BUSOBA 2321 EXAM 1 FULLY REVISED AND UP-
TO-DATE COLLECTION
indifference point - ANSWER -good tool when deciding between 2 alternatives
- equal value for the alternative options
-cost or profit is equal at a certain quantity (equal to each other)
-decisions only differ at an indifference point
- when slope/contribution profit is equal, the lines will never intersect and there
will be no indifference point. one line will always be higher than the other
indifference table - ANSWER
1. set the alternative equations equal to one another, find the indifference points
2. place the indifference points in a table, arranged from lowest to highest
3. choose the test points
4. calculate the costs/profit for EACH alternative
5. calculate HIGHEST PROFIT or LOWEST COST and that is the choice you
will make in each range of quantity
6. create the decision rules; can add consecutive options
How many indifference possibilities exist? - ANSWER # of pairs = k(k-1) / 2
where k = # of options
breakeven point - ANSWER -breakeven is the production and sales level at
which cost and revenue are equal to each other.
-this crossover analysis allows a company to determine the point (in units of
number) at which they would be indifferent to the costs created by the two
different machines.
-BC profit = zero, contribution margin will only have to break even FC
Decision Analysis Steps - ANSWER
1. Define the problem
2. List all possible alternatives (options we have control)
, 3. List all possible possible states of nature (no control)
4. Identify payoff (outcome) for each combination
5. Select modeling technique and make a decision (risk aversion of decision
maker depends on it)
Decision situation types - ANSWER - certainty: full information regarding
outcomes is available; merely choose the best
- uncertainty: no info regarding probability of a state of nature
- risk: probabilistic (p) information regarding occurrence of states of nature;
probabilities must add up to 100% (p)(1-p)
EMV (Expected Monetary Value) - ANSWER - for each alternative, calculate
by Σ (probability of outcome) x (payoff of outcome); want highest
- EMV calculations to evaluate decision trees
- Payoffs from payoff table
Equally Likely (Laplace method) - ANSWER - probability of each state of
nature is UNKNOWN, hence all states of nature are assumed to be equally
likely
- select alternative with highest average payoff
- average payoff = sum of payoffs for each alternative / n
EOL (expected opportunity loss) - ANSWER - for each alternative, calculate by
Σ (chance of outcome) x (regret of outcome); want smallest
- Using values from regret table
decision trees - ANSWER - model best to use concept of time
- shows order of more than one decision and more than one outcome
- CONSTRUCTED left to right
- SOLVED right to left
nodes of decision trees - ANSWER - circles: states of nature, calculate EMV
- square: decision (maximum EMV)
- triangle or vertical line: indicate terminal end of tree branch
TO-DATE COLLECTION
indifference point - ANSWER -good tool when deciding between 2 alternatives
- equal value for the alternative options
-cost or profit is equal at a certain quantity (equal to each other)
-decisions only differ at an indifference point
- when slope/contribution profit is equal, the lines will never intersect and there
will be no indifference point. one line will always be higher than the other
indifference table - ANSWER
1. set the alternative equations equal to one another, find the indifference points
2. place the indifference points in a table, arranged from lowest to highest
3. choose the test points
4. calculate the costs/profit for EACH alternative
5. calculate HIGHEST PROFIT or LOWEST COST and that is the choice you
will make in each range of quantity
6. create the decision rules; can add consecutive options
How many indifference possibilities exist? - ANSWER # of pairs = k(k-1) / 2
where k = # of options
breakeven point - ANSWER -breakeven is the production and sales level at
which cost and revenue are equal to each other.
-this crossover analysis allows a company to determine the point (in units of
number) at which they would be indifferent to the costs created by the two
different machines.
-BC profit = zero, contribution margin will only have to break even FC
Decision Analysis Steps - ANSWER
1. Define the problem
2. List all possible alternatives (options we have control)
, 3. List all possible possible states of nature (no control)
4. Identify payoff (outcome) for each combination
5. Select modeling technique and make a decision (risk aversion of decision
maker depends on it)
Decision situation types - ANSWER - certainty: full information regarding
outcomes is available; merely choose the best
- uncertainty: no info regarding probability of a state of nature
- risk: probabilistic (p) information regarding occurrence of states of nature;
probabilities must add up to 100% (p)(1-p)
EMV (Expected Monetary Value) - ANSWER - for each alternative, calculate
by Σ (probability of outcome) x (payoff of outcome); want highest
- EMV calculations to evaluate decision trees
- Payoffs from payoff table
Equally Likely (Laplace method) - ANSWER - probability of each state of
nature is UNKNOWN, hence all states of nature are assumed to be equally
likely
- select alternative with highest average payoff
- average payoff = sum of payoffs for each alternative / n
EOL (expected opportunity loss) - ANSWER - for each alternative, calculate by
Σ (chance of outcome) x (regret of outcome); want smallest
- Using values from regret table
decision trees - ANSWER - model best to use concept of time
- shows order of more than one decision and more than one outcome
- CONSTRUCTED left to right
- SOLVED right to left
nodes of decision trees - ANSWER - circles: states of nature, calculate EMV
- square: decision (maximum EMV)
- triangle or vertical line: indicate terminal end of tree branch
