What is the expected value of perfect information about the state of the economy?
Paper , Order, or Assignment Requirements
Task
QUESTION 1 Decision Analysis
Show all calculations to support your answers. You may follow the methods shown in the mp4 on Decision Analysis for a way to do part (b) of this question if you wish.
20 marks – 10 for (a), 10 for (b).
a) People frequently use three heuristics to assess probabilities and to predict values. Identify and describe these heuristics and identify and explain a bias to which each of these heuristics lead.
b) Martha Jones is considering investing money in three alternative investments over a one-year period. Below are the expected profits from each investment given assumptions about the state of the economy:
Decision Alternative
Good Economy
Poor Economy
Stock market
$200,000
-$60,000
Bonds
$80,000
$45,000
Term deposit
$45,000
$35,000
i) If Martha is an optimist which investment should she choose?
ii) If Martha is a pessimist which investment should she choose?
iii) Following the criterion of regret which investment should she choose?
iv) If Martha believes that there is a 65% chance of a good economy which investment should she choose?
v) What is the expected value of perfect information about the state of the economy?
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.
20 marks – 4 for (a), 8 for (b), 2 for (c), 6 for (d)
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 new product being good (s1) is 0.3 and the probability that demand will be poor (s2) is 0.7.
In evaluating the two production methods the manufacturer has calculated the following table of conditional profits:
s1
s2
a1
30,000
16,000
a2
10,000
24,000
a) Which production method should be used? Show calculations.
The manufacturer asks a marketing consult for an opinion as to whether demand will be good or poor. From previous experience when the consultant has indicated that demand will be good she has been right 80% of the time, and when she has indicated that demand will be poor she has been right 65% of the time.
b) Revise the prior probabilities in light of the consultant’s track record.
c) What is the posterior probability of good demand given that the consultant has indicated demand will be good?
d) What is the expected net gain or loss from engaging the consultant? Should the consultant be engaged? Explain the reasoning for your answer.
QUESTION 3 Simulation
This is a work integrated assessment item. The tasks are similar to what would be carried out in the workplace.
10 marks
A general practice has a nurse to attend patients with wounds and who need vaccinations. From an analysis of one week’s operation of the nursing service the following data were derived:
Time between arrivals
Number of occasions
10
10
15
20
20
25
25
30
30
15
Service time (minutes)
Number of occasions
10
40
15
20
20
20
30
10
30
10
Using Excel set up a simulation model to simulate about 2 hours (120 minutes) from time zero, and determine whether one nurse is sufficient or whether a second nurse is needed in the practice.
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.
QUESTION 4 Regression Analysis and Cost Estimation
20 marks – 4 for (a), 12 for (b), 4 for (c).
Quick Copy has recorded the following Maintenance Costs and two possible cost drivers over the last year.
Month
Number of photocopies
Hours of maintenance service
Maintenance costs
January
80,000
525
4,710
February
68,000
505
4,310
March
69,000
310
2,990
April
64,000
495
4,200
May
90,000
315
3,000
June
85,000
485
4,215
July
55,000
315
2,950
August
85,000
405
3,680
September
62,000
475
4,100
October
82,000
345
3,250
November
60,000
350
3,260
December
70,000
335
3,015
a) Using the High-Low method of cost estimation and Number of Photocopies as the cost driver, what would be the resulting cost equation for Maintenance Costs?
b) Using Excel, perform three regression analyses to regress Maintenance Costs against Number of Photocopies, then against number of Hours of Maintenance Service, then against both of them simultaneously. Paste your results into Word. State the cost equation from each. Prepare a report to management including an analysis and comment on the results of each regression with a reasoned recommendation of the best cost driver to use in the future.
c) If the simple regression using Number of Photocopies were adopted, what would be the predicted overhead in a month when there were 85,000 photocopies and 500 hours of maintenance service?
QUESTION 5 CVP Analysis
20 marks – 4 for (a), 4 for (b), 4 for (c), 8 for (d).
A smart phone manufacturer makes two types of smart phones, Connect32 and Connect64. He has sales staff who sell the phones on commission. The following data are available:
Product
Sales Price
Variable Production Cost
Sales Commission
Connect32
$600
$100
$20
Connect64
$850
$375
$35
Fixed costs per annum are $120,000.
a) Calculate the unit contribution margin for each product.
b) This year the manufacturer will specialise in making only Connect32 phones. How many does he need to sell to break even?
c) If Connect32 phones are still the only product what is the breakeven sales volume for the year in sales dollars?
d) He now decides to manufacture both phones this year in the ratio of 3 Connect64 to 1 Connect32.
How many of each phone must be sold to earn a profit of $195,000 before tax for the year?
How many of each phone must be sold to earn a profit of $140,000 after tax (of 30c in the dollar) for the year?
Question 6 Forecasting
10 marks – 2 for (a), 2 for (b), 2 for (c) and 4 for (d).
Use Excel QM software to generate your answers to parts a), b) and c). Paste the results, both the answers and the formulas into your Word document. Both should show row and column numbers.
The following data has been collected for the demand for 20 kg bags of potting mix for the Grow-Well Garden Supplies Company.
Year
Demand for potting mix (1,000 of bags)
1
4
2
6
3
4
4
5
5
10
6
8
7
7
8
9
9
12
10
14
11
15
a) Develop a 3 year moving average to forecast sales.
b) Estimate demand with a weighted moving average in which sales in the most recent year are given a weight of 2 and sales in the other 3 years are each given a weight of 1.
c) Develop a trend line for the demand for potting mix.
d) Which of the three methods above, 3 year moving average, a weighted moving average or a trend line would you use. Explain your answer.
Rationale
This assessment task covers topics 3,4,5,6 and 8: Decision analysis and value of information, simulation, correlation and regression analysis and CVP analysis. Specifically, it seeks to assess your ability to complete the following subject learning outcomes:
apply decision theory to business situations
use simulation in complex decisions
demonstrate understanding of the application of statistical hypothesis testing in regression analysis
apply CVP analysis to product mix decisions involving single and multiple products
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