Chapter 12-Quantitative Techniques. 705 SENSITIVITY ANALYSIS SENSITIVITY ANALYSIS — the study. of how the outcome of a decision process changes as one or mare of the assumptions change Example: With sales of 100 units, the company’s projected profit is P500: Sales 5,000 Less variable costs 3,000 Contribution margin P2,000 Less fixed costs 1500 Profit B_s09 What would profit be if: a, sales in units increases by 20%; b. variable costs per unit decreases by 5%; Cc. fixed costs decreases by P500? @ (0) iC] Present Units Increase VGlu decreases Fixed Cost Data by 20% by 5% decreases by P500 Sales (100 units) 5,000 P6,000. 5,000 5,000 Less variable costs _3,000 3,600 2.850 3,000 Contribution margin P2000 2,400 P2,150 2,000 Less fixed costs 1,500 1.500 4,500 4,000 Profit P 500 P 900 2650 1,000 In the above sensitivity analysis, different scenarios are presented, showing the expectied profit as the profit factors are changed.706 PART 2- FOUNDATIONS OF MANAGEMENT ACCOUNTING MULTIPLE CHOICE: 1. Which of the following statements about quantitative methods is incorrect? a. Every reablife decision situation may be modeled mathematically Under certain assumptions and a deterministic solution may be achieved. b. Quantitative or mathematical models are usually over- simplifications of the real world; to perform the calculations, assumptions must be made. In applying quantitative methods, behavioral issues should never be taken into account: 4. In applying quantitative methods, some relevant variables may not be quantified and are therefore not included, ant the quantitative techniques can be very complex and costy. 2. Simulation is a technique for experimenting with logical) mathematical models with the use of a computer. Which of the following statements about simulation models is false? a. Simulation models are stochastic or probabilistic moctls. . Simulations models mathematically " estimate what performance would be under various conditions. Simulation models are deterministic in nature, d. Simulation modeling samples the operation of a system. 3. Exogenous variables, or input variables, are a. the means of measuring the results of a decision after the fact. . important to the decision-making process but are outside the contral of the decision maker. are under the decision maker’s control. d. are limitations that must be considered as part of the decision process, 4, Itis a mathematical method for making decisions about the likelitiood of future events, such as sales and profits, in the face of uncertainty. ‘a. Learning curves c. Queuing theory b, Probabilty distribution theory d. Gantt charting 5. Probability analysis or risk analysis is 2. incompatible with sensitivity analysis.Chapter 12 Quantitative Techniques 707 b, an extension of sensitivity analysis. used only for situations involving three or fewer possible outcomes. 4. used only when the sum of probabilities is greater than one. 6. It is found by’ multiplying the probability of each outcome by its payoff, and summing the products. It represents the long-term average payoff for repeated trials. a. Expected value = | c. Present value b. Face value d. Maturity value 7.” Which of the following statements about expected value of perfect ‘information is incorrect? a. It is the difference betweeri the expected profit under certainty and the expected monetary value of the best act under uncertainty. b. It isthe excess of the total conditional profits under certainty over the profit from the best decision under uncertainty. c. It is the difference between. the expected profit under certainty and the expected opportunity loss, d. It is the: difference between the expected value without perfect information and the expected value under certainty. 8, Jess Compahy operates three’ shipping terminals, A, B, and C. Terminals A, B, and C handle approximately 60%, 30%, and 10%, respectively of the total cargo shipped, with‘error rates of 3% for ‘A, 4% for B, and 6% for C, Jess Company's interrial auditor randomly selects one shipping document, ascertaining that this document ‘contains an error. What is the probability that the error occurred in Terminal B? a, 33-1/3% c. 40% i b. 30% d. 1.20% ITEMS 9 and 10 ARE BASED ON THE FOLLOWING INFORMATION: itz’ Company is planning to produce a new product, Duhat Soap. ‘A marketing consultant prepared the following payoff probability distribution describing the relative likelihood of monthly sales volume levels and related contribution margin for Duhat Soap:708 PART 2~ FOUNDATIONS OF MANAGEMENT ACCOUNTING Monthly Sales Volume Probability Contribution Margin 15,000 units 40% P 75,000 18,000 30% 90,000 27,000 15% 135,000 36,000 10% 180,000 45,000 5% 225,000 9. If Nitz’ Company decides to market Duhat Soap, the expected value of the monthly sales volume is . ‘a. 28,200: c 106,500: b.. 141,000. d. 21,300. 10. If Nitz’ Company decides to market Duhat Soap, the expected value of the monthly contribution margin is a. P141,000. c. P106,500. b, P705,000. d. P 21,300, : ITEMS 11 and 12 ARE BASED ON THE FOLLOWING INFORMATION: NGO, a charitable organization, was given a special permit by the city government to conduct games of etiance for fund-raising purposes. From this project, NGO expects’ to earn profit from admission fees and sales of refreshments, and warts to merely ‘break-even’ on the games of chance. In oie of the games, a player draws one card from a standard deck of 52 cards. If a player draws any one of the four “queens,” he wins P50; if he draws any one of the 13 *hearts,” he wins P20. 11, What is the probability that a “heart” would be drawn? a 2B c 39 b. 25% d. 7.69% 12. How much price should be charged per draw so that the total ‘amount paid out for the winning draws would be equal to the total amount received from all the draws? a. P3.85 cc. P27.06 b. P5.00. * d. P 8.85Chapter 12 Quantitative Techniques 709 13. 14. Leevoi Scan. Company is developing its operating budget for 2008. Tt has developed ‘the following range of sales forecast and associated probabiltes for the year: Sales Estimates. - Probabilities 48,000 10% 68,000 50% 80,000 40% Leevoi Scan Company's. gross. profit rate averages 20% of sales. What is the expected value of Leevoi Scan Company's budgeted ccost of goods sold for 208? a. P56,640 c. P14,160 b. P70,800 dd, P52,260 ‘The country has been experiencing frequent brownouts, since its hydroelectric plants experienced some technical problems. Statistics showed that the country has the: following average number of brownouts: ‘Number of Brownouts ‘Number of Months per Month 2 0 3 4 3 6 4 8 For Lanie Company, each browmout costs P10,000. In view of this, the company is considering to lease a generator for P40,000 per month to provide power during brownouts. If Lanie Company would lease the generator in the coming year, how much is the estimated savings (additional expense) per month next year? a. (P11,700) c. P140/400 b. P11,700 dP. 40,000 ITEMS 15 and 16 ARE BASED ON THE FOLLOWING INFORMATION: Video Town sells original DVD movies, classified as Suspense, Drama, Musical, and Horror. Based on the past sales data, Video710 15. 16. w. PART 2~ FOUNDATIONS OF MANAGEMENT ACCOUNTING. Town's manager has made random letter assignments to represent customer choices, as follows: * Type of Movie Letter Assignment Number of Letters Assigned ‘Suspense AtoD 4 Drama EtoF 2 Musical Gtol 3 Horror J] a Total letters assigned 0} ‘What is the probability that a customer will buy a musical movie? a. 40% c. 30% b. 20% d. 10% In running a simulation of the demand for the types of movie being sold by Video Town, the following letters are drawn in sequence: H, F, and 8. The simulation indicates that the first ‘customer will buy 3 a, suspense movie, c. musical b. drama. d. horror. Leilani Company uses materials X and Y in the manufacture of its only product. The costs of istarials X ta Y are expected to decrease in the coming months. ‘The expected cost changes (which are independent of one another), aS well as their probabilities, were presented by the Purchasing Manager to the Budget Committee as follows: i ‘PROBABILITIES. | Decrease in Costs aA MateralY —}, 2% 20% 40% | 6% 50% 10% 8% 30% 50% | ‘The probability of 2 6% decrease in the cost of both Materials X and Y is a, 60%. c. 500%. b. 30%. d 5%Chapter 12 -Quantitative Techniques ITEMS 18 and 19 ARE BASED ON THE FOLLOWING INFORMATION: 18. 19. 20. Health. Conscious, Inc. is planning to open a spa in the city, A, market study conducted by an independent market research shows the following estimates of the number of clients (and probabilities) during a period: Number of Clients Probabilities 0-40 10% 41-80. 40% 81-120 30% 121-160 20% What is the probability of having between 81 to 160 clients in the spa during the period? a. 30%, 50% b. 20% d, 25% ‘What is the best estimate of the expected number of clients in the ‘spa during the period? a 84 c 80 b. 104 d. 5 Miss Lalaine owns a piece of land that is adjacent to a big area of a vacant lot owned by the city government. Recently, Miss Lalaine heard that the city government has plans about the vecant She inquired about such plans and she was given the foto induding each plan's probability of occurrence: ; Probabiti Plan A — Lease the lot to a businessman who will construct a mall on the lot 60% 'B — Construct a theme park on the vacaint lot 30% C= Construct a building that will house > some of the city government's offices 10% Miss Lalaine knows that the values of her lari, which she acquired ten years ago at a cost of only P500 “per sduare meter, v increase depending on which plan would materialize. He! estimates are as follows: :N2 PART 2- FOUNDATIONS OF MANAGEMENT ACCOUNTING Plan A ~ P5,000 per square meter B= 2,000 ©. - 1,000 ‘What is the expected value of the land? a. P5,000 . P2,667 b. 3,000 d, P3,700 ITEMS 21 to 23 ARE BASED ON THE FOLLOWING INFORMATION: The local chapter of JPIA.is planning to conduct a fund raising project by selling roses on Valentine's Day. The roses, which can be purchased from a nearby supplier at PS each, will be sold to the students for 15-each. Any unsold roses at the end of the day will be discarded. The estimated numbers of roses that can be sold on such day, as ‘well as their probabilities, as follows: Units of Roses Probability 600 0.20 800 0.30 1,000 0.40 1,200 0.10 21. What is the estimated sales of roses (in units) using an expected value approach? a. 880 900 b. 1,000 4. 400 22, What is the estimated unit sales of roses on Valentine’s Day using «a deterministic approach based on the most likely outcome? a. 880 <. 900 b. 1,000 d. 400 23, What is the conditional profit of purchasing 1,000 units of roses but selling only 800 units? a. P7,000 cc. P2,100 b. 8,000 d. P2,800Chapter 12 -Quantitative Techniques 13 24. ‘Two companies share customers in the same market: Company X conducted a study of the customers’ buying habits and obtained the following results: Company X: 80% of its customers were repeat-customers each month, while 20% went to Company Y. Company Y: 60% ofits customers were repeat-customers each ‘month, while 40% went to Company X: If the customers’ buying habits continue for a long petiosi, the percentage of customers each company will have is Company X Company ¥ a 80% 60% b. 120% 80% 4 66.6% 33.4% 4 33.4% 66.6% ITEMS 25 to 27 ARE BASED ON THE FOLLOWING INFORMATION: 2. 26. Mr. Imbestigador is contemplating whether to investigate the efficiency variance in its variable manufacturing costs. The investigation will cost P10,000. If the production departments are formed to be operating improperly, the company will incur 25,000 (in addition to the cost of investigation) to correct the operations. If the production departments are operating improperly and Mr. Imbestigador fails to investigate, operating costs from various inefficiencies are expected to amount to P40,000.. What is the expected value of the act “Investigate” if the probability of improper operations is 60%? a. P15,000 c. P25,000 b. P10,000 4.” P 5,000 What is the expected value of the act “Do not investigate” if the probability of improper operations is 609%? ‘a. P40,000 <. P34,000 b. P24,000 d. 30,000714 PART 2- FOUNDATIONS OF MANAGEMENT ACCOUNTING 27. Mr. Imbestigador would be indifferent between the two actions “Investigate’ and "Do not investigate" if the probability of improper operations is a. 60%. c 33.1/3% b. 40%. d. 66 2/3%, ITEMS 28 to 33 ARE BASED ON THE FOLLOWING INFORMATION: ‘The school canteen can sell either halo-halo or mami (hot noodle soup) on any given day. The contribution margin that the canteen could earn from halo-halo and mamiis affected by the weather, as follows: CONTRIBUTION MARGIN _| __ Ren sid Hot Weather | Cold We Halo-Halo 15,000 | P 6,000 | L Mami 11,400 _ 12,000 28. If the probability of hot weather on a given day at this time is 60%, what is the expected payoff for selling /halo-halo? a. 11,400 cc. P13,560 b. P 9,000 d. P11,640 29, What is the expected payoff for selling mam/ if the probability of hot weather on a given day at this time Is 60%? ‘a. P11,400 c. 13,800 b. P 6,840 d. P11,640 30. If the probability of hot weather on a given day at this time is 60%, which item(s) should the company sell? ‘2. Halo-Halo, because this item is salable when weather is hot. b. Mami, because it has the higher expected payoff. Halo-Halo and mami, so the canteen could maximize contribution margin, 4. 60% halo-halo and 40% mami. 31; If the canteen’s management could have perfect information, ie., it could know with certainty that the probability of hot weather on ‘a given day at this time is 60%, what is the expected payoff? a. P 9,000 cc. P15,000 b. 13,800 d. 11,400Chapter 12 = Quantitative Techniques 715 32. 34. 35. Refer to Item #31. What isthe expected value of perfect information? a. P13,800 c. P2,160 b. P11,640 d. P9,000 Refer to Item #32. If an experienced weather forecaster offers to sive the .canteen’s management an accurate forecast of ‘the weather for a fee, should the canteen’s management accept the offer if the fee is P3,000? a. Yes, so the management could know the accurate weather b, Yes, because the canteen would be able to maximize its contribution margin if its management knows the accurate weather forecast. .* No, because nobody can forecast weather accurately. d._ No, because the cost of the information is greater than the expected value of perfect information. Decision tree analysis is ‘a. an approach to solving problems by dividing a large ‘mathematical model into smaller, more manageable pieces in such a way that once the smaller problems have been solved, the result is the optimal solution to the overall model. b, 2 group of mathematical models of systems. involving waiting lines. used for situations involving a sequence of events with several possible outcomes associated with each event. d. a network model used to help control large-scale, complex projects. ‘ “The following statements apply to decision tree analysis, except: ‘a. Its use is appropriate for decision-making under conditions of risk. f b. The sum of probabilities of the events is equal to one (1). . Not all the events are included in the decision. .. All the events are mutually exclusive. ‘Trixie Company needs a component part for the production of a * new. product. The component part is available from local suppliers, but the company can make it with the use of a special equipment which it can rent for P10,000 per month.716 PART 2- FOUNDATIONS OF MANAGEMENT ACCOUNTING Each new product requires one component part. Thus, production requirement for the part is the same as the demand for the new product, which could be high (5,000 units per month), with probability of 70%, or low (2,000 units per month). ‘The contribution margin per unit of the new product is P12 if the company will make the part, and P8 if the part is purchased from Yocal supplier. ‘The company's management accountant prepared the following decision tree to help management select the better alternative: Decision Demand Payot (Cantbution) 5,000 units (70%) P0000 ‘Buy the component part oo 2,000 units (20%) +6000 5,000 units (70%) 0000 2000 units (30% 14000 Which of the following statements is correct? a, The expected value of buying the component part is P39,200. b, The expected value of making the component part 's P32,800. c. Making the part is the better alternative. d. Buying the part is the better alternative. 37. Krystyn Company's management must decide whether to produce Product X or Product Y. Expected sales volume can be classified as high or low. How many different payoffs are possible in a decision tree in this case? a2 6 b 4 a8 38. Which of the following statements about a Gantt Chart is correct? ‘a. A Gantt chart is used for determining.an optimal product mix. b. A Gantt chart shows only the activities along the critical path of a network. c. A Gantt chart shows the activities to be completed but not their sequencing.Chapter 12 - Quantitative Techniques 17. 4. ‘A Gantt chart shows the critical path for a project. 39, In the Gantt chart below, each of the bars represents the expected time necessary to complete the activity and the shaded regions represent the portions completed: Activity Based on the Gantt chart, a. b. c 4. 40. Both a, b, « 4, activities A and B are stil in progress. . the project is on schedule, the project is ahead of schedule. Activity C is cne month behind schedule. PERT and CPM are network analysis techniques that are used for determining the appropriate number of tellers needed in a bank. . determining the optimal product mix. project planning and control. 1. family planning and birth control. 41. PERT is different from CPM in that a. unlike CPM, PEF.T is a network technique. b. PERT uses probabilities on the activity times, whereas CPM uses deterministic time and cost estimates. c. PERT considers crash efforts and costs, while CPM does not. 4. PERT may be thought of as a mere subset of CPM, 42. In PERT, the expected time (t) for an activity when given an optimistic time (t,), a most likely time (tx) and a pessimistic time (tp) is calculated by which one of the following formulas?PART 2- FOUNDATIONS OF MANAGEMENT ACCOUNTING + ty th) (ty + Btn +) = 4 (hot ty +b) (te + Mey +) $6 (oS! ARE BASED ON THE FOLLOWING INFORMATION: 3 PERT network, the optimistic time (t,) for a particular activity ks, the most likely time (,) is 5 weeks, and the istic time ({,) is 7 weeks. ‘ected time (t,) to complete the activity is weeks. c. 17 weeks. 2.5 weeks, d. 30 weeks. : estimate of the standard deviation for the activity is 4 weeks, cS weeks. b. 2/3 week, d. 12/3 weeks. ty in a PERT network is expected to require 54 days to This estimate was calculated using the PERT formula sed on an optimistic completion time of 48 days and a most y completion time of 50 days mate was used for the pessimistic completion time (t,)? a. 54 days c. 76 days 5. 98 days d. 50 1/3 days RT network, the critical path is the path that has the most number of activities. requires the longest time to complete. requires the shortest time to complete, 6. . has the most slack, RT network, slack is the average of the time estimates for an activity. path that requires the longest completion time. time (number of days, weeks, etc.) an activity can be slayed without forcing a delay for the entire project. most likely time estimate for an activity.(Chapter 12 Quantitative Techniques ng 48, In CPM, crashing the network means a. abanidoning the entire project for practical reasons. . finding the minimum cost for completing thé project in minimum time. minimizing the number of activities in the project. d. working overtime to complete a non-critical path earlier than expected. 49. When making a cost-time trade-off in CPM, the first activity that should be crashed is the activity with the lowest crash cost per unit. on the critical path with the lowest crash cost per unit. ona non-critical path, d._ with the iongést expected time to complete. ITEMS 50 to $4 ARE BASED ON THE FOLLOWING INFORMATION: ‘The PERT diagram below describes the interrelationships of several activities to complete a project. The arrows represent the activities, The numbers indicate the expected time in months (t:) to complete each activity: pO Q : iS OO 50.” Which of the following statements about the PERT diagram is incorrect? 2. The PERT diagram has threé (3) paths. b. Activities A - B and A - C are paralle/ activities. c. Activities A~ B and B ~ E are series of activities. d, All the paths in the PERT diagram have slack time.720 PART 2- FOUNDATIONS OF MANAGEMENT ACCOUNTING. 51. The critical path in the PERT diagram is 52. The shorcest time to complete the entire project is a. 8months. ©. 18 months. b. 15 months. 4d. 141/3 months. 53. The slack time for Path A~B—E is a. 10 months. 3 months. b. 8 months. d. 18 months. 54, The slack time for Path A ~ B- C- D-Eis a. 18 moni, 3 months. b. 10 months, d. zero, 55. Following are taken from a PERT diagram for a project: ‘Aetwork Paths Expected time to complete Path A: 0-1-2-5-7 72 weeks Path B: 0-1-2-4-7 52 weeks Path C: 0-1-3-4-7 36 weeks Path D: 0- 1-3-6-7 56 weeks What is the critical path? a. 72 weeks c. Path b. Path A d. 36 weeks ITEMS 56 and 57 ARE BASED ON THE FOLLOWING INFORMATION: ‘The following network describes the logic of a particular project's “ ge FPChapter 12 - Quantitative Techniques 721 10 56. Which of the following is not a path in the network? a. PathA-B-C-D-H — c PathA-E-G-F-D-H b. Path A-E-D-H d. Path A= €-F-D-H 57. Based on the network diagram, what 6 the minimum duration of the entire project? 2. 46 days c 41 days b. 42 days d. 40 days 58. Morales Builders, Inc. uses the critical path method (CPM) to monitor construction projects.. In one of its projects (Job 55), the company is two (2) weeks behind. schedule, Mr. Morales, the company president, 1s considering this delay in Job 55 seriously because this project, per the contract with the client, is subject to a P40,000 per week completion penalty. To reduce the normal completion time of Job 55, and at the same time, earn the highest possible income from the project, Mr. Morales is considering to crash some of the activities in the project. The PERT diagram for Job 55 shows two paths worth considering: Path A-B-D~F-G~-H-Iwith normal completion time of 20 weeks > Citical Path A- D-€-F -G~H-I with normal completion time of 22 weeks From the aforementioned paths, the following activities can be crashed: Activities Cost to Crash 1 week Cost to Crash 2 weeks BD 15,000 29,000 FS 19,000 38,000 GH 17,000 40,000 To attain the companys objectives; which activities should be crashed? ‘a. Activity BD and Activity GH for one week each. 'b, Activity BD for two weeks. c.. Activities FG and GH for one week each. . Activity GH for two weeks.722 PART 2 FOUNDATIONS OF MANAGEMENT AOCOUNTING 1 LEMS 59 ans 63 ARE BASED ON THE FOLLOWING INFORMATION: ity cost chart for a manufacturing project of Lody, In. is /ORMAL CRASH Activity < Time(days) Cost ~~ Time(days) AB 7 P12,000 5 AD 10 15,750 9 AC rv 14,250 8 BE 14 21,000 10 oe 3 27,600 10 ce 15 20,250 13 BD 2 10,500 1 8c 1 7,500 Ye From the network diagram for this project, the critical path is Path A-C-E. 59. How long is the expected duration to complete the entire project? a. 26 days c. 2 days b. 23 days d. 21 days 60. In order to keep costs at 2 minimum and decrease the completion time of the project by three days, the company should crash an activity. Which activity should be crashed and how much is the incremental cost of crashing such activity? a. AC, P2,250 ©. DE, P3,600 b. CE, P2,250 4d. AB, P3,000 and AD, P750 61. It is mathematical technique used to maximize a revenue, contribution ‘margin, or profit function, or minimize a cost function subject to constraints, Such as scarce resources and production capacity. a. PERT Linear programming b. Queuing theory d._High-low points method 62. Linear programming is a mathematical technique that is used to allocate scarce resources. Mathematical expressions are used to describe a problem. In a linear programming model, the measure of effectiveness that is to be maximized or minimized:is the ‘a. set of decision variables. ¢. constraints function, b. set of slack variables. d._ objective function.Chapter 12 - Quantitative Techniques 723. 63. Ina linear programming model, the constraints are ‘a. minimized. _c. the revenues or profits to be maximized. b. thecosts. d._ the scarce resources. 64. Mucho Company wants to allocate its available funds between two investment alternatives: stocks and bonds, which differ in terms of return and risk. the company will invest at most 60% in either investment choice and desires to eam at’ least 20% from the investment. To allocate its available funds between stocks and bonds, the appropriate mathematical technique that Mucho Company can use is, a. Queuing theory. . PERT/CPM Capital budgeting. ._ Linear programming. ITEMS 65 to 68 ARE BASED ON THE FOLLOWING INFORMATION: Javee Corporation produces and sells two products, A and B, ‘The contribution margin. per unit of A is P10, while that of B is P15. Two. types of materials, X and Y, are used to. produce both products. At present, the company is experiencing some difficulties in acquiring the said materials, so it could not produce ‘as much quantity of A and B as it wants to produce. To properiy allocate, the available materials and, at the Same time, maximize its total contribution margin, the following model will be used: Max CM = 108 + 158 Subject to: 5A + 4B < 800 3A + 6B < 500 65.) The mathematical functions that the company will use to allocate the scarce materials and maximize total contribution margin are an example of a (an) a. linear programming model. \c. FTV model. b. expected value model. d._EOQ model. 66.. In the given mathematical functions, Max CM = 10A + 15B is the a. constraint function. c. shadow point. objective function. d._ objection function.724 67. 69. 70. mn PART 2 FOUNDATIONS OF MANAGEMENT ACCOUNTING The two inequality Functions are the a. objective functions, c. constraints, b._ feasibie solutions. d. irrelevant variables. ‘The point at which A = 60 and B = 40 a. would minimize contribution margin, b. would minimize cost. cc. isa comer point. d,_ isa feasible point. To solve a linear programming problem, slack, surplus, and artificial variables must be employed. Which of the following statements about a slack variable is correct? a. Tt is the benefit foregone by using a scarce resource in a given way. 'b, Its total amount’ varies with change in cost driver, but its cost per cost driver is constant within the relevant range. . Tk represents unused capacity and is added to inequalities of the < type to convert them into equalities. 4. Itrefers to the benefit of moving the feasible area. The quantitative tochniowe mest corionly used to arrive at the ‘optimal solution in linear programming rroblem a. regression analysis. simulation: 5. sensitivity analysis. 4, simplex method analysis. In linear programming, shadow prices may be calculated. Which Of tte following statements about shadow prices is incorrect? a. A shadow price is the amount by which the value of the ‘optimal solution of the objective function in a linear programming problem will change if a one-unit change is made in a binding constraint. b. Shadow prices in linear programming solutions are ordinarily considered to be the same as opportunity costs. ©. A shadow price refers to the measurement of the value of relaxing a constraint in a problem with dual variables. 4. A shadow price, is the price charged for a product or service when such product or service is transferred or sold by one segmient of an organization to another segment of the same ‘organizationChapter 12 Quantitative Techniques 725 72. Inlinear programming, sensitivity analysis is used to a. develop coefficients for the objective function. b. determine how the optimal solution will react to.changes in parameters, such as the objective function coefficient, the limiting value of a resource constraint, or a constraint coefficient. ‘c develop the optimat solution to the problem. d,_ identify the constraints. 73. A transportation model is a special case of the linear programming ‘model. Tt involves a. physical movement of goods from sources of supply to destinations. b. determination’ of How the optimal solution will. react to in parameters. %. deterthination of the amount by which the value of the ‘optimal solution of the objective function will change if a ‘one-unit change is made in a binding constraint. d. managing’ large construction projects by focusing on the critical path in'a network. 74. Linear programming. problems can be. solved. using either the ‘graphic method or the simplex method. Which of the following statements about the graphic method is not correct? ‘a. The. graphic. solution’ depicts the area of feasible combinations of activity given the constraints. b. The graph depicts the optimal corner. point. c. The graphic method can be used given more than two restrictions (constraints). d. ‘The graphic ‘method is limited to situations having two restrictions (constraints), ITEMS 75 aud 76 ARE BASED ON THE FOLLOWING INFORMATION: Kit Corporation produces two products, Tik and Tak, which uses ‘two types of materials, Buk and Bok. Fixed quantities of materials Buk and Bok are available each month. There is no constraint on the number of units of Product ‘Tik than can be sold, but the demand for Product Tak is limited,726 VARY 2-0. QATIONS OF MANAGEMENT ACCOUNTING The production and demand constraints are depicted on the following graph: zi Noto oa 5 de Neca Units of Product Units of Product Tak 75. The feasible solution region fs bounded by the lines connecting points a. A,C,D, andr. ©. B,C, D,andG, b. B,C, D, andF. d. A,C,E, and H. 76, Xf the profit line for Tik and Tak is moved rightward on the graph maintalaing it slope, the mix of Tik and Tak that will result in the maximum profit (the optimal solution) can be determined from 2. any point within the feasible solution region touched by the profit line. b, the lasi point in Uae “easible solution cegion taeched by the prof the first point in pao Une. ‘any corner point in the feasible solution region, ¢ feasible solution region touched by the ITEMS 77 fo 81 ARE BASED ON THE FOLLOWING INFORMATION: Company produces two products, C and D, each of which s bwo processes, grinding and mixing. The contribution iv ig PAS for Product C and P20 for Product D. The number Cf hours required to process the two products are as follows: ProductC Product D ing 10 2 Mixing 10 10 The numbers of hours available during the period are 400 hours for grinding and 306 hours for mixing.Chapter 12 - Quantitative Techniques 77. The objective function is a. Max. CM = 15C + 20D. b. Min, CM = 15C + 20D. 78, The grinding constraint is a. 10+ 100 < 400. b. 10C + 200 < 400. 79. The mixing constraint is a, 10C + 20D < 400. b. 10C +200 = 400. ao e da 727 10C + 200 = 400, 10C + 10D = 300. © Minimize 10C + 200. Maximize 15C + 20D. 10C + 10D < 300: 10C + 10D = 300. 80. Which of the following combinations of C and D is not a corer point within the feasible solution region? Product C 0 30 20 40 soso Product D 20 0 10 0 81. Which of the following combinations of Products C and D will maximize the objective function, subject to the given constraints? Product C 0 30 20 40 aose Product D 20 0 10 0 ITEMS 82 to 84 ARE BASED ON THE FOLLOWING INFORMATION: Balls, Inc. produces two products, Squid Balls (S) and Fish Balls (F), in two departments, the Mixing Department and Deep Frying Department. Production of the two products (combined) during any period cannot exceed 23,700 kilos. Data on the two products follow:728 PART 2 FOUNDATIONS OF NANAGEMENT ACCOUNTING Contibution —_TIVE REQUIRED (minutes Margin perio’ ~~ Mixing (i) Deep Frying (0) Squid Bais (S) aid 30 20 Fish Balls () 0 15 38 Total tine available (minutes) 48,000 72,000 82. Using linear programming, the abjective function te determine the optimal production of the batis each period is a. CM = 40M + 30D, c.405 + 30F < CM. b, CM = 40S +30F. d. 5S + 5.10F = 70. ‘83, Which of the following is net a constraint function for this linear programming problem? a. 3S + LSF < 48,000. © S+F< 23,700 b. 2S + 3.6F < 72,000 dd. CM = 40S + 30F 84, ‘The optimal number of units for Product D can be solved by calculating a, *f; {48,000 - 1.57) + 3.6F = 72,000. b. 28 + 3.6F < 72,000. G38 + LSF < 48,000. d. OM = 405 + 30F. ITEMS 85 0 92 ARE BASED ON THE FOLLOWING INFORMATION: Bags Company produces traveling bags and document bags. It uses four cutting machines and four sewing machines which i rents for P2,000 per month. Each machine's capacity is 300 hours per month, “As of now, no additional machines can be obtained. Production, sales, ard cost data are-as follows: Treveling Bags (Tj Document Bags (2) Selling price per unit P1,350 900 Variable cost per unit 4,000 700 Hours required per unit: Catting machine (C) Sewing machine (5) 1 Market fimit Fone 1,000 units 1Chapter 12 - Quantitative Techniques 729 85. 86. 87. 89. If a linear programming model is used to determine the optimal product mix ‘that will maximize contribution margin (CM), the objective function is ; a. Max CM = 350T +2000. ¢. Max $= 1,350T +9000. b. Min VC = 1,000T + 700D. d. Max CM = S50TD. How should the constraint function for the cutting machine.be expressed? a C#S<120 0 5G 2T+D<1,200 b. 2C + 45 < 1,200 d. 47+ D< 1,200 How should the constraint function for the sewing machine be expressed? ~a. 4T+D< 1,200 c 4T+D< 300 b. aT +04 d. 47 +D< 1,200 ‘Aside from the cutting machine and sewing machine constraints, another constraint in this linear programming mode! for Bags Company is a. 350T + 2000 = CM, c T< 1,000. b. T+D = 1,000. 4, D< 1,000. If the graphical approach is used in this linear programming ‘model, the graph will look like a. c Document Bags Document Bags Traveling Bags Traveling Bags730 PART 2- FOUNDATIONS OF MANAGEMENT ACCOUNTING Document Bags Document Bags Traveling Bags Traveling Bags 90. Which of the following product combinations or points is not a comer point in the: feasible solution region of the linear programming graph for this LP model? Traveling Bags Document Bags a. 0 1,000 b. 50 1,000 100 1,000 4 300 0 91. If the following product combinations represent the corner points Of the feasible solution region, what is the optimal mix? Traveling Bags Document Begs a 0 0 b. 0 1,000 c. 50 1,000 d. 300 0 92, The maximum amount that the company would be willing to spend. ‘on advertising to increase the demand for document bags to 1,200 units is a. PO. c. P180,000. b. 40,000. d. P 22,500. 93. Chen Corporation makes two products that are processed in two machines. The objective function and the constraints are as follows: Max P = 168 + 8B 8A + 12B< 72 8A +4B< 40 A>0;B>0Chapter 12- Quantitative Techniques 731 Where Ais the number of units ofthe first product; Bis the number of units of the second product. ‘What is the maximum possible profit? a. P48 cc. P160 b. P80 - d. P1286 ITEMS 94 to 96 ARE BASED ON THE FOLLOWING INFORMATION: 95. 96. 97. Chooch Company produces two types of its product, Regular and ‘Special. Pertinent data about the two products are as follows: Mixing” Packing Contribution Margin Regular (R) hours. 2hours P20 Special (8) Shows. hous 2B Total avalible ime per period 200hours 180 hours How should the objective function (maximization of contribution margin) be expressed? a. 20M + 28P c. 20R +285 b. 46(R+S) d. 20R + 285 < 380 How should the restrictions (constraints) for the two processes (mixing and packing) be expressed? Packing. a AR 42R<20 85 + 65 < 28 b. aM + 8M < 200 2P + 6P < 180 GAR +85 < 200 2R'+ 6S < 180 “d, OR +145 < 200 6R+ 145 < 180 If the simplex method is usetd to solve this linear. programming problem, how many slack variables are needed for the simplex tableau? a. Three c One b. Two d. None ‘A toothbrush manufacturer asks your advice on how to maximize his profit by achieving the best product mix given certain scarce resources. You decide that a linear programming technique should be of help. The following information has been gathered:732 PART 2- FOUNDATIONS OF MANAGEMENT ACCOUNTING » HOURS PER BATCH Cont. Margin Molding “Finishing ‘Per Batch Children’s toothbrush 2.5, 4 P30 ‘Aduit’s toothbrush 2.0 1 15 Hours available 1,500 1,400 Which of the following correctly formulates this linear programming problem? a. Maximize 30x + 15y c. Maximize 1,500x + 1,400y Subject to: Subject to: 25x + 4y < 1,500 2.5K + 4y > 30 x+y < 1,400 sty 215 x,y20 xy>0 b. Maximize 30x + 15y d. Maximize 30x + 15y Subject to: Subject to: 2.5x + 2y < 1,500 2.5x + 2y > 1,500 4x + y < 1,400 4x4 y > 1,400 x20 xy20 ITEMS 98 and 99 ARE BASED ON THE FOLLOWING INFORMATION: The following information were taken from the solution to a linear ‘programming problem involving maximization of contribution margin: Objective function: Maximize CM = 15x + 25y Subject to: Material A constraint: 3x + 6y < 600 Material B constrain 6x + 4y < 880 Non-negativity constraints: x > 0; y > 0 Optimal solution: 120 units of X and 40 units of ¥ Total CM at optimal mix: CM = 120(15) + 40(25) = P2,800 98. What is the shadow price if one unit is added to the Material B constraint? a. P6.75 cc. P62.50 b. PO.625 a. P40 99. Should the company acquire additional unit of Material B ifthe cost per unit is PO.20?Chapter 12 - Quantitative Techniques 733 100. 104. 102. a. Yes, because the acquisition cost is less than the shadowy price of Material B. b.. Yes, because the acmisition cost is greater than the shadow price of Material B. : cc, Yes, because the contribution margin will Increase by P0.20 per unit. a 4d. No, because the company’s capacity is limited to 880 units of Material B. ‘A university has a centralized printing office where the different colleges have their handouts and other instructional materials reproduced for distribution to their students. Recently, there have been long delays in printing the materials, because of the increase in the number of job requests from the different colleges. The University Administration is considering decentralizing printing offices ‘to reduce the backlogs and print the instructional materials on time. ‘An appropriate technique for minimizing the waiting time for a job, as well as the cost of providing printing services is ‘a. linear programming. . . queuing theory. b. regression analysis. d, PERT/CPM. © Queuing theory minimizes the sum of the walting costs and of the ‘a. “number of customers waiting in line, b. average waiting time in a queue. cost of providing the service. d._ cost of idle resources waiting in line. Movi-World operates ten cinemas in a mall. At present, each cinema has a ticket booth where customers fall in line to buy tickets. The company is planning to. change its present system into a one-tine, multi-server system. The booths will be installed in just one ticketing. center and the customers fall in just one line, ‘When a booth teller is free, the person at the head of the line goes to that teller. If the new system is implemented, it s expected to decrease the time customers spend in the line, increase the workload of the teller. decrease the company's expenses on the tellers’ salaries. decrease the number of tickets sold per day. pose734 PART 2- FOUNDATIONS OF MANAGEMENT ACCOUNTING 103. Clients arrive at an ATM booth at an average of 10 clients per hour. The ATM can serve (process requests: balance inquiry, fund transfer, withdrawals, bils payment, etc.) at an average rate of 12 Ee & clients per hour, What is the average number of clients waiting in line at any time? a 5 «12 b. 10 a2 104, What is the average number of ‘clients in the waiting line, not being serviced? a, Sdlients 10 clients b. 4 clients d. 12 clients 105, The average waiting time is ‘a. 60 minutes. c. 25 minutes. b. 14.38 minutes. d. 50 minutes. 106. It is a mathematical mode! that shows a constant percentage reduction in the average direct labor input time required per unit as the cumulative output doubles. a. PERT Queuing theory b. CPM d. Learning curve ITEMS 107 to 109 ARE BASED ON THE FOLLOWING INFORMATION: ‘A particular manufacturing job is subject to an estimated 60% learning curve. The first unit required 20 labor hours to complete. 107. A doubling of production will reduce the cumulative average unit completion time by a. 40%. Cc. 60%. b. 20%, d. 30%, 108. What is the cumulative average time per unit after four, units are completed? ‘a. 60 hours 7.20 hours b. 20 hours d. 28.80 hoursChapter 12 Quantitative Techniques gue 735 109. ‘What is the cumulative (total) time required to produce 4 units? ‘a. 60 hours ¢. 28.80 hours b, 39.20 hours d. 7.20 hours ITEMS 110 to 112 ARE BASED ON THE FOLLOWING INFORMATION: 110. i. 112. 113. The first unit of a manufacturing job required 50 labor hours to ‘complete. When production was doubled, the cumulative average time per unit to complete the two units was 40 hours, “The manufacturing job's learning curve is a. 40%. c. 20%, Dd. 50%. d. 80%. ‘Assuming the {saming curve continues, the cumulative (total) time required to produce 8 units is ‘a. 25.60 hours 204.80 hours b, 320 hours d.. 40 hours. ‘What is the time required to produce the second unit if the first unit required 50 hours to complete? a. 40 hours, 30 hours b. 50 hours dd. 80 hours A learning curve of 70% assumes that direct labor costs are reduced by 30% for each doubling of output. What is the cost of the 8” unit produced as an approximate percentage of the first unit produced? 2, 34.30% 30% b. 70% 4, 0.343% ITEMS 114 nd 115:ARE BASED ON THE FOLLOWING INFORMATION: 14, ‘The cumulative average labor cost per unit for the first batch (of 100 units) produced using a new process is P200, The cumulative. average labor cost after the second batch is P140, ‘The new process has a learning curve percentage of a. 30%, . cc. 140%. b. 70%. d. 200%,736 2ART 2- FOUNDATIONS OF MANAGEMENT ACCOUNTING: 115. Assuming that the learning. curve obtained in Item #130 continues, the cumulative (total) labor cost of four batches is a. 80,000. cc. P39,200. b. 56,000. d. P98, 116. It is the study of how the outcome of a decision process changes ‘as one or more of the assumptions used in the process change. Différent scenarios are presented, showing the outcome in each scenario as the assumptions change. @. Sensitivity analysis Queuing theory b. Learning curve d. PERT:Chapter 12--Quantitave Techniques Key ANswers: 4 C298) 2.0528, 3B 2 4B 26 gB Se BA 28 72 28 BA 30. 9D 34 10. C 32, 11. B33 12D 34 A 36, 148 36 1B. Ce 2°37. 16. C38. 7D. 38, 18.C 40, A At 20..D 42 21. A 43, 2B 44 EXPLANATIONS: Br>TOBOTDABDACAOVEDMPOFOBOO> 45. 46. 47. 48. 49. 50. 51 52. 59, 60. 61 RASBER BRLSR B>O000F FOF GHDFODDBBDOBO 67. 68 69. 70. 71 72 73 74, 78, 77. 78. 79, 80, at, 82, 83. 84, 86. 87. 88. voor>soRo0ODFODODFyBOD000 89. 90, 1 92, 93. 94, 95: 96. 97. 98. 99, 100, 101 102 103, 104. 105. 106. 107. 108, 109. 410, VOTFTODS> OOF ODDO0MODNOD 737 111 412. 113. 114. 115. 116 >oerad 1, ©. In applying quantitative methods, all the relevant variables may ot possibly be included. The model should therefore be reviewed in the light of behavioral issues, among others. 2. © Simulation models are probabilistic, not deterministic, in nature.738 PART 2 - FOUNDATIONS OF MANAGEMENT ACCOUNTING. Exogenous (originating externally) or input variables are innportant to the decision-making process but they are not within the control of the decision maker. An example is the economic condition that is expected to prevail during a period » Performance criteria ate the means of measuring the results of a decision after the fact. Decision variables are under the control of the decision maker. » Constraints are limitations that must be considered as Part of the decision process, Protabilly decision theory is a mathematical method for making decisions about the likelihood of future events, such as sales and profits, in the face of uncertainty Learning curves measure the benefits of experience in the early stages of a new task Queuing theory or 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 random, Gantt charting or bar charting is used to measure progress toward a goal Probability or risk analysis is used to examine possible outcomes given altemative parameters. Sensitivity analysis, on the other hand, answers “what-i-questons” when alternative parameters are changed. Probabilty analysis is therefore similar to sensitivity analysis ~ they both evaluate the probabilties and effects of differing inputs or outputs. > Probability analysis can be used even when many ‘outcomes are possible. > The sum of probabilities must be equal to one, There is no expected opportunity loss under conditions of certainty‘Chapter 12- Quantitative Techniques: 739 BA cargoes x Emor —Eiror Probability Terminal Handled Rate A GOH OH 180 (ths) “50% Bo Wh a 1.20 Ce) 918% C8 6%. 08D hs), 18.20% z 3a) 9D Monthly Sales Volume x Probability 15,000 units 0.40 6,000 units 18,000 0:30 5400 27,000 0.15 4,050 36,000 0.10 3,600 45,000 0.05 2.250 Expected value of monthly sales volume 721.300 units 10..¢ ‘Monthly Contribution Margin x Probability P. 75,000. 0.40 P 30,000. “90,000 030 27,000 135,000 0.15 20,250 180,000, 0.10 18,000 225,000 0.05 —11,250 Expected value of monthly contribution margin 106,500 1. B Probability that a“heart’ _ 13hearts _ would be drawn“. * 62eards — ~ 2846 4 13, 2 ca) Price = 5x 50+ —J5— x 20 = PBS per draw Proof Total Prizes (P50x 4) +(P20x 13) = Proceeds from all draws (52 x P8.85) = Pago P4s0740 2B. 14, 16. 16. 18. A PART 2 - FOUNDATIONS OF MANAGEMENT ACCOUNTING Sales Estimaie Probability Weighted Sales 49,000 010 P 4,800 68,000 0.50 34,000 80,000 040 32,000 Expected value of budgeted sales 70,800 x Cost ratio (400% - 20%) 80% Expected valve of budgeted cost of goods sok P6.640 Nuimber of Brownouts Probability 0 22 0 4 32 1.00 6 3n2 4.50 & ana 287 Average expected number of brownouts per month 5.17 x Cost per brownout P10, Total cost 51,700 Leese expense 40,000 Estimated savings per month ELt.z00 Probability thet a customer wil buy a= = 20% i The Btier-probabilities are: Suspense, 4/10 or 40%; Drama, 20%; and Horror ‘The first customer is simulated by the first letter drawn. The first letter drawn is H, which is assigned to the musical movie (G to 1), Therefore, the first customer is expected to buy a ‘musical movie. The requirement is the joint probability of a 6% decrease in the cost of both Materials X and Y. The joint probabiity of ‘occurrence of two independent events equals the product of their individual probabilities: 50% x 10% = 5% Probability of having between 81 to 120 clients 30% Add probabitiy of having between 121 to 160 clients, 20% Probability of having between 81 to 160 clents, Db‘Chapter 12 - Quantitative Techniques, 741 19. A_ The best estimate of the expected number of clients in the spa 20. 2a. 22. 23, 24. during the period is its expected value, using the midpoint in each range in the computation: ‘Number of Clients Midpoint Probabilities Weighted 0-40 20 x 0.10 2, 41-80 60 x 0.40 24 81-120 100 'x 0.30 30 121-160 140. x 0.20 2B Best estimate of the expected ‘umber of clients 84 clients Plan A. P5,000 x 60% 3,000 B — 2,000x 30% 600 1,000 x 10% Expected value (per square meter) P3700 Units of Roses Probability Weighted Units 600 0.20 120 800 0:30 240 4,000 “040 400 1,200 0.10 120 Estimated sales, expected value approach 880 units In a deterministic approach, it is assumed that a value is known with certainty. Per the requirement, the value is based fi the most likely outcome. Thus estimated sales is 1,000 Units, the estimate with the highest probability (40%). Sales (800 units x P15) 12,000 Less cost (1,000 x P5) 5,000 Conditional profit PZ000 Total market = 190% Company X: 0.80x + 0.40y = 100% - y Company Y: 0.60y + 0.20x = 100% —x742 25. C PART 2-5 UNOATIONS OF MANAGEMENT ACCOUNTING ‘Simplify each equation: D.8x + 0.4y = 100% -y O.6y + 0.2x = 100% ~x 0.8x = 100% -y—O.4y | O.6y = 100% -x-0.2x = 100% = 1.4y y= 100% = 1.2 os “08 ‘Substitute values: 100% roo 1a’ 6 = 133% - 2.796x 1.996x = ~1.33 6.6% y= 100%~x y= 100% ~66.6% = 33.4% If investigation is concucted, erat is P10,00, The outearnes ‘would be either proper operations or improper operations. ifthe probability’ of improper operations is 60%, the probability of proper operations is 40% The expected value of the act “Investigate” is computed as follows: Cost of Correct Weighted Outcomes Operations Probability Cost Proper operations P 0 40% «= PO Improper operations 25,000 60% 15,000 Total 15,000 Cost of investigation 10,000 Expected value of the act “Investigate” P2s.000 ALTERNATIVE SOLUTION: Proper operations (P 10,000 x 40%) P 4,000 Improper operetions (P 10,000 + P25,000) x 60% 24,000 Expected value ‘£25,000Chapter 12 - Quantitative Techniques 743 26. B If Mr. Imbestigador would not conduct an investigation, the 2. 28. 29: 10,000 cost of investigation would not be incurred. The expected value of the act “Do not investigate" is computed as follows: 4 Cost due to Weighted Outcomes inefficiencies - Probability Cost Proper operations Pio 40% Po Improper operations 40,000 60% 24.009 Total 24,090 Cost of investigation oe Expected value eao00 Mr, Imbestigador would be indifferent between the two actions “Investigate” and “Do not investigate” if the results (expected values) of such actions are equal Let x = probability of improper operations. (1—x) = probability of proper operations (1 —x) + 25,000x + 10,000 0(1 - x) + 40,000x 25,000x + 10,000 = 40,000x 40,000 = 15,000x x = 66-2/3% Probability of improper operations (x) = 66.23% Probability of proper operations (1 - x) = 33.15% If the probability of hot weather is 60%, the probability of cold weather is 40%, The expected payott for selling halo-halo i: (15,000 x 60%) + (6,000 x 40%) = B11.400 Expected payoff for selling mami if probability of hot weather is 60%: (11,400 x 60%) + (12,000 x 40%) = P11,640 30. B Based on the given data, the expected payoffs are: Sell halo-halo P11,400 Sell mami. 11,640744 34 32, 33, PART 2~ FOUNDATIONS OF MANAGEMENT ACCOUNTING ‘Therefore, despite the fact that the weather is-hot, the canteen should sell mami becausé it has the higher expected value or expected payoff, Naturally, the canteen’s management would sell halo-halo if the weather is hot and mami the weather is cold IF perfect information is available, that is, management would know with certainty that the probability of hot weather is 60%, the expected payoffs: Hot weather, sell halo-halo ——-P15,000x60% — P 9,000 Cold weather, sell mami 12,000 x 40% 4,800 ‘P43.800 ‘The expected value of perfect information is the difference ‘between the expected value without perfect information and the result ifthe best action is taken given perfect information. Expected value given perfect information (lem #31) 13,800 Expected vaive ofthe best course of action without perfect information (item #30) 11,640 Expected value of perfect information Bato Cost of obtaining perect information 3,000 Expected value of periect information (tem #32) 2.160 Loss if information is ought DECISION TREE ANALYSIS is used for situations involving a sequence .of events with several possible outcomes associated with each event, DyNamtic PROGRAWHING is an approach to solving problems by dividing a large mathematical model into smaller, more manageable pieces in such a way that once the smaller problems have been solved, the result is the optimal solution to the overall model. QUEUING THEORY is a group of mathematical models of systems involving waiting lines, PROGRAM EVALUATION REVEW TECENQUE (PERT) is 2 network Model used to help convo! lege-scale, complex projects.Chapter 12 - Quantitative Techniques 745 35. C. In decision tree analysis, all the possible events are included 37. in the decision. ‘tis used when various options, their consequences, and the probabilities of those consequences can be ascertained with a high degree of confidence. Making the part is the better alternative: MAKE Demend —Probebilty Contiouion Wighied Contbuon 5000. 70% 50,000" 36,000, 40,000 2000 30% 14000 4.200". 16,000 Expected value 39.200 * cantipuon = (000 units x Pt 2a) -P10,000 rent = P50,000 * Contrbuton = 6,000 units x Blut = P40,000 ‘The expected value of making (P39,200) is higher that that of buying (P32,800) thé part. ‘A decision tree stows: + the possible decision alternatives; ‘© the events or states of nature that might follow from each decision alternative; i «the probabilities of the events; anid + the quantified payoffs or outcomes of the events. Given two decision alternatives (Product X and Product Y), ‘and two outcomes (high and low) that might follow from each decision alternative, four (4) outcomes (payofts) are possible. A Gantt chart or Bar chart'is sometimes used in conjunction ‘with PERTICPM to show the progress ofa project, although it is not as sophisticated as PERT/CPM. It shows the activities tobe completed in a. project, but it does not reflect the relationships and the sequencing of such activities. Neither does it show the critical path in a project. > Linear programming is used to determine an optimal ‘product mix.748 56. ® <, 2 FOUNDATIONS OF MANAGEMENT ACCOUNTING > the PERT diagram has three (3) paths: A~B-E A-C-D-E A-B-C-D-E > Activities A- B and A — C are called parallel activities because they can be performed simultaneously. » Activities A- B and B ~ E are series of activities. They cannot be performed simultaneously. Activity A — B Must first be completed before starting activity B - E. ‘The expected time to complete each path are as follows: Path A-B-E 246 = 8 months A-C-D-E 3+5+7 15 months A-B-C-D-Es 2444547 18 months Path A - BC - DE requires the longest time to complete 50, itis the critical path, ‘The shortest time to complete the project is the time required to complete the critical path. From Item #51, Path A-B-C-D- E's the critical path requiring 18 months to complete. Slack time for Path A - B — E is 10 months: Number of menths for criticat path 18 Less number of months required to complete Path A-B-E 8 Slack time for Path A~B~E 10 months Path A~B-C -D~ Eis the critical path. As such, its slack time is zero (0). Only non-critical paths have slack time. Path A is the critical path because it requires the longest time to complete. Choice. A (72 weeks) cannot be the answer. Seventy-two weeks is not a path; it is the time required to complete the, aotivties in the path.‘Chapter 12 Quantitative Techniques. ‘ 749 56. B_ Apath in a network is a series of activities from start to finish. Inthe given network; the paths are: Path A-B-D=H PathA-B-C-D-H PathA-E-F-D-H Path A~E-G-F-D-H: > A-E-D—His not among the pattis in the given network diagram: 7 57. A The minimum duration of the entire project is the expected number of days required to complete the activities in the critical path. The critical path is the path that requires the longest time to complete. In the given network diagram, the paths and their duration are: Path Duration in Days A=B-D-H (14+ 12+ 16) 42 A-B-C-D-H(14+ 16+ 16) 6 A-E-F-D-H(6+9+7+ 18) 40 A-E-G-F-D-H(6+10+7+16) 41 Path A- B-C -D~ His the critical path requiring 46 days to ‘complete.. This (46 days) is the minimum duration of the entire project. 58. C Ina CPM problem, the activities that should be crashed are those that are on the critical path. Hence, activity BD should not be considered (Choices A and B). ‘The activities that can possibly be crashed are activities FG and GH. The alternatives, as well as the costs to crash are as follows: Cost to Crash 4) “Crash Activities FG and GH for one ‘week each (19,000 + P17,000) 36,000 2). Crash Activity FG for two weeks 38,000 3) Crash Activity GH for two weeks 2 40,000 ‘Alternative 1 requires the least crash cost (P36,000) for two weeks. This is what the firm will incur if the activities are60 A D PART 2 - FOUNDATIONS OF MANAGEMENT ACCOUNTING crashed, compared to the penalty for delay of P80,000 (P40,000 per week for two weeks). ‘Therefore, to meet the company’s objectives of reducing the normal.completion timé of Job 85 and eam the. highest possible income, Activities FG and GH should be crashed for ‘one week each. “The expected duration to complete the entire project is the time ‘expected to complete the activities in the critical path. Path A~C. ~E, the critical path, involves two activities: AC which requires 11 cays and CE which is expected to be completed in 15. days. ‘Therefore, the expected duration for the entire project is 26 days, (11 days + 18 days). Only the activities in the critical path should be crashed. ‘Activities DE, AB, and AD (Choices C and D) do not lie on the citcal path, so they should not be considered. If the plan is to reduce the completion time by 3 days, activity ‘AG should be crashed for an incremental cost of P2,250. Activity AC: Time Cost Normal 11 days 12,000 Crash 8 14,250 Savings in days ‘days Incremental cost 22250 Ina finear programming model, the objéctive function represents the outcome to be optimized, such as sales, contribution margin, profit, or cost. » The decision variables are the unknowns used to construct the constraints and the objective functions. > A slack variable is a positive variable that is added to an inequality (@ constraint function) to transform it to an equality form > Constraints are the resource limitations and other conditions within which the objective function is to be ‘optimized.(Chapter 12 Quantitative Techniques 751 63. D. Constraints are mathematical statements expressed as 69. 70. inequalities or equalities. They are the resource limitations to which the values of the variables are subject,” Linear programming is the appropriate mathematical technique for allocating scarce resources to. optimize a given objective function. : Linear programming is a mathematical tool that can be used for allocating scarce resources to optimize a given objective function. © Max CM = 10A + 15B is the objective function involving maximization of the total contribution margin subject to the given carsstraints. ‘The constraints restrict the optimal value of the objective function. Such constraints are depicted by means of inequalities. ‘The point at which A = 60.and B = 40 is a feasible point because it does not violate either of the constraint functions. it ‘would be the optimal solution point ifitis.a comer point and ifit maximizes the total contribution margin (objective function). A slack variable, represents unused capacity using the simplex method. To convert inequalities of the < type to equali slack variables are added, If an equality is of the’z type, @ surplus variable is subtracted, ‘and a second variable; called an artificial variable, is added to prevent violation of the non-negativity constraint. > The benefit foregone by using a scarce resource in a given way is called the opportunity cost. > Total variable costs vary with the change in cost driver, but its.cost per cost driver is constant within the relevant range. . > ‘A shadow price is the benefit of movingithe feasible area. The simplex method is the most commonly used techniqué to solve linear programming problems. . The mathematical752 m1. 72, 73. 7A, 75. 76. 7. /ARY 2~ FOUNDATIONS GP NANAGEMENT ACCOUNTING consiraint equations are arranged in a matrix of coefficients AA transfer price is the price charged for 2 product or service When sucht product or service is transferred or sold by one segment of an organization to another segment of the same ‘organization, ‘n linear programming, sensitivity analysis is used to determine how the optimal solution will react to changes in parameters, ‘such 2s the objective function coefficient, the limiting value of a resource constraint, or 2 constraint coefficient. Itis also used to determine the effect of adding a new variable or constraint. ‘An example of sensitivity analysis in a linear programming problers isthe calcviation of a shadow price. A ‘renaportation mode! is a special case of the linear progr2mining model, It involves the physical movement of goods frorn sources of supply to destinations ‘The objective function in a transportation model inchices the cost of transporting the goods fiom each source destination The constraints are the demand for such goods by each destination and the output for each supply point In the graphic method to solve linear programming problems, ‘more than two restrictions (constraints) are possible. The lines connecting points B, C, D, and F bound the feasible solution region. All product combinations within this region do not violate any of the'three given constraint. ‘The fast point in the feasible solution region touched by the profit ine determines the solution ‘The objective function in this linear programming problem involves maximization of total contribution margin. Total CM from selting Product C = 15C; from Product D = 20D. Thus, the objective function is Max. CM = 15C + 200.Sg oe a Chapter 12- Quantitative Techniques: 753 78. B The maximum number of hours available for grinding is 400 hours. Product C requirés 10 hours and Product D requires 20 hours in the grinding process. » Thus the grinding. constraint function is 10C + 20D < 400. 79. C The maximum available number of hours for the. mixing process is 300 hours. Both products C and D require 10 hours in mixing, so the mixing constraint function is 10C + 10D < 300. i 80. D_ The comer points are as follows: GRINDING ConstRamNT: 10C + 20D $400 MixING ConsTRAINT: 10C + 10D 7300 40C + 10D = 300 ifC=0,D=30; ifD=0,C=30 IFC =-0, D = 20 in the grinding constraint and D = 30 in the mixing constraint. In this case, the maximum number of units of that can be produced to satisfy both constraints is 20 units (the lower value is the upper limit). HD = 0, C = 40 in'gtinding and C= 30'in mixing. The upper limit for C = 30 units. The combinations, which lie in the feasible solution region, are: Product C Product D 0 20 30 0 ‘Another comer points the intersection of the constraint lines for finding and mixing, This can be determined algebraically by solving the two equations simultaneously: Grinding: 40C + 20D = 400 Mixing: 406 + 40D. 40D = 100 D=10 0, ‘600 (600, 0), + Market limit for D: D < 1,000754 756 PART 2~ FOUNDATIONS OF MANAGEMENT ACCOUNTING PART 2.- FOUNDATIONS OF MANAGEMENT ACCOUNTING The constraints can be plotted as follows: Traveling bags 90. G_ Refer to the graph in Item #89, the points (100, 1,000) or 160 a1. Units of traveling bags and 1,000 units of document bags is ‘outside the feasible solution region. This combination (100, 1,000) is a non-feasible solution “The optimal mix is the product combination that resuits in the highest contribution margin. Using the objective function (Max CM = 350T + 200D) to compute the total CM for each combination, the results are as follows: Traveling Bags cement Pa: Fated Ota 0 a a Poo b, 0 4,000 200,06 « 50° 1,900 247,500 4 300 0 105,060 ‘To maximize CM while satisfying all the given constraints, 50 units of traveiing bags and 1,000 units of document bags must be produced. If the demand for document bags could be increased to 1,200 Units, the new optimal solution would be 1,200 units of doournents bags and none of traveling bags, instead of 7,000 units of document bags and 50 units of traveling bags. The increase in contribution maigin would be:Chapter 12-Quantitative Techniques eee Traveling Bags ‘ Document Bags Total CM 0 4,200 240,000 50 1,000 217,500, Incréase in CM B.22.500 The incremental CM of P22,500 is the maximum amount that ‘the company would be willing to spend for advertising expense to increase the demand for document bags. 93. B 1) 8A+12B<72 BA+4B <40 8A+12B=72 BA+4B=40 AHO: ifA=0: 12B=72 4B = 40 B=_6 B=10 Feasible solution: A=0, B=6 > the lower value of B (6, instead of 40) is the feasible figure because it wil satisfy both constraints. 2). itB=0: fB=0: 8A=40 A=5 Feasible solution: A=3,B=4 — - ‘Computation of Total Profit (P = 16A + 8B) using the Feasible Values of A and B:760 PART 2- FOUNDATIONS OF MANAGEMENT ACCOUNTING. 104, B The formula is: = Be _— Nee Tara By where: Nq= average number of clients in the waiting in fine, not being serviced 105. C_ The formula to compute the average waiting (W) is: we Nb 2 89. 917 houror 26 minutes 107. A Ita job has a 60% learning curve, the cumulative average time {end labor cost) per unit is reduced by 40% each time production doubles; reduction is 20% if the learning curve is 80%, 108. C Cumulative Averege Curitve Units Time per Unit Total Time 1 200 hours 20.80 hours 2 (20howrsx60%) 120hours (12 hours x2 units) 24.80 hours 4 (12hoursx60%) —72hours (7.Zhoursx4 units) 28.80 hours 109. C Refer fo the solution in Item #108, 110. D Cumulative Average Time per Unit 50 hours (60x?) 40hours 50x?= 40, where ? is the learning curve percentage 40+ 50 7 = 20% m1, ¢ Cumulative Average Cumulative Units Time per Unit Total Time 1 50.0 hours 50.0 hours 2 (6Ohours x 80%) 40.0hours (40 hours x 2units) 80.0 hours 4 40hours x 80%) 32,0hours (32hours x4 unis) 128.0 hours 8 (@2hows x80%) 25.8hours (256hoursx 8 units) 204.8 hoursChapter 12 - Quantitative Techniques 761 112. C 113, A 114. B 115. From the solution in Item #141, the total cumulative time to produce two units is 80 hours. If the first unt required 50 hours to complete, the second unit required 30 hours. Units Cumulative Cost per Unit 1 Assumedfigure: P1.00 2 (1x70%) 0.70 4 (0.70x70%) 0.49 8 (049x70%) 0,343 9 0.343+ 1 = 34.30 Learning curve percentage = 140 + 200 = 20% Batches ‘Cumulative Cost per Unit 400 units P200 200 units (200 x 70%) . 140 400 units (140x70%) 98 Total cost of 400 units (4 batches) = 400 x P98 = P39.200