Quantitative Techniques in Decision Making

DRILLS
1. One limitation of the linear programming technique is that it is effective only for
a. two-product situations c. straight-line relationship situations
b. manufacturing resource constraint situations d. curvilinear relationships

2. In order to solve a linear programming problem slack, surplus, and artificial variables must be employed. A slack
variable represents
a. opportunity costs c. outside variables with high cost
b. unused capacity d. the variable with the most negative value

3. The procedure employed to solve linear programming problems is

a. differential calculus b. integral calculus c. simulation d. matrix algebra

4. Through the use of a decision models, managers thoroughly analyze many alternatives and decide on the best
alternative for the company. Often the actual results achieved from a particular decision are not what was expected
when the decision was made. In addition, an alternative that was not selected would have actually been the best
decision for the company. The appropriate technique to analyze the alternatives by using expected inputs and altering
them before a decision is made is
a. expected value analysis b. linear programming c. PERT d. sensitivity analysis

5. A transportation model is a special case of the

a. EOQ model b. Markov model c. Linear programming model d. Dynamic programming model

6. In linear programming, the shadow price refers to the

a. measurement of the value of relaxing a constraint in a problem with dual variables
b. marginal change in profit associated with a change in the contribution margin of one of the variables
c. unused capacity available one the optimal solution is obtained
d. solution variable that is located outside the feasible area

7. The use of a decision tree is appropriate for decision making under conditions of
a. uncertainty and risk
b. uncertainty and subjective likelihoods
c. uncertainty and objective likelihoods
d. risk

8. A decision maker is operating in an environment in which all the facts surrounding a decision are known exactly, and
each alternative is associated with only one possible outcome. The environment is known as
a. certainty b. risk c. uncertainty d. conflict

9. Which one of the following statements does not apply to decision tree analysis?
a. the sum of the probabilities of the events is less than one
b. all of the events are mutually exclusive
c. all of the events are included in the decision
d. the branches emanate from a node from left to right

10. Correlation is a term frequently used in conjunction with regression analysis and is measured by the value of the
coefficient of correlation, r. The best explanation of the value r is that it
a. is always positive
b. interprets variances in terms of the independent variable
c. is a measure of the relative relationship between two variables
d. is positive only for downward slopping regression lines

11. In the standard regression equation y = a + bx, the letter b is best described as a(n)
a. independent variable b. dependent variable c. constant coefficient d. variable coefficient

12. The letter x in the standard regression equation is best described as a(n)
a. independent variable b. dependent variable c. constant coefficient d. variable coefficient

13. Regression analysis

a. estimates the independent cost variable c. constant coefficient
b. estimates the dependent cost variable d. encompasses factors outside the relevant range
14. The correlation coefficient that indicates the weakest linear association between two variables is
a. -0.73 b. -0.11 c. 0.35 d. 0.72

15. The modeling technique to be employed in a situation involving a sequence of events with several possible outcomes
associated with each event is
a. network analysis b. decision tree analysis c. Monte Carlo simulation d. linear programming

16. The expected value of perfect information is the

a. same as the expected profit under uncertainty
b. sum of the conditional profit (loss) for the best event of each act times the probability of each event occurring
c. difference between the expected profit under certainty and the expected opportunity loss
d. difference between the expected profit under certainty and the expected monetary value of the best act under
uncertainty

17. Sweivel Company is preparing its 20x2 budget and, taking into consideration the recent pace of economic recovery,
has developed several sales forecasts and the estimated probability associated with each sales forecast. In order to
determine the sales forecast to be used for 20x2 budgeting purposes, which one of the following techniques should
Sweivel use?
a. expected value analysis c. Monte Carlo simulation
b. continuous probability simulation d. exponential distribution analysis

18. The modeling technique to be employed in a situation involving a sequence of events with several possible outcomes
associated with each event is
a. network analysis. b. decision tree analysis. c. Monte Carlo simulation d. linear programming.

19. The modeling technique to be employed in a situation involving a sequence of events with several possible outcomes
associated with each event would be
a. network analysis b. decision tree analysis. c. monte carlo simulation. d. queuing theory

20. When a decision maker is faced with a decision and the probabilities of various outcomes are known, the situation is
said to be decision making
a. under risk. b. under uncertainty. c. under certainty. d. through satisficing

21. Huron Company plans to bid on a special project that calls for a total of 24,000 units. The units will be produced in
lots, with the first lot consisting of 750 units. Based on prior experience, the direct labor time needed per unit of product
will be progressively smaller by a constant percentage rate as experience is gained in the manufacturing process. The
quantitative method that would best estimate Huron's total cost for the project is
a. learning curve techniques c. discounted cash flow techniques
b. differential calculus d. linear programming

22. The process of evaluating the effect of changes in solution in a linear programming application is called
a. iterative analysis. b. regression analysis c. sensitivity analysis. d. matrix analysis

23. Simulation, a widely used technique in decision modeling, is

a. a process of modeling whereby real activities are represented in mathematical or other form.
b. a technique used to pinpoint random deviations in industrial processes and other repetitive operations.
c. a technique used to separate costs into fixed and variable portions.
d. an inventory management model that is used to calculate the optimum order quantity.

24. ZorbaCo has developed a comprehensive budget using a microcomputer spreadsheet. ZorbaCo's sales manager
wishes to study the effects of: (1) decreasing selling price in
order to increase sales volume, and (2) putting salespersons on commission instead of fixed salaries. These options can
best be studied on the microcomputer by using
a. linear programming. b. decision tree analysis. c. simulation. d. markov analysis

25. Philip Co. Is developing its budgeted cost of goods sold for next year. Philip has developed the following range of
sales estimates and associated probabilities for the year:
Sales estimate Probability
P60,000 25%
85,000 40
100,000 35
Philip's cost of goods sold average 80% of sales. What is the expected value of Philip's cost of goods sold?
a. P85,000
b. P84,000
c. P68,000
d. P67,200
The probabilities shown in the table represent the estimate of sales for a new product.
Sales Units Probability
0-200 15%
201-400 45%
401-600 25%
601-800 15%

26. What is the probability of selling between 201 and 600 units of the product?
a. 0% b. 11.25% c. 70% d. 25%

27. What is the best estimate of the expected sales of the new product?
a. 480 b. 380 c. 400 d. 800

28. During the past few years, Wilder Company has experienced the following average number of power outages:
Number per Month Number of Months
0 3
1 2
2 4
3 3
Each power outage results in out-of-pocket costs of P800. For P1,000 per month, Wilder can lease a generator to
provide power outages. If Wilder leases a generator in the coming year, the estimate savings/(additional cost) for the
year will be
a. (P15,200) b. (P1,267) c. P3,200 d. P7,200

29. According to recent focus sessions, Norton Corporation has a "can't miss" consumer product on its hands. Sales
forecasts indicate either excellent or good results, with Norton's sales manager assigning a probability of .6 to a good
results outcome. The company is now studying various sales compensation plans for the product and has determined
the following contribution margin data.
Contribution Margin
If sales are excellent and
Plan 1 is adopted P300,000
Plan 2 is adopted 370,000

If sales are good and

Plan 1 is adopted 240,000
Plan 2 is adopted 180,000
On the basis of this information, which of the following statements is correct?
a. Plan 2 should be adopted because it is P10,000 more attractive than Plan 1.
b. Plan 1 should be adopted because of the sales manager's higher confidence in good results.
c. Plan 1 should be adopted because it is P8,000 more attractive than Plan 2.
d. Either Plan should be adopted, the decision being dependent on the probability of excellent sales results.

30. The table below shows the estimated probabilities of the proportions of defective units resulting from a production
run. Each defective unit costs the company P100, and each production run consists of 100 units.
Percentage Defective Probability
1% 20%
2% 20%
3% 30%
4% 20%
5% 10%
The expected percentage of defective units is
A. 2.80% B. 3.00% C. 0.90% D. 3.45%

31. Two projects are going to be implemented. The probability for positive cash flows in each one is 1/2, and the
probability for negative cash flows in each one is 1/2. What is the probability that at least one of the projects will have
positive cash flows?
A. 0.5 B. 0.67 C. 0.75 D. 0.95
32. Pongo Company's managers are attempting to value a piece of land that they own. One potential occurrence is that
the old road that borders the land gets paved. Another possibility is that the road does not get paved. A third outcome is
that the road might be destroyed and completely replaced by a new road. Based on the following future states of
nature, their probabilities, and subsequent values of the land, what is the expected value of the land?

Future States of Nature (SN) Probability

SN 1: Current road gets paved 0.5
SN 2: Road does not get paved 0.4
SN 3: Current road destroyed and replaced with new road 0.1
Estimates of land value under each possible future state of nature:
Value if SN 1: P200,000
Value if SN 2: P100,000
Value if SN 3: P550,000
A. P133,333 B. P195,000 C. P225,000 D. P283,333

33. Pleasant Valley Company makes two products, ceramic vases (V) and ceramic bowls (B). Each vase requires 2 pounds
of material and 3 hours of labor. Each bowl requires 2 pounds of material and 1 hour of labor. During the next
production week, there will be 100 pounds of material and 60 hours of labor available to make vases and bowls. Each
pound of material costs P4 and each hour of labor costs P10. All factory overhead is fixed and is estimated to be P200 for
this production process for a week. Pleasant Valley sells vases for P50 each and bowls for P35 each. One of the
constraints on Pleasant Valley's objective function would be
A. 2V + 2B ≤60. B. 3V + B≤60. C. V+ 3B 100. D. P8V+ P8B <P600.

34. A particular manufacturing job is subject to an estimated 90% learning curve. The first unit required 50 labor hours
to complete. What is the cumulative average time per unit after four units are completed?
a. 50 hours b. 45 hours c. 40.5 hours d. 40 hours

35. A learning curve of 80% assumes that direct labor costs are reduced by 20% for each doubling of output. What is the
incremental cost of the sixteenth unit produced as an approximate percentage of the first unit produced?
a. 41% b. 31% c. 51% d. 64%

36. A manufacturing company required 800 direct labor hours to produce the first lot of four units of a new motor.
Management believes that a 90% learning curve will be experienced over the next four lots of production. How many
direct labor hours will be required to manufacture the next 12 units?
a. 2,016 b. 1,792 c. 1,944 d. 2,160

37. LCB, Inc. is preparing a bid to the Department of the Navy to produce engines for rescue boats. The company has
manufactured these engines for the Navy for the past 3 years, on an exclusive contract, and has experienced the
following costs:
Cumulative Cumulative
Units Cumulative Labor
Produced Materials Costs
10 P 60,000 P120,000
20 120,000 192,000
40 240,000 307,2009
At LCB, variable overhead is applied on the basis of P1.00 per direct labor peso. Based on historical costs, LCB knows that
the production of 40 engines will be allocated P100,000 of fixed overhead costs. The bid request is for an additional 40
units; all companies submitting bids are allowed to charge a maximum of 25% above full cost for each order. LCB's rate
of learning on the 3-year engine contract is
a. 75.5%. b. 80.0%. c. 62.5%. d. 79.0%

38. Lake Corporation manufactures specialty components for the electronics industry in a highly labor intensive pho
environment. Arc Electronics has asked Lake to bid on a component that Lake made for Arc last month. The previous
order was for 80 units and required 120 hours of direct labor to manufacture. Arc would now like 240 additional
components. Lake experiences an 80% learning curve on all of its jobs. The number of direct labor hours needed for Lake
to complete the 240 additional components is
a. 360.0. b. 187.2. c. 307.2. d. 256.0

39. Langley Corporation is developing a new product that will be manufactured in pairs. The company recently produced
the first two units of this product using 200 hours of direct labor time. If Langley has a 90% learning curve and uses the
cumulative average-time learning model, the total direct labor time to manufacture the first four units of this new
product is
a. 324 hours. b. 380 hours. c. 400 hours. d. 360 hours
40. A manufacturing company has the opportunity to submit a bid for 20 units of a product on which it has already
produced two 10-unit lots. The production manager believes that the learning experience observed on the first two lots
will continue for at least the next two lots. The direct labor required on the first two lots was as follows. 5,000 direct
labor hours for the first lot of 10 units
3,000 additional direct labor hours for the second lot of 10 units
The learning rate experienced by the company on the first two lots of this product using the Cumulative Average- Time
Learning Model is
a. 60.0%. b. 62.5%. c. 80.0%. d. 40.0%.

41. The average labor cost per unit for the first batch produced by a new process is P120. The cumulative average labor
cost after the second batch is P72 per product. Using a batch size of 100 and assuming the learning curve continues, the
total labor cost of four batches will be
a. P17,280. b. P2,592. c. P10,368. d. P4,320.
42. Management of a bookkeeping company observed that the average time spent to perform identical tasks using a
new software package decreases as the number of tasks performed increases. The following information on the use of
the new software was collected.
Number of Total Time to Average Time
Tasks Perform All to Perform
Performed Tasks Each Task
1 10 minutes 10 minutes
2 18 minutes 9 minutes
4 32.4 minutes 8.1 minutes
If this learning effect continues, what is the average time to perform each of the first eight tasks?
A. 7.29 minutes. B. 8.1 minutes. C. 6.56 minutes. D. 5.90 minutes.

43. Seacraft Inc. received a request for a competitive bid for the sale of one of its unique boating products with a desired
modification. Seacraft is now in the process of manufacturing this product but with a slightly different modification for
another customer. These unique products are labor intensive and both will have long production runs. Which one of the
following methods should Seacraft use to estimate the cost of the new competitive bid?
A. Expected value analysis. C. Regression analysis.
B. Learning curve analysis. D. Continuous probability simulation.

Mulvey Company derived the following cost relationship from a regression analysis of its monthly manufacturing
overhead cost.
C = P80,000+ P12M
If C monthly manufacturing overhead cost
M = machine hours

The standard error of the estimate of the regression is P6,000.

The standard time required to manufacture one six-unit case of Mulvey's single product is 4 machine hours.
Mulvey applies manufacturing overhead to production on the basis of machine hours, and its normal annual production
is 50,000 cases.

44. Mulvey's estimated variable manufacturing overhead cost for a month in which scheduled production is 5,000 cases
would be
a. P80,000 b. P320,000. c. P240,000. d. P360,000.

45. Mulvey's predetermined fixed manufacturing overhead rate would be

a. P1.60 per machine hour.
b. P3.20 per machine hour.
c. P4.00 per machine hour.
d. P4.80 per machine hour.

46. Simple regression analysis may be used to approximate the relationship between two variables, e.g., direct labor
hours and total product cost. This technique is
a. Most appropriate when the relationship between the two variables is expressed by an exponential (non-
linear) graph.
b. Based on a two-dimensional model and the formula, y = a + bx.
c. Useful in determining variable costs per unit produced, but is not related to fixed costs.
d. Quantitative, but is not expressed graphically.

47. The average amount of change in a dependent variable that is associated with a change in an independent variable is
determined through
 a. Factor analysis.
b. Normal analysis.
c. Correlation analysis.
d. Regression analysis.

48. Thompson Company is in the process of preparing its budget for the next fiscal year. The company has had problems
controlling costs in prior years and has decided to adopt a flexible budgeting system this year. Many of its costs contain
both fixed and variable cost components. A method that can be used to separate costs into fixed and variable
components is
a. Monte Carlo simulation.
b. Dynamic programming.
c. Regression analysis.
d. Expected value analysis.

49. The least exact method for separating fixed and variable costs is
a. The least squares method.
b. Computer simulation.
c. The high-low method.
d. Matrix algebra.

Total production costs of prior periods for a company are listed. Assume that the same cost behavior patterns
can be extended linearly over the range of 3,000 to 35,000 units and that the cost driver for each cost is the number of
units produced.
Production in units per month 3,000 9,000 16,000 35,000
Cost X P23,700 P 52,680 P 86,490 P178,260
Cost Y 47,280 41,840 252,160 551,600
50. What is the average cost per unit at a production level of 8,000 units for cost X?
a. P5.98
b. P5.85
c. P7.90
d. P4.83

51. Jacob Corp. wishes to determine the fixed portion of its maintenance expense (a semivariable expense), as measured
against direct labor hours, for the first 3 months of the year. The inspection costs are fixed; the adjustments
necessitated by errors found during inspection account for the variable portion of the maintenance costs. Information
for the first quarter is as follows:
Direct Labor Hours Maintenance Expense
January 34,000 P610
February 31,000 P585
March 34,000 P610

What is the fixed portion of Jacob's maintenance expense, rounded to the nearest peso?
A. P283 B. P327 C. P258 D. P541

52. What coefficient of correlation results from the following data?

X Y
1 10
2 8
3 6
4 4
5 2
A.0 B.-1 C. +1 D. Cannot be determined from the data given.

53. In regression analysis, which of the following correlation coefficients represents the strongest relationship between
the independent and dependent variables?
A. 1.03 B.-.02 C.-89 D. .75

54. Sensitivity analysis in linear programming is used to

a. Determine the degree that the constraints vary.
b. Test the accuracy of the parameters.
c. Develop the technological matrix.
d. Determine how the optimal solution would react to changes in parameters.
55. United Industries manufactures three products at its highly automated factory. The products are all popular with
demand far exceeding the company's ability to supply the marketplace. To maximize profit, management should focus
on each product's
a. Gross margin.
b. Segment margin.
c. Contribution margin.
d. Contribution margin per machine hour.

56. A regional construction company must move materials and supplies from three warehouses located in three
separate cities to various construction sites. In order to minimize the cost of transferring the materials and supplies, the
method the company would find most useful is
a. Cost-volume-profit analysis.
b. Transportation algorithms.
c. Discounted cash flow techniques.
d. PERT/CPM analysis.

Belmont Company manufactures and sells shirts and gloves in its two-department plant. Belmont employs linear
programming to determine its optimum product mix. Economic data pertaining to the two products are presented as
follows
Shirt(S) Gloves, Pair (G)
Selling price per unit P22 P40
Cost data per unit
Variable manufacturing cost 8 12
Variable selling expense 2 4
Fixed manufacturing cost 5 9
Fixed selling expense 1 2
Direct Labor Data
Cutting Finishing
Shirt(S) 10 minutes 15 minutes
Gloves, pair(G) 6 minutes 30 minutes
Monthly capacity 960 hours 1,920 hours

57. The algebraic formulation of Belmont's objective function is

a. MAX Z= 10S + 16G.
b. MAX Z = 14S+28G.
c. MAX Z = 12S+ 24G.
d. MAX Z= 7S+ 15G.

58. The algebraic formulation of Belmont's monthly direct labor constraints is

a. 10S+ 15S+ 6G+ 30G ≤2,880.
b. 1/6S+ 1/4S+ 1/10G+ 1/2G ≤2,880.
c. 1/6S-1/10G >960; 1/4S - 1/2G ≤1,920.
d. 1/6S+ 1/10G ≤960; 1/4S+ 1/2G ≤1,920.

59. The algebraic formulation of the monthly nonnegativity constraints is

a. S. G >0.
b. S. G<0.
c. S. G=0.
d. S, G≥0.
ReMetal, Inc. uses the following model to determine blends of new (n) metal and scrap (s) metal.
Max Z = P30N + P70S
subject to:
3N+2S ≤15
2N+4S ≤18
60. These mathematical functions are an example of a(n)
A. Parametric model. C. Economic order quantity model.
B. Present value model. D. Linear programming model.

61. The two inequality functions are

A. Constraints. B. Objectives. C. Conditions. D. Shadow prices.

62. The point where N = 2 and S = 3 would

A. Be the optimal solution point. C. Lie in a corner.
 B. Be a feasible point. D. Minimize cost.

63. Merlin company has excess capacity on two machines, 24 hours on machine 105 and 16 hours on machine
107. To lize this excess capacity, the company has two products, known as Product D and Product F, that must
use both machines in manufacturing. Both have excess product demand, and the company can sell as many
units as it can manufacture. The company's objective is to maximize profits.

Product D has an incremental profit of P6 per unit, and each unit utilizes 2 hours of time on Machine 105
and then 2 hours of time on Machine 107. Product F has an incremental profit of P7 per unit, and each unit
utilizes 3 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 company's profit. A feasible solution for
Merlin Company is where
A. D=2 and F=8.
B. D=6 and F = 4.
C. D= 12 and F = 0.
D. D=8 and F = 3.

64. Heniser Pet Foods manufactures two products, X and Y. The unit contribution margins for Products X and Y are P30
and P50, respectively. Each product uses Materials A and B. Product X uses 6 pounds of Material A and 12 pounds of
Material B. Product Y uses 12 pounds of Material A and 8 pounds of Material B. The company can purchase only 1,200
pounds of Material A and 1,760 pounds of Material B. The optimal mix of products to manufacture is
A. 146 units of X and 0 units of Y.
B. O units of X and 100 units of Y.
C. 120 units of X and 40 units of Y.
D. 40 units of X and 120 units of Y.

65. Yummy-for-Your-Tummy, Inc. is introducing a new line of diet specialty dog food composed of genetically altered
com and wheat. There will be two types of dog food, "Puppy" and "Inactive Dog," with expected unit profits of P10 and
P15, respectively. The number of pounds of corn and wheat needed per unit of Puppy food is 2 and 3, respectively. The
number of pounds of corn and wheat needed per unit of Inactive Dog food is 4 and 2, respectively. A local mill delivers
100 pounds of corn and 80 pounds of wheat weekly. What is the optimal weekly production schedule?
A. 0 Puppy: 25 Inactive Dog
B. 20 Puppy: 10 Inactive Dog
C. 10 Puppy, 20 Inactive Dog
D. 15 Puppy; 17.5 Inactive Dog

66. Quality control programs employ many tools for problem definition and analysis. A scatter diagram is one of these
tools. The objective of a scatter diagram is to
a. Display a population of items for analysis.
b. Show frequency distribution in graphic form.
c. Divide a universe of data into homogeneous groups.
d. Show the vital trend and separate trivial items.

67. Shadow prices in linear programming solutions are ordinarily considered to be the same as
a. Relevant costs.
b. Differential cost.
c. Alternative costs.
d. Opportunity costs.

68. Through the use of decision models, managers thoroughly analyze many alternatives and decide on the best
alternative for the company. Often the actual results achieved from a
particular decision are not what was expected when the decision was made. In addition, an alternative that was not
selected would have actually been the best decision for the company. The appropriate technique to analyze the
alternatives by using expected inputs and altering them before a decision is made is
A. Expected value analysis.
B. Linear programming.
C. Program Evaluation Review Technique (PERT).
D. Sensitivity analysis.

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