-28
The operating condition that cannot be identified by using a
[314] Source: Publisher queuing model is the
A particular manufacturing job is subject to an estimated
80% learning curve. The first unit required 50 labor hours A. Average percentage of time that a service facility
to complete. What is the cumulative average time per unit is idle.
after eight units are completed?
B. Probability of a specified number of units in the
A. 20.0 hours. queue.
B. 45.0 hours.
[321] Source: CMA 0685 5-7
C. 40.5 hours. The minimax regret decision rule is applicable to decision
making under conditions of
D. 40.0 hours.
A. Risk.
C. Maximax.
[318] Source: CMA 0688 5-27
Queuing models are concerned with balancing the cost of D. Minimax.
waiting in the queue with the
C. 3 customers. A. $560
D. 4 customers. B. $650
C. $720
[332] Source: Publisher
(Refers to Fact Pattern #43) D. $760
What is the average number of customers waiting in line,
not being served?
[337] Source: Publisher
A. .75 Rusty, the night manager at a local fast food restaurant, has
had problems with his employees not arriving on time. After
B. 1.33 doing some research, he discovered that, if his employees
were on time the night before, the probability that they
C. 4 would arrive on time again is .7. On the other hand, if they
were late the night before, the probability that they would
D. 8 arrive on time the following day is .4. What is the
probability that an employee will arrive on time the fourth
day if they arrived on time the first day?
[333] Source: Publisher
(Refers to Fact Pattern #43) A. .575
What is the average waiting time?
B. .583
A. .25 minutes.
C. .61
B. .33 minutes.
D. .7
C. .50 minutes.
A. $160 D. 50,000
B. $320
[Fact Pattern #46]
C. $640
In Canada, highway tollbooth operators are given yearly
D. $1,040 bonuses for various accomplishments. The following
information was made available: Linus has an average of 5
cars arriving in a minute and can service 7 in a minute.
[336] Source: Publisher Schroeder has an average of 4 cars arriving in a minute and
(Refers to Fact Pattern #44) can service 6 in a minute. Snoopy has an average of 5 cars
Jackson's management expects machine hours for the arriving in a minute and can service 8 in a minute. Pigpen
month of May to be 1,400 hours. What is their expected has an average of 6 cars arriving in a minute and can
service 10 in a minute. Engineering Department has developed a new fuel injection
system that can be produced in-house because of the
[340] Source: Publisher availability of production capacity.
(Refers to Fact Pattern #46)
If the yearly bonus is given to the operator with the lowest The first production run of the new fuel injection system has
average number of cars waiting in line, which operator already been completed in-house. This 80-unit production
would receive the bonus? run took 60 direct labor hours per unit to produce based
on the cumulative average labor hours per fuel injection
A. Linus. unit. Donehart has experienced an 80% learning curve with
similar products, and this experience indicates that learning
B. Schroeder. tends to cease by the time 640 systems are produced.
Donehart's direct labor cost (including employee benefits)
C. Snoopy. is $18 per direct labor hour.
A. 11.81 hours.
[352] Source: Publisher
B. 15.75 hours. (Refers to Fact Pattern #48)
To determine a confidence interval for the parameter
C. 21.50 hours. estimated by b in the regression computation, an
appropriate t-value would be selected from a table of
D. 23.625 hours. values from student's t-distribution corresponding to the
desired level of confidence and having
Answer (D) is correct. Each firm's retention and loss Answer (B) is incorrect because 100 is the mode of
of customers should be defined in equation form, and the set.
the results should be solved simultaneously. Thus,
100% of A's customers minus B's customers equals Answer (C) is incorrect because 160 is the median
70% repeat business of A plus 20% of new business value.
from B's former customers. In equation form, A's
customers are Answer (D) is correct. The mean is a simple average.
It is computed by dividing the total sales of 1,925
.7A + .2B = 100% - B. units by the 11 days. Thus, the mean is 175 units.
Similarly, the equation for Firm B's customers is
.8B + .3A = 100% - A
Simplifying the equations gives [5] Source: CMA 0685 5-14
100% - 1.2B 100% - 1.3A
A = ------------ B = ------------ Answer (A) is incorrect because 300 is the volume
.7 .8 on the day representing the midpoint of the 11-day
Substituting the B equation into the equation for A, period.
100% - 1.5 (100% - 1.3A)
A = ------------------------- Answer (B) is correct. The mode is the number that
.7 occurs most often in a set. Since 100 units is the only
100% - 150% + 1.95A = -50% + 1.95A recurring number, 100 is the mode.
A = ------------------- ------------
.7 .7 Answer (C) is incorrect because 160 is the median.
.7A = -50% + 1.95A
1.25A = 50% Answer (D) is incorrect because 100 is among the
A = 40% responses given.
[3] Source: CMA 0683 5-17 [6] Source: CMA 0685 5-15
Answer (A) is incorrect because .50 is the Answer (A) is incorrect because 300 is the volume
percentage of sales Department A processes. on the day representing the midpoint of the 11-day
period.
Answer (B) is correct. The probability that one
Answer (B) is incorrect because 100 is the mode.
[10] Source: CMA 1285 5-18
Answer (C) is correct. When data are arranged in
numerical order, one-half of the values are smaller Answer (A) is incorrect because the $4.80 fixed
than the median and one-half of the values are manufacturing overhead rate equals annual fixed costs
greater. Accordingly, this value occurs at the 50th divided by machine time ($960,000 ・200,000).
percentile. With 11 days of sales, the middle value is
the sixth item. The following is the ranking of sales in Answer (B) is incorrect because the $4.80 fixed
order of volume: 100, 100, 100, 135, 150, 160, manufacturing overhead rate equals annual fixed costs
180, 190, 200, 300, 310. The middle item (median) divided by machine time ($960,000 ・200,000).
is 160.
Answer (C) is incorrect because the $4.80 fixed
Answer (D) is incorrect because 175 is the mean. manufacturing overhead rate equals annual fixed costs
divided by machine time ($960,000 ・200,000).
[7] Source: CMA 0685 5-8 Answer (D) is correct. According to the regression
equation, the monthly fixed costs are $80,000. On an
Answer (A) is incorrect because it includes annual basis, the total is $960,000. For normal
uncertainty as part of the answer. production of 50,000 cases, 200,000 hours of
machine time are required. Allocating the $960,000
Answer (B) is incorrect because it includes of fixed costs over 200,000 hours of machine time
uncertainty as part of the answer. results in a cost of $4.80 per machine hour.
Answer (D) is correct. Decision tree analysis is used Answer (A) is incorrect because the mode is the
when various options, their consequences, and the most common variable in a set.
probabilities of those consequences can be
ascertained with a high degree of confidence. Under Answer (B) is incorrect because the median is the
conditions of uncertainty, however, probabilities are middle value in a set.
unknown.
Answer (C) is incorrect because a coefficient of
correlation indicates the strength of the linear
[8] Source: CMA 1286 5-1 relationship among two or more variables.
Answer (A) is incorrect because management Answer (D) is correct. The standard deviation is a
decision processes fall into three categories: measure of the degree of compactness of the values
repetitive, nonprogrammed, and strategic. in a population. This measure is used to help
determine appropriate sample sizes. The formula is
Answer (B) is correct. Decision making can be
classified variously. For example, repetitive decisions 1/2
concern routine, programmable, day-to-day matters, レ ソ
e.g., the automatic reordering of stock when it ウ (x - mu)イ ウ
reaches a predetermined level. Nonprogrammed ウ i ウ
decisions are the shorter-term, tactical Sigma = ウ------------ウ
implementation of the strategic decisions. Strategic ウ N ウ
decisions are aimed at setting long-term goals and タ ル
objectives and making other overall ongoing
decisions for the entity. The denominator is n - 1 when calculating the
standard deviation of a sample.
Answer (C) is incorrect because management
decision processes fall into three categories:
repetitive, nonprogrammed, and strategic. [12] Source: CMA 1286 5-7
Answer (D) is incorrect because management Answer (A) is incorrect because the t-test compares
decision processes fall into three categories: means.
repetitive, nonprogrammed, and strategic.
Answer (B) is incorrect because correlation analysis
measures the relationship among variables.
[9] Source: CMA 1285 5-17
Answer (C) is incorrect because correlation analysis
Answer (A) is incorrect because $80,000 is the measures the relationship among variables.
amount of monthly fixed costs.
Answer (D) is correct. Student's "t" distribution is a
Answer (B) is incorrect because $320,000 is the sum special distribution to be used when only small
of the fixed and variable costs. samples are available and the population variance is
not given. It is mound-shaped and symmetric like a
Answer (C) is correct. Each case requires 4 hours of normal distribution, only typically flatter with more
machine time. Thus, 5,000 cases would require variation. A small sample is usually deemed to be less
20,000 hours. At $12 per hour, the variable costs than 30. For samples larger than 30, the "t"
would total $240,000. distribution gives results similar to the standard
normal distribution. It is used to compare the means
Answer (D) is incorrect because 5,000 cases times 4 of two distributions to determine whether there is any
machine hours times the $12 variable cost equals significant difference between the two groups from
$240,000. which the means were taken.
[13] Source: CMA 0688 5-19 Answer (D) is incorrect because 20% is among the
given responses.
Answer (A) is incorrect because, in game theory, the
maximax criterion is a decision rule adopted by
risk-seeking, optimistic players who desire the largest [16] Source: CMA 0688 5-26
possible payoff and are willing to accept high risk.
The player determines the payoff for each state of Answer (A) is incorrect because Model P104
nature expected to arise after each possible decision, corresponds to numbers 0 and 1.
ascertains the maximum payoff for each decision, and
then chooses the decision with the maximum payoff. Answer (B) is correct. The third customer is
simulated by the third number drawn. Therefore, the
Answer (B) is incorrect because a player who uses third customer's purchase is represented by the
the minimax decision criterion determines the number six. The numbers two through six correspond
maximum loss for each decision possibility and then to model X104. Thus, the third customer is expected
chooses the decision with the minimum loss. This rule to purchase model X104.
produces the same result as the maximin technique,
which determines the minimum payoff for each Answer (C) is incorrect because Model A104
decision and then chooses the decision with the corresponds to numbers 7 and 8.
maximum minimum payoff. Minimax and maximin are
conservative criteria. Answer (D) is incorrect because Model S104
corresponds to number 9.
Answer (C) is incorrect because the minimum regret
criterion is used by a player who wishes to minimize
the effect of a ba d decision in either direction. It [17] Source: CMA 1288 5-5
chooses the decision that has the lowest maximum
opportunity cost (profit foregone). Answer (A) is correct. In a decision tree, the events
following from a decision are mutually exclusive.
Answer (D) is correct. A rational economic decision Also, all possible events are included. Thus, the sum
maker (one completely guided by objective criteria) of the probabilities of the events is 1.0.
will use expected monetary value to maximize his/her
gains under conditions of risk because (s)he is Answer (B) is incorrect because it is a true statement
risk-neutral. For decisions involving variability in with respect to decision trees.
outcomes, the concept of expected value provides a
rational means for selecting the best choice. Expected Answer (C) is incorrect because it is a true statement
value represents the long-term average payoff for with respect to decision trees.
repeated trials. The best choice is the one having the
highest expected value (sum of the products of the Answer (D) is incorrect because it is a true statement
possible outcomes and their respective probabilities). with respect to decision trees.
[14] Source: CMA 0688 5-18 [18] Source: CMA 1288 5-14
Answer (A) is correct. The less the variability of the Answer (A) is incorrect because, if X is less than
future results of a decision, the smaller the risk 0.40, the investigation is not cost beneficial.
involved. If each choice is associated with only one
possible outcome, no variability exists, and the Answer (B) is correct. Costs will be either $6,000 or
probability of the outcome is 1.0. Such a condition is $24,000 if the variance is investigated and either $0
one of certainty (zero variance). or $33,000 if not. The probabilities at which the
expected costs of investigation are equal to the
Answer (B) is incorrect because there would be no expected costs of not investigating can be determined
risk or uncertainty if all facts were known and there from the following equation (X = the probability that
was only one possible outcome for each alternative. operations are improper):
[15] Source: CMA 0688 5-25 Answer (D) is incorrect because the investigation
should be made if X is greater than 0.40.
Answer (A) is incorrect because 10% is the
probability of selecting S104.
[19] Source: CMA 1288 5-25
Answer (B) is correct. A total of ten random
numbers have been assigned. Of these, two (0 and 1) Answer (A) is incorrect because the standard
have been assigned to model P104. Thus, there are deviation measures dispersion (range), not the size of
two chances out of ten, or 20%, that a customer will constraints.
select that model.
Answer (B) is incorrect because frequency is given.
Answer (C) is incorrect because 50% is the
probability of selecting X104. Answer (C) is incorrect because the standard
deviation measures the dispersion of observations,
not probabilities.
Answer (A) is correct. The expected demand is
Answer (D) is correct. The standard deviation 300,000 units [(.4 x 200,000) + (.3 x 300,000) + (.2
measures the range (dispersion) of observations x 400,000) + (.1 x 500,000)]. Total expected cost is
around the mean. For example, about 95.5% of all therefore $170,000 [$50,000 fixed cost + ($.40 x
observations fall within two standard deviations of the 300,000) variable cost].
mean of a normally distributed variable.
Answer (B) is incorrect because $130,000 is
calculated by multiplying [($.4 x 200,000) +
[20] Source: CMA 1288 5-26 $50,000] instead of [($.4 x 300,000) + $50,000].
Answer (A) is incorrect because $2,250,000 is the Answer (C) is incorrect because $210,000 is
variance. Anser (C) is incorrect because $750 is the calculated by using 400,000 in the formula $.40X +
square root of $562,500. $50,000 instead of 300,000.
Answer (B) is correct. Substituting the cash flow Answer (D) is incorrect because $250,000 is
figures into the formula produces the following: calculated by using 500,000 in the formula $.40X +
$50,000 instead of 300,000.
_ _ _
X X (X - X)イ P (X - X)イ P
e e e e e [24] Source: CMA 0689 5-27
------ ------ ---------- ---- -----------
$4,000 $5,500 $2,250,000 x .25 = $ 562,500 Answer (A) is incorrect because the single purpose
5,000 5,500 250,000 x .50 = 125,000 machine is the best choice if expected demand is less
8,000 5,500 6,250,000 x .25 = 1,562,500 than 150,000.
Variance $2,250,000
The square root of $2,250,000 is $1,500. Answer (B) is incorrect because the automatic
machine is the best choice if expected demand
Answer (C) is incorrect because $750 is the square exceeds 350,000.
root of $562,500.
Answer (C) is correct. The semiautomatic machine
Answer (D) is incorrect because $353.55 is the has an expected cost of $170,000 based on an
square root of $125,000. expected demand of 300,000 units [(.4 X 200,000)
+ (.3 X 300,000) + (.2 X 400,000) + (.1 X
500,000)]. The single purpose machine has an
[21] Source: CMA 1288 5-27 expected cost of $200,000 [($.60 x 300,000) +
$20,000]. The automatic machine has an expected
Answer (A) is correct. The standard deviation for cost of $180,000 [($.20 x 300,000) + $120,000)].
clocks ($1,500) is lower than the standard deviation Hence, the semiautomatic machine has the lowest
for calculators. Thus, the range of outcomes is less expected cost at the expected level of demand.
dispersed and producing clocks is less risky.
Answer (D) is incorrect because the automatic
Answer (B) is incorrect because the greatest machine has the second lowest expected cost.
probability is for a lower rate of return.
Answer (C) is incorrect because both products are [25] Source: CMA 0689 5-28
profitable.
Answer (A) is incorrect because $(40) is the payoff
Answer (D) is incorrect because calculators have the amount when demand is 2 units.
higher standard deviation and the greater risk.
Answer (B) is incorrect because $80 is the payoff
amount when demand is 4 or 6 units.
[22] Source: CMA 0689 5-17
Answer (C) is correct. The approach to the solution
Answer (A) is correct. Probability distribution theory is to weight (multiply) the probabilities for each level
can be used to project sales. It is a mathematical of demand by the payoff for that level of demand.
method for making decisions about the likelihood of
future events (such as sales) in the face of uncertainty. Demand Payoff Probability Weighted Total
Various estimates of sales (generated from the sales ------ -------- ------------ --------------
force) can be weighted with different probabilities. 0 $(160) .1 $(16)
2 (40) .3 (12)
Answer (B) is incorrect because a Gantt chart is a 4 80 .4 32
bar chart used to measure progress toward a goal. 6 80 .2 16
Expected Profit $ 20
Answer (C) is incorrect because a learning curve
measures the benefit of experience in the early stages Answer (D) is incorrect because the expected profit
of a new task. of $20 equals the sum of the weighted totals when
supply is 4 units.
Answer (D) is incorrect because queuing
(waiting-line) theory is used to determine the optimum
balance between the cost of providing service to
reduce waiting lines and the cost of allowing waiting
lines to exist when items in the queue arrive at [27] Source: CMA 0689 5-30
random.
Answer (A) is incorrect because $68 is the amount of
profit with perfect information.
[23] Source: CMA 0689 5-26
Answer (B) is correct. The maximum amount the limit and the lower control limit. The processes are
seller should pay for perfect information is the measured periodically, and the values are plotted on
difference between the expected profit with perfect the chart. If the value falls within the control limits, no
information ($68) and the expected profit if demand action is taken. If the value falls outside the limits, the
process is considered "out of control," and an
is not known. Without the perfect information, the investigation is made for possible corrective action.
seller should purchase the supply that will result in the Another advantage of the chart is that it makes trends
maximum long-run profit. Using the information given, visible.
it can be determined that the profit will be $20 when
the supply is 4 units. It is also evident that the profit is Answer (D) is incorrect because quality control does
zero when the supply is zero. The expected profit not relate to controls over EDP operations.
must also be calculated for supply levels of 2 and 6
units. For a supply of 2 units, the expected profit is
Answer (C) is incorrect because the price paid for Answer (C) is correct. A deterministic approach
perfect information equals the difference between assumes that a value is known with certainty. If that
profits expected with perfect information and profits value is deemed to be the most likely outcome,
without perfect information, or $40 ($68 - $28). assumed demand will be 5,000 pretzels, the volume
with the highest probability (35%).
Answer (D) is incorrect because the price paid for
perfect information equals the difference between Answer (D) is incorrect because 6,000 pretzels is
profits expected with perfect information and profits merely the greatest demand.
without perfect information, or $40 ($68 - $28).
Answer (A) is incorrect because quality control does Answer (C) is correct. Each pretzel costs $.30. Thus,
not relate to controls over accounting procedures. the cost of 4,000 pretzels is $1,200 (4,000 x $.30).
Selling 4,000 pretzels at $1 each produces revenue
Answer (B) is incorrect because quality control does of $4,000. Subtracting the $1,200 of costs from the
not relate to controls over labor costs. $4,000 of revenue results in a conditional profit of
$2,800.
Answer (C) is correct. Statistical control charts are
graphic aids for monitoring the status of any process Answer (D) is incorrect because $800 assumes
subject to random variations. The chart consists of 2,000 are sold.
three horizontal lines plotted on a horizontal time
scale. The vertical scale represents the appropriate
quantitative measure. The center line represents the [34] Source: CMA 1289 5-24
average or mean value for the process being
controlled. The other two lines are the upper control Answer (A) is correct. Regardless of demand, only
the 4,000 pretzels in stock can be sold. Thus, the $30.40).
conditional profit is the $2,800 difference between
the cost of 4,000 pretzels at $.30 each ($1,200) and Answer (D) is incorrect because the most Stan would
the revenue from selling 4,000 pretzels at $1 each pay for perfect information is the difference between
($4,000). expected profit with perfect information and expected
profit without perfect information, or $2.60 ($33 -
Answer (B) is incorrect because only 4,000 units can $30.40).
be sold. The profit equals $2,800 [($1 x 4,000) -
($.30 x 4,000)].
[37] Source: CMA 0690 5-19
Answer (C) is incorrect because only 4,000 units can
be sold. The profit equals $2,800 [($1 x 4,000) - Answer (A) is incorrect because linear programming
($.30 x 4,000)]. is used to optimize a function, such as profits or
costs, given certain constraints.
Answer (D) is incorrect because only 4,000 units can
be sold. The profit equals $2,800 [($1 x 4,000) - Answer (B) is incorrect because the minimax regret
($.30 x 4,000)]. criterion is a decision rule developed in game theory.
It chooses the option with the set of outcomes that
includes the lowest maximum opportunity cost.
[35] Source: CMA 0690 5-17
Answer (C) is correct. The expected value of an
Answer (A) is incorrect because 20 units does not action is found by multiplying the probability of each
have the greatest expected value. possible outcome by its payoff and summing the
products. It represents the long-term average payoff
Answer (B) is incorrect because 30 units does not for repeated trials. If estimates of sales and
have the greatest expected value. probabilities are known, expected value analysis can
be used to determine budgeted sales.
Answer (C) is correct. Expected value analysis is a
means of selecting the best option when decisions Answer (D) is incorrect because Monte Carlo
involve risk. The expected value equals the sum of simulation involves adding random numbers to
the products of the various payoffs and their otherwise deterministic models to simulate the
respective probabilities. Stocking 40 bags for each uncertainty inherent in real-world situations.
game is the action with the greatest expected value
($30.40) according to the payoff table.
[38] Source: CMA 0690 5-25
Answer (D) is incorrect because 50 units does not
have the greatest expected value. Answer (A) is incorrect because the expected value
is a long-range average; it is likely that the expected
value will never be exactly achieved for a particular
[36] Source: CMA 0690 5-18 event.
Answer (A) is incorrect because the most Stan would Answer (B) is incorrect because expected value does
pay for perfect information is the difference between not consider present values.
expected profit with perfect information and expected
profit without perfect information, or $2.60 ($33 - Answer (C) is incorrect because probability is only
$30.40). one component of expected value.
Answer (B) is correct. Expected value analysis Answer (D) is correct. The expected value of an
estimates future monetary value based on forecasts action is found by multiplying the probability of each
and their related probabilities of occurrence. The possible outcome by its payoff and summing the
expected value is found by multiplying the probability products. It represents the long-term average payoff
of each outcome by its payoff and summing the for repeated trials. In other words, expected value is
products. The expected value of perfect information the weighted average of probable outcomes.
is the difference between the expected value under
certainty and the expected value of the optimal
decision under uncertainty. The expected value under [39] Source: CMA 0692 4-4
certainty equals the sum of the products of the profit
maximizing payoffs of perfect forecasts and the Answer (A) is incorrect because the conditional value
related probabilities. is the return given a certain condition or state of
nature.
20% x $20 = $ 4.00
40% x $30 = 12.00 Answer (B) is correct. For decisions involving risk,
30% x $40 = 12.00 the concept of expected value provides a rational
10% x $50 = 5.00 means for selecting the best alternative. The expected
------ value of a decision is found by multiplying the
Total $33.00 probability of each outcome by its payoff, and
====== summing the products. The result is the long-term
Thus, with perfect information, the proprietor could average payoff for repeated trials.
achieve an average profit of $33 per game. Without
perfect information, the expected value is only Answer (C) is incorrect because the profit forgone by
$30.40. Accordingly, up to $2.60 could be paid for not choosing the best alternative is the opportunity
perfect information ($33 - $30.40). cost.
Answer (C) is incorrect because the most Stan would Answer (D) is incorrect because expected value
pay for perfect information is the difference between represents the long-run average profit from an event.
expected profit with perfect information and expected
profit without perfect information, or $2.60 ($33 -
[40] Source: CMA 1292 4-21 problem occurred in the clothing department.
Answer (A) is incorrect because the least the Answer (C) is incorrect because the clothing
company can make by selling coffee is $1,900. department quality problems make up 1/3 of the
overall company problems.
Answer (B) is incorrect because the most the
company can make by selling coffee is $2,000. Answer (D) is correct. Weighting the percentage of
sales by the percentage of quality control problems
Answer (C) is incorrect because the most the for each department determines the annual company
company can make by selling coffee is $2,000. rate of damaged goods as follows:
Answer (C) is incorrect because the most the vendor Answer (D) is correct. Perfect information permits
could profit from perfect information on hot days certainty that a future state of nature will occur. The
would be $600 ($2,500 - $1,900). expected value of perfect information determines the
maximum amount a decision maker is willing to pay
Answer (D) is incorrect because perfect information for information. It is the difference between the
is worth $600, but information that is 50% accurate expected value without perfect information, that is,
warrants only a $300 payment. the expected value of the best action under
uncertainty, and the expected value under certainty.
Under certainty, a decision maker knows in each
[43] Source: CMA 1292 4-24 case which state of nature will occur and can act
accordingly.
Answer (A) is incorrect because the rate is 50%
(1.5% ・3%) for the hardware department.
[46] Source: CMA 1293 4-28
Answer (B) is incorrect because damages in the
clothing department contribute to 1% of the company Answer (A) is incorrect because the dependent cost
rate, but the question asks for the probability that a variable is estimated.
prospective measure.
Answer (B) is incorrect because probability
assumptions are not used in regression analysis.
[50] Source: CMA 1286 5-5
Answer (C) is correct. Regression analysis finds an
equation for the linear relationship among variables. Answer (A) is incorrect because factor analysis tries
The behavior of the dependent variable is explained to determine factors leading to a result.
in terms of one or more independent variables.
Simple regression has one independent variable, and Answer (B) is incorrect because it is not meaningful in
multiple regression has more than one. this context.
Answer (D) is incorrect because the coefficient of Answer (C) is incorrect because correlation analysis
determination may be interpreted as the proportion of determines the degree of the linear relationship
the total variation in the dependent variable that is between variables.
explained by the regression equation.
Answer (D) is correct. Regression analysis assumes
that a change in the value of a dependent variable is
[47] Source: CMA 1293 4-29 related to the change in the value of an independent
variable. It attempts to find an equation for the linear
Answer (A) is incorrect because network analysis is relationship among variables by using the least
a means of scheduling long term projects; PERT and squares method, which minimizes the sum of the
the critical path method (CPM) are examples. squares of the vertical distance between each
observation point and the regression line.
Accordingly, regression analysis determines the
Answer (B) is correct. Decision trees may be used to amount of change in a dependent variable based
describe complex decision situations. Each branch of upon changes in one or more independent variables.
the tree represents a different decision, and each twig It is an extension of correlation analysis to find a
extending from each branch represents several formula for the relationship among variables.
possible outcomes of the decision.
Answer (C) is incorrect because Monte Carlo [51] Source: CMA 0688 5-2
simulation is a technique for experimenting with
mathematical models using a computer, which Answer (A) is incorrect because Monte Carlo
generates random values for each variable. simulation involves adding random numbers to
otherwise deterministic models to simulate the
Answer (D) is incorrect because linear programming uncertainty inherent in real-world situations.
is a means of allocating scarce resources given a
specified objective and a variety of constraints. Answer (B) is incorrect because dynamic
programming is used for problems that involve
probabilistic variables and time-staged decisions, that
[48] Source: CMA 1286 5-2 is, decisions affected by previous decisions. It
involves an iterative formulation of problems. A
Answer (A) is incorrect because a probability less decision tree with probabilities for each branch
than 1.0 would not be certainty. illustrates a time-staged decision process that could
be evaluated with dynamic programming.
Answer (B) is correct. An event is certain if there is Answer (C) is correct. Regression analysis can be
no doubt that it will occur. The probability is 1.0 if an used to estimate costs and divide them into their fixed
event is certain to occur, and 0 if it is certain not to and variable components. A dependent variable is
occur. Under conditions of certainty, consequences estimated based upon the values of one or more
are therefore deterministic, not probabilistic or independent variables. The basic regression formula
unknown. explains the behavior of a dependent variable (y) in
terms of an independent variable (x). In the formula
Answer (C) is incorrect because certainty implies a for simple linear regression, a is the y-intercept (fixed
specific outcome. cost in a cost function), b is the slope of the
regression line (variable cost), and e is the error term.
Answer (D) is incorrect because it is a nonsense The formula is
answer.
y = a + bx + e
[49] Source: CMA 1286 5-3 Answer (D) is incorrect because expected value
analysis is a means of selecting the best alternative
Answer (A) is incorrect because the standard when decisions involve risk. The expected value
deviation is a measure of dispersion of a population. equals the sum of the products of payoffs and their
respective probabilities.
Answer (B) is correct. Expected value analysis is an
estimate of future monetary value based on forecasts
and their related probabilities of occurrence. The [52] Source: CMA 0688 5-20
expected value is found by multiplying the probability
of each outcome by its payoff and summing the Answer (A) is correct. The first step is to determine
products. Expected value is thus an arithmetic mean the expected value without perfect information by
using probabilities as weights. formulating a payoff matrix. For example, the
expected payoff for the combination of State of
Answer (C) is incorrect because the standard Nature S1 and Decision 1 is $2.40 (10% probability
deviation is a measure of dispersion of a population. x $24 outcome). The entire payoff matrix is
Answer (B) is correct. Expected value analysis [57] Source: CMA 1291 4-19
estimates future monetary value based on forecasts
and their related probabilities of occurrence. The Answer (A) is incorrect because network analysis is
expected value under uncertainty is found by a project scheduling technique.
multiplying the probability of each outcome (event) by
its payoff (conditional profit or loss) and summing the Answer (B) is correct. A decision tree diagram is a
products. quantitative tool for decision making used to obtain
an optimum solution when a series of related
Answer (C) is incorrect because the best event will decisions must be made. The tree will consist of
not occur every time; less desirable events will also decision choices for each decision point, possible
occur and must enter into the calculation. events that might follow from each choice, probability
estimates for each event, and quantified outcomes. A
Answer (D) is incorrect because each event must be decision tree facilitates calculation of the expected
weighted by the probability of its occurrence. value of a decision.
Answer (C) is incorrect because the Monte Carlo Answer (B) is correct. The slope of a line is a
method adds random behavior to otherwise constant equal to the proportionate change along the
deterministic models to simulate the uncertainty y axis for each change along the x axis. Thus, in a
inherent in real-world situations. regression equation, slope represents the variable
portion of the total cost in the cost function, i.e., the
Answer (D) is incorrect because queuing theory is change in cost that occurs for each one-unit change in
used to minimize the total cost of waiting lines. activity.
Answer (A) is incorrect because it does not have an Answer (D) is incorrect because e is the error term.
error term or a slope term.
Answer (B) is incorrect because it does not have an [62] Source: Publisher
error term or a slope term.
Answer (A) is incorrect because a is the y-axis
Answer (C) is correct. The equation is based upon intercept.
application of regression analysis to observations of
the independent variable x and the dependent Answer (B) is incorrect because y is the dependent
variable y. The result equates y (the dependent variable.
variable) with the sum of a (the y-intercept), bx (b is
the slope and x is the independent variable), and e Answer (C) is incorrect because b is the slope of the
(an error term). The error term indicates the degree line.
of uncertainty.
Answer (D) is correct. The independent or
Answer (D) is incorrect because a simple regression explanatory variable is the variable that is permitted
should be a linear, not curvilinear, function. to change. These changes are used to predict values
of the dependent variable.
Answer (C) is incorrect because b is the slope of the Answer (D) is correct. The error term in the equation
is e. The error term is usually assumed to have a
line. mean of zero in linear regression, thereby permitting
calculations using the formula y = a + bx.
Answer (D) is incorrect because x is the independent
variable.
[64] Source: Publisher
Answer (A) is incorrect because y is the dependent Answer (A) is incorrect because it describes a
variable. confidence interval.
Answer (B) is correct. Constant variance signifies a the costs of Material 1 and Material 2.
uniform deviation of points from the regression line.
This uniformity is based on the assumption that the
distribution of the observations and errors is not [69] Source: Publisher
affected by the values of the independent variable(s).
Answer (A) is incorrect because it is an attribute of a
Answer (C) is incorrect because constant variance is probability distribution.
one of the basic assumptions underlying regression
analysis. Answer (B) is incorrect because it is an attribute of a
probability distribution.
Answer (D) is incorrect because one of the basic
assumptions underlying regression analysis is that Answer (C) is correct. In probability distribution, the
observations are independent. probability of any event(s) is bounded by 0 (no
chance) and 1 (certainty). The total probability of all
possible outcomes must sum to 1. Also, a probability
[66] Source: Publisher distribution models a random variable through the use
of a formula or graph that provides the probability
Answer (A) is incorrect because all of the answers associated with the occurrence of certain values of
are correct. the random variable. If only one outcome is possible,
the variable is not random but constant and known
Answer (B) is incorrect because all of the answers with certainty.
are correct.
Answer (D) is incorrect because it is an attribute of a
Answer (C) is incorrect because all of the answers probability distribution.
are correct.
Answer (D) is correct. All four statements are true. [70] Source: CIA 1189 III-19
This ideal situation permits t-tests (i.e., use of the
normal distribution adjusted for degrees of freedom) Answer (A) is incorrect because a flowchart but not
to evaluate the significance of the estimates. a decision tree would depict this item.
Answer (A) is correct. Decision making under risk Answer (C) is incorrect because a flowchart but not
entails consideration of multiple possible future states a decision tree would depict this item.
of nature for each choice. The decision is under risk if
a probability distribution for these states can be Answer (D) is correct. A decision tree is a logic
estimated. Thus, the states of nature will be mutually diagram used to represent sequential decision-making
exclusive, and the sum of their probabilities will equal processes. It is useful when the most beneficial series
1.0. Risk increases as the variability of outcomes of decisions is to be chosen. The possible decisions
becomes greater. In practice, however, the terms risk for each decision point, the events that might follow
and uncertainty are often treated as synonyms. from each decision, the probabilities of these events,
and the quantified outcomes of the events should be
Answer (B) is incorrect because, under uncertainty, known to develop a decision tree. A flowchart is a
the probabilities of the possible states of nature are diagram of a repetitive logical process, such as the
unknown. steps in a computer program. Thus, it is not designed
to show particular outcomes.
Answer (C) is incorrect because, under certainty, that
is, with perfect information, the outcome of each
decision choice is known; that is, its probability is [71] Source: CIA 1195 II-14
1.0.
Answer (A) is incorrect because a t-test is not valid
Answer (D) is incorrect because satisficing decisions in this case.
are satisfactory or sufficient but not optimal.
Answer (B) is incorrect because the auditor already
has a list of the entire population, and no sampling is
[68] Source: CIA 1194 III-60 needed.
Answer (A) is correct. The joint probability of Answer (C) is incorrect because a t-test can be used
occurrence of two independent events equals the with groups that differ in size.
product of their individual probabilities. The
probability that the cost of Material 1 will increase by Answer (D) is correct. The t-distribution is used for
3% is .3. The probability that the cost of Material 2 small samples but in the same way as the normal
will increase by 3% is .5. The probability that both distribution. A t-test is not valid when used with
will occur is .15 (.3 x .5). ordinal-level data. A t-test by definition is an
application of parametric statistics. Nonparametric
Answer (B) is incorrect because 40% is the average (distribution-free) statistics is applied to problems for
of the probabilities of a 3% increase in the costs of which rank order, but not a specific distribution, is
Material 1 and Material 2. known.
[73] Source: CMA 1294 4-30 Answer (D) is incorrect because matrix algebra is a
precise method of separating fixed and variable costs.
Answer (A) is correct. Expected value analysis
provides a rational means for selecting the best
alternative in decisions involving risk. The expected [76] Source: CIA 0594 III-41
value of an alternative is found by multiplying the
probability of each outcome by its payoff, and Answer (A) is incorrect because knowing the
summing the products. It represents the long-term behavior of business cycles can be valuable when
average payoff for repeated trials. forecasting the required purchases of inventory.
Answer (B) is incorrect because simulation is not Answer (B) is correct. Internal accounting allocations
necessary. Several estimates are known. of costs to different segments of the firm are arbitrary
assignments of already incurred costs that are
Answer (C) is incorrect because the exponential irrelevant to forecasting its purchases.
distribution is the probability of zero occurrences in a
specified time period. Answer (C) is incorrect because understanding
seasonal variations in demand for the product can be
Answer (D) is incorrect because sensitivity analysis valuable when forecasting the required purchases of
involves making several estimates of key variables inventory.
and recalculating results based on the alternative
estimates; the objective is to determine how sensitive Answer (D) is incorrect because the use of
a solution is to changes in estimates. econometric models can be valuable when
forecasting the required purchases of inventory.
Answer (A) is incorrect because, under risk there are [77] Source: CIA 0594 III-99
multiple outcomes; certainty exists when only one
outcome is possible. Answer (A) is correct. Cost X is a mixed cost (part
variable and part fixed). The hi-low method can be
Answer (B) is incorrect because calculation of used to determine the fixed and variable portions.
expected values is dependent upon probabilities. Dividing the total cost of X at two different
production volumes by the difference in units
Answer (C) is incorrect because decision makers produced gives a unit variable cost of $4.83
may also rely on probabilistic information under [($178,260 - $23,700) ・(35,000 units - 3,000
conditions of risk. units)]. Fixed cost must therefore be $9,210
[$178,260 cost of X for 35,000 units - ($4.83 x
Answer (D) is correct. Probability is important to 35,000 units)]. Total cost of X for 8,000 units is
$47,850 [$9,210 + ($4.83 x 8,000 units)], and the
management decision making because of the average cost is $5.98 ($47,850 ・8,000).
uncertainty of future events. Probability techniques
assist in making the best decisions in the face of Answer (B) is incorrect because $5.85 equals the
uncertainty. There are two types of probability: average cost of 9,000 units.
objective and subjective. Objective probabilities are
calculated from either logic or actual experience. Answer (C) is incorrect because $7.90 equals the
Subjective probabilities are estimates, based on average cost of 3,000 units.
judgment and past experience, of the likelihood of
future events. In business, subjective probability can Answer (D) is incorrect because $4.83 is the variable
indicate the degree of confidence a person has in cost per unit.
some outcome. Under conditions of uncertainty, a
decision maker must first establish subjective
probabilities; only then can the decision-making [78] Source: CMA 1287 5-21
process proceed as it does under conditions of risk.
Answer (A) is correct. The sum of the probabilities
that the process is in or out of control is 1.0. Thus, if
[75] Source: Publisher P is the probability that a process is in control, (1 - P)
is its complement, or the probability that the process
Answer (A) is incorrect because the least squares is not in control.
(regression) method is a sophisticated method of
identifying the fixed and variable costs. Answer (B) is incorrect because it is a nonsense
answer.
Answer (C) is incorrect because it is a nonsense
answer. [82] Source: Publisher
Answer (D) is incorrect because it is a nonsense Answer (A) is incorrect because .0577 results from
answer. using n, not n-1, in the denominator.
[80] Source: CIA 0587 III-44 Answer (C) is incorrect because the null hypothesis is
that the population mean is equal to or less than 1
Answer (A) is incorrect because a C chart is also an calorie. The alternate hypothesis is that it is greater
attribute control chart. It shows defects per item. than 1.
Answer (B) is correct. A P chart is based on an Answer (D) is incorrect because the null hypothesis is
attribute (acceptable/not acceptable) rather than a that the population mean is equal to or less than 1
measure of a variable, specifically, the percentage of calorie. The alternate hypothesis is that it is greater
defects in a sample. than 1.
Answer (B) is incorrect because -.05 is the difference Answer (D) is incorrect because some sodas have
between the sample mean and the hypothesized true more than 1 calorie.
mean.
Answer (C) is incorrect because the value is negative. [89] Source: CMA 0697 4-22
Answer (D) is incorrect because the value is negative. Answer (A) is incorrect because $85,000 is the sales
estimate with the highest probability.
Answer (A) is correct. The degrees of freedom Answer (C) is incorrect because $68,000 is 80% of
associated with the test statistic equals the sample the sales estimate with the highest probability.
size minus the number of parameters being tested.
Measurements of calorie content were made for nine Answer (D) is correct. The expected value is
cans of diet soda; i.e., nine distinct observations were calculated by weighting each sales estimate by the
included in the sample. The only parameter tested is probability of its occurrence. Consequently, the
オ, the mean calorie content of the diet sodas, so the expected value of sales is $84,000 [$60,000 x .25) +
number of degrees of freedom is 8 (9 - 1). ($85,000 x .40) + ($100,000 x .35)]. Cost of goods
sold is therefore $67,200 (80% x $84,000).
Answer (B) is incorrect because 9 is the sample size.
Answer (B) is incorrect because there is a 70% Answer (C) is incorrect because 10.2% is the simple
probability of selling between 201 and 600 units. sum of the squares assuming an unweighted list of
only five data points.
Answer (C) is correct. The probability of selling
Answer (D) is correct. The variance is the average of in the 1,151-1,200 range, 8 in the 1,201-1,250
the squared deviations from the mean. It is found by range, and 4 in the 1,251-1,300 range. Thus, the
subtracting the mean from each value, squaring each probability of a number of calls greater than 1,150 is
difference, adding the squared differences, and simply (10 + 8 + 4) ・200 = .11.
dividing the sum by the number of data points. The
mean, or expected value, of the percentage of
defective units is 2.80%. Moreover, there are [100] Source: Publisher
effectively 100 data points in this problem because
the probabilities of possible outcomes are given Answer (A) is incorrect because the probability is
instead of a set of actual outcomes. For example, a determined by dividing the number of outcomes
20% probability of a 1% rate is the equivalent of 20 greater than 1,150 by the total number of outcomes.
occurrences of a 1% rate in a sample of 100
production runs. Accordingly, instead of dividing by Answer (B) is correct. If each of 500 outcomes
the sum of the data points in the variance formula, (1,300 - 800) is equally likely, the probability of
each squared difference can be multiplied by the more than 1,150 calls in a week is 30% [(1,300 -
related probability as shown below: 1,150) ・500].
(1.0% - 2.80%)2 x .20 = .648 Answer (C) is incorrect because the probability is
(2.0% - 2.80%)2 x .20 = .128 determined by dividing the number of outcomes
(3.0% - 2.80%)2 x .30 = .012 greater than 1,150 by the total number of outcomes.
(4.0% - 2.80%)2 x .20 = .288
(5.0% - 2.80%)2 x .10 = .484 Answer (D) is incorrect because the probability is
----- determined by dividing the number of outcomes
Variance 1.56% greater than 1,150 by the total number of outcomes.
=====
Answer (C) is incorrect because the null hypothesis Answer (B) is correct. The expected value of the
has not been disproved. land is determined by multiplying the probability of
each state of nature by the value under that particular
Answer (D) is correct. The null hypothesis is that the state of nature, and adding all of the products. Thus,
error rate is equal to or less than 0.5%. Given that no the land's expected value is (0.5)($200,000) +
errors were found, no basis for disproving the null (0.4)($100,000) + (0.1)($550,000) = $195,000.
hypothesis is presented.
Answer (C) is incorrect because $225,000 gives too
much weight to the third option.
[99] Source: Publisher
Answer (D) is incorrect because $283,333 uses a
Answer (A) is incorrect because .06 is the probability simple unweighted average of the returns from the
that over 1,200 calls will be received. three options.
Answer (C) is incorrect because the standard Answer (D) is correct. The population variance is the
deviation is the square root of the variance. average of the squared deviations from the mean. It is
found by subtracting the mean from each value,
Answer (D) is incorrect because the standard squaring each difference, adding these squared
deviation is the square root of the variance. differences, and dividing the sum by the number of
data points. The mean, or expected value, was
determined to be $2,033,000 in the previous
[104] Source: Publisher question. In this case, probabilities are given, so
instead of dividing by the sum of the data points in the
Answer (A) is incorrect because the standard variance formula, each squared difference can be
deviation is the square root of the variance. multiplied by the appropriately related probability, as
shown below.
Answer (B) is correct. Substituting the cash flow
figures into the probability-based formula for the ($1,000,000 - $2,033,000)イ x 0.18 = $192,076,020,000
population variance produces the following: ($1,200,000 - $2,033,000)イ x 0.15 = 104,083,350,000
($1,700,000 - $2,033,000)イ x 0.24 = 26,613,360,000
- -2 -2 ($2,600,000 - $2,033,000)イ x 0.22 = 70,727,580,000
X X (X - X) P (X - X) P ($3,300,000 - $2,033,000)イ x 0.21 = 337,110,690,000
e e e e e ----------------
------- ------- ---------- ---- ----------- Variance $730,611,000,000
$ 8,000 $10,200 $4,840,000 x 0.20 = $ 968,000 ================
$12,000 $10,200 $3,240,000 x 0.30 = $ 972,000 The variance is an intermediate step in the calculation
$10,000 $10,200 $ 40,000 x 0.50 = $ 20,000 of the standard deviation. The standard deviation is
2 the square root of the variance.
(Variance) ・ = $1,960,000
(Standard deviation) ・ = $ 1,400
- [107] Source: CMA Samp Q1-3
X = (0.20)($8,000) + (0.30)($12,000) + (0.50)($10,000)
= $1,600 + $3,600 + $5,000 Answer (A) is correct. The coefficient of variation is
= $10,200 useful when the rates of return and standard
Answer (D) is correct. To determine the expected Answer (C) is incorrect because the company should
value, each potential outcome is multiplied by its undertake the British investment. As a result, its
probability, and then these values are summed to give return will increase and its risk will decrease.
the expected value.
Answer (D) is incorrect because the company should
$1,000,000 x .18 = $ 180,000 undertake the British investment. As a result, its
1,200,000 x .15 = 180,000 return will increase and its risk will decrease.
1,700,000 x .24 = 408,000
2,600,000 x .22 = 572,000
3,300,000 x .21 = 693,000 [108] Source: Publisher
----------
$2,033,000 Answer (A) is incorrect because the cost of insurance
========== and installation of an alarm system is $40,000, which
is greater than the $37,500 expected loss.
their probabilistic nature. In other words, a problem
Answer (B) is incorrect because the cost of insurance is divided into a number of subproblems and then
alone is $50,000. worked backward, so each subproblem is solved
until the final solution is obtained. Decision trees are
Answer (C) is correct. If an alarm system is not an example of dynamic programming.
installed, the expected fire loss in the next year is
$75,000 [(90% x $0) + (5% x $100,000) + (3% x
$1,000,000) + (2% x $2,000,000)]. If an alarm [111] Source: CMA 1280 5-15
system is installed, the expected fire loss in the next
year is $37,500 (50% x $75,000 expected loss Answer (A) is incorrect because statistical sampling is
without an alarm system). Accordingly, if the building used to calculate the condition of a population based
is not insured, the enterprise's total cost if it does not on a sample from that population. A sample is not
install an alarm system is the expected uninsured loss needed because the life of the tires is already known,
of $75,000. If the alarm system is installed, the total as is the number of miles on each car.
cost is $39,500 ($2,000 installation cost + $37,500
expected uninsured loss). If the building is insured, Answer (B) is correct. Probability analysis can be
and the alarm system is not installed, the expected fire used to estimate the condition of the tires in the fleet
loss will be reimbursed, but an insurance premium of at any one time and the expected value of replacing
$50,000 must be paid. If the alarm system is all tires at once versus as they wear out.
installed, the expected fire loss will be reimbursed,
but the sum of the insurance premium and the Answer (C) is incorrect because linear programming
installation cost will be $40,000 {[(100% - 24%) x is used to find the most economic combination of a
$50,000] + $2,000}. Thus, the enterprise's best large number of scarce resources. An objective
course of action is not to self-insure, but to install an function is minimized, e.g., cost, or maximized, e.g.,
alarm system. profit, subject to a series of constraints, e.g., available
resources, necessary output, etc.
Answer (D) is incorrect because the expected
uninsured loss is $75,000 without an alarm system. Answer (D) is incorrect because learning curve
techniques are useful in measuring and estimating the
increased efficiency in increased production quantities
[109] Source: CIA 1190 III-15 due to increasing expertise on the part of the people
working on production.
Answer (A) is incorrect because random or normal
variations should fall within realistically determined
control limits. [112] Source: CMA 0681 5-10
Answer (B) is correct. Statistical quality control Answer (A) is incorrect because $8x + $0.01x イ is the
charts are graphic aids for monitoring the status of cost function without the constant.
any process subject to random variations. For
example, an X-bar chart depicts the sample means Answer (B) is incorrect because the first derivative of
for a variable. If the values fall within the upper and $0.01x イ is $0.02x.
lower control limits, no action is taken. Accordingly,
values outside these limits are abnormal and should
be investigated for possible corrective action. Answer (C) is correct. The marginal cost function is
the derivative of the total cost function. Remember,
Answer (C) is incorrect because random or normal the basic formula for the derivative is
variations should fall within realistically determined
control limits. n n-1
f'(Ax ) = nAx
Answer (D) is incorrect because, in time series If:
analysis, cyclic variation is the fluctuation in the value A = the constant, or number of x's
of a variable caused by change in the level of general x = the variable being differentiated
business activity. n = the exponent of the independent variable
Also recall that the derivative of the entire equation is
the sum of the derivatives of the individual elements.
[110] Source: CMA 1280 5-13 Thus, the derivative of the cost function is
Answer (B) is incorrect because statistical analysis is Answer (A) is incorrect because, assuming saving is
a mathematical technique. defined as investment, the effect on saving is
indeterminate. The stock of money may or may not
Answer (C) is correct. Goal programming permits an have been reduced in favor of greater investment. If
ordinal specification and solution to a problem with saving is defined as money held plus investment,
multiple goals. With its ability to incorporate multiple however, no saving could occur.
goals, goal programming has the potential to be
Answer (B) is incorrect because the relationship margin of $6 plus an unknown number of units of F at
between earned income and interest income cannot a unit contribution margin of $7 (P = $6D + $7F).
be determined.
Answer (C) is incorrect because the stock of money [124] Source: CMA 1288 5-9
cannot be negative.
Answer (A) is incorrect because 2D + F ・16 is the
Answer (D) is correct. This model recognizes three constraint equation for Machine 107.
sources of funds: current period earned income, prior
period return on investment, and prior period money Answer (B) is correct. The constraint equations for
machine hours are 2D + 3F ・24 hours and 2D + 1F
held. The three uses of funds in the current period are ・16 hours. Since these equations involve two
consumption, investment, and money held. If the unknowns (D and F), they may be solved
excess of consumption spending over earned income simultaneously. Solving for F in the second equation
in period t is greater than the return on investment in produces F ・16 - 2D. Substituting this result into the
period (t - 1), investment or the stock of money must first equation produces 2D + 3(16 - 2D) ・24.
have declined because spending is greater than
income and earnings on investments. Answer (C) is incorrect because D equals [(16 - F)
・2].
[121] Source: CMA 1287 5-24 Answer (D) is incorrect because the constraint
equations for machine hours are 2D + 3F ・24 hours
Answer (A) is incorrect because the increase in and 2D + 1F ・16 hours. Solving for F in the second
investment may have come from a decline in the equation produces F ・16 - 2D. Substituting this
stock of money held. result into the first equation produces 2D + 3(16 -
2D) ・24.
Answer (B) is incorrect because the level of interest
rates cannot be determined.
[125] Source: CMA 1288 5-10
Answer (C) is correct. If investments have increased
by more than the interest earned, some of the current Answer (A) is incorrect because objective functions
period's earnings must have been invested or the are those that management is attempting to maximize
stock of money may have decreased. (or minimize) in a linear programming problem.
Answer (D) is incorrect because net investment Answer (B) is incorrect because inequalities refer to
occurred. equations that do not balance. These can balance.
Answer (D) is incorrect because the reduction in the Answer (A) is incorrect because, if F is 8, D must be
money stock may have been consumed or invested. 0.
[128] Source: CMA 0689 5-13 Answer (A) is incorrect because the machine-hour
constraint is in the ratio of 1:2:2.5. It can be stated as
Answer (A) is incorrect because sensitivity analysis is A + 2B + 2.5C ・100.
not used to determine how constraints vary but rather
how the optimum solution will change if constraints Answer (B) is correct. Machine hours are not given,
do vary. but up to 100 anchor bolts can be produced with the
existing capacity. Assuming that 100 units of machine
Answer (B) is incorrect because the accuracy of the time are available (one per anchor bolt), the units of
parameters cannot be tested as a part of the model. time required to produce a bearing must be 2 (100 ・
The intent is simply to measure the impact if the 50 bearings). The time per caster is 2.5 (100 ・40
assumed parameters do vary. casters). Because the machine-hour constraint is
known to be in the ratio of 1:2:2.5, it can be stated as
Answer (C) is incorrect because the technological
matrix is developed by production managers or A + 2B + 2.5C ・100.
engineers and is an input into the model.
Answer (C) is incorrect because the machine-hour
Answer (D) is correct. Sensitivity analysis in linear constraint is in the ratio of 1:2:2.5. It can be stated as
programming determines how the optimal solution will A + 2B + 2.5C ・100.
change if an objective function coefficient, the limiting
value of a resource constraint, or a constraint Answer (D) is incorrect because the machine-hour
coefficient is varied. It also considers the effect of constraint is in the ratio of 1:2:2.5. It can be stated as
adding a new variable or constraint. A + 2B + 2.5C ・100.
[129] Source: CMA 0689 5-18 [132] Source: CMA 0690 5-29
Answer (A) is correct. The purpose of linear Answer (A) is incorrect because relevant costing
programming is to find the combination of resources refers to future costs that differ among decision
subject to constraints that optimizes the objective choices.
function. Harrington wishes to maximize the total
contribution margin. Thus, the first step is to Answer (B) is incorrect because responsibility
determine the contribution margin for each of the accounting is the practice of charging costs and
three products. The contribution margin is $3 ($4 - crediting revenues to those managers who have
$1 variable cost) for anchor bolts, $3 ($3.50 - $.50) responsibility for them.
for bearings, and $4 ($6 - $2) for casters. The
objective is therefore to maximize $3A + $3B + Answer (C) is incorrect because simple regression
$4C. analysis is a means of explaining the variation in a
dependent variable based upon an independent
Answer (B) is incorrect because the contribution variable.
margin is $3 for B and $4 for C.
Answer (D) is correct. Linear programming is a
Answer (C) is incorrect because the contribution deterministic mathematical technique used to
margins for A, B, and C are $3, $3, and $4, maximize linear revenue functions or to minimize
respectively. linear cost functions subject to linear constraints.
Linear programming is often used to plan resource
Answer (D) is incorrect because the product allocations. Managers need to use resources as
variables for A, B, and C must be multiplied by their profitably or as inexpensively as possible. Solving
contribution margins, which are $3, $3, and $4, linear programming problems requires the use of
independent variables, dependent variables,
respectively. constraints, and slack variables. Slack variables are
used to convert equations stated as inequalities into
equalities.
determined by subtracting the second equation from
the first:
[133] Source: CMA 1290 4-25
2X + 3Y = 18
Answer (A) is incorrect because the objective -2X + -Y = -10
function is Z = 200B + 150C. -------- ---
2Y = 8
Answer (B) is incorrect because the objective Y = 4 and X = 3
function is Z = 200B + 150C. This solution also results in a profit of $20 [($4 x 3) +
($2 x 4)].
Answer (C) is incorrect because the objective
function is Z = 200B + 150C. Answer (B) is incorrect because the maximum profit
is $20.
Answer (D) is correct. The objective function is the
equation to maximize the contribution margin. Given Answer (C) is incorrect because the maximum profit
that each 100 pounds of boat wax contributes $200 is $20.
and each 100 pounds of car wax contributes $150,
the company's goal is to maximize the total of these Answer (D) is incorrect because the maximum profit
amounts. Consequently, if B is the number of is $20.
100-pound units of boat wax, C is the number of
100-pound units of car wax, and Z is the total
contribution margin, the objective function is Z = [136] Source: CMA 1291 4-25
$200B + $150C.
Answer (A) is incorrect because correlation and
regression analysis is a means of measuring the
[134] Source: CMA 1290 4-26 relationships among two or more variables.
Answer (B) is incorrect because the mixing constraint Answer (C) is incorrect because transportation
is 5B + 2.4C ・800. algorithms are used to minimize transportation costs
when goods must be shipped from multiple factories
Answer (C) is correct. The Mixing Department has to multiple customers or warehouses.
only 800 hours available per month, which is a
limitation (constraint) on production. Thus, the total Answer (D) is correct. Linear programming is a
mixing time is less than or equal to 800 hours. Every technique used to optimize a revenue, profit, or cost
100-pound batch of boat wax (B) requires 5 hours of function subject to constraints. LP is often used for
mixing time, and every 100-pound batch of car wax planning resource allocations. Other business
(C) requires 2.4 hours of mixing time. Accordingly, applications include selecting a product mix, blending
the total mixing time available cannot exceed 5B plus chemical products, scheduling flight crews, assigning
2.4C, and the constraint equation is 5B + 2.4C ・ jobs to machines, and determining transportation
800. routes.
[138] Source: CMA 1293 4-2 Answer (D) is incorrect because PERT/CPM
analysis is a project management scheduling
Answer (A) is incorrect because focusing on a technique.
product's gross margin may not result in an optimal
decision if that product uses a greater amount of the
scarce resource than does another product with a [141] Source: CMA 1283 5-16
lower gross margin. Moreover, gross margin includes
some fixed costs. Answer (A) is correct. The total variable cost of
Model A is $17 ($3 material + $8 DL + $6 variable
Answer (B) is incorrect because focusing on segment OH). The contribution margin is $10.50 ($27.50 unit
margin may not maximize profit if the segment uses price - $17 VC). Similarly, the total variable cost of
more than its share of the scarce resource. Model B is $43 ($7 materials + $12 DL + $24
variable OH) and the contribution margin is $32 ($75
Answer (C) is incorrect because product contribution unit price - $43 VC). Thus, the objective linear
margin and contribution margin ratio may not result in program function should maximize the total
an optimal decision if the products use differing contribution margin from both products: 10.50A +
quantities of the limited resource. 32.00B.
Answer (D) is correct. Given a constraining resource, Answer (B) is incorrect because selling price is used
total profit is maximized by manufacturing the product instead of contribution margin.
that will maximize the profit per unit of scarce
resource. Assuming machine hours are the Answer (C) is incorrect because total costs are used
constraining resource, products should be instead of contribution margin.
manufactured that will produce the greatest
contribution margin (revenue - variable cost) per Answer (D) is incorrect because variable costs are
machine hour. This analysis assumes that fixed costs used instead of contribution margin.
will be unchanged regardless of which product is
manufactured.
[142] Source: CMA 1283 5-17
[139] Source: CMA 1293 4-30 Answer (A) is incorrect because the constraint
function for direct labor must be equal to or less than
Answer (A) is incorrect because the EOQ model is the 600,000 available hours. Because every unit of
used to determine inventory order quantity and is not Model A requires 1 hour of labor and every unit of
related to the transportation model. Model B requires 1.5 hours of labor, the constraint
function is 1A + 1.5B ・600,000.
Answer (B) is incorrect because a Markov model is
useful in decision problems in which the probability of Answer (B) is incorrect because the constraint
the occurrence of a future state depends only on the function for direct labor must be equal to or less than
current state of nature. the 600,000 available hours. Because every unit of
Model A requires 1 hour of labor and every unit of
Answer (C) is correct. The transportation model is a Model B requires 1.5 hours of labor, the constraint
special type of linear programming model. A function is 1A + 1.5B ・600,000.
transportation model involves physical movement of
goods from sources of supply to destinations. The Answer (C) is incorrect because the constraint
objective function includes the transportation cost of function for direct labor must be equal to or less than
each item from each source to each destination. The the 600,000 available hours. Because every unit of
constraints are the output for each supply point and Model A requires 1 hour of labor and every unit of
the demand by each destination. Model B requires 1.5 hours of labor, the constraint
function is 1A + 1.5B ・600,000.
Answer (D) is incorrect because dynamic
programming is a type of model useful for problems Answer (D) is correct. Since 600,000 direct labor
that involve time-staged decisions such as decisions hours are available, the function must be equal to or
affected by previous decisions; typically, dynamic less than 600,000. Since every unit of Model A
programming is used for much smaller problems than requires 1 hour of labor and every unit of Model B
linear programming. requires 1.5 hours of labor, the constraint function is
1A + 1.5B ・600,000.
Answer (B) is incorrect because multiplying any Answer (A) is incorrect because production cannot
matrix by a different matrix (whether inverse or not) be negative, but it can be exactly zero. Thus, the
will not yield the same result as either of the nonnegativity constraints are that production of S and
multiplicands. G must be greater than or equal to 0.
Answer (C) is correct. In matrix operations, ordinary Answer (B) is incorrect because production cannot
division is not possible. In lieu of division, one be negative, but it can be exactly zero. Thus, the
multiplies by an inverse matrix. By definition, a matrix nonnegativity constraints are that production of S and
times its inverse will give an identity matrix. This G must be greater than or equal to 0.
operation is similar to dividing one number or one
variable by itself and obtaining one. An identity matrix Answer (C) is incorrect because production cannot
is a matrix with zeros in all elements except the be negative, but it can be exactly zero. Thus, the
principal diagonal, which contains ones. nonnegativity constraints are that production of S and
G must be greater than or equal to 0.
Answer (D) is incorrect because multiplying any
matrix by a different matrix (whether inverse or not) Answer (D) is correct. Production cannot be
will not yield the same result as either of the negative, but it can be exactly zero. Thus, the
multiplicands. nonnegativity constraints are that production of S and
G must be greater than or equal to 0.
Answer (A) is incorrect because the constraints Answer (B) is incorrect because the constraint
should not be combined, and all times should be in functions are the conditions under which the objective
hours. function is to be maximized or minimized.
Answer (B) is incorrect because the constraints Answer (C) is incorrect because it is a nonsense
should not be combined. answer.
the objective function is to be optimized, such as
Answer (D) is correct. Linear programming is a labor or machine hours.
mathematical technique used to maximize revenue
(profit) functions or to minimize cost functions subject Answer (B) is incorrect because objectives are the
to constraints. Here, the function f is the objective ultimate goals of an operation. This answer is
function. The objective function in a linear essentially nonsense as used here.
programming model symbolically represents the
revenues (profits) or costs being maximized or Answer (C) is incorrect because conditions represent
minimized, respectively. the present state of the environment. This answer is
essentially nonsense as used here.
[150] Source: CMA 1286 5-26 Answer (D) is incorrect because a shadow price is
the opportunity cost of not having one additional unit
Answer (A) is incorrect because it is not meaningful of one of the constrained resources.
in this context.
Answer (B) is correct. The constraint functions are [154] Source: CMA 1287 5-20
the "subject to" functions; i.e., they state the limits on
production imposed by scarce resources. Answer (A) is incorrect because there is another
point (N = 3 and S = 3) that will optimize the
Answer (C) is incorrect because it is not meaningful objective function.
in this context.
Answer (B) is correct. The best way to answer this
Answer (D) is incorrect because the objective question is to solve the problem graphically. The
function is to be maximized or minimized subject to point at which N equals two and S equals three is a
the constraints. feasible point but not the optimal point. The optimal
point is that point at which Z will be maximized. The
given values do not violate either of the constraints.
[151] Source: CMA 0687 5-19 However, this procedure does not indicate whether
the point is the optimal point.
Answer (A) is incorrect because the material
constraint requires that 2 pounds per vase plus 2 Answer (C) is incorrect because the graph shows
pounds per bowl be less than or equal to 100. that the point does not lie in a corner where two
constraint lines meet.
Answer (B) is correct. Given 100 pounds of material,
the material constraint requires that 2 pounds per Answer (D) is incorrect because this is not a
vase plus 2 pounds per bowl be less than or equal to minimization problem; producing zero would minimize
100. The labor constraint is 3 hours per vase plus 1 costs but would not maximize revenue or profits.
hour per bowl, which must be less than or equal to
60 hours.
[155] Source: CMA 1288 5-2
Answer (C) is incorrect because the labor constraint
requires that 3 hours per vase plus 1 hour per bowl Answer (A) is incorrect because PERT and CPM
be less than or equal to 60 hours. are network diagrams designed to coordinate large,
complicated projects that are carried out over a long
Answer (D) is incorrect because material costs and period of time.
labor costs should not be combined.
Answer (B) is correct. The linear programming model
is designed to maximize income or minimize costs
[152] Source: CMA 1287 5-18 given resource constraints. It is a static model
because it does not allow for a sequence of
Answer (A) is incorrect because a parametric model decisions.
is concerned with population parameters and is based
on strict assumptions about distributions. Answer (C) is incorrect because queuing models are
designed to minimize the total cost of a system that
Answer (B) is incorrect because a present value involves a waiting line. Queuing models are dynamic
model is used to determine the present equivalent of in that they assume random applications for service.
money to be received in the future.
Answer (D) is incorrect because Markov processes
Answer (C) is incorrect because an EOQ model is are used in sequential decision problems in which the
used to determine the proper order size for inventory probability of the occurrence of a future state of
purchases based on costs and annual demand. nature depends only on the current state. The initial
state matters less and less as time goes by.
Answer (D) is correct. Linear programming is a
technique used to optimize a revenue, profit, or cost
function subject to constraints. LP is often used for [156] Source: CMA 1288 5-7
planning resource allocations. Other business
applications include selecting a product mix, blending Answer (A) is incorrect because the feasible solution
chemical products, scheduling flight crews, assigning is within the area of possible production. A feasible
jobs to machines, and determining transportation solution is one that does not violate any constraint.
routes.
Answer (B) is incorrect because constraints are the
given limitations on resources or market limitations.
[153] Source: CMA 1287 5-19
Answer (C) is correct. The shadow price in a linear
Answer (A) is correct. The inequality functions state programming problem is the return (increase in the
the constraints. They are the limitations within which objective function) that would accrue if one more unit
of a limited resource (a constraint in the problem)
were available. The shadow price is the maximum Answer (B) is correct. The transportation model is a
amount that one should be willing to pay for special type of linear programming problem. It
additional units of the resource. involves the analysis of the physical movement of
goods from sources of supply to destinations. The
Answer (D) is incorrect because the objective objective function includes the transportation cost of
function is the equation that is to be maximized or each item from each source to each destination. The
minimized in a linear programming problem. For objective is to minimize the total transportation cost
example, a typical objective function is to maximize subject to such constraints as warehouse capabilities
contribution margin by selling products A and B, and customer locations.
which have known contribution margins per unit.
Answer (C) is incorrect because dynamic
programming is a variant of mathematical
[157] Source: CMA 1288 5-11 programming that applies to sequential
decision-making situations.
Answer (A) is incorrect because, if D is 2 and F is 8,
the first constraint is violated. Answer (D) is incorrect because the critical path
method is a project scheduling technique.
Answer (B) is correct. This question does not ask for
the optimum solution, only a feasible solution. Thus,
the only question that is being addressed is whether [160] Source: CMA 0694 4-10
the production level violates the constraint functions.
This problem can be solved either graphically or by Answer (A) is incorrect because a simulation model
means of trial and error. The graphical approach is a technique for experimenting with models using a
involves drawing the constraint lines on a graph and computer. It does not necessarily use maximization
outlining the feasible region. An easier approach is to and constraint functions.
solve the problem by trial and error. For each
answer, it can be determined whether the production Answer (B) is correct. When making a cost-time
levels violate the constraint functions. trade-off, the first activity to be crashed (have its
completion time accelerated) is one on the critical
2D + 3F ・24 path. To select an activity on another path would not
2D + 1F ・16 reduce the total time of completion. The initial activity
chosen should be the one with the completion time
Substituting the production levels in the answer that can be accelerated at the lowest cost per unit of
choices shows that only D=6 and F=4 does not time saved.
violate a constraint.
Answer (C) is incorrect because the EOQ is based
Answer (C) is incorrect because, if D is 12 and F is on a single equation that includes a square root.
0, the second constraint is violated.
Answer (D) is incorrect because the present value
Answer (D) is incorrect because, if D is 8 and E is 3, model is based on a single equation that incorporates
both constraints are violated. a rate of return.
[158] Source: CMA 1288 5-18 [161] Source: CMA 0694 4-11
Answer (A) is incorrect because regression explains Answer (A) is incorrect because contributions to
the behavior of a dependent variable (such as total revenue are included in the objective (maximization)
costs) in terms of one or more independent variables equation.
(such as units produced).
Answer (B) is incorrect because a shadow point, or
Answer (B) is correct. Linear programming is used to shadow price, is the amount by which the value of the
maximize an objective function, such as contribution optimal solution of the objective function will change
margin, given a number of constraints. The constraints if a one-unit change is made in a binding constraint.
represent limits on sales (product demand) and
limitations on the supply of resources, such as raw Answer (C) is incorrect because conditions are
materials, labor, and machine hours. usually not shown through inequalities.
Answer (C) is incorrect because mix variance Answer (D) is correct. The restrictions on the optimal
analysis is the analysis of the variance between actual value of the objective function in a linear
and planned contribution margin that is caused by a programming problem are known as constraints.
difference between actual and planned product mix. They are depicted by means of inequalities.
Answer (B) is incorrect because 0 units of X and 100 Answer (A) is correct. Cell D2 is sales for year 3.
units of Y yield a contribution margin of $2,500. Given that sales are expected to increase 20% each
year, the amount in that cell should be 120% of the
Answer (C) is correct. Linear programming is used to preceding year's sales. The formula is C2 x 1.2.
maximize a contribution margin function, or minimize
a cost function, subject to constraints, such as scarce Answer (B) is incorrect because +B2 x 1.2 is the
resources or minimum/maximum levels of production. formula for cell C2.
In this problem, the equation to be maximized (the
objective function, or 15X + 25Y) is to be maximized Answer (C) is incorrect because +C2 + (.2 x B2)
subject to the two constraint functions (Material A: bases the increase in sales on 20% of the year 1
3X + 6Y < 600 and Material B: 6X + 4Y < 880). amount instead of the year 2 amount.
One way to solve this problem is to graph the
constraint lines and determine the feasible area. The Answer (D) is incorrect because +B2 + (.2 x B2) is
optimal production level is at an extreme point within an alternative formula for cell C2.
the feasible area. However, a simple alternative is to
calculate the contribution margin for each feasible
answer choice. Thus, a production level of 120 units [168] Source: CMA 0696 4-9
of X and 40 units of Y is the feasible level that yields
the maximum contribution margin of $2,800 [(120 x Answer (A) is incorrect because cell D4 (D2 - D3)
$15) + (40 x $25)]. This mix is feasible because it reflects proper applications of formulas, although the
requires 600 pounds of A[(3 lbs. x 120) + (4 lbs. x amount is incorrect as a result of errors in other cells.
40)] and 880 feet of B[(6 ft. x 120) + (4ft. x 40)].
Answer (B) is incorrect because cell D8 (40% x D7)
Answer (D) is incorrect because producing 120 units reflects proper applications of formulas, although the
of Y violates the constraint for Material A. amount is incorrect as a result of errors in other cells.
[169] Source: CMA 0696 4-10 Answer (D) is incorrect because sensitivity analysis is
a method of studying the effects of changes in one or
Answer (A) is incorrect because $21,858 results more variables on the results of a decision model.
from not considering the changes in sales and cost of
goods sold in year 3 and the impact those changes
had in year 4. [172] Source: CIA 1187 III-45
Answer (B) is correct. If the error in cell D2 is Answer (A) is incorrect because 49 and 17 are
corrected, the sales for year 3 become $576,000 constants, not coefficients.
(1.2 x $480,000). Cell E2 should therefore be
$691,200 (1.2 x $576,000). Cell C3 is correct, but Answer (B) is correct. Systems of linear equations
cell D3 is not. Thus, cell E3 should be $535,680 (1.2 can often be more conveniently manipulated by using
x 1.2 x $372,000), and the gross profit in cell E4 matrix notation and matrix algebra techniques. In this
should be $155,520 ($691, 200 - $535,680). Selling format, the ordered numerical coefficients of the
expenses in cell E5 are correct at $39,930. unknowns are presented in a matrix (in this case, two
Administrative expenses in cell E6 should be $53,240 rows by two columns). The variables are described
(1.1 x $48,400). Hence, gross profit in cell E7 is by a row or, in this problem, a column vector. Finally,
$62,350 ($155,520 - $39,930 - $53,240). Income the right side of the system is described by a vector
taxes (cell E8) become $24,940 (.4 x $62,350). (here, a column) of constants.
Finally, net income in cell E9 is $37,410 ($62,350 -
$24,940). Answer (C) is incorrect because the variables vector
and the constants vector are misplaced.
Answer (C) is incorrect because $90,978 results
from not considering the change in cost of goods sold Answer (D) is incorrect because the coefficients
in year 3 and the impact it had on year 4. matrix and the variables vector are misplaced.
Answer (A) is correct. Matrix algebra is a [174] Source: CIA 1189 III-47
mathematical technique for solving a set of
simultaneous equations. Matrices consisting of the Answer (A) is incorrect because integral calculus is
coefficients of the variables of the equations may be used to compute the area under a curve. It finds
manipulated by addition, subtraction, multiplication, antiderivatives; that is, the first derivative of the
and inversion. Because the two service departments integral is the function that was integrated.
simultaneously provide services to each other,
recognition of these reciprocal services requires Answer (B) is correct. Differential calculus is used to
solution of a set of simultaneous equations. identify the maxima or minima of nonlinear functions.
The derivative of a function measures the slope or
Answer (B) is incorrect because regression analysis is rate of change of that function. Maxima or minima
a statistical procedure for estimation of the relation occur where the slope is equal to zero. A maximum
between variables. exists when the derivative of the first derivative of the
function is negative. A minimum exists when the allocations. In this problem, the equation to be
second derivative is positive. maximized, called the objective function, is: $30X +
$50Y. This equation is to be maximized subject to
Answer (C) is incorrect because operations research the constraints on materials. The two constraint
is a broad term for the application of scientific and functions are:
quantitative methods to the understanding of systems,
especially human-machine systems used in business. Material A: 6X + 12Y ・1,200
Material B: 12X + 8Y ・1,760
Answer (D) is incorrect because regression analysis
creates an equation to explain the variation in a One way to solve this problem is to graph the
dependent variable caused by changes in one or constraint lines and determine the feasible area. The
more independent variables. optimal production level is at an extreme point within
the feasible area. The graph shows that a production
level of 120 units of X and 40 units of Y is a feasible
[175] Source: CIA 1191 III-39 production level that maximizes the contribution
margin.
Answer (A) is correct. Marginal cost is the
incremental cost incurred to produce one additional Answer (D) is incorrect because 40 units of X and
unit of output. The derivative of the total cost function 120 units of Y is not within the feasible production
is the change in total cost per unit change in output area. It violates the constraint on Material A.
quantity. Accordingly, it is the same as marginal cost.
Marginal cost increases or decreases as the
derivative (slope) of the total cost function increases [178] Source: CIA 1193 III-72
or decreases.
Answer (A) is incorrect because the formula is
Answer (B) is incorrect because marginal cost may nonlinear and there are no stated constraints.
increase or decrease as total cost increases. Whether
it increases or decreases depends on whether the Answer (B) is incorrect because least squares is
derivative of the total cost function increases or related to regression analysis.
decreases.
Answer (C) is correct. Only differential calculus can
Answer (C) is incorrect because marginal cost may be used to derive the normal equations for regression
increase or decrease as total cost increases. (least squares) analysis. This form of calculus
identifies the maxima or minima of curvilinear
Answer (D) is incorrect because marginal cost may functions. Hence, it is applicable to the problem of
increase or decrease as total cost increases. finding the function that minimizes the squared
deviations of the observed values from the regression
line.
[176] Source: CIA 1195 III-11
Answer (D) is incorrect because integral calculus
Answer (A) is correct. The objective of a scatter concerns areas and volume.
diagram is to demonstrate correlations. Each
observation is represented by a dot on a graph
corresponding to a particular value of X (the [179] Source: CIA 1194 III-58
independent variable) and Y (the dependent
variable). Answer (A) is correct. Linear programming is a
mathematical technique for planning resource
Answer (B) is incorrect because the objective of a allocation that optimizes a given objective function
histogram is to show frequency distribution in graphic that is subject to certain constraints. In this case, the
form. maximum investment is constrained by a 70% limit on
either investment choice.
Answer (C) is incorrect because the objective of
stratification is to divide a universe of data into Answer (B) is incorrect because capital budgeting is
homogeneous groups. used to analyze and evaluate long-term capital
investments.
Answer (D) is incorrect because regression analysis
is used to find trend lines. Answer (C) is incorrect because differential analysis
is used for decision making when differences in costs
[177] Source: Publisher (revenues) for two or more options are compared.
Answer (A) is incorrect because the $4,380 of Answer (D) is incorrect because queuing theory is
contribution margin yielded by 146 units of X and 0 used to minimize the sum of the costs of waiting lines
units of Y is less than the $5,600 yielded by 120 units and servicing waiting lines when items arrive
of X and 40 units of Y. randomly at a service point and are serviced
sequentially.
Answer (B) is incorrect because the $5,000 of
contribution margin yielded by 0 units of X and 100
units of Y is less than the $5,600 yielded by 120 units [180] Source: CIA 0593 IV-21
of X and 40 units of Y.
Answer (A) is incorrect because relevant costs are
Answer (C) is correct. Linear programming is a expected future costs that will vary with the decision
technique used to maximize a contribution margin taken. They are reflected in the objective function and
function or to minimize a cost function, subject to constraints of linear programming problems.
constraints such as scarce resources or
minimum/maximum levels of production. Thus, linear Answer (B) is incorrect because a differential cost is
programming is often used for planning resource the net relevant cost.
include the 45% of the cleaning department that the
Answer (C) is incorrect because the term alternative food service department is dependent upon.
costs is seldom used in either managerial/cost
accounting textbooks or the literature on decision Answer (C) is incorrect because $82,211 does not
theory. include the 10% of the maintenance department that
the food service department is dependent upon.
Answer (D) is correct. A shadow price is the amount
by which the value of the optimal solution of the Answer (D) is incorrect because $83,211 reverses
objective function in a linear programming problem the 10% of maintenance in the equation with the 45%
will change if a one-unit change is made in a binding of cleaning in the equation.
constraint. The calculation of a shadow price is a
simple example of sensitivity analysis. An opportunity
cost is the maximum benefit forgone by using a scarce [184] Source: Publisher
resource for a given purpose. It is the benefit from the
next best use of that resource. Thus, shadow prices Answer (A) is incorrect because 25 Inactive Dog
and opportunity costs are related concepts. units and 0 Puppy units yield a contribution margin of
$375.
[181] Source: Publisher Answer (B) is incorrect because 20 Puppy units and
10 Inactive Dog units yield a contribution margin of
Answer (A) is incorrect because it is based on a 35% $350.
allocation rather than a 50% allocation.
Answer (C) is incorrect because 10 Puppy units and
Answer (B) is correct. Under the direct method, the 20 Inactive Dog units yield a contribution margin of
costs incurred in a service department are allocated $400.
directly to production without consideration of
services performed for other service departments. Answer (D) is correct. Linear programming is used to
Thus, $40,000 of maintenance costs would be maximize a contribution margin function or minimize a
allocated to production. Since the same amount of cost function, subject to constraints, such as scarce
work is performed for each production department, resources or minimum/ maximum levels of
they would each be allocated $20,000. production. In this problem, the equation to be
maximized, 10x + 15y, is to be maximized subject to
Answer (C) is incorrect because they are not based two constraint functions; Corn: 2x + 4y ・100, and
on the direct method in that they include some Wheat: 3x + 2y ・80. Solve these two equations:
interdepartmental allocations.
2x + 4y ・100 --------> 2x + 4y ・100
Answer (D) is incorrect because they are not based 3x + 2y ・80 --------> 6x + 4y ・160
on the direct method in that they include some -4x ・ 60
interdepartmental allocations. x ・15
Answer (B) is correct. The three simultaneous Answer (A) is incorrect because more detailed
equations can be solved using substitution. Substitute information is not available. The Pareto diagram does
the maintenance department into the cleaning not focus on the total quantity of computer
department equation. complaints.
Answer (D) is incorrect because $60,000 does not Answer (D) is incorrect because cost information is
include the 20% of the maintenance department that not provided.
the cleaning department is dependent upon.
2x + 4y ・100 2x + 4y ・100
[187] Source: CIA 1192 III-41 3x + 2y ・80 6x + 4y ・160
4x ・ 60
Answer (A) is correct. A model consisting of a x ・15
system of functions may be used to optimize an
objective function. If the functions in the model are all Substitute into 2x + 4y ・100, and get y = 17.5.
linear, the model is a linear programming model. Thus, a contribution margin of $412.50.
Linear programming is a technique to determine
optimal resource allocation. Several solution methods
are available to solve linear programming problems. [190] Source: Publisher
The graphical method, the easiest technique, is limited
to simple problems. Here, the graph consists of three Answer (A) is incorrect because Redler's amount of
lines, each representing a production constraint. The cleaning fluid to maximize revenue is 260,000 gallons.
lines connecting points 3, 4, 6, and 7 bound the
feasible solution region. Product mixes of X and Y Answer (B) is correct. A maximization problem is
that lie outside this boundary cannot be produced solved by setting the first derivative of the revenue
and/or sold because the demand constraint (line 3,4), function equal to zero and solving for x. The first
the labor constraint (line 4,6), and the material derivative of the Funz-N-Oonz revenue function is 22
constraint (line 6,7) are binding. - .08x. Thus,
Answer (D) is incorrect because the last point in the Answer (C) is incorrect because Moonsammy's
feasible solution region touched by a profit line profit will be maximized at a production level of
determines the solution. 36,000 gallons.
Answer (B) is incorrect because 20 Puppy units and Answer (A) is correct. This question is easily solved
10 Inactive Dog units yield a contribution margin of by substituting 100 for x in the two given equations
$350. for each company. For Redler, it is:
Answer (C) is incorrect because 10 Puppy units and Revenue = $100 + $26(100) - $.05(10,000)
20 Inactive Dog units yield a contribution margin of Cost = $50 + $8(100) - $.01(10,000)
$400. The cost equation is subtracted from the revenue
equation to determine profit or loss per gallon of x.
Answer (D) is correct. Linear programming is used to
maximize a contribution margin function or minimize a [-$100 + $2,600 - $500 - ($50 + $800 + $100)]
cost function, subject to constraints, such as scarce Profit = $2,000 (revenue) - $950 (costs)
resources or minimum/maximum levels of production. = $1,050 (profit)
In this problem, the equation to be maximized, 10x + Because x is stated in thousands of gallons, the total
profit is $1,050,000. Minus PV of lease payments (60,800)
--------
Answer (B) is incorrect because Funz-N-Oonz has a Profit recognized $ 9,200
profit of only $445,000. ========
The $60,800 remaining gain on the sale-leaseback
Answer (C) is incorrect because Moonsammy has a should be amortized in proportion to the gross rentals
total loss of $430,000. expensed over the lease term because the leaseback
is classified as an operating lease (none of the criteria
Answer (D) is incorrect because Step-N-Wolf has a for a capital lease is met). At 12/31/01, the date of
profit of only $20,000. the inception of the lease, the entire $60,800 should
be reported in the balance sheet as deferred revenue
from the sale of the equipment.
[193] Source: CPA 0591 I-44
Answer (D) is incorrect because $70,000 is the total
Answer (A) is incorrect because $50,000 is the total profit.
deferred gain at the inception of the lease.
Answer (B) is correct. A profit or loss on the sale in [195] Source: CPA 0590 I-31
a sale-leaseback transaction is ordinarily deferred
and amortized in proportion to the amortization of the Answer (A) is incorrect because $34,100 is the
leased asset if the leaseback is classified as a capital present value of reasonable lease rentals.
lease. At 12/31/01, a gain proportionate to the lease
amortization will be recognized [($150,000 - Answer (B) is incorrect because $30,000 is the profit
$100,000) ・10 years = $5,000]. Hence, the recognized.
deferred gain will be $45,000 ($50,000 - $5,000).
Answer (C) is incorrect because $4,100 is the excess
Answer (C) is incorrect because $25,588 is the of the present value of reasonable lease rentals over
difference between the total deferred gain and the the profit recognized.
periodic lease payment.
Answer (D) is correct. The general rule is that profit
Answer (D) is incorrect because the seller-lessee has or loss on the sale in a sale-leaseback transaction is
retained substantially all of the use of the property deferred and amortized over the life of the lease.
and should therefore defer gain. However, SFAS 28 provides for certain exceptions.
One exception applies when the seller-lessee
relinquishes the right to substantially all of the
[194] Source: CPA 0588 I-32 remaining use of the property sold and retains only a
minor portion of such use. This exception is indicated
Answer (A) is incorrect because the profit not if the present value of a reasonable amount of rentals
recognized should be deferred. for the leaseback represents 10% or less of the fair
value of the asset sold. In this case, the seller-lessee
Answer (B) is incorrect because $9,200 is the profit should account for the sale and the leaseback as
recognized. separate transactions based upon their respective
terms. Because the $34,100 present value of the
Answer (C) is correct. In an ordinary sale and reasonable lease rentals is less than 10% of the
leaseback, any profit or loss on the sale is amortized $360,000 sales price (the fair value), Bain should
over the life of the lease. But SFAS 28 provides for recognize the entire $30,000 difference between the
exceptions. One exception applies when a $360,000 sales price and the $330,000 carrying
seller-lessee retains more than a minor part but less amount as a gain from the sale. The leaseback should
than substantially all of the use of the property then be accounted for as if it were unrelated to the
through the leaseback. The "excess" profit on the sale sale, because the leaseback is considered to be
is recognized at the date of the sale if the seller-lessee minor.
in this situation realizes a profit on the sale in excess
of either
[196] Source: CPA 0593 I-31
1. The present value of the minimum lease payments over
the lease Answer (A) is incorrect because $950,000 includes
term if the leaseback is an operating lease, or the gain on plane #2.
2. The recorded amount of the leased asset if the
leaseback is Answer (B) is correct. The lease of plane #1 is a
classified as a capital lease. capital lease because its 8-year term exceeds 75% of
"Substantially all" has essentially the same meaning as the 10-year estimated remaining economic life of the
the "90% test" used in determining whether a lease is plane. In a sale and leaseback transaction, any profit
a capital or operating lease (the present value of the or loss on the sale is ordinarily required to be
lease payments is 90% or more of the fair value of deferred and amortized in proportion to the
the leased property). "Minor" refers to a transfer of amortization of the leased asset if the lease is a capital
10% or less of the use of the property in the lease. lease. The amortization is in proportion to the gross
rental payments expensed over the lease term if the
For Ruhl Corp., the $60,800 present value of the lease is an operating lease. At the inception of this
lease rentals is greater than 10% and less than 90% lease, the $500,000 gain ($600,000 sales price -
of the fair value of the leased property as measured $100,000 carrying amount) should be reported as
by the sales price. Thus, $9,200 in excess profit deferred revenue. The lease of plane #2 is an
should be recognized. operating lease that falls under an exception provided
Sales price $220,000 by SFAS 28. When the seller-lessee relinquishes the
Book value (150,000) right to substantially all of the remaining use of the
-------- property sold and retains only a minor portion of such
Profit $ 70,000 use (in this case, less than 10% of the remaining
useful life), the seller-lessee should account for the Answer (B) is incorrect because 800 hours is the
sale and the leaseback as separate transactions based amount allocated to products A and C.
upon their respective terms. Dirk should recognize
the entire $450,000 gain ($1,000,000 sales price - Answer (C) is incorrect because 1,150 hours is
$550,000 carrying amount). Thus, only the $500,000 found by not multiplying the demand for A and C by
gain from the sale of plane #1 is deferred. the number of hours required to produce them.
Answer (C) is incorrect because $450,000 equals Answer (D) is incorrect because 1,400 hours is the
the gain on plane #2. machine hour capacity of machine X.
Answer (C) is incorrect because $15,000 is the Answer (B) is incorrect because $1,000 is the net
excess of the fair value over the carrying amount. profit after fixed costs.
Answer (D) is incorrect because full recognition of Answer (C) is correct. The contribution margin is the
the loss ($0 deferred loss) is not appropriate when selling price minus the variable cost. The contribution
the fair value is greater than the carrying amount. In margin is then multiplied by the number of units sold.
these circumstances, the loss is essentially a prepaid In this example, products A and C are fixed. The
rental expense. number of units of product B must be found using
linear programming.
[202] Source: CMA 1291 4-18 Answer (D) is incorrect because costs are not
needed for these calculations.
Answer (A) is incorrect because queuing theory is
used to minimize the costs of waiting lines.
[205] Source: CMA 0688 5-1
Answer (B) is incorrect because linear programming
is used to minimize a cost function or maximize a Answer (A) is incorrect because queuing theory is
profit function given constraints. used to minimize the sum of the costs of waiting lines
and of servicing them.
Answer (C) is incorrect because decision trees are
diagrams that analyze sequences of probabilistic Answer (B) is correct. Expected value analysis can
decisions, the events that may follow each decision, be used to analyze anticipated sales. The estimates of
and their outcomes. anticipated sales can be assigned probabilities. The
expected value will be the sum of the products of the
Answer (D) is correct. Simulation is a technique for outcomes (sales) and the probabilities.
experimenting with mathematical models using a
computer. Monte Carlo simulation is a technique to Answer (C) is incorrect because Markov analysis is
generate the individual values for a random variable. used when the probability of a future state depends
A random number generator is used to produce only upon the current state. This would probably not
numbers with a uniform probability distribution. The be true for sales of a new product.
second step of the Monte Carlo process then
transforms the random numbers into values consistent Answer (D) is incorrect because contribution margin
with the desired distribution. The performance of a analysis concerns the relationship of sales and
model under conditions of uncertainty may be variable costs.
investigated by randomly selecting values for each of
the variables in the model based on the probability
distribution of each variable and then calculating the [206] Source: CMA 0688 5-7
value of the solution. Advantages of Monte Carlo
simulation are that time can be compressed, Answer (A) is incorrect because the rate of learning
alternative policies can be considered, and complex is determined as follows: The cumulative average unit
systems can be analyzed. labor cost for 10 units was $12,000 ($120,000 ・
10). The cumulative cost for 20 units was $9,600.
The cost for 40 units was $7,680. Because $9,600 is
[203] Source: CMA 1280 5-11 80% of $12,000 and $7,680 is 80% of $9,600, an
80% rate of learning occurred.
Answer (A) is incorrect because expected value
analysis is useful when finding the anticipated payoff Answer (B) is incorrect because the rate of learning is
from a probability distribution of payoffs and the determined as follows: The cumulative average unit
probability of each payoff. labor cost for 10 units was $12,000 ($120,000 ・
10). The cumulative cost for 20 units was $9,600.
Answer (B) is correct. Markov analysis is used when The cost for 40 units was $7,680. Because $9,600 is
a decision involves a number of separate states of 80% of $12,000 and $7,680 is 80% of $9,600, an
nature, and the probability of moving from one state 80% rate of learning occurred.
to another is dependent only upon the current state.
We are presented with consumers who are loyal to Answer (C) is correct. The learning curve reflects a
one bakery, and given a probability of their moving percentage reduction in time to complete a task for
away from that bakery or becoming new customers each doubling of cumulative production. An analysis
of another bakery. of the materials costs shows that these costs are
strictly variable. However, the labor costs are not
Answer (C) is incorrect because learning curve strictly variable because the cumulative amount at the
techniques are used to analyze the increases in end of the second year (for which production is
volume efficiency due to the augmented experience of double that of the first year) is not exactly double that
employees. for Year One. The same is true of the second- and
third-year labor costs. The cumulative average unit
Answer (D) is incorrect because correlation and labor cost for 10 units was $12,000 ($120,000 ・
regression analyses are used to describe the strength 10). The cumulative average unit labor cost for 20
and direction, i.e., positive or negative, of units (representing a doubling of production) was
relationships between variables. $9,600 ($192,000 ・20). The cumulative unit
average for the next doubling was $7,680 ($307,200
・40). Since $9,600 is 80% of $12,000 and $7,680
is 80% of $9,600, an 80% rate of learning occurred.
[204] Source: CMA 1287 5-26
Answer (D) is incorrect because the rate of learning
is determined as follows: The cumulative average unit
labor cost for 10 units was $12,000 ($120,000 ・ Answer (C) is incorrect because the formula includes
10). The cumulative cost for 20 units was $9,600. 4 times the most likely time in the numerator, with a
The cost for 40 units was $7,680. Because $9,600 is denominator of 6.
80% of $12,000 and $7,680 is 80% of $9,600, an
80% rate of learning occurred. Answer (D) is incorrect because the numerator
equals the optimistic time, plus 4 times the most likely
time, plus the pessimistic time. The denominator is 6.
[207] Source: CMA 0688 5-8
Answer (A) is incorrect because $760,800 equals [210] Source: CMA 0688 5-15
125% times $608,640, which is full cost without
including $100,000 fixed overhead. Answer (A) is correct. PERT and CPM emphasize
time. The critical path is thus the path that requires the
Answer (B) is incorrect because $608,640 is full cost longest time through the network. It is the path with
without including $100,000 fixed overhead. the least amount of slack because any delay on the
critical path increases project length. Hence, slack
Answer (C) is correct. The company is permitted to time on the critical path is zero. Slack time is found
bid 25% above full cost (including fixed overhead). on all other paths. It is the time by which the path is
Given a learning curve of 80% and a cumulative shorter than the critical path. For example, if a critical
average unit labor cost for 40 units of $7,680 path requires 14 weeks and another path 13 weeks,
($307,200 ・40), the additional labor costs for the the alternative has 1 week of slack time. The work on
next 40 units can be determined. Cumulative average the noncritical path can be delayed by 1 week and
unit labor cost for 80 units is estimated to be $6,144 the completion time of the total project will not be
(80% x $7,680). Estimated total labor cost for 80 lengthened.
units is $491,520 (80 units x $6,144). Thus, the
incremental labor cost of the last 40 units is expected Answer (B) is incorrect because the critical path is
to be $184,320 ($491,520 - $307,200). Variable the longest but not necessarily the most costly.
overhead is $1 per direct labor dollar, or $184,320.
Adding $240,000 for materials and $100,000 for Answer (C) is incorrect because the critical path is
fixed overhead results in a full cost of $708,640 the longest but not necessarily the most costly.
($184,320 DL + $184,320 VOH + $240,000 DM
+ $100,000 FOH). Consequently, the bid price Answer (D) is incorrect because the critical path is
should be $885,800 (125% x $708,640 full cost). the longest but not necessarily the most costly.
Answer (D) is incorrect because $708,640 includes Answer (A) is incorrect because sensitivity analysis is
$100,000 of fixed costs. not used to determine how constraints vary but rather
how the optimum solution will change if constraints
do vary.
[209] Source: CMA 0688 5-14
Answer (B) is incorrect because the accuracy of the
Answer (A) is incorrect because the most likely time parameters cannot be tested as a part of the model.
is multiplied by 4, not the optimistic or pessimistic The intent is simply to measure the impact if the
times. assumed parameters do vary.
Answer (B) is correct. The expected times used in a Answer (C) is incorrect because the technological
PERT analysis are determined by applying a 1-4-1 matrix is developed by production managers or
ratio. The optimistic time is multiplied by one, the engineers and is an input into the model.
most likely time by four, and the pessimistic time by
one. The products are added and the sum is divided Answer (D) is correct. Sensitivity analysis in linear
by six. Thus, the three time estimates are weighted programming determines how the optimal solution will
1/6, 4/6, and 1/6. change if an objective function coefficient, the limiting
value of a resource constraint, or a constraint
coefficient is varied. It also considers the effect of Answer (C) is incorrect because the PERT estimate
adding a new variable or constraint. is 4.5 months.
Answer (D) is incorrect because Gantt charting Answer (C) is incorrect because discounted cash
involves drawing a bar chart showing the progress of flow techniques are used to evaluate capital
a project. investment decisions.
Answer (D) is incorrect because PERT is a type of Answer (D) is incorrect because PERT is also based
network analysis used to plan and control large on most likely and optimistic times.
projects.
Answer (A) is incorrect because both the simplex Answer (C) is incorrect because differential calculus
method and iterative analysis are ways of working a is used to find derivatives of functions and to
linear programming problem by hand. determine the points of maximization or minimization.
Answer (B) is incorrect because regression analysis is Answer (D) is correct. In a Markov chain, the
a means of finding the relationship between two or probability of an event is conditioned upon the
more variables. previous event. Many card games reflect the Markov
process because the probabilities are altered by the
Answer (C) is correct. Sensitivity analysis is a cards already played. Markov analysis is thus an
process to determine how sensitive the final result appropriate technique for forecasting consumer
(solution) is to changes in variables. It is often used in buying habits because it relies on recent evidence
capital budgeting decisions to incorporate various rather than on an average of all evidence.
levels of risk.
Answer (D) is incorrect because matrix analysis is [223] Source: CMA 1285 5-23
another mathematical tool used to solve a variety of
problem types. Answer (A) is incorrect because linear programming
is used to maximize or minimize an objective function
given a number of limiting factors.
[220] Source: CMA 1284 5-9
Answer (A) is incorrect because basic PERT does Answer (B) is incorrect because decision tree
analysis is used to study the results of various
not consider cost. decisions that have a number of outcomes, all with
different risks.
Answer (B) is incorrect because basic PERT does
not consider cost. Answer (C) is correct. Simulation involves
developing a computer model in logical and
Answer (C) is incorrect because slack times occur mathematical form. The model is a representation of a
under both methods of analysis. system that relates the relevant variables, their
behavior, and their interactions. Varying the
Answer (D) is correct. Both PERT (program assumptions in the model permits sensitivity analysis,
evaluation and review technique) and CPM (critical for example, of the effects of changing prices.
path method) are useful in the planning and control of
a large system or process. PERT and CPM both Answer (D) is incorrect because Markov analysis is
construct a network of time relationships between useful when a problem involves a variety of states of
each subunit or subproject to identify the subprojects nature and the probability of moving from one to
that have a direct effect on the completion date of the another depends only upon the current state.
project. PERT uses probabilistic time estimates
(usually based on the most likely, the optimistic, and
the pessimistic times for an activity). CPM uses [224] Source: CMA 1286 5-9
deterministic time and cost estimates. It also uses time
and cost estimates for normal and "crash" efforts. Answer (A) is incorrect because a GANTT chart is a
bar chart used to keep a record of the steps in a
project that have already been completed.
[221] Source: CMA 0685 5-11
Answer (B) is incorrect because CPM is similar to
Answer (A) is correct. Computer simulation is used PERT, but uses deterministic estimates of time.
when an optimization model cannot be developed,
e.g., because the variables exceed the equations Answer (C) is correct. PERT is used to obtain a
describing them. Simulation involves constructing a probabilistic estimate of the completion time for a
mathematical/logical model incorporating most of the project. The PERT method is sometimes known as
features of the problem. This model is tested in a the 1-4-1 three-estimate method because the most
variety of hypothetical situations, and the modeled optimistic and pessimistic estimates are each
responses can then be measured. weighted by one and the most likely estimate is
weighted by four. The sum of these three weighted
Answer (B) is incorrect because simulation is not estimates is then divided by six to arrive at the
probable completion time. through a complex project by emphasizing the
longest, or critical, path.
Answer (D) is incorrect because Markov analysis is
useful when a problem involves a variety of states of Answer (B) is correct. Queuing theory is a group of
nature and the probability of moving from one to mathematical models for systems involving waiting
another depends only upon the current state. lines. In general, a queuing system consists of a
waiting line and a service facility (a crane in this case).
The objective of queuing theory is to minimize the
[225] Source: CMA 0688 5-3 total cost of the system, including both service and
waiting costs, for a given rate of arrivals.
Answer (A) is correct. Monte Carlo simulation is
used to generate the individual values for a random Answer (C) is incorrect because the IRR is a
variable. The performance of a model under discounted cash flow technique used to evaluate
conditions of uncertainty may be investigated by investment projects.
randomly selecting values for each of the variables in
the model based on the probability distribution of Answer (D) is incorrect because the expected value
each variable and then calculating the value of the of a decision is found by multiplying the probability of
solution. Advantages of Monte Carlo simulation are each outcome by its payoff and summing the
that time can be compressed, alternative policies can products.
be considered, and complex systems can be
analyzed.
[228] Source: CMA 0690 5-22
Answer (B) is incorrect because expected value
analysis is used when specific outcomes can be Answer (A) is incorrect because regression analysis
associated with particular events and probabilities can explains the behavior of a dependent variable (such
be assigned to those events. as total cost) in terms of one or more independent
variables (such as units produced).
Answer (C) is incorrect because multiple regression
analysis explains the behavior of a dependent variable Answer (B) is incorrect because expected value
based on the value of one or several independent analysis is used to determine an anticipated return or
variables. cost based upon probabilities of events and their
related outcomes.
Answer (D) is incorrect because contribution margin
Answer (C) is correct. Learning curves reflect the
analysis is used to explore changes in sales and increased rate at which people perform tasks as they
variable costs. gain experience. The time to perform a given task
becomes progressively shorter during the early stages
of production. The curve is expressed as a
[226] Source: CMA 0688 5-6 percentage reduction in time to complete a task for
each doubling of cumulative production. A learning
Answer (A) is incorrect because queuing curve percentage of 80% is common.
(waiting-line) theory is used for systems involving
waiting lines (such as cash registers in a store or teller Answer (D) is incorrect because Monte Carlo
windows in a bank). Its objective is to minimize the simulation is used to generate values for random
total cost of the system (service and waiting costs). variables in computer models.
one or more independent variables. Answer (A) is incorrect because the critical path is
the longest path.
Answer (C) is correct. PERT is a network analysis
technique that uses probabilistic time and cost Answer (B) is correct. The critical path is the longest
estimates to aid managers in planning and controlling path through a network. It is critical because any
large-scale, complex projects having many increase in time for an activity on this path will delay
the entire project. Moreover, any decrease in time for
interrelated activities. PERT diagrams are free-form an activity not on the critical path will not shorten the
networks showing each activity as a line between project.
events. A sequence of lines shows interrelationships
among activities. The critical path is the longest path Answer (C) is incorrect because variability of
in time through the network. It is critical in that if any estimated times is not the distinguishing characteristic
activity on the critical path takes longer than of the critical path. Indeed, CPM does not assign
expected, the entire project will be delayed. Paths probabilities to activity times.
that are not critical have slack time. One advantage of
PERT is that it identifies this slack time, which Answer (D) is incorrect because time, not cost,
represents unused resources that can be diverted to determines whether a path is critical.
the critical path.
Answer (D) is incorrect because learning curve [230] Source: CIA 1182 IV-20
analysis is based on the observation that people
perform tasks more rapidly as they gain experience. Answer (A) is correct. Computer simulations are
used to examine what-if questions. Variables may be
changed, assumptions modified, and models refined.
[227] Source: CMA 1289 5-12 Computer simulations may be used in various types
of problems, including production and financial
Answer (A) is incorrect because a critical path models. Simulation techniques can be used on
network is used to plan and measure the progress microcomputers as well as larger installations.
Answer (D) is correct. Project management concerns
Answer (B) is incorrect because time-based managing teams assigned to special projects. Lumpy
simulations are a common simulation technique. demand refers to periodic demand for a product or
service that increases in large, lumpy increments.
Answer (C) is incorrect because the refinement of
models leads to more informed management decision
making. [234] Source: CIA 1195 III-100
Answer (D) is incorrect because goal-seeking Answer (A) is correct. PERT/CPM is a network
analyses solve for the desired level of several key technique for scheduling interrelated time series
variables given the model criteria. This analysis is a activities and identifying any critical paths in the series
common simulation technique. of activities. The critical path is the longest path
through the network.
[231] Source: CIA 0589 III-44 Answer (B) is incorrect because linear programming
is a mathematical technique for maximizing or
Answer (A) is correct. Simulation is a technique for minimizing a given objective subject to certain
experimenting with logical-mathematical models using constraints.
a computer. Despite the power of mathematics, many
problems cannot be solved by known analytical Answer (C) is incorrect because queuing theory is
methods because of the behavior of the variables and used to minimize the costs of waiting lines when items
the complexity of their interactions. However, the arrive randomly at a service point and are serviced
performance of a quantitative model under sequentially.
uncertainty may be investigated by randomly selecting
values for each of the variables in the model (based Answer (D) is incorrect because sensitivity analysis is
on the probability distribution of each variable) and a method for studying the effects of changes in one or
then calculating the value of the solution. If this more variables on the results of a decision model.
process is performed a large number of times, the
distribution of results from the model will be obtained.
[235] Source: CIA 0592 III-69
Answer (B) is incorrect because regression analysis
finds an equation for the relationship among variables. Answer (A) is incorrect because the path length of
A-C is 13.
Answer (C) is incorrect because capital budgeting is
a methodology to maximize the returns on long-term Answer (B) is incorrect because the path length of
investment decisions. B-E is 8.
Answer (D) is incorrect because linear programming Answer (C) is correct. The critical path is the longest
is a technique used to maximize a revenue or profit path because it defines the minimum duration of the
function or minimize a cost function subject to project. A-D-E (4 + 6 + 5 = 15) is the critical path.
constraints.
Answer (D) is incorrect because B-D-C is not a
path. The predecessor of C is A.
[232] Source: CMA 1287 5-26
Answer (A) is incorrect because slack time is an [236] Source: CIA 1191 III-37
inherent part of the noncritical paths on PERT
projects. Answer (A) is incorrect because an activity with
slack may nevertheless be essential to the overall
Answer (B) is correct. Combining PERT with cost project.
data permits decisions as to whether the benefits of
earlier completion of a project are justified in terms of Answer (B) is incorrect because it is not a backup
the additional costs of completion. For this purpose, activity.
activity times and costs must be estimated for both
normal and crash efforts. Answer (C) is correct. Slack is the free time
associated with each activity. In other words, paths
Answer (C) is incorrect because PERT-Cost can be that are not critical have slack time. Slack represents
used without computerization. unused resources that can be diverted to the critical
path.
Answer (D) is incorrect because costs are not
needed for these calculations. Answer (D) is incorrect because time is involved in a
slack activity.
[239] Source: CMA 1288 5-24 Answer (C) is incorrect because arrival times are
based on a Poisson distribution and service times are
Answer (A) is incorrect because the activity to be exponentially distributed.
crashed must be on the critical path. Activity BC is
not on the critical path. Answer (D) is incorrect because if the arrival rate
were greater than the rate of service, the line would
Answer (B) is incorrect because the cost to crash be infinitely long.
activity EF for 2 weeks is $700 higher than the cost
to crash activities DE and EF for one week ($19,500
- $18,800). [242] Source: CMA 0692 4-5
Answer (C) is correct. Activities that are to be Answer (A) is incorrect because 360 hours assumes
crashed in a CPM problem should be ones that are no learning curve effect.
on the critical (longest) path. Thus, activity BC should
not be selected because it is not on the critical path. Answer (B) is correct. One common assumption
To finish activity BC 2 weeks early would not reduce made in a learning curve model is that the cumulative
the total time to complete the project. Thus, the only average time per unit is reduced by a certain
feasible choices are DE and EF on the critical path. percentage each time production doubles. An 80%
The total cost to crash DE and EF for 1 week each is learning curve results in the following performance for
$18,800 ($10,000 + $8,800), which is less than the the lots shown:
cost to crash either activity for 2 weeks. Thus, DE
and EF should be crashed for 1 week each because Cumulative
the total cost is less than the $21,000 ($10,500 x 2) Units Average Hours
2-week delay penalty. ---------- --------------------
80 1.5 hours (120 ・80)
Answer (D) is incorrect because the cost to crash 160 1.2 hours (.8 x 1.5)
activity DE for 2 weeks is $800 higher than the cost 320 .96 hours (.8 x 1.2)
to crash activities DE and EF for one week ($19,600 Thus, to produce 320 units, total production time will
- $18,800). be 307.2 hours (.96 x 320). The total time for the last
240 units will be 187.2 hours (307.2 - 120).
[240] Source: CMA 1291 4-17 Answer (C) is incorrect because 307.2 hours is the
total time for completing 320 units.
Answer (A) is incorrect because 2 months is the most
optimistic estimate. Answer (D) is incorrect because 256 hours is a
nonsense answer.
Answer (B) is incorrect because 4 months is the most
likely estimate.
[243] Source: CMA 1294 4-28
Answer (C) is correct. The PERT method weights
Answer (A) is incorrect because expected value
analysis selects the best alternative for decisions Answer (D) is incorrect because 12 weeks is the
involving risk by multiplying the probability of each difference between the optimistic and pessimistic
outcome by its payoff, and summing the products. estimates.
Answer (D) is incorrect because simulation would not Answer (C) is incorrect because 14 is the sum of the
be appropriate when a single project is being bid two standard deviations.
upon.
Answer (D) is incorrect because 48 is the product of
the standard deviations.
[244] Source: CMA 0683 5-8
Answer (A) is incorrect because 1-40 is an [247] Source: CMA 1288 5-19
appropriate assignment of random numbers for the
notification category. Answer (A) is correct. Assuming that the cumulative
average time model applies, an 80% learning curve
Answer (B) is incorrect because 40-90 includes 51 means that the cumulative average time per unit (and
numbers. labor cost, given a constant labor rate) declines by
20% each time unit output doubles in the early stages
Answer (C) is incorrect because 61-100 is an of production. The first lot size was 50 units, which
appropriate assignment of random numbers for the was produced at a total cost of $15,400 ($1,500 for
notification category. materials and $13,900 for labor and overhead).
Materials costs are strictly variable and should remain
Answer (D) is correct. Given a 50% chance of a proportional to production. The labor ($8,500) and
recall, 50 different numbers should be assigned to variable overhead ($4,000) costs (labor-related),
that alternative. The answer (11-60) is the only however, will be affected by the learning curve. The
alternative with 50 numbers. average cost per lot for labor and variable overhead
after 100 units have been produced should be 80%
of the costs of the first lot of 50 units. Thus, the
[245] Source: CMA 0688 5-13 average labor and variable overhead cost per 50-unit
lot will be $10,000 (80% x $12,500). If production
Answer (A) is correct. PERT analysis includes doubles again (to a total production of 200 units or
probabilistic estimates of activity completion times. four lots of 50 each), the cumulative average cost for
Three time estimates are made: optimistic, most labor and variable overhead will be $8,000 per lot
likely, and pessimistic. The time estimates for an (80% x $10,000). Given four lots of 50 each, at an
activity are assumed to approximate a beta average cost of $8,000 per lot, the total cost for
probability distribution. In contrast to the normal labor and variable overhead must be $32,000.
distribution, this distribution has finite endpoints (the Adding $6,000 for raw materials ($1,500 per 50-unit
optimistic and pessimistic estimates) and is unimodal; lot) gives a total variable cost of $38,000 for 200
that is, it has only one mode (the most likely time). units. Fixed overhead is 10% of total variable cost,
PERT approximates the mean of the beta distribution so total cost is $41,800. The total cost for the last
by dividing the sum of the optimistic time, the 150 units is $26,400 ($41,800 - $15,400).
pessimistic time, and four times the most likely time
(the mode) by six. The standard deviation is Answer (B) is incorrect because $32,000 is the total
approximated by dividing the difference between the cost for labor and variable overhead for 200 units.
pessimistic and optimistic times by six. The basis for
the latter approximation is that various probability Answer (C) is incorrect because $38,000 is the total
distributions have tails that lie about plus or minus variable cost for 200 units.
three standard deviations from the mean. For
example, 99.9% of observations in the normal Answer (D) is incorrect because $41,800 is the total
distribution are expected to lie within this range. cost for 200 units.
Accordingly, if the pessimistic and optimistic times
are 21 and 9 weeks, respectively, the standard
deviation is 2 weeks (12 ・6). [248] Source: CMA 1288 5-20
Answer (B) is incorrect because 6 is the approximate Answer (A) is incorrect because with no learning
number of standard deviations between the tails of curve effect, estimated total hours would be 4,000
the normal distribution. instead of 1,960, a change of more than 50%.
Answer (C) is incorrect because 9 weeks is the Answer (B) is incorrect because fixed costs applied
pessimistic estimate. per lot would decline because they are based on
labor hours, which are declining.
Answer (B) is incorrect because CPM but not PERT
Answer (C) is incorrect because with no learning uses activity costs and considers crash times.
curve effect, estimated total hours would be 4,000
instead of 1,960, a change of more than 50%. Answer (C) is incorrect because a less significant
difference between PERT and CPM is that PERT
Answer (D) is correct. The sum of the direct labor uses probabilistic estimates of completion times.
hours for the initial lot of 50 units was 1,000. A CPM times are deterministic. The 1:4:1 method is
second lot of 50 would reduce the cumulative hours typically used in PERT. Under this method, the most
per lot to 700 (70% x 1,000). A doubling to four lots optimistic and pessimistic estimates are weighted
would reduce the cumulative hours per lot to 490 equally, but the most likely estimate is weighted four
(70% x 700). Thus, for an output of 200 units, the times more heavily than the others.
total hours worked would be 1,960 (4 x 490).
Subtracting the 1,000 hours required for the first 50 Answer (D) is correct. Both PERT and CPM are
units from the 1,960-hour total gives 960 hours for network analysis techniques. But CPM was
the last 150 units. Dividing 960 hours by 150 units
produces a per-unit time of 6.4 hours. developed independently of PERT and is widely used
in the construction industry. CPM may be thought of
as a subset of PERT. Like PERT, it is a network
[249] Source: CMA 1288 5-24 technique, but, unlike PERT, it uses deterministic time
and cost estimates. Its advantages include cost
Answer (A) is incorrect because activity BC is not on estimates plus the concept of "crash" efforts and
the critical path. costs. Activity times are estimated for normal effort
and crash effort. Crash time is the time to complete
Answer (B) is incorrect because activity BC is not on an activity assuming that all available resources were
the critical path.
devoted to the task (overtime, extra crew, etc.).
Answer (C) is incorrect because the cost of crashing Activity costs are also estimated for normal and crash
EF 2 weeks is $19,500, which is greater than the efforts. These estimates allow the project manager to
total cost to crash DE and EF for 1 week each. estimate the costs of completing the project if some
of the activities are completed on a crash basis. The
Answer (D) is correct. Activities that are to be network diagram is constructed in the same manner
crashed in a critical path problem should be ones that as PERT diagrams. Once the diagram is constructed,
are on the critical (longest) path. Thus, activity BC the critical paths are found for normal and crash
should not be selected because it is not on the critical times. More than one critical path may exist for each
path. To finish activity BC 2 weeks early would not diagram.
reduce the total time to complete the project.
Therefore, the only feasible choices are DE and EF
on the critical path. The total cost to crash DE and [252] Source: CMA 0689 5-25
EF for 1 week each is $18,800 ($10,000 + $8,800),
which is less than the cost to crash either activity for 2 Answer (A) is incorrect because the critical path is
weeks. Thus, DE and EF should be crashed for 1 not shown.
week each since the total cost is less than the
$21,000 ($10,500 x 2) 2-week delay penalty. Answer (B) is incorrect because linear programming
is used to determine an optimal product mix.
[250] Source: CMA 0689 5-23 Answer (C) is incorrect because a Gantt chart shows
the activities to be completed but does not reflect
Answer (A) is incorrect because determining product their relationships (sequencing) or define a critical
mix can be accomplished by using linear path.
programming.
Answer (D) is correct. A Gantt or bar chart is
Answer (B) is correct. The Program Evaluation and sometimes used in conjunction with PERT or CPM
Review Technique and critical path method are useful to show the progress of a special project. Time is
in the planning and control of a complex system or shown on the horizontal axis, the length of a bar
process. PERT and CPM both construct a network equals the length of an activity, and shading indicates
of time relationships between each event or the degree of completion. However, the Gantt chart
subproject to identify the subprojects that have a is not as sophisticated as PERT or CPM in that it
direct effect on the completion date of the project as does not reflect the relationships among the activities
a whole. The critical path is the longest path through or define a critical path.
the network. If any activity on this path takes longer
than expected, the entire project will be delayed
(slack time is zero). Every project has at least one [253] Source: CMA 0690 5-21
critical path. Some have more than one.
Answer (A) is incorrect because expected value
Answer (C) is incorrect because product costs are analysis is used to determine an anticipated return or
determined by cost accounting. cost based upon probabilities of events and their
related outcomes.
Answer (D) is incorrect because queuing theory
determines the number of servers needed in a Answer (B) is incorrect because linear programming
restaurant. optimizes a function given certain constraints.
Answer (A) is incorrect because CPM specifies the Answer (D) is correct. Sensitivity modeling can be
activity times (uses deterministic estimates). used to determine the outcome of a variety of
decisions. A trial-and-error method may be adopted, network analysis.
usually in a computer model, to calculate the
sensitivity of the solution (variability of outcomes) to Answer (D) is incorrect because linear programming
changes in a variable. is a tool for optimizing a cost or profit function given
specified constraints.
Answer (A) is incorrect because correlation and Answer (B) is incorrect because $10,368 is based on
regression analysis is a means of determining the the assumption that the cumulative average unit labor
degree of the relationship among two or more cost is reduced by the learning curve percentage with
variables. each batch, not each doubling of output.
Answer (B) is incorrect because CVP analysis is Answer (C) is incorrect because $2,592 represents
used to analyze the relationship among fixed costs, the labor cost of 100 units at the unit rate expected
variable costs, sales volume, and profit or loss. after another doubling of production to eight batches.
Answer (C) is incorrect because PERT-Cost is a Answer (D) is correct. The learning curve reflects the
means of network analysis that assigns costs to all increased rate at which people perform tasks as they
activities so that the effect of any change in a given gain experience. The time required to perform a given
task on cost as well as on time may be estimated. task becomes progressively shorter. Ordinarily, the
curve is expressed in a percentage of reduced time to
Answer (D) is correct. Queuing theory is a group of complete a task for each doubling of cumulative
mathematical models for systems involving waiting production. One common assumption in a learning
lines. In general, a queuing system consists of a curve model is that the cumulative average time (and
waiting line and a service facility (loading docks in this labor cost) per unit is reduced by a certain
case). The objective of queuing theory is to minimize percentage each time production doubles. Given a
the total cost of the system, including both service $120 cost per unit for the first 100 units and a $72
and waiting costs, for a given rate of arrivals. cost per unit when cumulative production doubled to
200 units, the learning curve percentage must be 60%
($72 ・$120). If production is again doubled to 400
[256] Source: CMA 1291 4-23 units (four batches), the average unit labor cost
should be $43.20 (60% x $72). Hence, total labor
Answer (A) is incorrect because queuing theory is cost for 400 units is estimated to be $17,280 (400 x
used to minimize the cost of waiting lines. $43.20).
Answer (D) is correct. In a PERT or critical path Answer (D) is correct. PERT diagrams are free-form
network, the critical path is the longest path in time networks showing each activity in a large project as a
through the network. The longest path is critical in line between events. The critical path is the longest
that if any activity on the critical path takes longer path in time through the network. That path is critical
than expected, the entire project will be delayed. in that if any activity on the critical path takes longer
Every network has at least one critical path. Paths than expected, the entire project will be delayed.
that are not critical have slack time. Paths that are not critical have slack time. Slack is the
number of days an activity can be delayed without
forcing a delay for the entire project.
[261] Source: CMA 0694 4-3
Answer (A) is incorrect because eliminating an [264] Source: CMA 1291 4-26
activity with slack will not reduce the total time of the
project. Answer (A) is incorrect because simulation is a
means of experimenting with logical or mathematical
Answer (B) is incorrect because the lowest unit crash models using a computer.
cost may not result in a major time savings.
Answer (B) is incorrect because queuing theory is
Answer (C) is incorrect because the time reduction used to minimize the cost of waiting lines.
should be related to its cost. The maximum time
reduction may not be cost effective. Answer (C) is incorrect because statistical sampling is
a means of estimating the characteristics of a
Answer (D) is correct. When making a cost-time population by examining a few of its units.
trade-off, the first activity to be crashed (have its
completion time accelerated) is one on the critical Answer (D) is correct. Time series analysis would be
path. To select an activity on another path would not appropriate because it relies on past experience.
reduce the total time of completion. The initial activity Changes in the value of a variable (such as sales) may
chosen should be the one with the completion time have several possible components, e.g., a change in
that can be accelerated at the lowest possible cost demand for the product or a change in market share.
per unit of time saved. These changes are regressed on time (the
independent variable).
[266] Source: CMA 0695 4-12 Answer (B) is correct. Correlation and regression
analysis can be used to determine if a relationship
Answer (A) is incorrect because uncertainty is exists among two or more variables. The degree of
reflected in the use of probabilistic estimates of that relationship is assessed by means of correlation
completion times. analysis. Thus, regressing sales (the dependent
variable) on both sales of replacement parts and sales
Answer (B) is incorrect because the difference of automobiles (independent variables) would
between the latest starting time and earliest finishing determine the extent of the dependence.
time is irrelevant.
Answer (C) is incorrect because statistical sampling is
Answer (C) is incorrect because the path with the a means of choosing and analyzing a sample to
largest amount of time associated with it is the critical estimate population characteristics.
path.
Answer (D) is incorrect because time series or trend
Answer (D) is correct. PERT diagrams are free-form analysis regresses the dependent variable on time (the
networks showing each activity in a large project as a independent variable).
line between events. The critical path is the longest
path in time through the network. That path is critical
in that, if any activity on the critical path takes longer [270] Source: CIA 0593 III-64
than expected, the entire project will be delayed.
Paths that are not critical have slack time. Slack is the Answer (A) is incorrect because a perfect negative
number of days an activity can be delayed without correlation exists.
forcing a delay for the entire project.
Answer (B) is correct. The coefficient of correlation
(in standard notation, r) measures the strength of the
[267] Source: CMA 1285 5-27 linear relationship. The magnitude of r is independent
of the scales of measurement of X and Y. Its range is
Answer (A) is incorrect because -0.73 signifies a -1.0 to 1.0. A value of -1.0 indicates a perfectly
strong negative correlation. inverse linear relationship between X and Y. A value
of zero indicates no linear relationship between X and
Answer (B) is correct. The correlation coefficient can Y. A value of +1.0 indicates a perfectly direct
vary from -1 to +1. A -1 relationship indicates a relationship between X and Y. As X increases by 1,
perfect negative correlation, and a +1 relationship Y consistently decreases by 2. Hence, a perfectly
indicates a perfect positive correlation. A zero inverse relationship exists, and r must be equal to
correlation coefficient would indicate no association -1.0.
between the variables. Therefore, the correlation
coefficient that is nearest to zero would indicate the Answer (C) is incorrect because an inverse, not a
weakest linear association. Of the options given in the direct, relationship exists.
question, the correlation coefficient that is nearest to
zero is -0.11.
Answer (D) is incorrect because a linear relationship
Answer (C) is incorrect because 0.12 is a slightly exists between X and Y.
stronger correlation.
Answer (D) is incorrect because 0.35 is a [271] Source: CIA 1194 II-46
considerably stronger correlation.
Answer (A) is incorrect because 1.03 is an
impossible value.
[268] Source: CMA 1289 5-14
Answer (B) is incorrect because -.02 is a very weak
Answer (A) is incorrect because the coefficient is correlation coefficient.
negative if the relationship between the variables is
inverse. Answer (C) is correct. Because the range of values is
between -1.0 and 1.0, -.89 suggests a very strong
Answer (B) is incorrect because the coefficient inverse relationship between the independent and
relates the two variables to each other. dependent variables. A value of -1.0 signifies a
perfect inverse relationship, and a value of 1.0
Answer (C) is incorrect because the size of the signifies a perfect direct relationship.
coefficient varies between -1.0 and +1.0.
Answer (D) is incorrect because .75 is .25 from the
Answer (D) is correct. The coefficient of correlation maximum value, whereas - .89 is .11 from the
(r) measures the strength of the linear relationship minimum value.
between the dependent and independent variables.
The magnitude of r is independent of the scales of
measurement of x and y. The coefficient lies between [272] Source: CIA 0595 II-46
-1.0 and +1.0. A value of zero indicates no linear
relationship between the x and y variables. A value of Answer (A) is incorrect because cross-sectional
+1.0 indicates a perfectly direct relationship, and a regression analysis is inappropriate. The auditor is
value of -1.0 indicates a perfectly inverse relationship. trying to estimate changes in a single account balance
over time.
[269] Source: CMA 1291 4-27 Answer (B) is incorrect because regression analysis
may still be the most appropriate methodology to
Answer (A) is incorrect because simulation is a estimate interest income, but the auditor should first
means of experimenting with logical or mathematical understand the factors that may be causing r イ to
decrease. The reason may be a systematic error in total variance in cost that can be explained by the
the account balance. regression equation. If the coefficient of determination
is .99724, 99.724% of the variance is explained by
Answer (C) is correct. The coefficient of the regression equation. Thus, the values in the
determination (r イ) is the amount of variation in the regression equation explain virtually the entire amount
dependent variable (interest income) that is explained of total cost.
by the independent variables. In this case, less of the
change in interest income is explained by the model. Answer (B) is incorrect because the percentage of
Thus, some other factor must be causing interest the total variance explained by the regression
income to change. This change merits audit equation is 99.724% which corresponds to the
investigation. coefficient of determination (r イ), or .99724.
Answer (D) is incorrect because linear regression Answer (C) is incorrect because the percentage of
models are simpler models, but the auditor should be the total variance explained by the regression
searching for a systematic error in the account equation is 99.724% which corresponds to the
balance or applying a more complex model. coefficient of determination (r イ), or .99724.
[275] Source: CMA 1290 4-29 Answer (A) is correct. Given so few observations
(fewer than 30), t-values must be used. The company
Answer (A) is incorrect because the budgeted wants 95% confidence, which means 47.5% at the
maintenance costs are $3,746. top of the range and 47.5% at the bottom. Thus, the
appropriate column of the t-table to use is .025 (half
Answer (B) is incorrect because the budgeted of the 5% error allowance is at the top 50% and half
maintenance costs are $3,746. at the bottom). Given 12 observations and two
variables, and thus only 10 degrees of freedom (12 -
Answer (C) is incorrect because the budgeted 2), the appropriate t-value from the table is 2.23. The
maintenance costs are $3,746. standard error of the b coefficient (0.12126)
multiplied by the t-value (2.23) equals the range
Answer (D) is correct. Substituting the given data into above and below the mean. The variable coefficient
the regression equation results in a budgeted cost of 7.2884 plus the range of .2704 (2.23 x .12126)
$3,746 (rounded to the nearest dollar). equals 7.558. 7.2884 - 0.2704 equals 7.0180. The
range is thus $7.02 to $7.56 (to the nearest cent).
y = a + bx
y = 684.65 + 7.2884(420) Answer (B) is incorrect because it does not cover
y = $3,746 two standard deviations of the range.
Answer (A) is correct. The coefficient of Answer (D) is incorrect because it does not cover
determination (r イ) measures the percentage of the two standard deviations of the range.
Answer (B) is incorrect because dynamic
programming is an approach to solving problems, not
[279] Source: Publisher a particular algorithm. It divides a large mathematical
model into smaller, more manageable pieces in such a
Answer (A) is incorrect because it includes more than way that, once the smaller problems have been
one standard deviation from the mean. solved, the result is the optimal solution to the overall
model.
Answer (B) is incorrect because it includes more than
one standard deviation from the mean. Answer (C) is correct. Learning curves reflect the
increased rate at which people perform tasks as they
Answer (C) is incorrect because it includes less than gain experience. Thus, the time required to perform a
one standard deviation from the mean. given task becomes progressively shorter. Ordinarily,
the learning curve is expressed as a percentage of
Answer (D) is correct. Based on the regression reduced time to complete a task for each doubling of
equation, the total cost at 400 hours would be cumulative production.
$684.65 of fixed costs (the constant coefficient) plus
$2,915.36 (400 x 7.2884) of variable costs, for a Answer (D) is incorrect because time series analysis
total of $3,600.01. The standard error of the estimate applies to data gathered at successive moments in
is given as $34.469, or $34.47. Thus, one standard time. It is a forecasting technique in which the
deviation either way would be $3,600.01 - $34.47 = dependent variable is regressed on time.
$3,565.54 and $3,600.01 + $34.47 = $3,634.48. A
two-thirds confidence level falls within one standard
deviation (approximately from the mean). [283] Source: CMA 0697 4-26
Answer (D) is incorrect because the objective is to Answer (A) is incorrect because a transportation
compare stores at one moment in time. Multiple model is a form of linear programming used to
regression time series analysis compares the allocate shipments most economically. Transition
performance of an individual store over a period of probabilities are not used in a transportation model.
time.
Answer (B) is correct. Markov analysis is useful in
decision problems in which the transition probability
[281] Source: CMA 0697 4-21 of the occurrence of a future state depends only on
the current state. Thus, it is employed to analyze how
Answer (A) is incorrect because the critical path is certain systems evolve over repeated trials, with the
the longest path. initial state mattering less and less as time passes. The
objective is to estimate the probability that the system
Answer (B) is incorrect because whether a path is will be in a given state at a moment in the future. This
critical is a function of its completion time, not the problem could probably also have been solved using
number of nodes. queuing theory, but that was not one of the answer
choices.
Answer (C) is correct. The critical path is the longest
path through the network. If any activity on this path Answer (C) is incorrect because calculus is used to
takes longer than expected, the entire project will be optimize a nonlinear model, for example, a cost
delayed (slack time is zero). Every project has at function.
least one critical path. Some have more than one.
Answer (D) is incorrect because the critical path
Answer (D) is incorrect because a critical path has no method is used to plan and control large projects.
slack. The longest path through the network of activities is
the critical path.
Answer (A) is incorrect because, in time series Answer (B) is correct. When all customers must wait
analysis, variance of the error term is usually constant. in a single queue, a decrease in waiting time is
possible given multiple servers. An added effect is to
Answer (B) is correct. Time series analysis is a increase customer satisfaction.
regression model in which the independent variable is
time. In time series analysis, the value of the next time Answer (C) is incorrect because, assuming a Poisson
period is frequently dependent on the value of the process, the number of customers per teller will not
time period before that. Hence, the error terms are change.
usually correlated or dependent on the prior period;
i.e., they are characterized by autocorrelation (serial Answer (D) is incorrect because tellers' duties will
correlation). not change, so on-the-job training will not improve.
Answer (D) is incorrect because, in time series Answer (A) is incorrect because service by one
analysis, the expected value of the error term usually ticket-seller at a movie theater is an example of a
equals zero. single-channel, single-phase system.
Answer (C) is incorrect because, under exponential Answer (D) is incorrect because an example of a
smoothing, each forecast equals the sum of the last multiple-channel, multiple-phase system is a set of
observation times the smoothing constant, plus the supermarket checkout lines each of which is served in
last forecast times one minus the constant. sequence by a cashier and a person who packs
grocery bags.
Answer (D) is correct. The simple moving-average
method is a smoothing technique that uses the
experience of the past N periods (through time [291] Source: CIA 0584 IV-34
period t) to forecast a value for the next period. Thus,
the average includes each new observation and Answer (A) is correct. One hundred customers arrive
discards the oldest observation. The forecast formula in line per hour and only 60 are serviced per hour.
for the next period (for time period t+1) is the sum of Accordingly, the queue will expand to infinity during
the last N observations divided by N. peak periods.
Answer (B) is correct. Under exponential smoothing, Answer (D) is incorrect because insufficient
each forecast equals the sum of the last observation information is given to determine average customer
times the smoothing constant, plus the last forecast waiting time. The question gives only peak period
data. maximax criterion is a decision rule adopted by
risk-seeking, optimistic players who desire the largest
possible payoff and are willing to accept high risk.
[292] Source: CIA 1192 III-98 The player determines the payoff for each state of
nature expected to arise after each possible decision,
Answer (A) is incorrect because the binomial ascertains the maximum payoff for each decision, and
distribution is a discrete distribution in which each trial then chooses the decision with the maximum payoff.
has just two outcomes.
Answer (B) is incorrect because the minimum regret
Answer (B) is incorrect because the chi-square criterion is used by a player who wishes to minimize
distribution is a continuous distribution used to the effect of a bad decision in either direction. It
measure the fit between actual data and the chooses the decision that has the lowest maximum
theoretical distribution. opportunity cost (benefit forgone).
Answer (C) is correct. Queuing models assume that Answer (C) is incorrect because the insufficient
arrivals follow a Poisson process: the events (arrivals) reason (Laplace) criterion applies when the decision
are independent, any number of events must be maker cannot assign probabilities to the states of
possible in the interval of time, the probability of an nature arising after a decision. The reasoning is that, if
event is proportional to the length of the interval, and no probability distribution can be assigned, the
the probability of more than one event is negligible if probabilities must be equal, and the expected value is
the interval is sufficiently small. If Y is the average calculated accordingly. This criterion is risk-neutral.
number of events in a given interval, k is the number
of events, and e is the natural logarithm (2.71828...), Answer (D) is correct. A rational economic decision
the probability of k is maker (one completely guided by objective criteria)
will use expected monetary value to maximize gains
k -Y under conditions of uncertainty because (s)he is
Y e risk-neutral (the utility of a gain equals the disutility of
f(k) = ------ a loss of the same absolute amount). For decisions
k! involving variability in outcomes, the concept of
expected value provides a rational means for
Answer (D) is incorrect because service time has an selecting the best choice. Expected value represents
exponential distribution. This distribution gives the the long-term average payoff for repeated trials. The
probability of zero events in a given interval, i.e., the best choice is the one having the highest expected
probability of a specified time between arrivals. value (sum of the products of the possible outcomes
and their respective probabilities).
[294] Source: CIA 1192 III-100 [297] Source: CIA 0590 III-48
Answer (A) is incorrect because car 4 must wait 4 Answer (A) is correct. Game (or decision) theory is a
minutes. mathematical approach to decision making when
confronted with an enemy or competitor. Games are
Answer (B) is incorrect because car 4 must wait 4 classified according to the number of players and the
minutes. algebraic sum of the payoffs. In a two-person game,
if the payoff is given by the loser to the winner, the
Answer (C) is correct. Car 4 arrives at the algebraic sum is zero and the game is called a
just-vacated island window 4 minutes after car 3. It zero-sum game. If it is possible for both players to
must wait 4 minutes for car 3 to be serviced. profit, however, the game is a positive-sum game.
Mathematical models have been developed to select
Answer (D) is incorrect because car 4 must wait 4 optimal strategies for certain simple games.
minutes.
Answer (B) is incorrect because probability theory
assists in making the best decisions in the face of
[295] Source: CMA 0688 5-19 uncertainty by providing mathematical methods for
expressing doubt or assurance about the occurrence
of a chance event.
Answer (A) is incorrect because, in game theory, the
Answer (C) is incorrect because queuing theory is a curve indicates that a doubling of production reduces
mathematical technique for minimizing the total cost of the time required by 20%. For example, if the first
a queue (cost of providing service + the cost of unit requires 50 hours, the cumulative average
allowing idle resources to stand in the queue) when completion time is 40 hours (80% x 50 hours) for
items arrive randomly at a service point and are two units and 32 hours (80% x 40 hours) for four
serviced sequentially. units.
Answer (D) is incorrect because sensitivity analysis is Answer (D) is incorrect because 30 hours is the time
a trial-and-error method, usually employed with a necessary to complete the second unit.
computer, for studying the effects of changes in one
or more variables on the results of a decision model.
[301] Source: CIA 1189 III-50
[298] Source: CIA 1191 III-100 Answer (A) is correct. Time series analysis or trend
analysis relies on past experience. Changes in the
Answer (A) is incorrect because the minimize regret value of a variable (e.g., unit sales of a product) may
rule selects the action or strategy that minimizes the have several possible components. In time series
sum of the regrets for the strategy. analysis, the dependent variable is regressed on time
(the independent variable). The secular trend is the
Answer (B) is incorrect because the maximize utility long-term change that occurs in a series. It is
rule is not a decision rule. represented by a straight line or curve on a graph.
Seasonal variations are common in many businesses.
Answer (C) is correct. According to game theory, a A variety of methods include seasonal variations in a
player who uses the minimax decision criterion forecasting model, but most methods adjust data by a
determines the maximum loss for each decision seasonal index. Cyclical fluctuations are variations in
possibility and then chooses the decision with the the level of activity in business periods. Whereas
minimum maximum loss. This rule produces the same some of these fluctuations are beyond the control of
result as the maximin technique, which determines the the firm, they need to be considered in forecasting.
minimum payoff for each decision and then chooses They are usually incorporated as index numbers.
the decision with the maximum minimum payoff. Irregular or random variations are any variations not
Minimax and maximin are conservative criteria included in the three categories above. Business can
adopted by risk-averse players, that is, those for be affected by random happenings, e.g., weather,
whom the disutility of a loss exceeds the utility of an strikes, or fires.
equal gain.
Answer (B) is incorrect because alpha is not a
Answer (D) is incorrect because the maximax rule meaningful term in this context.
selects the strategy or choice that provides the
greatest payoff if the most favorable state of nature Answer (C) is incorrect because alpha and repetitive
occurs. are not meaningful terms in this context.
Answer (D) is incorrect because game theory is an Answer (B) is incorrect because probability theory is
approach to decision making that considers the a mathematical technique used to express
actions of competitors. quantitatively the likelihood of occurrence of an
event.
[300] Source: CMA 0696 4-7 Answer (C) is incorrect because linear programming
is a mathematical technique for optimizing a given
Answer (A) is incorrect because 50 hours is the time objective subject to certain constraints.
for the first unit.
Answer (D) is incorrect because sensitivity analysis is
Answer (B) is incorrect because 40 hours is the a method for studying the effects of changes in one or
cumulative average completion time for two units. more variables on the results of a decision model.
Answer (C) is incorrect because both firms will Answer (B) is incorrect because the location with the
experience lower profits. minimum regret is L2.
Answer (D) is incorrect because both firms will Answer (C) is incorrect because the location with the
experience lower profits. minimum regret is L2.
[305] Source: CIA 1191 III-96 Answer (D) is incorrect because the expected
opportunity loss from selecting location L4 is 5.5.
Answer (A) is incorrect because the location with the
greatest potential profit is L5.
[308] Source: CIA 0592 IV-21
Answer (B) is incorrect because the location with the
greatest potential profit is L5. Answer (A) is incorrect because the expected values
of X and Y are equal.
Answer (C) is incorrect because the location with the Answer (B) is incorrect because the expected values
greatest potential profit is L5. of X and Y are equal.
Answer (D) is correct. Under the maximax criterion, Answer (C) is incorrect because a risk-averse
the decision maker selects the choice that maximizes decision maker would want the least amount of risk
the maximum profit. The maximum profits for the five
locations are: for a given expected value of return. Given that the
expected values are the same, the product with the
Location L1 L2 L3 L4 L5 least risk should be chosen.
---------------------------------------------
Maximum Profit 15 21 17 26 29 Answer (D) is correct. For a risk-averse decision
--------------------------------------------- maker, the utility of a gain is less than the disutility of
The location with the greatest potential profit is L5. an equal loss. A risk-averse decision maker therefore
tends to prefer a stable pattern of returns, in this case,
a lower maximum return and a higher minimum return.
[306] Source: CIA 1191 III-97 Accordingly, X should be chosen because the
dispersion of values is lower than that of Y.
Answer (A) is correct. Under the minimax regret
criterion, the decision-maker selects the choice that
minimizes the maximum regret (opportunity loss). The [309] Source: CIA 0593 III-66
maximum regret for each location is determined from
the opportunity loss matrix (see Discussion of the Answer (A) is correct. After a problem has been
next question). The maximum regret for each location formulated into any mathematical model, it may be
is the highest number in each column as indicated subjected to sensitivity analysis. Sensitivity analysis is
below: a method for studying the effects of changes in one or
more variables on the results of a decision model.
Location L1 L2 L3 L4 L5
Answer (B) is incorrect because statistical estimation critical path is 36 days long, the slack is the 3-day
involves the estimation of parameters. difference. In other words, work along path
A-D-E-C can be delayed by 3 days without affecting
Answer (C) is incorrect because statistical hypothesis the final completion time.
testing calculates the conditional probability that both
the hypothesis is true and the sample results have Answer (C) is incorrect because 6 days is the
occurred. difference between A-D-E-C and the shortest path.
Answer (D) is incorrect because a time-series study Answer (D) is incorrect because 33 days is the time
involves forecasting data over time.
required to complete path A-D-E-C.
Answer (A) is correct. A Markov chain is a series of Answer (A) is incorrect because 25 days is the most
events in which the probability of an event depends likely completion time.
on the immediately preceding event. An example is
the game of blackjack in which the probability of Answer (B) is incorrect because 27 days is the
certain cards being dealt is dependent upon what expected completion time.
cards have already been dealt. In the analysis of bad
debts, preceding events, such as collections, credit Answer (C) is incorrect because 32 days is based on
policy changes, and writeoffs, affect the probabilities a simple arithmetic average.
of future losses.
Answer (D) is correct. A PERT analysis incorporates
Answer (B) is incorrect because econometrics uncertainty by using probabilistic estimates of activity
forecasts the impact of different economic policies completion times. The most optimistic, most likely,
and conditions. and most pessimistic times are weighted on a basis of
1 to 4 to 1, respectively. Given an expected
Answer (C) is incorrect because Monte Carlo completion time of 27 days, a most likely completion
analysis is a simulation technique that uses time of 25 days, and a most optimistic completion
random-number procedures to create values for time of 24 days, the following formula may be solved
probabilistic components. for the most pessimistic completion time (X):
Answer (D) is incorrect because 50.0 hours is the Answer (A) is correct. Two basic costs are involved
completion time for the first unit. in queuing (waiting-line) models: (1) the cost of
providing service (including facility costs and
operating costs) and (2) the cost of idle resources
[316] Source: Publisher waiting in line. The latter may be a direct cost if paid
employees are waiting or an opportunity cost in the
Answer (A) is incorrect because 50 hours is the case of waiting customers. The objective of the
completion time for the first unit. queuing theory is to minimize the total cost of the
system, including both service and waiting costs, for a
Answer (B) is incorrect because 45 is the cumulative given rate of arrivals. This minimization occurs at the
average completion time after production of two point where the cost of waiting is balanced by the
units. cost of providing service.
Answer (C) is correct. The learning curve reflects the Answer (B) is incorrect because queuing theory is a
increased rate at which people perform tasks as they cost minimization technique.
gain experience. The time required to perform a given
task becomes progressively shorter. Ordinarily, the Answer (C) is incorrect because queuing theory is a
curve is expressed in a percentage of reduced time to cost minimization technique.
complete a task for each doubling of cumulative
production. One common assumption in a learning Answer (D) is incorrect because queuing theory is a
curve model is that the cumulative average time (and cost minimization technique.
labor cost) per unit is reduced by a certain
percentage each time production doubles. Thus, a
90% learning curve indicates that a doubling of
production will reduce the cumulative average unit [319] Source: CMA 0688 5-28
completion time by 10%. For example, if the first unit
required 50 hours to complete, the average Answer (A) is incorrect because each can be
completion time after two units will be 45 hours (90% calculated using the queuing model.
x 50 hours). If production is again doubled (to four
units), the cumulative average completion time will be Answer (B) is incorrect because each can be
40.5 hours (90% x 45 hours). calculated using the queuing model.
Answer (D) is incorrect because 40.0 hours assumes Answer (C) is correct. The objective of a queuing
two successive reductions of 5 hours [50 - (90% x model is to minimize the total cost of a system,
50)] each. including both service and waiting costs, for a given
rate of arrivals. The arrivals and services in a queuing
model occur in accordance with a Poisson process;
[317] Source: CIA 0596 III-100 i.e., the probability of occurrence of an event is
constant, and the occurrence is independent of what
Answer (A) is incorrect because the critical path has happened immediately preceding the current
method (CPM) is intended to identify bottlenecks in a observation. The Poisson probability distribution is
network and hence identify the longest path. used to predict the probability of the occurrence of a
given number of events in a given time, given the
Answer (B) is correct. Network models are used to expected number of events per unit of time and the
solve managerial problems pertaining to project length of time. The formula assumes a specified
scheduling, information systems design, and number of service facilities and random arrivals. Also,
transportation systems design. Networks consisting the formula calculates the average number in line or
of nodes and arcs may be created to represent in being serviced, the average waiting time, and the
graphic form problems related to transportation, average percent of time that a service facility is idle.
The actual waiting time cannot be determined from
use of the model. which chooses the strategy with the maximum
minimum payoff, gives the same results as the
Answer (D) is incorrect because the average number minimax procedure.
of units in the system (in line or being serviced) can
be calculated.
[323] Source: Publisher
[320] Source: Publisher Answer (A) is incorrect because the least squares
method is a sophisticated method of identifying the
Answer (A) is incorrect because $283 equals fixed and variable costs.
variable cost for January or March.
Answer (B) is incorrect because a computer
Answer (B) is correct. The high-low method can be simulation is a more exact method of separating fixed
used to determine the fixed and variable cost and variable costs.
components of a mixed cost. The variable cost is
found by dividing the change in total cost (TC) by the Answer (C) is correct. The fixed and variable
change in activity, e.g., DLH. The fixed cost is found portions of mixed costs may be estimated by
by substituting the variable cost into either of the identifying the highest and the lowest costs within the
activity/cost functions. Alternatively, the fixed cost is relevant range. The difference in cost divided by the
the cost given a zero level of activity. difference in activity is the variable rate. Once the
variable rate is found, the fixed portion is
Change in TC $25 determinable. The high-low method is a simple
----- = $.00833 approximation of the mixed cost formula. The costs
Change in DLH 3,000 of using more sophisticated methods sometimes
FC = TC - VC outweigh the incremental accuracy achieved. In these
FC = $585 - (31,000 x $.00833) = $327 cases, the high-low method is sufficient.
FC = $610 - (34,000 x $.00833) = $327
Answer (D) is incorrect because matrix algebra is a
Answer (C) is incorrect because $258 equals precise method of separating fixed and variable costs.
variable cost for February.
Answer (D) is incorrect because $541 equals [324] Source: CIA 1194 III-59
variable cost for February and March.
Answer (A) is correct. Regression analysis is a
statistical technique for measuring the relationship
[321] Source: CMA 0685 5-7 between variables. It estimates the component of the
dependent variable that varies with changes in the
Answer (A) is incorrect because, in decision making independent variable and the component that does
under risk, the probabilities of the consequences of not vary.
possible actions are known with a higher degree of
confidence. Answer (B) is incorrect because game theory is a
mathematical approach to decision making in which
Answer (B) is correct. The minimax regret decision the actions of competitors are considered.
rule is applicable under conditions of uncertainty, that
is, when the probabilities of future consequences are Answer (C) is incorrect because sensitivity analysis
not known. Using this criterion, management studies how changes in one or more variables affect
constructs a decision table based on opportunity the optimal solution in a linear programming model.
costs for each possible action and state of nature that
may exist and then selects the act that minimizes the Answer (D) is incorrect because queuing theory is
maximum possible opportunity cost. used to minimize the sum of the costs of waiting lines
and servicing waiting lines when items arrive
Answer (C) is incorrect because probabilities can randomly at a service point and are serviced
also be determined objectively. sequentially.
Answer (C) is incorrect because sampling actual Answer (B) is incorrect because the project cannot
demand for prior periods does not necessarily yield be completed in less than 8 months.
the expected demand given changes in future
circumstances. Answer (C) is correct. The longest, or critical, path in
the network from node (A) to node (F) is path
Answer (D) is correct. The Monte Carlo simulation A-C-D-F. All other paths are shorter than path
method is often used to generate the individual values A-C-D-F, so the activities along those paths can be
for a random variable. The performance of a completed before the activities along path A-C-D-F.
quantitative model under uncertainty may be Thus, the shortest time to complete the project is 8
investigated by randomly selecting values for each months (3 + 3 + 2).
variable in the model (based on the probability
distribution of each variable), and then calculating the Answer (D) is incorrect because no path through the
value of the solution. If this process is performed network requires 14 months.
many times, the distribution of results from the model
will be obtained. Thus, random numbers are assigned
so that the probability of an outcome in the model is [331] Source: Publisher
the same as that in the actual circumstances. Average
simulated long-term demand must therefore equal Answer (A) is incorrect because the average number
expected demand. of customers in line or being served at any time is 2.
Answer (C) is incorrect because the expected time of Answer (C) is incorrect because the average number
the critical path is 13.0 days. of customers in line or being served at any time is 2.
Answer (D) is incorrect because the expected time of Answer (D) is incorrect because the average number
the critical path is 13.0 days. of customers in line or being served at any time is 2.
Answer (A) is correct. The critical (longest) path is Answer (A) is incorrect because the average number
A-D-E, which has an expected time of 13 days. of customers waiting in line, not being served, is 1.33.
However, to decrease the project's completion time
by 1.5 days, paths A-B-C-E (4.5 + 1.0 + 6.5 = 12 Answer (B) is correct. The average number of
days) and A-B-D-E (4.5 + .5 + 7.5 = 12.5 days) as customers waiting in line can be found by squaring the
well as A-D-E must also be shortened. Hence, average number of customers arriving, and dividing
A-D-E must be reduced by 1.5 days, A-B-C-E by that by the number of customers able to be served
.5 day, and A-B-D-E by 1.0 day. The only way to times the difference between the number of
decrease A-D-E by 1.5 days is to crash activity AD customers a cashier can serve and the average
(5.5 expective time - 4.0 crash time = 1.5 days). number of customers. Therefore, the equation is
subtracted from the total cost of that respective
16 16 16 month. Therefore, using the month of February, it
-------- = ---- = -- = 1.33 customers waiting in line, not would be:
6(6 - 4) 6(2) 12 being served
$.40 x 2,600 hours = $1,040 $1,200 Total Cost
Answer (C) is incorrect because the average number 1,040 Variable Cost
of customers waiting in line, not being served, is 1.33. ------
$ 160 Fixed Cost
Answer (D) is incorrect because the average number ======
of customers waiting in line, not being served, is 1.33.
Answer (B) is incorrect because $160 is the fixed
cost for Jackson Co.
[333] Source: Publisher
Answer (C) is incorrect because $160 is the fixed
Answer (A) is incorrect because the average waiting cost for Jackson Co.
time is .33 minutes.
Answer (D) is incorrect because $160 is the fixed
Answer (B) is correct. The average waiting time can cost for Jackson Co.
be found by taking the average number of customers
waiting in line and dividing that by the average
number of customers arriving per minute. The [336] Source: Publisher
average number of customers waiting in line can be
found by squaring the average number of customers Answer (A) is incorrect because $560 is the variable
arriving, and dividing that by the number of customers cost, not the total cost.
able to be served times the difference between the
number of customers a cashier can serve and the Answer (B) is incorrect because $720 is the
average number of customers. Therefore, the expected total cost for the month of May.
equation is
Answer (C) is correct. The expected total cost, using
16 16 16 the high-low method, can be found by taking the
-------- = ---- = -- = 1.33 customers waiting in line, not number of expected machine hours and multiplying it
6(6 - 4) 6(2) 12 line, not being served by the variable cost per machine hour. This number is
Therefore, using the 1.33 people waiting in line, not then added to the fixed cost.
being served, the equation is
1,400 hours x $.40 per hour = $560 + $160 = $720
1.33
---- = .33 Answer (D) is incorrect because $720 is the
4 expected total cost for the month of May.
Answer (D) is incorrect because the average waiting Answer (A) is incorrect because .575 is the
time is .33 minutes. probability of an employee arriving on time the 5th
day.
[334] Source: Publisher Answer (B) is correct. Markov processes are useful
in decision problems in which the probability of the
Answer (A) is correct. The high-low method is used occurrence of a future state depends only on the
to generate a regression line by basing the equation current state. For this problem, the process should be
on only the highest and lowest of a series of set up as follows:
observations. In this problem, March was the lowest
and February the highest. To
-----------------
February $1,200 for 2,600 hours From On Time Late
March 800 for 1,600 hours ------- ------- ----
------ ----- On time .7 .3
Increase $ 400 for 1,000 hours Late .4 .6
Thus, it costs $400 for 1,000 hours, or $.40 for an In Out Pr
hour. --------------------------------------------------------------
Day 2 (1.0) x (.7) = .7 (1-.7) = .3
Answer (B) is incorrect because the variable cost of Day 3 (.7) x (.7) + (.3) x (.4) = .61 (1-.61) = .39
cleaning is $.40 per machine hour. Day 4 (.61) x (.7) + (.39) x (.4) = .583 (1-.58) = .417
Answer (C) is incorrect because the variable cost of Answer (C) is incorrect because .61 is the probability
cleaning is $.40 per machine hour. of an employee arriving on time the 3rd day.
Answer (D) is incorrect because the variable cost of Answer (D) is incorrect because .7 is the probability
cleaning is $.40 per machine hour. of an employee arriving on time the 2nd day.
Answer (A) is correct. The fixed cost using the Answer (A) is incorrect because it results from
high-low method can be found by multiplying the deducting too much for holding fees.
variable cost per machine hour, $.40, by the number
of machine hours of either month. This number is then Answer (B) is incorrect because it results from
deducting too much for holding fees. units serviced in a unit of time (T). This number is
then multiplied by T. The product of this calculation is
Answer (C) is correct. If Q ・D in an inventory then divided into B squared. In this example, for
simulation, then holding cost per unit times the Pigpen, the calculation is
difference between Q and D is subtracted from gross
profit times D to get net profit. 2
B 36 36
Net profit = $50D - $20(Q - D) N = -------- or N = ---------- = -- = .9 cars
Net profit = $50(950) - $20(1,000 - 950) q T(T - B) q 10(10 - 6) 40
Net profit = $47,500 - $1,000
Net profit = $46,500
[342] Source: Publisher
Answer (D) is incorrect because it results from a
failure to deduct holding fees. Answer (A) is incorrect because Linus has an
average waiting time of .357 minutes.
Answer (B) is correct. If Q < D in an inventory Answer (D) is correct. The average waiting time is
simulation, then shortage cost per unit times the found by dividing the average number waiting in line,
difference between Q and D is subtracted from gross not being serviced, by the average number of work
profit times Q to get net profit. units arriving in a unit of time. In this example,
Pigpen's customers have the shortest wait.
Net profit = $50Q - $25(D - Q)
Net profit = $50(1,000) - $25(1,100 - 1,000) N
Net profit = $50,000 - $2,500 q .9
Net profit = $47,500 W = -- or W = -- = .15 minutes
B 6
Answer (C) is incorrect because it results from
deducting the wrong amount for goodwill loss.
[343] Source: Publisher
Answer (D) is incorrect because it results from a
failure to make a deduction for goodwill loss. Answer (A) is incorrect because Lucy has a
cumulative average time per unit of 25.6 hours.
[340] Source: Publisher Answer (B) is correct. The learning curve reflects the
increased rate at which people perform tasks as they
Answer (A) is incorrect because Linus has an gain experience. The time required to perform a given
average of 2.5 cars in line at any time. task becomes progressively shorter. One common
assumption in a learning curve model is that the
Answer (B) is incorrect because Schroeder has an cumulative average time per unit is reduced by a
average of 2 cars in line at any time. certain percentage each time production doubles.
Therefore, for Sally, if the first unit required 60 hours
Answer (C) is incorrect because Snoopy has an to complete, her average completion time after two
average of 1.67 cars in line at any time. units will be 42 hours (70% x 60 hours). If
production is doubled to 4 units, her average
Answer (D) is correct. The average number of cars completion time will be 29.4 hours (70% x 42 hours).
waiting in line is found by initially subtracting the When production is then doubled to 8 units, her
average number of work units arriving in a unit of time average completion time will be 20.6 hours (70% x
from the average number of work units serviced in a 29.4 hours). This is the best among the four workers.
unit of time. This number is then divided into the
average number of work units serviced in a unit of Answer (C) is incorrect because Marcy has a
time. In this example, for Pigpen, the calculation is cumulative average time per unit of 29.16 hours.
Answer (B) is incorrect because Schroeder has an Answer (B) is correct. Learning curves reflect the
average of 1.33 cars in his line, not being serviced. increased rate at which people perform tasks as they
gain experience. For this example, the learning curve
Answer (C) is incorrect because Snoopy has an has the following affect:
average of 1.04 cars in his line, not being serviced.
Average Labor Average
Answer (D) is correct. The first step in finding the Run Number Units Hours per Unit Labor Hours
average number of cars waiting in line, not being ---------- ----- -------------- -----------
serviced, is to subtract the average number of work 1 80 60 4,800
2 160 48 7,680
3 320 38.40 12,288 Answer (A) is correct. Learning curves reflect the
4 640 30.72 19,660.80 increased rate at which people perform tasks as they
Therefore, the average labor hours per unit is 30.72 gain experience. For this example, the learning curve
hours. has the following effect:
Answer (C) is incorrect because 23.63 hours is the Average Labor Total
average labor hours per unit for Midland Inc. Run Number Units Hours per Unit Labor Hours
---------- ----- -------------- -----------
Answer (D) is incorrect because 23.04 hours is 1 80 56 4,400
incremental hours per unit after 320 units have been 2 160 42 6,720
produced. 3 320 31.5 10,080
4 640 23.625 15,120
Therefore, the total hours required to produce the
[345] Source: Publisher 640 units is 15,120.
Answer (A) is incorrect because 8,294.4 hours is the Answer (B) is incorrect because 18,350 hours is
time required to complete the remaining 360 units found by using an 80% learning curve.
after the learning curve.
Answer (C) is incorrect because 19,530 hours is the
Answer (B) is incorrect because 19,660.8 hours is total hours required to complete the project.
the time required to complete the 640 units on the
learning curve. Answer (D) is incorrect because 35,840 hours is the
amount of time necessary assuming no learning curve.
Answer (C) is incorrect because 24,330 hours is the
time required to complete 1,000 units if
subcontracted to Midland Inc. [348] Source: Publisher
Answer (D) is correct. The total hours required to Answer (A) is incorrect because 11.81 hours is the
complete a project with a learning curve is found by time needed to finish additional units after 1,280 units,
adding the total labor hours required to produce the assuming the learning curve did not end at 640 units.
last set of units on the learning curve with the
remaining number of units times the final hours per Answer (B) is correct. The hours per unit required to
incremental unit. The following chart shows the final finish additional units after a point on the learning
hours per incremental unit: curve is found by subtracting the total hours required
to finish the previous point on the learning curve from
Units in Run Hours in Run Hours per Unit the current one. Then, this number is divided by the
------------ ------------ -------------- increase in units produced. For example,
80 4,800 60
80 2,880 36 15,120 hours (amount needed to finish 640 units)
160 4,608 28.80 -10,080 hours (amount needed to finish 320 units)
320 7,372.8 23.04 ------------
Therefore, 23.04 hours per unit times 360 remaining 5,040 hours
units gives 8,294.40 hours. This number added to the 5,040 hours ・320 units = 15.75 hours
19,660.8 hours required to complete the 640 hours
on the learning curve equals 27,955.2 hours. Answer (C) is incorrect because 21.50 hours is the
time needed to finish additional assuming an 80%
learning curve.
[346] Source: Publisher
Answer (D) is incorrect because 23.625 hours is the
Answer (A) is correct. The best method to determine average labor hours per unit to finish 640 units.
the total out-of-pocket costs to complete a project is
to first multiply the total hours required by the cost
per hour. After this, subtract the initial costs of [349] Source: Publisher
producing the first batch. This will result in the total
out-of-pocket costs to complete a project. Answer (A) is incorrect because $302,400 ignores
the hours required for the additional units and it
27,955.2 hours x $18 per hour = $503,193.60 ignores the increases in the direct labor rate.
80 units x 60 hours x $18 per hour = - 86,400.00
----------- Answer (B) is incorrect because $330,220.80
$416,793.60 ignores the hours required for the additional units.
===========
Answer (C) is incorrect because $390,600 ignores
Answer (B) is incorrect because $463,104 is found the increases in the direct labor rate.
by using the direct labor cost related to outsourcing
to Midland. Answer (D) is correct. The total out-of-pocket cost
for outsourcing is found by adding the total labor
Answer (C) is incorrect because $503,193.60 is hours required to finish the units on the learning curve
found by not subtracting the cost of the initial 80 to the product of additional units and hours per
units. additional unit. This number is then multiplied by the
direct labor cost. In this example:
Answer (D) is incorrect because $559,104 is found
by using the direct labor cost related to outsourcing 15,120 hours + (280 units x 15.75 hours per unit)
to Midland. 19,530
Direct labor rate [$20.00 x (1 + .04 labor increase)
x (1 + .05 cost margin)] $ 21.84
[347] Source: Publisher -----------
$426,535.20 freedom.
===========
Answer (B) is correct. The first step is to determine Answer (B) is incorrect because they do not
market size, market share, and unit price under the represent a 95% confidence interval.
1-4-1 ratio of PERT. Market size would be:
Answer (C) is incorrect because they do not
60,000 x 1 = 60,000 represent a 95% confidence interval.
90,000 x 4 = 360,000
140,000 x 1 = 140,000 Answer (D) is incorrect because they do not
------- represent a 95% confidence interval.
560,000 ・6 = 93,333
Market share would be:
25% x 1 = 25 [354] Source: Publisher
30% x 4 = 120
35% x 1 = 35 Answer (A) is incorrect because $42,000 represents
---- only variable costs.
180 ・6 = 30%
Price would be: Answer (B) is correct. The overhead may be
750 x 1 = 750 calculated from the regression equation as: y = a + bx.
800 x 4 = 3,200
875 x 1 = 875 OH = $40,000 + [($2.10)(20,000)]
---------- OH = $82,000
4,825 ・6 = $804.1667 Note that the fixed costs are $40,000 and the
Total revenue would be: variable costs are $2.10 per direct labor hour.
93,333 x 30% x $804.1667 = $22,516,587
Answer (C) is incorrect because they overstate the
Answer (C) is incorrect because $23,441,666 is variable cost portion of the total.
based on an unweighted average of the three
possibilities. Answer (D) is incorrect because they overstate the
variable cost portion of the total.
Answer (D) is incorrect because $42,875,000 is
based on the optimistic column.