the methods shown in the mp4 on Decision Analysis for a way to do part (b) of this question if you wish.
(a) Describe four criteria that may be used for decision making under complete uncertainty involving conditional profits and how they work.
(b) Joe White is considering investing some money that he inherited. Joe is considering investing three types of investment, A, B or C. The conditional profits from each given a Good Economy or a Poor Economy are as follows:
(i) If Joe is an optimist which type of investment should he select?
(ii) If Joe is a pessimist which type of investment should he select?
(iii) Following the criterion of regret which type of investment should he select?
(iv) If Joe believes that there is a 60% chance of a good economy which type of investment should he select?
(c) Harry Harrison was invited by a friend to put up $20 000 to join a syndicate planning a single joint venture. The syndicate planned to import a container load of personal computers from Taiwan, to be sold before a major company launched its new Super PC. If the imports arrived before the rival Super PCs were launched Harry would receive a net return of $40 000; otherwise he would lose one half of his original investment.
Based on expected monetary values what is the minimum probability Harry would require for timely arrival of the imported PCs for the investment opportunity to be worthwhile?
QUESTION 2 Value of information
Show all calculations to support your answers. You may follow the methods shown in the mp4 on Value of info for a way to answer this question if you wish.
A manufacturer is trying to choose between two production methods (a1 and a2) for a new product. He considers that the probability of demand for the product being poor (s1) is 07 and the probability of demand being good (s2) is 0.3.
In evaluating the two production methods the manufacturer has calculated the following table of conditional profits:
a1 $6,000 $10,000
a2 -1,000 25,000
(i) What is the optimum action?
(ii) What is the expected value of perfect information?
In the past the manufacturer has sometimes obtained from a marketing consultant an opinion about whether demand for a product will be poor or good. From previous experience, when the consultant has indicated that demand will be poor he has been right 80% of the time, and when he has indicated that demand will be good he has been right 70% of the time.
(iii) Suppose that the consultant would charge $3,000 for an opinion. Should the manufacturer pay for an opinion? Why?
QUESTION 3 Simulation
This is a work integrated assessment item. The tasks are similar to what would be carried out in the workplace.
The Wallabies Football Club gains significant revenue from ticket sales at each game played at home during the season. The sale of programs for these games also adds to profitability. Each program costs $2.00 to produce and sells for $5.00. Any programs unsold at the end of any game are sent to a recycling centre and do not produce any revenue.
Records of the programs sold for each game show the following:
Number of Programs Sold Probability
(a) Your manager has asked you as the management accountant for the club to determine the profitability of program production. In particular you have been asked to investigate two strategies where the number of programs to be printed are either (i) the number demanded the previous match, or (ii) 2500 every match. You decide to use Excel to simulate the sale of programs at 10 games in a season together with the profit or loss on programs for each game under scenarios (i) and (ii). Include a calculation of the total profit/loss for the season and the average profit/loss per game.
Hints: Your model should have 8 columns: Game #, RN Sales, Demand, Print #, Sales Units, Sales Revenue, Production Costs, Profit/Loss. The model must be completely formula driven - there must be no data in the model or the model formulas – all data should be in a data input section above the model. An IF or MIN function is required in the formulas in the Sales Units column. After completing the model you can vary the results by pressing F9 (recalculate) a number of times to view such variations resulting from changes in the random numbers generated.
Because there are two scenarios to simulate you must have two copies of your simulations. Under scenario (i) you will have to generate a dummy sales demand to kick start the process. This would not be necessary under scenario (ii).
Show the data and the model in two printouts: (1) the results, and (2) the formulas. Both printouts must show row and column numbers and be copied from Excel into Word. See Spreadsheet Advice in Interact Resources for guidance.
(b) To check on your simulation conclusions use marginal analysis to determine the optimum number of programs to print.
(c) Write a report to your manager explaining which of the two production strategies you would recommend and why. You may support your report by including reference to the profits under each strategy, noting any limitations to the methods you have adopted to analyse the situations.
The report must be dated, addressed to the Manager and signed off by you.
(Word limit: No more than 150 words)
QUESTION 4 Regression Analysis and Cost Estimation
A local real estate agent asks you to help estimate the sale prices of homes. The agent believes that the floor space area of the house and the number of bedrooms help explain selling prices, and has collected the following data from past sales.
House Price m2 Bedrooms
1 $304,000 200 3
2 600,000 370 4
3 456,000 270 3
4 344,000 250 3
5 704,000 400 5
6 356,000 260 3
7 320,000 230 2
8 336,000 180 2
9 560,000 350 5
10 584,000 330 4
11 440,000 290 3