PART 4C D. Some amount other than those given.

Quantitative Methods for

Decision Analysis [6] Source: CMA 0685 5-15
354 Questions (Refers to Fact Pattern #1)
The median value for daily sales for this period is

[1] Source: CMA 0683 5-14 A. 300.

Dick Rixard is a quality control specialist for the Lasser
Company. Lasser makes ball bearings that require close B. 100.
tolerances. In a recent production run Rixard found that the
bearings had an average diameter of .755 inches with a C. 160.
standard deviation of .01 inches for a sample of 100
bearings. In his quality control testing he uses a 95% D. 175.
confidence interval. If the Z score is 1.96, the lower
boundary of the confidence interval for this production run
is [7] Source: CMA 0685 5-8
The use of a decision tree is appropriate for decision
A. .755 inches. making under conditions of

B. .7354 inches. A. Uncertainty and risk.

C. .7746 inches. B. Uncertainty and subjective likelihoods.

D. Some amount other than those given. C. Certainty.

D. Risk.
[2] Source: CMA 0683 5-16
Two firms share customers in the same market. Firm A
sampled its customers' buying habits and found that about [8] Source: CMA 1286 5-1
70% of its customers were repeat customers each week, Management accountants help develop and maintain
while 30% went to Firm B. Firm B found that 80% of its reporting systems that are aligned with organizational
customers remained loyal each week, while 20% switched structures and that provide useful information on an
to Firm A. If this retention and loss of customers continues organization's performance. Management decision
for a long period, the percentage of customers Firm A will processes fall into three categories:
have is
A. Nonrepetitive, nonprogrammed, and nonstrategic.
A. 70%.
B. Repetitive, nonprogrammed, and strategic.
B. 80%.
C. Repetitive, nonprogrammed, and nonstrategic.
C. 60%.
D. Nonrepetitive, nonprogrammed, and strategic.
D. 40%.

[3] Source: CMA 0683 5-17 [Fact Pattern #2]

CLT Company has three sales departments. Department A Mulvey Company derived the following cost relationship
processes about 50% of CLT's sales, Department B about from a regression analysis of its monthly manufacturing
30%, and Department C about 20%. In the past, overhead cost:
Departments A, B, and C had error rates of about 2%,
5%, and 2.5%, respectively. A random audit of the sales C = $80,000 + $12M
records yields a recording error of sufficient magnitude to If C = monthly manufacturing overhead cost
distort the company's results. The probability that M = machine hours
Department A is responsible for this error is The standard error of the estimate of the regression is
$6,000.
A. .50.
The standard time required to manufacture one six-unit
B. .33. case of Mulvey's single product is 4 machine hours. Mulvey
applies manufacturing overhead to production on the basis
C. .02. of machine hours, and its normal annual production is
50,000 cases.
D. .25.
[9] Source: CMA 1285 5-17
(Refers to Fact Pattern #2)
Mulvey's estimated variable manufacturing overhead cost
for a month in which scheduled production is 5,000 cases
[5] Source: CMA 0685 5-14 would be
(Refers to Fact Pattern #1)
The modal value for daily sales for this period is A. $80,000.

A. 300. B. $320,000.

B. 100. C. $240,000.

C. 160. D. $360,000.
 choices based on past sales data. The assignments are as
follows.
[10] Source: CMA 1285 5-18
(Refers to Fact Pattern #2) Model Random Numbers
Mulvey's predetermined fixed manufacturing overhead rate --------- -----------------
would be P104 0-1
X104 2-6
A. $1.60 per machine hour. A104 7-8
S104 9
B. $3.20 per machine hour.
[15] Source: CMA 0688 5-25
C. $4.00 per machine hour. (Refers to Fact Pattern #3)
The probability that a customer will select model P104 is
D. $4.80 per machine hour.
A. 10%.

[11] Source: CMA 1285 5-26 B. 20%.

A sales supervisor is concerned with what appear to be
unusually high travel expenses of one salesperson. The C. 50%.
measure by which the sales supervisor can best evaluate
the difference between the expenses of one salesperson D. Some percentage other than those given.
and those of other salespersons is the

A. Mode. [16] Source: CMA 0688 5-26

(Refers to Fact Pattern #3)
B. Median. In running a simulation of the computer demand, the
following numbers are drawn in sequence: 2, 8, and 6. The
C. Coefficient of correlation. simulation indicates that the third customer will purchase.

D. Standard deviation. A. Model P104.

B. Model X104.

[12] Source: CMA 1286 5-7 C. Model A104.

A t-test is a statistical test used to compare the
D. Model S104.
A. Variances of two distributions.

B. Independence of two variables. [17] Source: CMA 1288 5-5

Which one of the following statements does not apply to
C. Correlation of two variables. decision tree analysis?

D. Means of two distributions. A. The sum of the probabilities of the events is less
than one.

[13] Source: CMA 0688 5-19

Under conditions of risk, the rational, economic decision B. All of the events are mutually exclusive.
maker will use which one of the following decision criteria?
C. All of the events are included in the decision.
A. Maximax.
D. The branches emanate from a node from left to
B. Minimax. right.

C. Minimum regret.
[18] Source: CMA 1288 5-14
D. Expected monetary value. Ron Bagley is contemplating whether to investigate a labor
efficiency variance in the Assembly Department. It will cost
$6,000 to undertake the investigation and another $18,000
[14] Source: CMA 0688 5-18 to correct operations if the department is found to be
A decision maker is operating in an environment in which operating improperly. If the department is operating
all the facts surrounding a decision are known exactly, and improperly and Bagley failed to make the investigation,
each alternative is associated with only one possible operating costs from the various inefficiencies are expected
outcome. The environment is known as to amount to $33,000. Bagley would be indifferent
between investigating and not investigating the variance if
A. Certainty. the probability of improper operation is

B. Risk. A. 0.29.

C. Uncertainty. B. 0.40.

D. Conflict. C. 0.60.

D. 0.71.
[Fact Pattern #3]
A computer store sells four computer models designated as
P104, X104, A104, and S104. The store manager has [Fact Pattern #4]
made random number assignments to represent customer The management at Altron Corporation is evaluating two
new products to undertake during the next 1-year period, D. Choose to introduce calculators because the
digital clocks and calculators. For each product, the product has the lesser risk.
Marketing Department has estimated the possible net cash
flows and the probability of each cash flow.
[22] Source: CMA 0689 5-17
Digital Clocks Calculators A quantitative technique useful in projecting a firm's sales
------------------------ ----------------------- and profits is
Probability Cash Flow Probability Cash Flow
----------- --------- ----------- ----------
25% $4,000 10% $ 0 A. Probability distribution theory.
50 5,000 50 3,000
25 8,000 40 10,000 B. Gantt charting.
Since both products have equal expected values of $5,500,
management is still undecided. John Wills, a financial C. Learning curves.
analyst, has suggested that the calculation of the standard
deviation for each product's cash flows may aid in the D. Queuing theory.
decision. He used the following data.

1/2 [Fact Pattern #5]

ﾚ ｿ A company is considering three alternative machines to
ｳn _ ｳ produce a new product. The cost structures (unit variable
S = ｳ・X - X)ｲ P ｳ costs plus avoidable fixed costs) for the three machines are
shown as follows. The selling price is unaffected by the
ｳ e eｳ machine used.
ﾀ ﾙ
e =1 Single purpose machine $.60x + $20,000
X = individual cash flows. Semiautomatic machine $.40x + $50,000
e Automatic machine $.20x + $120,000
_ The demand for units of the new product is described by
X = expected value of all cash flows. the following probability distribution.
P = probabilities assigned to each cash flow.
e Demand Probability
------------ ------------
200,000 0.4
[19] Source: CMA 1288 5-25 300,000 0.3
(Refers to Fact Pattern #4) 400,000 0.2
John Wills is using the standard deviation to assist in the 500,000 0.1
decision process because he is
[23] Source: CMA 0689 5-26
A. Measuring the size of the constraints. (Refers to Fact Pattern #5)
Ignoring the time value of money, the expected cost of
B. Determining the frequency of an event. using the semiautomatic machine is
C. Measuring the dispersion of the probability for A. $170,000.
each event.
B. $130,000.
D. Measuring the range of each event.
C. $210,000.
[20] Source: CMA 1288 5-26 D. $250,000.
(Refers to Fact Pattern #4)
The standard deviation of the cash flows of the digital
clocks is [24] Source: CMA 0689 5-27
(Refers to Fact Pattern #5)
A. $2,250,000.00. Using the expected value criterion,
B. $1,500.00. A. The single purpose machine should be used
because of the low expected demand.
C. $750.00.
B. The automatic machine should be used because of
D. $353.55. the high expected demand.

C. The semiautomatic machine should be used

[21] Source: CMA 1288 5-27 because it has the lowest expected cost.
(Refers to Fact Pattern #4)
If the standard deviation for the cash flows of the D. The automatic machine has the lowest expected
calculators is $3,775, the management at Altron would cost.
A. Choose to introduce digital clocks because this
product has the lesser risk. [Fact Pattern #6]
Refer to the profit payoff table below.
B. Choose to introduce calculators because this
product has a 40% probability for the highest cash Demand in Units
flow. ---------------------------------------
0 2 4 6
C. Not choose either product. Probability of Demand
Supply ---------------------------------------
in Units 0.1 0.3 0.4 0.2 D. Monitor internal control applications in EDP
-------- ----- ----- ----- ----- operations.
0 $0 $0 $0 $0
2 (80) 40 40 40
4 (160) (40) 80 80 [Fact Pattern #7]
6 (240) (120) 0 120 The College Honor Society sells hot pretzels at the home
football games. The pretzels are sold for $1.00 each, and
[25] Source: CMA 0689 5-28 the cost per pretzel is $.30. Any unsold pretzels are
(Refers to Fact Pattern #6) discarded because they will be stale before the next home
The expected profit when supply equals 4 units, is game.

A. $(40). The frequency distribution of the demand for pretzels per

game is presented as follows.
B. $80.
Unit Sales Volume Probability
C. $20. ------------------ -------------
2,000 pretzels .10
D. $(10). 3,000 pretzels .15
4,000 pretzels .20
5,000 pretzels .35
[26] Source: CMA 0689 5-29 6,000 pretzels .20
(Refers to Fact Pattern #6)
The expected profit with perfect information is [30] Source: CMA 1289 5-20
(Refers to Fact Pattern #7)
A. $28. The estimated demand for pretzels at the next home
football game using an expected value approach is
B. $20.
A. 4,000 pretzels.
C. $(36).
B. 4,400 pretzels.
D. $68.
C. 5,000 pretzels.

[27] Source: CMA 0689 5-30 D. Some amount other than those given.
(Refers to Fact Pattern #6)
The price one is willing to pay for perfect information is
[31] Source: CMA 1289 5-21
A. $68. (Refers to Fact Pattern #7)
The estimated demand for pretzels at the next home
B. $40. football game using a deterministic approach based on the
most likely outcome is
C. $48.
A. 4,000 pretzels.
D. $104.
B. 4,400 pretzels.

[28] Source: CMA 1289 5-13 C. 5,000 pretzels.

Simple regression analysis may be used to approximate the
relationship between two variables, e.g., direct labor hours D. 6,000 pretzels.
and total product cost. This technique is

A. Most appropriate when the relationship between [32] Source: CMA 1289 5-22
the two variables is expressed by an exponential (Refers to Fact Pattern #7)
(non-linear) graph. The conditional profit per game of having 4,000 pretzels
available but only selling 3,000 pretzels is
B. Based on a two-dimensional model and the
A. $1,800.
formula, y = a + bx.
B. $2,100.
C. Useful in determining variable costs per unit
produced, but is not related to fixed costs. C. $2,800.

D. Quantitative, but is not expressed graphically. D. Some amount other than those given.

[29] Source: CMA 1289 5-15 [33] Source: CMA 1289 5-23
Statistical quality control often involves the use of control (Refers to Fact Pattern #7)
charts whose basic purpose is to The conditional profit per game of having 4,000 pretzels
available and selling all 4,000 pretzels is
A. Determine when accounting control procedures
are not working. A. $1,200.

B. Control labor costs in production operations. B. $2,100.

C. Detect performance trends away from normal C. $2,800.

operations.
D. $800.
 C. Expected value analysis.
[34] Source: CMA 1289 5-24
(Refers to Fact Pattern #7) D. Monte Carlo simulation.
The conditional profit (loss) per game of having 4,000
pretzels available but being able to sell 5,000 pretzels if
they had been available is [38] Source: CMA 0690 5-25
In decision making under conditions of uncertainty,
A. $2,800. expected value refers to the

B. $(1,225). A. Likely outcome of a proposed action.

C. $4,025. B. Present value of alternative actions.

D. $3,500. C. Probability of a given outcome from a proposed

action.

[Fact Pattern #8] D. Weighted average of probable outcomes of an

Stan Berry is considering selling peanuts at the Keefer High action.
School football games. The peanuts would cost $.50 per
bag and could be sold for $1.50 per bag. No other costs
would be incurred to sell the peanuts. All unsold bags can [39] Source: CMA 0692 4-4
be returned to the supplier for $.30 each. Berry estimated The expected monetary value of an event
the demand for peanuts at each football game and
constructed the payoff table that follows. A. Is equal to the conditional value or profit of the
event.
Action (Bags to Stock)
---------------------- B. Is equal to the payoff of the event times the
Demand Probability probability the event will occur.
(Bags) of Demand 20 30 40 50
------- ---------- ----- ------ ----- ----- C. Is the profit forgone by not choosing the best
20 .2 $20 $18 $16 $14 alternative.
30 .4 $20 $30 $28 $26
40 .3 $20 $30 $40 $38 D. Is the absolute profit from a particular event.
50 .1 $20 $30 $40 $50
Expected value
of action $20.00 $27.60 $30.40 $29.60 [Fact Pattern #9]
A beverage stand can sell either soft drinks or coffee on
[35] Source: CMA 0690 5-17 any given day. If the stand sells soft drinks and the weather
(Refers to Fact Pattern #8) is hot, it will make $2,500; if the weather is cold, the profit
The optimum number of bags of peanuts to stock is will be $1,000. If the stand sells coffee and the weather is
hot, it will make $1,900; if the weather is cold, the profit
A. 20. will be $2,000. The probability of cold weather on a given
day at this time is 60%.
B. 30.
[40] Source: CMA 1292 4-21
C. 40. (Refers to Fact Pattern #9)
The expected payoff for selling coffee is
D. 50.
A. $1,360.

[36] Source: CMA 0690 5-18 B. $2,200.

(Refers to Fact Pattern #8)
The maximum that Stan Berry should pay for perfect C. $3,900.
information so that he could always stock the correct
number of bags of peanuts is
D. $1,960.
A. $.80.

B. $2.60. [41] Source: CMA 1292 4-22

(Refers to Fact Pattern #9)
C. $10.40. The expected payoff if the vendor has perfect information is

D. $30.00. A. $3,900.

B. $2,200.
[37] Source: CMA 0690 5-19
Alsen Company is in the process of preparing its budget. C. $1,360.
As part of the process, the company has prepared sales
estimates and estimated the probability associated with D. $1,960.
each sales estimate. Which one of the following techniques
should be used by Alsen to determine sales for budgeting
purposes? [42] Source: CMA 1292 4-23
(Refers to Fact Pattern #9)
A. Linear programming. If the probability of hot weather given a hot weather
forecast is 50%, how much would the vendor be willing to
B. Minimax regret criteria. pay for the forecast?
 A. $600.
[47] Source: CMA 1293 4-29
B. $300. The modeling technique to be employed in a situation
involving a sequence of events with several possible
C. $1,000. outcomes associated with each event is

D. $500. A. Network analysis.

B. Decision tree analysis.

[43] Source: CMA 1292 4-24
Ryerson Company has three sales departments, each C. Monte Carlo simulation.
contributing the following percentages of total sales:
clothing, 50%; hardware, 30%; and household sundries, D. Linear programming.
20%. Each department has had the following average
annual damaged goods rates: clothing, 2%; hardware, 5%;
and household sundries, 2.5%. A random corporate audit [48] Source: CMA 1286 5-2
has found a weekly damaged goods rate of sufficient Decisions are frequently classified as those made under
magnitude to alarm Ryerson's management. The probability certainty and those made under uncertainty. Certainty exists
(rounded) that this rate occurred in the clothing department when
is
A. The probability of the event is less than 1.0.
A. 50%.
B. There is absolutely no doubt that an event will
B. 1%. occur.

C. 25%. C. There is more than one outcome for each possible

action.
D. 33 1/3%.
D. The standard deviation of an event is greater than
zero.
[44] Source: CMA 1293 4-23
The Madison Company has decided to introduce a new
product. The company estimates that there is a 30% [49] Source: CMA 1286 5-3
probability that the product will contribute $700,000 to Expected value in decision analysis is
profits, a 30% probability that it will contribute $200,000,
and a 40% probability that the contribution will be a A. A standard deviation using the probabilities as
negative $400,000. The expected contribution of the new weights.
product is
B. An arithmetic mean using the probabilities as
A. $500,000. weights.

B. $110,000. C. The square root of the squared deviations.

C. $270,000. D. A measure of the difference between the best

possible outcome and the outcome of the original
D. $430,000. decision.

[45] Source: CMA 1293 4-26 [50] Source: CMA 1286 5-5
The expected value of perfect information is the The average amount of change in a dependent variable that
is associated with a change in an independent variable is
A. Same as the expected profit under certainty. determined through

B. Sum of the conditional profit (loss) for the best A. Factor analysis.
event of each act times the probability of each event
occurring. B. Normal analysis.

C. Difference between the expected profit under C. Correlation analysis.

certainty and the expected opportunity loss.
D. Regression analysis.
D. Difference between the expected profit under
certainty and the expected monetary value of the best
act under uncertainty. [51] Source: CMA 0688 5-2
Thompson Company is in the process of preparing its
budget for the next fiscal year. The company has had
[46] Source: CMA 1293 4-28 problems controlling costs in prior years and has decided
Regression analysis to adopt a flexible budgeting system this year. Many of its
costs contain both fixed and variable cost components. A
A. Estimates the independent cost variable. method that can be used to separate costs into fixed and
variable components is
B. Uses probability assumptions to determine total
project costs. A. Monte Carlo simulation.

C. Estimates the dependent cost variable. B. Dynamic programming.

D. Ignores the coefficient of determination. C. Regression analysis.

 (Refers to Fact Pattern #10)
D. Expected value analysis. The expected value of perfect information is the

A. Same as the expected profit under certainty.

[52] Source: CMA 0688 5-20
The following table contains the profit outcomes for each B. Sum of the conditional profit (loss) for the best
state of nature and decision combination for a firm event of each act times the probability of each event's
occurring.
States of Nature
--------------------------- C. Difference between the expected profit under
S1 S2 S3 uncertainty and conditional profit for the best act
------- -------- ------ under certainty.
Decision 1 $24 $14 $(6)
Decision 2 $20 $10 $5 D. Difference between the expected profit under
Decision 3 $(20) $8 $15 certainty and the expected monetary value of the best
Probabilities 0.10 0.50 0.40 act under uncertainty.
The expected value of perfect information for this firm in
this case is
[57] Source: CMA 1291 4-19
A. $6.40. The modeling technique to be employed in a situation
involving a sequence of events with several possible
B. $8.40. outcomes associated with each event would be

C. $9.00. A. Network analysis.

D. $8.60. B. Decision tree analysis.

C. Monte Carlo simulation.

[53] Source: CMA 1288 5-1
A modeling technique that incorporates the uncertainty D. Queuing theory.
inherent in most decisions is a(n)

A. CPM model. [58] Source: Publisher

Simple linear regression is a method applied when the
B. Linear programming model. underlying relationship between two variables is believed to
be linear. The least squares process estimates this
C. Decision tree analysis. hypothesized true relationship by minimizing the sum of
squared errors of the observations in a sample about a
D. EOQ model. fitted line. Which equation properly represents the
underlying true relationship between variables?

[Fact Pattern #10] A. y = a + x.

The Booster Club at Blair College sells hot dogs at home
basketball games. The group has a frequency distribution of B. y = a + bx.
the demand for hot dogs per game and plans to apply the
expected value decision rule to determine the number of C. y = a + bx + e.
hot dogs to stock.
D. y = a + bxｲ + e.
[54] Source: CMA 0691 4-1
(Refers to Fact Pattern #10)
The expected monetary value of an act is the [Fact Pattern #11]
The formula for the regression equation is y = a + bx + e.
A. Sum of the conditional profit (loss) for each event.
[59] Source: Publisher
B. Sum of the conditional profit (loss) for each event (Refers to Fact Pattern #11)
times the probability of each event's occurrence. The dependent variable is

C. Conditional profit (loss) for the best event times A. a.

the probability of each event's occurrence.
B. y.
D. Revenue minus the costs for the act.
C. b.

[55] Source: CMA 0691 4-2 D. x.

(Refers to Fact Pattern #10)
The Booster Club should select the demand level that
[60] Source: Publisher
A. Is closest to the expected demand. (Refers to Fact Pattern #11)
The y-axis intercept is
B. Has the greatest probability of occurring.
A. a.
C. Has the greatest expected opportunity cost.
B. b.
D. Has the greatest expected monetary value.
C. x.

[56] Source: CMA 0691 4-3 D. e.

 [66] Source: Publisher
If the error term is normally distributed about zero, then
[61] Source: Publisher
(Refers to Fact Pattern #11) A. The parameter estimates of the y-intercept and
The slope of the line is slope also have a normal distribution.

A. y. B. The estimate of the slope can be tested using a

t-test.
B. b.
C. The probability that the error term is greater than
C. x. zero is equal to the probability that it is less than zero
for any observation.
D. e.
D. All of the answers are correct.

[62] Source: Publisher

(Refers to Fact Pattern #11) [67] Source: CIA 0589 III-21
The independent variable is When a decision maker is faced with a decision and the
probabilities of various outcomes are known, the situation
A. a. is said to be decision making

B. y. A. Under risk.

C. b. B. Under uncertainty.

D. x. C. Under certainty.

D. Through satisficing.
[63] Source: Publisher
(Refers to Fact Pattern #11)
The error term is [68] Source: CIA 1194 III-60
A company uses two major material inputs in its
A. a. production. To prepare its manufacturing operations
budget, the company has to project the cost changes of
these material inputs. The cost changes are independent of
B. y. one another. The purchasing department provides the
following probabilities associated with projected cost
C. b. changes:

D. e. Cost Change Material 1 Material 2

------------ ---------- ----------
3% increase .3 .5
[64] Source: Publisher 5% increase .5 .4
The confidence interval for the value of y in the simple 10% increase .2 .1
linear regression equation represents The probability of a 3% increase in the cost of both
Material 1 and Material 2 is
A. A range of values constructed from the regression
equation results for a specified level of probability. A. 15%

B. A variability about the least squares line that is B. 40%

uniform for all values of the independent variable in
the sample. C. 80%

C. The proportion of the variance explained by the D. 20%

independent variable.

D. A measure of the strength of the linear [69] Source: Publisher

relationship. Which of the following is not an attribute of a probability
distribution?

[65] Source: Publisher A. The total probability associated with all possible
In a simple linear regression, constant variance means occurrences equals 1.

A. A range of values constructed from the regression B. It can be modeled by means of a formula or graph
equation results for a specified level of probability. that provides the probability for every possible
outcome.
B. A variability about the least squares line that is
uniform for all values of the independent variable in C. Only one outcome is possible.
the sample.
D. It concerns a random variable.
C. The underlying assumptions of the regression
equation that are not met.
[70] Source: CIA 1189 III-19
D. That errors in successive observations are not Flowcharts and decision trees both show flow or
independent. sequencing. Unlike the flowchart, however, a decision tree
shows
 A. Processing.
B. Under conditions of uncertainty, the first task is to
B. Decision rules. determine the expected value of each of the multiple
outcomes.
C. Input.
C. Under conditions of risk, decisions are solely
D. Outcome probabilities. based on the decision maker's experience and
intuition.

[71] Source: CIA 1195 II-14 D. Under conditions of uncertainty, the first task is to
In a large computer manufacturer, there has been much establish subjective probabilities of occurrence for the
concern about the consistency across departments in multiple outcomes.
adhering to new and unpopular purchasing guidelines. An
auditor has a list that rank-orders all departments according
to the percentage of purchases that are consistent with the [75] Source: Publisher
guidelines and indicates which division the department is The least exact method for separating fixed and variable
from. The auditor performs a t-test for differences in means costs is
on the average rank of departments in divisions A and B to
see if there is any difference in compliance with the policy A. The least squares method.
and finds that division A (which has more departments) has
a significantly higher (i.e., better) average rank than division B. Computer simulation.
B. Which one of the following conclusions should be drawn
from this analysis? C. The high-low method.

A. Division A is complying better with the new D. Matrix algebra.

policy.

B. A random sample of departments should be [76] Source: CIA 0594 III-41

drawn and the analysis recalculated. In forecasting purchases of inventory for a firm, all of the
following are useful except
C. A t-test is not valid when the tested groups differ
in size. A. Knowledge of the behavior of business cycles.

D. A t-test is inappropriate for this data, and another B. Internal allocations of costs to different segments
type of analysis should be used. of the firm.

C. Information on the seasonal variations in demand.

[72] Source: CIA 1188 III-44
In decision theory, those uncontrollable future events that D. Econometric modeling.
can affect the outcome of a decision are

A. Payoffs. [Fact Pattern #12]

Total production costs of prior periods for a company are
B. States of nature. listed. Assume that the same cost behavior patterns can be
extended linearly over the range of 3,000 to 35,000 units
C. Probabilities. and that the cost driver for each cost is the number of units
produced.
D. Nodes.
Production
in units
[73] Source: CMA 1294 4-30 per month 3,000 9,000 16,000 35,000
Sweivel Company is preparing its budget and, taking into Cost X $23,700 $ 52,680 $ 86,490 $178,260
consideration the recent pace of economic recovery, has Cost Y 47,280 141,840 252,160 551,600
developed several sales forecasts and the estimated
probability associated with each sales forecast. To [77] Source: CIA 0594 III-99
determine the sales forecast to be used for budgeting (Refers to Fact Pattern #12)
purposes, which one of the following techniques should What is the average cost per unit at a production level of
Sweivel use? 8,000 units for cost X?

A. Expected value analysis. A. $5.98

B. Continuous probability simulation. B. $5.85

C. Exponential distribution analysis. C. $7.90

D. Sensitivity analysis. D. $4.83

[74] Source: CIA 0593 III-34 [Fact Pattern #13]

Decision makers are normally confronted with a choice A simple two-state cost investigation model calls for a
among feasible choices. Their decisions often have to be decision to investigate if the following inequality holds:
made under conditions of risk or uncertainty, that is, with
less than complete and accurate knowledge of the outcome L(1 - P) > I + C(1 - P)
for each alternative. Which of the following is correct? If: L = excess operating cost if out of control
P = probability that the process is in control
A. Under conditions of risk, there is only one I = cost of investigation
potential outcome for each alternative. C = cost of correction if out of control
 B. .0612
[78] Source: CMA 1287 5-21
(Refers to Fact Pattern #13) C. .0316
The value (1 - P) must be
D. .00375
A. The probability that the process is out of control.

B. A measure of the seriousness of the [83] Source: Publisher

consequences. (Refers to Fact Pattern #14)
Let ｵ denote the true mean calories of all diet sodas
C. The inverse of the probability matrix. produced by ABC Company. What hypothesis should be
tested to determine whether ABC's claim is valid?
D. The transpose of the probability matrix.
A.

[79] Source: CMA 1287 5-22 Ho: ｵ = 1

(Refers to Fact Pattern #13) Ha: ｵ is not equal to 1
The critical probability that the process is in control is B.
A. I/(L - C) - 1. Ho: ｵ ・1
B. (I + C)/L. Ha: ｵ > 1

C.
C. 1 - I/(L - C).

D. Greater than I/C. Ho: ｵ = 1

Ha: ｵ > 1

[80] Source: CIA 0587 III-44 D.

The statistical quality control department prepares a control
chart showing the percentages of defective production. Ho: ｵ = 0
Simple statistical calculations provide control limits that Ha: ｵ < 1
indicate whether assignable causes of variation are
explainable on chance grounds. The chart is particularly
valuable in determining whether the quality of materials [84] Source: Publisher
received from outside vendors is consistent from month to (Refers to Fact Pattern #14)
month. What is the best term for this chart? The appropriate means for testing this hypothesis is

A. C chart. A. A z-statistic.

B. P chart. B. A t-statistic.

C. R chart. C. An F-statistic.

D. X-bar chart. D. A Q-statistic.

[81] Source: CIA 0595 II-48 [85] Source: Publisher

Many firms are beginning to use the statistical processing (Refers to Fact Pattern #14)
control techniques as part of their total quality management The value of the t-statistic is
approach. Which of the following would not constitute a
part of statistical processing control techniques? A. -2.45

A. Acceptance sampling. B. -.05

B. Dollar-unit sampling. C. 2.45

C. Quality control charts. D. 4.65

D. Continuous monitoring and feedback.

[86] Source: Publisher
(Refers to Fact Pattern #14)
[Fact Pattern #14] The appropriate number of degrees of freedom for this
The ABC Company has specified that the mean number of t-statistic is
calories in a can of its diet soda is 1 or less. A consumer
testing service examined nine cans with the following A. 8
amounts of calories: .9, .95, 1.0, 1.05, .85, 1.0, .95, .95,
and .9. The mean of these observations is .95. The sum of B. 9
the squared deviations from the mean is .03. Assume the
underlying population is approximately normal. C. 0

[82] Source: Publisher

(Refers to Fact Pattern #14) D. 1
What is the sample standard deviation?

A. .0577 [87] Source: Publisher

(Refers to Fact Pattern #14) Flesher Farms expects its raspberry crop to have a
The following data are from a table of critical values of t: $120,000 market value. An unprotected crop subject to
frost has an expected market value of $80,000. If Flesher
d.f. t.10 t.05 t.025 protects the raspberries against frost, the market value of
---- ----- ----- ----- the crop is still expected to be $120,000 under frost-free
5 1.476 2.015 2.571 conditions and $180,000 if a frost occurs. What must be
6 1.440 1.943 2.447 the probability of a frost for Flesher to be indifferent to
7 1.415 1.895 2.365 spending $20,000 for tents to provide frost protection?
8 1.397 1.860 2.306
9 1.383 1.833 2.262 A. .167
The value of t defining the rejection region for testing the
hypothesis that ABC's soda has 1 calorie or less per can, B. .200
assuming a 95% confidence level, is
C. .250
A. 2.306
D. .333
B. 1.86

C. 1.833 [92] Source: Publisher

During the past few years, Wilder Company has
D. 2.262 experienced the following average number of power
outages:

[88] Source: Publisher Number per month Number of Months

(Refers to Fact Pattern #14) ---------------- ----------------
What conclusion can be drawn with 95% confidence? 0 3
1 2
A. The manufacturer's claim can be rejected. 2 4
3 3
B. The manufacturer's claim cannot be rejected. --
12
C. No decision is possible based on current ==
information. Each power outage results in out-of-pocket costs of $800.
For $1,000 per month, Wilder can lease a generator to
D. All sodas have at most 1 calorie. provide power during outages. If Wilder leases a generator
in the coming year, the estimated savings (or additional
expense) for the year will be
[89] Source: CMA 0697 4-22
Philip Enterprises, distributor of compact disks (CDs), is A. ($15,200)
developing its budgeted cost of goods sold for 1998. Philip
has developed the following range of sales estimates and B. ($1,267)
associated probabilities for the year:
C. $3,200
Sales Estimate Probability
-------------- ------------- D. $7,200
$ 60,000 25%
85,000 40
100,000 35 [Fact Pattern #15]
Philip's cost of goods sold averages 80% of sales. What is The probabilities shown in the table below represent the
the expected value of Philip's 1998 budgeted cost of goods estimate of sales for a new product.
sold?
Sales (Units) Probability
A. $85,000 ------------ -----------
0-200 15%
B. $84,000 201-400 45%
401-600 25%
C. $68,000 601-800 15%

D. $67,200 [93] Source: Publisher

(Refers to Fact Pattern #15)
What is the probability of selling between 201 and 600
[90] Source: CMA 0697 4-24 units of the product?
The modeling technique to be used for situations involving a
sequence of events with several possible outcomes A. 0%
associated with each event is
B. 11.25%
A. Queuing theory.
C. 70%
B. Dynamic programming.
D. 25%
C. The critical path method.

D. Decision tree analysis. [94] Source: Publisher

(Refers to Fact Pattern #15)
What is the best estimate of the expected sales of the new
[91] Source: Publisher product?
Under favorable weather conditions, the management of
 A. 480 C. Indicate the null hypothesis is false.

B. 380 D. Fail to prove the error rate is above 0.5%.

C. 400
[Fact Pattern #17]
D. 800 Brown Maintenance Services has been performing
technical maintenance service on a wide variety of business
machines for small businesses in a large metropolitan area
[Fact Pattern #16] for many years. Brown has been considering a change in its
The table below shows the estimated probabilities of the fee structure. The analysis requires a probability distribution
proportions of defective units resulting from a production for each week for the number of anticipated service calls
run. Each defective unit costs the company $100, and each related to each of several different types of equipment.
production run consists of 100 units.
[99] Source: Publisher
Percentage Defective Probability (Refers to Fact Pattern #17)
-------------------- ----------- Phil Brown suggested establishing the distribution using the
1% 20% relative frequency of various numbers of weekly service
2% 20% calls over the last 4 years. The following tabulation was
3% 30% prepared:
4% 20%
5% 10% Number of Calls Number of Occurrences
--------------- ---------------------
[95] Source: Publisher 801-850 4
(Refers to Fact Pattern #16) 851-900 10
The expected percentage of defective units is 901-950 80
951-1,000 40
A. 2.80% 1,001-1,050 20
1,051-1,100 12
B. 3.00% 1,101-1,150 12
1,151-1,200 10
C. 0.90% 1,201-1,250 8
1,251-1,300 4
D. 3.45% Based on this probability distribution, the probability of
more than 1,150 calls for service during a given week is

[96] Source: Publisher A. .06

(Refers to Fact Pattern #16)
The variance of the percentage of defective units is B. .89

A. 0.00% C. .17

B. 3.16% D. .11

C. 10.20%
[100] Source: Publisher
D. 1.56% (Refers to Fact Pattern #17)
Billy Brown disagreed with his brother, arguing that the
number and size of the companies with which they held
[97] Source: Publisher maintenance contracts had changed recently. He concluded
(Refers to Fact Pattern #16) that this past experience was not relevant, and the firm
The company hires a worker to oversee the machinery and would be better off recognizing their ignorance of the future
assure that no defective units are produced. What is the in the rate restructuring. Billy proposed the assumption of a
breakeven amount per production run to be paid to the uniform distribution with every possible number of calls
worker? from 801 to 1,300 being equally likely. Based on this
uniform distribution, the probability of more than 1,150
A. $100 calls during a week is

B. $200 A. .40

C. $280 B. .30

D. $295 C. .70

D. .20
[98] Source: CIA 1191 II-39
An audit of accounts payable was made to determine if the
error rate was within the stated policy of 0.5%. One [101] Source: Publisher
hundred of the 10,000 accounts payable transactions were Two projects are going to be implemented. The probability
randomly selected using a 95% confidence level. No errors for positive cash flows in each one is 1/2, and the
were found. With 95% certainty, one can conclude that the probability for negative cash flows in each one is 1/2. What
sample results is the probability that at least one of the projects will have
positive cash flows?
A. Indicate another sample is needed.
A. 0.5
B. Prove there are no errors in accounts payable.
B. 0.67
 C. $767.00
C. 0.75
D. $366.67
D. 0.95

[Fact Pattern #18]

[102] Source: Publisher Stock A has the following possibilities for earnings in the
Pongo Company's managers are attempting to value a 2000 year:
piece of land that they own. One potential occurrence is
that the old road that borders the land gets paved. Another Earnings Probability
possibility is that the road does not get paved. A third ---------- -----------
outcome is that the road might be destroyed and $1,000,000 18%
completely replaced by a new road. Based on the following $1,200,000 15%
future states of nature, their probabilities, and subsequent $1,700,000 24%
values of the land, what is the expected value of the land? $2,600,000 22%
$3,300,000 21%
Future States of Nature (SN) Probability
--------------------------------- ----------- [105] Source: Publisher
SN 1: Current road gets paved .5 (Refers to Fact Pattern #18)
SN 2: Road does not get paved .4 What are the expected earnings for Stock A in 2001?
SN 3: Current road destroyed and
replaced with new road .1 A. $843,000
Estimates of land value under each possible future state of
nature: B. $1,333,333

Value if SN 1: $200,000 C. $1,960,000

Value if SN 2: $100,000
Value if SN 3: $550,000 D. $2,033,000
A. $133,333

B. $195,000 [106] Source: Publisher

(Refers to Fact Pattern #18)
C. $225,000 What is the variance of potential earnings of Stock A?

D. $283,333 A. $854,758

B. $223,111,000,000
[103] Source: Publisher
Bobby, a market analyst for Investing Magazine, is C. $576,272,000,000
analyzing the stock of Vandelay Industries. Bobby decides
to use the market data for the year to date to approximate D. $730,611,000,000
the standard deviation on monthly returns for Vandelay.
Given the following, what should Bobby estimate the
standard deviation to be? [107] Source: CMA Samp Q1-3
A U.S. company currently has domestic operations only. It
Month Return is considering an equal-size investment in either Canada or
-------- --------- Britain. The data on expected rate of return and the risk
January 10% associated with each of these proposed investments are
February 2% given below.
March 19%
April 25% Mean Standard
May 13% Proposed Investment Return Deviation
June 9% ------------------- ------ ---------
A. 4.79 British Investment 22% 10%
Canadian Investment 28% 15%
B. 8.07 The mean return on the company's current (domestic only)
business is 20%, with a standard deviation of 15%. Using
C. 14.53 the above data and the correlation coefficients, the
company calculated the following portfolio risk and return
D. 22.91 (based on a ratio of 50% U.S. domestic operations and
50% international operations).

[104] Source: Publisher Mean Standard

SuperTrucks Corporation is undertaking a new division of Investments Return Deviation
transport truck production for the upcoming calendar year. ---------------- ------ ---------
In the division's first year, management for SuperTrucks U.S. and Britain 21% 3%
has predicted that there is a 20% chance that cash inflows U.S. and Canada 24% 15%
from the new division will be $8,000, a 30% chance that The company plans to select the optimal combination of
cash inflows will be $12,000, and a 50% chance that cash countries based on risk and return for the domestic and
inflows will be $10,000. What is the standard deviation of international investments taken together. Based on the
the expected cash flows for SuperTrucks Corporation's above data, which one of the following alternatives
new division? provides the best risk adjusted return to the firm?

A. $2,720.00 A. Undertake the British investment.

B. $1,400.00 B. Undertake the Canadian investment.

 C. Do not undertake either investment. D. Dynamic programming.

D. Unable to determine based on data given.

[111] Source: CMA 1280 5-15
A car rental agency has a policy of replacing the tires on its
[108] Source: Publisher car fleet as the tires wear out. Management wonders if
An enterprise intends to insure its building against 100% of there would be any cost savings if the tires are periodically
any fire loss, that is, for an amount equal to the full fair replaced at one time on its fleet of 500 cars. The technique
value of $2,000,000. The following is the probability the car rental agency would find most useful is
distribution of potential property losses from fire for the
year that the insurance policy will be effective: A. Statistical sampling.

Amount of Loss With B. Probability analysis.

Probability (Without) an Alarm System
----------- ------------------------- C. Linear programming.
90% $ 0
5% 100,000(50,000) D. Learning curve techniques.
3% 1,000,000(500,000)
.2% 2,000,000(1,000,000)
The enterprise estimates that an alarm system will reduce [Fact Pattern #19]
the amount of fire loss by 50%. Furthermore, the Redler Company manufactures and sells an industrial
installation of an alarm system will reduce the annual fire strength cleaning fluid. The equations presented as follows
insurance premium by 24%. The annual premium without represent the revenue (R) and cost (C) functions for the
an alarm system is $50,000, and the annual cost of such a company where x is equal to 1,000 gallons of fluid.
system is $2,000. Which course of action should the
enterprise adopt to minimize its costs? 2
R(x) = - $100 + $26x - $0.05x
Insure the Building Install the Alarm System 2
------------------- ------------------------ C(x) = $50 + $8x + $0.01x
A.
[112] Source: CMA 0681 5-10
Yes Yes (Refers to Fact Pattern #19)
B. The function that represents the marginal cost to
manufacture 1 gallon of cleaning fluid is
Yes No
C. A. $8x + $0.01xｲ.

No Yes B. $8 + $0.01x.
D.
C. $8 + $0.02x.
No No
D. $8 ・$0.02x.

[109] Source: CIA 1190 III-15

(Refer to Figure 6.) A health insurance company uses a [113] Source: CMA 0681 5-11
computer application to monitor physician bill amounts for (Refers to Fact Pattern #19)
various surgical procedures. This program allows the The quantity of cleaning fluid that should be produced to
company to better control reimbursement rates. The X-bar maximize revenue is
chart is an example of the output from this application.
Select the interpretation that best explains the data plotted A. 520,000 gallons.
on the chart.
B. 260,000 gallons.
A. Random variation.
C. 160,000 gallons.
B. Abnormal variation.
D. 150,000 gallons.
C. Normal variation.

D. Cyclic variation. [114] Source: CMA 0681 5-12

(Refers to Fact Pattern #19)
The quantity of cleaning fluid that should be produced to
[110] Source: CMA 1280 5-13 maximize profit is
A manufacturing company allocates the cost of its service
departments to the producing departments. The service A. 520,000 gallons.
departments provide services to each other as well as to
the producing departments. The allocation technique that B. 260,000 gallons.
will charge each service department with the cost of the
service received from other service departments as well as C. 160,000 gallons.
charge the producing departments for the total incurred
costs of all service departments is D. 150,000 gallons.

A. Matrix algebra.
[115] Source: CMA 0681 5-13
B. Boolean algebra. (Refers to Fact Pattern #19)
What would the profit (loss) be if the company
C. Simulation techniques. manufactured and sold 300,000 gallons of cleaning fluid?
 A. $3,200,000. t
Pc = consumption spending during time period t.
B. $(50,000). t
b = financial investments held at time period t.
C. $(3,350,000). t
R = interest rate.
D. $(150,000). m = stock of money held at time period t.
t

[116] Source: CMA 0683 5-5 [120] Source: CMA 1287 5-23
The personnel manager has just completed a survey on (Refers to Fact Pattern #20)
employee attitudes, working conditions, and productivity. If
He would like to analyze data subject to the constraints of
his company (i.e., salary structure, capital equipment, etc.). Pc - Py > b (R), then
The stated objectives of this company are to (1) maximize t t t-1
profits, (2) maximize safety, and (3) promote positive
employee attitudes. The decision analysis technique that A. Saving would occur.
could accomplish this analysis is
B. Earned income would exceed interest income.
A. Linear programming.
C.
B. Statistical analysis.
m would be negative.
C. Goal programming. t
D. Investments and/or stock of money would decline.
D. Dynamic programming.

[121] Source: CMA 1287 5-24

[117] Source: CMA 1283 5-20 (Refers to Fact Pattern #20)
One limitation of the linear programming technique is that it If b > b (1 + R), then
is effective only for
t t-1
A. Two-product situations. A. Earned income must exceed consumption
spending.
B. Manufacturing resource constraint situations.
B. Interest rates must be very high.
C. Straight-line relationship situations.
C. Net investment took place.
D. Income maximization situations.
D. Net disinvestment took place.

[118] Source: CMA 1286 5-27

In order to solve a linear programming problem, slack, [122] Source: CMA 1287 5-25
surplus, and artificial variables must be employed. A slack (Refers to Fact Pattern #20)
variable represents If a household's need to hold money declines, then

A. Opportunity costs. A.

B. Unused capacity. b >b

t t-1
C. Outside variables with high cost.
B.
D. The variable with the most negative value.
m < m
t t-1
[119] Source: CMA 1286 5-28
The procedure employed to solve linear programming C.
problems is
Pc < Py
A. Differential calculus. t t

B. Integral calculus. D. Negative saving occurs.

C. Simulation.
[Fact Pattern #21]
D. Matrix algebra. Merlin Company has excess capacity on two machines, 24
hours on Machine 105 and 16 hours on Machine 107. To
utilize this excess capacity, the company has two products,
[Fact Pattern #20] known as Product D and Product F, that must use both
The equality between a household's total sources and uses machines in manufacturing. Both have excess product
of funds can be represented in the form of the budget demand, and the company can sell as many units as it can
constraint model presented as follows. manufacture. The company's objective is to maximize
profits.
Py + b (1 + R) + m = Pc + b + m
t t-1 t-1 t t t Product D has an incremental profit of $6 per unit, and
If each unit utilizes 2 hours of time on Machine 105 and then
Py = earned income during time period t. 2 hours of time on Machine 107. Product F has an
incremental profit of $7 per unit, and each unit utilizes 3 A. Determine the degree that the constraints vary.
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, B. Test the accuracy of the parameters.
F be the number of units for Product F, and P be the
company's profit. C. Develop the technological matrix.

[123] Source: CMA 1288 5-8 D. Determine how the optimal solution would react to
(Refers to Fact Pattern #21) changes in parameters.
The objective function for Merlin Company is

A. P = $6(4D) + $7(4F). [Fact Pattern #22]

Harrington Corporation produces three products: anchor
B. P = (2D + 3F ・24) + (2D + F ・16). bolts, bearings, and casters.

C. P = $6(2D + 3F ・24) + $7(2D + F ・16). There are 150 direct labor hours available. Machine hour
capacity allows 100 anchor bolts, only; 50 bearings, only;
D. P = $6D + $7F. 40 casters, only; or any combination of the three that does
not exceed the capacity.

[124] Source: CMA 1288 5-9 Selling Variable Cost Fixed Cost DL Hours
(Refers to Fact Pattern #21) Price per Unit per Unit per Unit
The optimum number of units for Product D can be solved ------- ------------- ---------- ---------
by calculating Anchor bolts $4.00 $1.00 $2.00 2
Bearings 3.50 .50 2.00 2
A. 2D + F ・16. Casters 6.00 2.00 3.00 3
For planning purposes, Harrington uses the following
notation.
B. 2D + 3(16 - 2D) ・24. A = anchor bolts
B = bearings
C. 2(16 - F) + 3F ・24. C = casters

D. 2D + 3(16 + 2D) ・24. [129] Source: CMA 0689 5-18

(Refers to Fact Pattern #22)
The objective function for a linear program to maximize
[125] Source: CMA 1288 5-10 contribution from Harrington's three products is
(Refers to Fact Pattern #21)
The equations 2D + 3F ・24, D ・0, and F ・0 are A. Max Z = $3A + $3B + $4C.

A. Objective functions. B. Max Z = $3A + $2.50B + $5C.

B. Inequalities. C. Max Z = $4A + $3.50B + $6C.

C. Deterministic functions. D. Max Z = A + B + C.

D. Constraints.
[130] Source: CMA 0689 5-19
(Refers to Fact Pattern #22)
[126] Source: CMA 1288 5-11 The direct labor constraint for Harrington's linear program
(Refers to Fact Pattern #21) is
A feasible solution for Merlin Company is
A. A + B + C ・150.
A. D = 2 and F = 8.
B. Min Z = 2A + 2B + 3C.
B. D = 6 and F = 4.
C. Max Z = 2A + 2B + 3C - 150.
C. D = 12 and F = 0.
D. 2A + 2B + 3C ・150.
D. D = 8 and F = 3.

[131] Source: CMA 0689 5-20

[127] Source: CMA 1288 5-4 (Refers to Fact Pattern #22)
Variables that are important to the decision-making The machine hour constraint for Harrington's linear
process but are out of the control of the decision maker, program is
e.g., economic conditions, are considered to be
A. The same as the direct labor constraint.
A. Exogenous variables.
B. A + 2B + 2.5C ・100.
B. Decision variables.
C. Indeterminable from the data given.
C. Performance criteria.
D. A + B + C ・190.
D. Constraints.

[132] Source: CMA 0690 5-29

[128] Source: CMA 0689 5-13
The best way to allocate scarce resources to attain a
Sensitivity analysis in linear programming is used to
chosen objective such as maximization of operating income
or minimization of operating costs is C. $18.

A. Relevant costing. D. $24.

B. Responsibility accounting.
[136] Source: CMA 1291 4-25
C. Simple regression analysis. Southern Company packages and sells nuts in cans.
Pecans, cashews, Brazil nuts, hazelnuts, and peanuts are
D. Linear programming. packaged individually as well as in combinations and
mixtures. Southern wants to package the nuts so that it can
maximize its profits while considering market demand. In
[Fact Pattern #23] addition, there are limited supplies for some types of nuts.
Keego Enterprises manufactures two products, boat wax The technique Southern should employ is
and car wax, in two departments, the Mixing Department
and the Packaging Department. The Mixing Department A. Correlation and regression analysis.
has 800 hours per month available, and the Packaging
Department has 1,200 hours per month available. B. Discounted cash flow techniques.
Production of the two products cannot exceed 36,000
pounds. Data on the two products follow: C. Transportation algorithms.

Hours per 100 Pounds D. Linear programming.

Contribution --------------------
Margin Mixing Packaging
(per 100 pounds) (M) (P) [137] Source: CMA 0692 4-8
---------------- ------ --------- The Multi Resource Company manufactures two lines of
Boat wax (B) $200 5.0 3.6 washing machines, Regular and Deluxe. The contribution
Car wax (C) 150 2.4 6.0 margin of a Regular model is $110 and a Deluxe model
$175. The company has two departments, assembly and
[133] Source: CMA 1290 4-25 testing. The Regular model requires 3 hours to assemble,
(Refers to Fact Pattern #23) while a Deluxe model requires 4 hours. The total time
The objective function for the linear program Keego would available in assembly is 12,000 hours. In the testing
use to determine the optimal monthly production of each department, it requires 2.5 hours to test a Regular model
wax would be and 1.5 hours to test a Deluxe model. A total of 6,000
hours of testing time is available. To maximize profit, Multi
A. Z = 150B + 200C. Resource should manufacture

B. 2B + 1.5C ・36,000. A. 2,400 Regular models.

C. 2B + 1.5C ・36,000. B. 3,000 Deluxe models.

D. Z = 200B + 150C. C. 1,091 Regular models and 2,182 Deluxe models.

D. 4,000 Deluxe models.

[134] Source: CMA 1290 4-26
(Refers to Fact Pattern #23)
The mixing constraint for the Keego linear program would [138] Source: CMA 1293 4-2
be 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
A. 2.4M + 6P ・36,000.
marketplace. To maximize profit, management should focus
on each product's
B. 5B + 2.4C ・800.
A. Gross margin.
C. 5B + 2.4C ・800.
B. Segment margin.
D. 5B + 2.4C = 800.
C. Contribution margin.
[135] Source: CMA 1291 4-24 D. Contribution margin per machine hour.
A small company makes only two products with the
following production constraints representing two machines
and their maximum availability: [139] Source: CMA 1293 4-30
A transportation model is a special case of the
2X + 3Y ・18
2X + Y ・10 A. Economic order quantity model.
X ・0; Y ・0
If B. Markov model.
X = the units of the first product.
Y = the units of the second product. C. Linear programming model.

If the profit equation is Z = $4X + $2Y, the maximum D. Dynamic programming model.
possible profit is

A. $20. [140] Source: CMA 1280 5-5

A regional construction company must move materials and
B. $21. 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 (Refers to Fact Pattern #25)
the company would find most useful is The algebraic formulation of Belmont's objective function is

A. Cost-volume-profit analysis. A. MAX Z = 10S + 16G.

B. Transportation algorithms. B. MAX Z = 14S + 28G.

C. Discounted cash flow techniques. C. MAX Z = 12S + 24G.

D. PERT/CPM analysis. D. MAX Z = 7S + 15G.

[146] Source: CMA 1285 5-10

(Refers to Fact Pattern #25)
[142] Source: CMA 1283 5-17 The algebraic formulation of Belmont's monthly direct labor
(Refers to Fact Pattern #24) constraints is
The constraint function for the direct labor is
A. 10S + 15S + 6G + 30G ・2,880.
A. 1A + 1.5B ・200,000.
B. 1/6S + 1/4S + 1/10G + 1/2G ・2,880.
B. 8A + 12B ・600,000.
C. 1/6S - 1/10G ・960; 1/4S - 1/2G ・1,920.
C. 8A + 12B ・200,000.
D. 1/6S + 1/10G ・960; 1/4S + 1/2G ・1,920.
D. 1A + 1.5B ・600,000.

[147] Source: CMA 1285 5-11

[143] Source: CMA 1283 5-18 (Refers to Fact Pattern #25)
(Refers to Fact Pattern #24) The algebraic formulation of the monthly nonnegativity
The constraint function for the machine capacity is constraints is

A. 6A + 24B ・200,000. A. S, G > 0.

B. 1/.5A + 1.5/2.0B ・800,000. B. S, G < 0.

C. .5A + 2B ・200,000. C. S, G ・0.

D. (.5 + .5)A + (2 + 2)B ・200,000. D. S, G ・0.

[144] Source: Publisher [148] Source: CMA 1285 5-21

The product of a matrix and its inverse matrix is Jordan & Co. has been sued by a client for breach of
warranty. Jordan's controller has accumulated data from
A. The matrix. the outcomes of similar cases. Jordan & Co. can best
quantify its exposure to a loss in this situation by using
B. The inverse matrix.
A. Regression analysis.
C. An identity matrix.
B. Markov analysis.
D. A nonconforming matrix.
C. Expected value analysis.

[Fact Pattern #25] D. Queuing theory.

Belmont Company manufactures and sells shirts and gloves
in its two-department plant. Belmont employs linear
programming to determine its optimum product mix. [Fact Pattern #26]
Economic data pertaining to the two products are The terminology and techniques used in linear programming
presented as follows. are as follows. Linear programming is a mathematical
technique that is designed to assist an organization in
Shirt(S) Gloves, Pair (G) allocating its resources. A linear programming problem
-------- ---------------- takes the form of
Selling price per unit $22 $40
Cost data per unit f = A X + A X + ... + A X
Variable manufacturing cost 8 12 11 22 nn
Variable selling expense 2 4
Fixed manufacturing cost 5 9 subject to
Fixed selling expense 1 2 B X + B X + ... + B X ・C1
Direct Labor Data 11 22 nn
----------------------------
Cutting Finishing
---------- ----------- [149] Source: CMA 1286 5-25
Shirt(S) 10 minutes 15 minutes (Refers to Fact Pattern #26)
Gloves, pair(G) 6 minutes 30 minutes The following function is the
Monthly capacity 960 hours 1,920 hours
f = A X + A X + ... + A X
[145] Source: CMA 1285 5-9 11 22 nn
 A. Revenue function. [153] Source: CMA 1287 5-19
(Refers to Fact Pattern #28)
The two inequality functions are
B. Constraint function.
A. Constraints.
C. Linear function.
B. Objectives.
D. Objective function.
C. Conditions.

[150] Source: CMA 1286 5-26 D. Shadow prices.

(Refers to Fact Pattern #26)
The following function is the
[154] Source: CMA 1287 5-20
B X + B X + ... + B X ・C1 (Refers to Fact Pattern #28)
11 22 nn The point where N = 2 and S = 3 would

A. Variable function. A. Be the optimal solution point.

B. Constraint function. B. Be a feasible point.

C. Linear function. C. Lie in a corner.

D. Objective function. D. Minimize cost.

[Fact Pattern #27] [155] Source: CMA 1288 5-2

Pleasant Valley Company makes two products, ceramic Dynamic decision models that incorporate a sequence of
vases (V) and ceramic bowls (B). Each vase requires 2 decisions over different periods of time include all of the
pounds of material and 3 hours of labor. Each bowl following except the
requires 2 pounds of material and 1 hour of labor. During
the next production week, there will be 100 pounds of A. PERT model.
material and 60 hours of labor available to make vases and
bowls. Each pound of material costs $4 and each hour of B. Linear programming model.
labor costs $10. All factory overhead is fixed and is
estimated to be $200 for this production process for a C. Queuing model.
week. Pleasant Valley sells vases for $50 each and bowls
for $35 each. D. Markov process.

[151] Source: CMA 0687 5-19

(Refers to Fact Pattern #27) [156] Source: CMA 1288 5-7
One of the constraints on Pleasant Valley's objective In linear programming, the increase in profit if one more unit
function would be of a limited resource is made available is indicated by

A. 2V + 2B ・60. A. The feasible solution.

B. 3V + B ・60. B. Constraints.

C. Shadow prices.
C. V + 3B ・100.
D. The objective function.
D. $8V + $8B ・$600.

[157] Source: CMA 1288 5-11

[Fact Pattern #28] Merlin company has excess capacity on two machines, 24
ReMetal, Inc. uses the following model to determine blends hours on machine 105 and 16 hours on machine 107. To
of new (n) metal and scrap (s) metal. utilize this excess capacity, the company has two products,
known as Product D and Product F, that must use both
Max Z = $30N + $70S machines in manufacturing. Both have excess product
subject to: demand, and the company can sell as many units as it can
3N + 2S ・15 manufacture. The company's objective is to maximize
2N + 4S ・18 profits.

Product D has an incremental profit of $6 per unit, and

[152] Source: CMA 1287 5-18 each unit utilizes 2 hours of time on Machine 105 and then
(Refers to Fact Pattern #28) 2 hours of time on Machine 107. Product F has an
These mathematical functions are an example of a(n) incremental profit of $7 per unit, and each unit utilizes 3

A. Parametric model. 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,
B. Present value model. F be the number of units for Product F, and P be the
company's profit. A feasible solution for Merlin Company
C. Economic order quantity model. is where

D. Linear programming model. A. D = 2 and F = 8.

B. D = 6 and F = 4.
 C. D = 12 and F = 0. B. Lie in a corner.

D. D = 8 and F = 3. C. Be a feasible point.

D. Be an infeasible point.
[158] Source: CMA 1288 5-18
Lynch Corporation manufactures and sells three products.
Top management would like to change the present sales [163] Source: CMA 1294 4-2
mix to increase overall operating income. Each of the United Industries manufactures three products at its highly
company's products has various manufacturing and sales automated factory. The products are very popular, with
restrictions, including maximum demand levels and raw demand far exceeding the company's ability to supply the
material availability. In order to achieve the most profitable marketplace. To maximize profit, management should focus
sales mix, Lynch should employ on each product's

A. Multiple regression. A. Gross margin.

B. Linear programming. B. Segment margin.

C. Mix variance analysis. C. Contribution margin ratio.

D. Expected value techniques. D. Contribution margin per machine hour.

[159] Source: CMA 1291 4-20 [164] Source: CMA 0695 4-10
A transportation model is a special case of the The Mix and Match Company has two products, Product
X and Product Y, that it manufactures through its
A. Markov model. production facilities. The contribution margin for Product X
is $15 per unit, whereas Product Y's contribution is $25.
B. Linear programming model. Each product uses Materials A and B. Product X uses 3
pounds of Material A, and Product Y uses 6 pounds.
C. Dynamic programming model. Product X requires 6 feet of Material B and Product Y
uses 4 feet. The company can only purchase 600 pounds
D. Critical path method. of Material A and 880 feet of Material B. The optimal mix
of products to manufacture is

[Fact Pattern #29] Product X Product Y

Manders Manufacturing Corporation uses the following --------- ----------
model to determine its product mix for metal (M) and scrap
metal (S). A.

Max Z = $30M + $70S 146 units and 0 units.

If 3M + 2S ・15 B.
2M + 4S ・18
0 units and 100 units.
C.
[160] Source: CMA 0694 4-10
(Refers to Fact Pattern #29) 120 units and 40 units.
These mathematical functions are an example of a(n) D.

A. Simulation model. 40 units and 120 units.

B. Linear programming model.

[165] Source: CMA 0695 4-11
C. Economic order quantity model. In linear programming, the shadow price refers to the

D. Present value model. A. Measurement of the value of relaxing a constraint

in a problem with dual variables.

[161] Source: CMA 0694 4-11 B. Marginal change in profit associated with a change
(Refers to Fact Pattern #29) in the contribution margin of one of the variables.
The two inequality functions are
C. Unused capacity available once the optimal
A. Contributions. solution is obtained.

B. Shadow points. D. Variables that are included in the final solution of

the linear programming model.
C. Conditions.

D. Constraints. [166] Source: CMA 0697 4-23

A transportation model is a specialized example of

[162] Source: CMA 0694 4-12 A. The critical path method.

(Refers to Fact Pattern #29)
The point at which M = 2 and S = 3 would B. Linear programming.

A. Minimize cost. C. Queuing theory.

 A. A transportation model.
D. Monte Carlo simulation.
B. Markov analysis.

[Fact Pattern #30] C. Calculus-based optimization.

A financial analyst has been asked to forecast net income
over the next 3 years using the computer spreadsheet D. A queuing model.
below. The actual results for year 1 are shown in column B.
Net sales and cost of goods sold are projected to increase
at the rate of 20% each year. Selling and administrative [171] Source: CIA 1191 III-38
expenses are projected to increase at an annual rate of A company has two production and two service
10%. However, several mistakes have been made in the departments. Each service department provides service to
spreadsheet below. the two production departments and to the other service
department. In allocating service department costs, the
A B C D E company would like to account for the service provided by
--------------------------------------------------------- each service department to the other. To do so, it could
1 Year 1 Year 2 Year 3 Year 4 use
-------- -------- -------- --------
2 Net sales $400,000 $480,000 $480,000 $576,000 A. Matrix algebra.
3 Cost of goods sold 310,000 372,000 372,000
446,400 B. Regression analysis.
4 Gross profit 90,000 108,000 108,000 129,600
5 Selling expenses 30,000 33,000 36,300 39,930 C. Game theory.
6 Administrative
expenses 40,000 44,000 48,400 58,080 D. Sensitivity analysis.
7 Income before taxes 20,000 31,000 23,300 31,590
8 Income taxes at 40% 8,000 12,400 9,320 12,636
9 Net income 12,000 18,600 13,980 18,954 [172] Source: CIA 1187 III-45
A set of simultaneous equations reads:
[167] Source: CMA 0696 4-8
(Refers to Fact Pattern #30) 6X + 3X = 49
A correct formula for cell D2 is 1 2
12X + 2X = 17
A. +C2 x 1.2 1 2
If the equations were placed in a matrix format it would be
B. +B2 x 1.2
A.
C. +C2 + (.2 x B2)
ﾚ ｿﾚ ｿ
D. +B2 + (.2 x B2) ｳx ｳ ｳ 6 3 49ｳ
ｳ 1ｳ ｳ ｳ
ｳx ｳ ｳ12 2 17ｳ
[168] Source: CMA 0696 4-9
(Refers to Fact Pattern #30) ｳ 2ｳ ｳ ｳ
Which one of the cells listed below contains an incorrect ﾀ ﾙﾀ ﾙ
formula?
B.
A. D4
ﾚ ｿﾚ ｿﾚ ｿ
B. D8 ｳ 6 3ｳ ｳx ｳ ｳ49ｳ
ｳ ｳ ｳ 1ｳ ｳ ｳ
C. E6 ｳ12 2ｳ ｳx ｳ ｳ17ｳ
ｳ ｳ ｳ 2ｳ ｳ ｳ
D. C1
ﾀ ﾙﾀ ﾙﾀ ﾙ

C.
[169] Source: CMA 0696 4-10
(Refers to Fact Pattern #30)
If all of the errors in the formulas in the spreadsheet were ﾚ ｿﾚ ｿﾚ ｿ
corrected, the correct projected net income for year 4 ｳ 6 3ｳ ｳ49ｳ ｳx ｳ
would be ｳ ｳ ｳ ｳ ｳ 1ｳ
ｳ12 2ｳ ｳ17ｳ ｳx ｳ
A. $21,858 ｳ ｳ ｳ ｳ ｳ 2ｳ
ﾀ ﾙﾀ ﾙﾀ ﾙ
B. $37,410
D.
C. $90,978
ﾚ ｿﾚ ｿﾚ ｿ
D. $88,074
ｳx ｳ ｳ 6 3ｳ ｳ49ｳ
ｳ 1ｳ ｳ ｳ ｳ ｳ
[170] Source: CMA 1296 4-10 ｳx ｳ ｳ12 2ｳ ｳ17ｳ
A large retail chain has 10 warehouses and 50 retail ｳ 2ｳ ｳ ｳ ｳ ｳ
locations. The quantitative technique it would likely use to ﾀ ﾙﾀ ﾙﾀ ﾙ
determine the minimum cost of moving its goods from the
warehouses to the retail stores is
[173] Source: CIA 0581 IV-25
The Apex Fertilizer Company is planning a new formulation Quality control programs employ many tools for problem
to appeal to the increasing market of herb growers. Each definition and analysis. A scatter diagram is one of these
unit of the product will require 3 pounds of chemical A, 1 tools. The objective of a scatter diagram is to
pound of chemical B, and 4 pounds of chemical C. The
per-pound costs of chemical A are $7.95; chemical B, A. Display a population of items for analysis.
$3.28; and chemical C, $6.14. Which of the following
matrix algebra formulations will lead to the cost of one unit B. Show frequency distribution in graphic form.
of the new fertilizer?
C. Divide a universe of data into homogeneous
A. groups.

ﾚ ｿﾚ ｿ D. Show the vital trend and separate trivial items.

ｳ7.95, 3.28, 6.14ｳ ｳ3 0 0ｳ
ﾀ ﾙ ｳ0 1 0ｳ
[177] Source: Publisher
ｳ0 0 4ｳ
Heniser Pet Foods manufactures two products, X and Y.
ﾀ ﾙ The unit contribution margins for Products X and Y are
B. $30 and $50, respectively. Each product uses Materials A
and B. Product X uses 6 pounds of Material A and 12
ﾚ ｿﾚ ｿ pounds of Material B. Product Y uses 12 pounds of
ｳ7.95ｳ ｳ3, 1, 4ｳ Material A and 8 pounds of Material B. The company can
ｳ3.28ｳ ﾀ ﾙ purchase only 1,200 pounds of Material A and 1,760
ｳ6.14ｳ pounds of Material B. The optimal mix of products to
ﾀ ﾙ manufacture is

C. A. 146 units of X and 0 units of Y.

B. 0 units of X and 100 units of Y.

ﾚ ｿﾚｿ
ｳ7.95ｳ ｳ3ｳ C. 120 units of X and 40 units of Y.
ｳ3.28ｳ ｳ1ｳ
ｳ6.14ｳ ｳ4ｳ D. 40 units of X and 120 units of Y.
ﾀ ﾙﾀﾙ

D. [178] Source: CIA 1193 III-72

An internal auditing department developed the formula,
ﾚ ｿﾚ ｿ Total audit cost (TC) = a + bX + cXｲ, with X equaling
ｳ3 1 4ｳ ｳ7.95ｳ internal audit resources. The director wanted to minimize
ﾀ ﾙ ｳ3.29ｳ TC with respect to X. The appropriate technique to use is

ｳ6.14ｳ A. Linear programming.

ﾀ ﾙ
B. Least squares.

C. Differential calculus.
[174] Source: CIA 1189 III-47
What process is used when calculus is employed to D. Integral calculus.
determine a firm's maximum profit for a given revenue
function?
[179] Source: CIA 1194 III-58
A. Integration.
An investment company is attempting to allocate its
available funds between two investment alternatives, stocks
B. Differentiation.
and bonds, which differ in terms of expected return and
risk. The company would like to minimize its risk while
C. Operations research.
earning an expected return of at least 10% and investing no
more than 70% in either of the investment alternatives. An
D. Regression analysis. appropriate technique for allocating its funds between
stocks and bonds is
[175] Source: CIA 1191 III-39
A. Linear programming.
Which of the following statements about marginal costs is
correct? B. Capital budgeting.
A. Marginal cost equals the derivative of the total
C. Differential analysis.
cost function.
D. Queuing theory.
B. Marginal cost increases as output quantity
increases.
[180] Source: CIA 0593 IV-21
C. Marginal cost decreases as output quantity
Shadow prices in linear programming solutions are
increases.
ordinarily considered to be the same as
D. Marginal cost increases when total cost increases.
A. Relevant costs.

B. Differential cost.
[176] Source: CIA 1195 III-11
 C. Alternative costs. A. 0 Puppy; 25 Inactive Dog

D. Opportunity costs. B. 20 Puppy; 10 Inactive Dog

C. 10 Puppy; 20 Inactive Dog

[Fact Pattern #31]
Polar Bear Inc. has three service departments. The D. 15 Puppy; 17.5 Inactive Dog
relationship between the three departments, maintenance,
cleaning, and food prep, and the total costs incurred by
each are expressed below: [Fact Pattern #32]
An organization has collected data on the complaints made
Maintenance = $40,000 + .25C by personal computer users and has categorized the
Cleaning = $60,000 + .2M complaints.
Food Service = $50,000 + .1M + .45C
In addition, there are two production departments: [185] Source: CIA 1195 III-15
Assembly and Finishing. Maintenance workers spend (Refers to Fact Pattern #32)
about 35% of their time in each of the two production (Refer to Figure 7.) Using the information collected, the
departments. Cleaning employees spend about 15% of organization should focus on
their time in each production department. Food service
devotes 90% of its efforts to Assembly and 10% to A. The total number of personal computer complaints
Finishing. that occurred.

[181] Source: Publisher B. The number of computer complaints associated

(Refers to Fact Pattern #31) with diskette problems and new software usage.
Using the direct method, how much maintenance cost
would be allocated to Assembly? C. The number of computer complaints associated
with the lack of user knowledge and hardware
A. $14,000 problems.

B. $20,000 D. The cost to alleviate all computer complaints.

C. $20,264
[186] Source: CIA 1195 III-16
D. $28,948 (Refers to Fact Pattern #32)
(Refer to Figure 7.) The chart displays

[182] Source: Publisher A. The arithmetic mean of each computer complaint.

(Refers to Fact Pattern #31)
Using the reciprocal method, what is the total cleaning B. The relative frequency of each computer
department cost to be allocated to all other departments? complaint.

A. $57,895 C. The median of each computer complaint.

B. $71,579 D. The absolute frequency of each computer

complaint.
C. $68,000

D. $60,000 [Fact Pattern #33]

A company produces two products, X and Y, which use
material and labor as inputs. Fixed amounts of labor and
[183] Source: Publisher material are available for production each month. In
(Refers to Fact Pattern #31) addition, the demand for product Y each month is limited;
Using the reciprocal method, what is the total food service product X has no constraint on the number of units that can
department cost to be allocated to all other departments? be sold. A graphical depiction of these production and
demand constraints is presented in Figure 8.
A. $88,001
[187] Source: CIA 1192 III-41
B. $55,790 (Refers to Fact Pattern #33)
(Refer to Figure 8.) The feasible solution region is bounded
C. $82,211 by the lines connecting points

D. $83,211 A. 3, 4, 6, and 7.

B. 1, 5, 6, and 8.
[184] Source: Publisher
Yummy-for-Your-Tummy, Inc. is introducing a new line of C. 2, 4, 5, 6, and 8.
diet specialty dog food composed of genetically altered
corn and wheat. There will be two types of dog food, D. 3, 5, 6, and 7.
"Puppy" and "Inactive Dog," with expected unit profits of
$10 and $15, respectively. The number of pounds of corn
and wheat needed per unit of Puppy food is 2 and 3, [188] Source: CIA 1192 III-42
respectively. The number of pounds of corn and wheat (Refers to Fact Pattern #33)
needed per unit of Inactive Dog food is 4 and 2, (Refer to Figure 8.) If a series of profit lines for X and Y
respectively. A local mill delivers 100 pounds of corn and are drawn on the graph, the mix of X and Y that will result
80 pounds of wheat weekly. What is the optimal weekly in the maximum profit can be determined from
production schedule?
 A. The last point in the feasible solution region A. Redler Company.

touched by a profit line.

B. Funz-N-Oonz Inc.
B. Any point on the boundary of the feasible solution
region touched by a profit line. C. Moonsammy and Associates.

C. The first point on the feasible solution region D. Step-N-Wolf Intl.

boundary that intersects a profit line.

D. Any point on the demand constraint that intersects [192] Source: Publisher
a profit line. (Refers to Fact Pattern #34)
If each of the four companies manufactured and sold
100,000 gallons of cleaning fluid, which firm would have
[189] Source: Publisher the largest profits?
Yummy-for-Your-Tummy, Inc. is introducing a new line of
diet specialty dog food composed of genetically altered A. Redler Company.
corn and wheat. There will be two types of dog food,
"Puppy" and "Inactive Dog," with expected unit profits of B. Funz-N-Oonz Inc.
$10 and $15, respectively. The number of pounds of corn
and wheat needed per unit of Puppy food is 2 and 3, C. Moonsammy and Associates.
respectively. The number of pounds of corn and wheat
needed per unit of Inactive Dog food is 4 and 2, D. Step-N-Wolf Intl.
respectively. A local mill delivers 100 pounds of corn and
80 pounds of wheat weekly. What is the optimal weekly
production schedule? [193] Source: CPA 0591 I-44
On January 1, 2001, Hooks Oil Co. sold equipment with a
A. 0 Puppy; 25 Inactive Dog carrying amount of $100,000 and a remaining useful life of
10 years to Maco Drilling for $150,000. Hooks
B. 20 Puppy; 10 Inactive Dog immediately leased the equipment back under a 10-year
capital lease with a present value of $150,000. It will
C. 10 Puppy; 20 Inactive Dog depreciate the equipment using the straight-line method.
Hooks made the first annual lease payment of $24,412 in
D. 15 Puppy; 17.5 Inactive Dog December 2001. In Hooks's December 31, 2001 balance
sheet, the unearned gain on the equipment sale should be

[Fact Pattern #34] A. $50,000

The following four companies manufacture and sell an
industrial strength cleaning fluid. The equations presented B. $45,000
below represent the revenue (R) and cost (C) functions for
C. $25,588
the companies if X is stated in terms of thousands of gallons
of fluid. D. $0

Revenue Function Cost Function

--------------------------- -------------------------- [194] Source: CPA 0588 I-32
Redler Company R(x) = $100 + $26x $.05x2 C(x) = $50 + On December 31, 2001, Ruhl Corp. sold equipment to
$8x + $.01x2 Dorr and simultaneously leased it back for 3 years. The
Funz-N-Oonz following data pertain to the transaction at this date:
Inc. R(x) = $90 + $22x $.04x2 C(x) = $65 + $10x +
$.02x2 Sales price $220,000
Moonsammy and Carrying amount 150,000
Associates R(x) = $85 + $20x $.08x2 C(x) = $45 + Present value of lease rentals
$12x + $.03x2 ($2,000 for 36 months at 12%) 60,800
Step-N-Wolf Estimated remaining useful life 10 years
Intl. R(x) = $110 + $18x $.07x2 C(x) = $70 + $5x + At December 31, 2001, what amount should Ruhl report
$.04x2 as deferred revenue from the sale of the equipment?

[190] Source: Publisher A. $0

(Refers to Fact Pattern #34)
Which company has the largest quantity of cleaning fluid B. $9,200
that must be produced to maximize revenue?
C. $60,800
A. Redler Company.
D. $70,000
B. Funz-N-Oonz Inc.

C. Moonsammy and Associates. [195] Source: CPA 0590 I-31

On December 31, 2001, Bain Corp. sold a machine to
D. Step-N-Wolf Intl. Ryan and simultaneously leased it back for 1 year.
Pertinent information at this date follows:

[191] Source: Publisher Sales price $360,000

(Refers to Fact Pattern #34) Carrying amount 330,000
Which company has the largest quantity of cleaning fluid Present value of reasonable lease rentals
that should be produced to maximize profit? ($3,000 for 12 months at 12%) 34,100
Estimated remaining useful life 12 years
In Bain's December 31, 2001 balance sheet, the deferred units.
revenue from the sale of this machine should be
Each product uses different amounts of machine time
A. $34,100 (hours per unit), and each machine has different capacities
(hours per year), as summarized below.
B. $30,000
MACHINE TIME (HOURS)
C. $4,100 --------------------
PRODUCT X Y Z
D. $0 ------- ----- ----- -----
A 2 4 3
B 3 2 5
[196] Source: CPA 0593 I-31 C 4 3 2
On December 31, 2001, Dirk Corp. sold Smith Co. two CAPACITY 1,400 1,650 2,100
airplanes and simultaneously leased them back. Additional Each product also has a different selling price per unit and
information pertaining to the sale-leasebacks follows: different costs per unit.

Plane #1 Plane #2 PRODUCT

-------- ---------- -------
Sales price $600,000 $1,000,000 A B C
Carrying amount, 12/31/01 $100,000 $550,000 -- -- --
Remaining useful life, Selling price per unit $7 $6 $5
12/31/01 10 years 35 years Variable cost per unit 5 3 1
Lease term 8 years 3 years Fixed cost per unit 1 1 2
Annual lease payments $100,000 $200,000 Management used linear programming to generate the
In its December 31, 2001 balance sheet, what amount following solution:
should Dirk report as deferred gain on these transactions?
PRODUCT VALUE REDUCED VALUE
A. $950,000 ------- ----- -------------
A 100 8
B. $500,000 B ? 2
C 150 0
C. $450,000 CONSTRAINT VALUE SHADOW PRICE
---------- ----- ------------
D. $0
Machine X 0 ?
Machine Y 400 0
[197] Source: CPA 0592 T-32 Machine Z 500 0
Rig Co. sold its factory at a gain, and simultaneously leased Demand A 100 0
it back for 10 years. The factory's remaining economic life Demand C 150 0
is 20 years. The lease was reported as an operating lease.
At the time of sale, Rig should report the gain as a(n) [199] Source: Publisher
(Refers to Fact Pattern #35)
A. Extraordinary item, net of income tax. How many available machine hours for the production of B
does machine X have?
B. Asset valuation allowance.
A. 600 hours.
C. Separate component of stockholders' equity.
B. 800 hours.
D. Deferred credit.
C. 1,150 hours.

[198] Source: CPA 1192 I-35 D. 1,400 hours.

On June 30, 2001, Lang Co. sold equipment with an
estimated useful life of 11 years and immediately leased it
back for 10 years. The equipment's carrying amount was [200] Source: Publisher
$450,000; the sales price was $430,000; and the present (Refers to Fact Pattern #35)
value of the lease payments, which is equal to the fair value What is the maximum number of units of B that can be
of the equipment, was $465,000. In its June 30, 2001 produced by machine Y?
balance sheet, what amount should Lang report as deferred
loss? A. 1,400 units.

A. $35,000 B. 800 units.

B. $20,000 C. 700 units.

C. $15,000 D. 400 units.

D. $0
[201] Source: Publisher
(Refers to Fact Pattern #35)
[Fact Pattern #35] If management has decided to maximize the number of units
A company produces three products, A, B, and C, using of B, what is the combined total contribution margin of
three different machines, X, Y, and Z. Management has products A, B, and C produced by machine Z?
decided that at least 100 units of product A must be
manufactured. Marketing research indicates that the A. $550
company's maximum market share for product C is 150
 B. $1,000
[Fact Pattern #36]
C. $1,700 LCB, Inc. is preparing a bid to the Department of the Navy
to produce engines for rescue boats. The company has
D. $3,250 manufactured these engines for the Navy for the past 3
years, on an exclusive contract, and has experienced the
following costs:
[202] Source: CMA 1291 4-18
A company experiences both variable usage rates and Cumulative Total Cumulative Costs
variable lead times for its inventory items. The probability Units Produced Materials Labor
distributions for both usage and lead times are known. A -------------- --------- --------
technique the company could use for determining the 10 $ 60,000 $120,000
optimal safety stock levels for an inventory item is 20 120,000 192,000
40 240,000 307,200
A. Queuing theory. At LCB, variable overhead is applied on the basis of $1.00
per direct labor dollar. Based on historical costs, LCB
B. Linear programming. knows that the production of 40 engines will incur
$100,000 of fixed overhead costs. The bid request is for
C. Decision tree analysis. an additional 40 units; all companies submitting bids are
allowed to charge a maximum of 25% above full cost for
D. Monte Carlo simulation. each order.

[206] Source: CMA 0688 5-7

[203] Source: CMA 1280 5-11 (Refers to Fact Pattern #36)
Quiterite Baking Company is a large regional bakery that LCB's rate of learning on the 3-year engine contract is
competes with two other large bakeries. All three bakeries
supply grocery stores, convenience stores, and restaurants. A. 75.5%.
Data regarding the market share of each bakery and the
percentage of customers gained and lost from each bakery B. 79.0%
have been developed. Quiterite wants to learn more about
the behavior of its customers and their loyalty to Quiterite. C. 80.0%.
A technique that would be most helpful to Quiterite is
D. 62.6%.
A. Expected value analysis.

B. Markov analysis. [207] Source: CMA 0688 5-8

(Refers to Fact Pattern #36)
C. Learning curve techniques. The maximum bid price that LCB, Inc. could submit to the
Department of the Navy for the 40 units is
D. Correlation and regression analysis.
A. $760,800.

[204] Source: CMA 1287 5-26 B. $608,640.

The Program Evaluation and Review Technique (PERT) is
widely used to plan and measure progress toward C. $885,800.
scheduled events. PERT is combined with cost data to
produce a PERT-Cost analysis in order to D. $708,640.

A. Calculate the total project cost inclusive of the

additional slack time. [208] Source: CMA 0688 5-9
(Refers to Fact Pattern #36)
B. Evaluate and optimize trade-offs between time of In order to ensure that the company would not lose money
an event's completion and its cost to complete. on the project, LCB's minimum bid for the 40 units would
be
C. Implement computer-integrated manufacturing
concepts. A. $760,800.

D. Avoid the problem of time variance analysis. B. $608,640.

C. $885,800.
[205] Source: CMA 0688 5-1
Jay Vee Enterprises is evaluating whether to introduce a D. $708,640.
new product in its sports equipment product line. The
company has had significant experience in marketing new
sports products and has obtained a number of sales [209] Source: CMA 0688 5-14
estimates from its sales force. An appropriate method to When using PERT, the expected time for an activity, given
analyze the anticipated sales level for the new product an optimistic time (A), a pessimistic time (B), and a most
would be likely time (m), is calculated by which of the following
formulas?
A. Queuing theory.
A. (4a + m + 4b)/6.
B. Expected value analysis.
B. (a + 4m + b)/6.
C. The Markov process.
C. (a + b)/2.
D. Contribution margin analysis.
D. (b - a)/2.
 A company is planning a multi-phase construction project.
The time estimates for a particular phase of the project are
[210] Source: CMA 0688 5-15
In a PERT or CPM network, the critical path is the Optimistic 2 months
Most likely 4 months
A. Longest path through the network with the least Pessimistic 9 months
amount of slack. Using the Program Evaluation Review Technique (PERT),
the expected completion time for this particular phase
B. Shortest path through the network with the least would be
amount of slack.
A. 4 months.
C. Shortest path through the network.
B. 4ｽ months.
D. Most costly path through the network.
C. 5 months.

[211] Source: CMA 0688 5-16 D. 7ｽ months.

When making a cost/time trade-off in PERT analysis, the
first activity that should be crashed is the activity
[216] Source: CMA 1291 4-22
A. With the least amount of slack. Huron Company plans to bid on a special project that calls
for a total of 24,000 units. The units will be produced in
B. On the critical path with the lowest unit crash cost. lots, with the first lot consisting of 750 units. Based on prior
experience, the direct labor time needed per unit of product
C. On the critical path with the maximum possible will be progressively smaller by a constant percentage rate
time reduction. as experience is gained in the manufacturing process. The
quantitative method that would best estimate Huron's total
D. With the lowest unit crash cost. cost for the project is

A. Learning curve techniques.

[212] Source: CMA 0689 5-13
Sensitivity analysis in linear programming is used to B. Differential calculus.

A. Determine the degree that the constraints vary. C. Discounted cash flow techniques.

B. Test the accuracy of the parameters. D. Linear programming.

C. Develop the technological matrix.

[217] Source: CMA 1293 4-27
D. Determine how the optimal solution would react to Royal Manufacturing Company is using a Program
changes in parameters. Evaluation and Review Technique (PERT) in the planning
of the installation of a new computerized manufacturing
system. The critical path determined by PERT
[213] Source: CMA 0689 5-15
A statistical technique used to evaluate possible rates of A. Is the shortest path through the PERT network.
return for a capital budgeting project is
B. Is the longest path through the PERT network.
A. Regression analysis.
C. Is based on the most likely times for each activity.
B. Simulation analysis.
D. Is based on the most pessimistic times for each
C. Markov chain analysis. activity.

D. Gantt charting.
[218] Source: CMA 1280 5-6
A university has several small construction and repair
[214] Source: CMA 0690 5-20 projects for the maintenance crew to perform. There are a
Pallis Enterprises has a warehouse with a loading dock that limited number of painters, woodworkers, and electricians.
is used to unload railroad freight cars. Pallis maintains The method that will help provide the fastest completion of
records of daily incoming cars that are delivered to the all jobs is
warehouse during the night. On any given night, zero to six
freight cars could be delivered. It takes the dock workers 4 A. Queuing theory.
hours to unload each car. The company would like to
analyze the wait time (delay) involved when more than two B. Time series analysis.
freight cars are delivered. The appropriate technique to
analyze the arrival of the freight cars is C. PERT/CPM analysis.

A. Monte Carlo simulation. D. Linear programming.

B. Expected value analysis.

[219] Source: CMA 1283 5-19
C. Minimax regret criteria. The process of evaluating the effect of changes in variables
such as sales price or wage rates on the optimum solution
D. Program Evaluation Review Technique (PERT). in a linear programming application is called

A. Iterative analysis.
[215] Source: CMA 1291 4-17
 B. Regression analysis. completion time for a project is

C. Sensitivity analysis. A. A GANTT chart.

D. Matrix analysis. B. The critical path method (CPM).

C. The performance evaluation and review technique

[220] Source: CMA 1284 5-9 (PERT).
Which one of the following statements best describes a
difference between basic PERT and the Critical Path D. The Markov chain.
Method (CPM) of network analysis?

A. PERT considers only activity cost while CPM [225] Source: CMA 0688 5-3
considers only activity time. LeVar, Inc. has obtained probability estimates from its
production and sales departments regarding the costs and
B. PERT considers both activity cost and activity selling prices it can anticipate for a new product line. The
time while CPM considers only activity cost. company is uncertain as to which combination of costs and
selling prices will occur. The best method for determining
C. PERT does not allow for slack times on the the expected outcome of the various alternatives is
activities while CPM does.
A. Monte Carlo simulation.
D. PERT uses probability distributions on the activity
times while CPM uses point estimates for the activity B. Expected value analysis.
times.
C. Multiple regression analysis.

[221] Source: CMA 0685 5-11 D. Contribution margin analysis.

Simulation, a widely used technique in decision modeling, is

A. A process of modeling whereby real activities are [226] Source: CMA 0688 5-6
represented in mathematical or other form. Value Supply Ltd. is implementing a new integrated
computerized accounting system. The systems development
B. A technique used to pinpoint random deviations in department has analyzed the various steps involved in
industrial processes and other repetitive operations. implementing the system and has assigned time and cost
estimates to complete the project. The method used to
C. A technique used to separate costs into fixed and monitor the installation process is
variable portions.
A. Queuing theory.
D. An inventory management model that is used to
calculate the optimum order quantity. B. Regression analysis.

C. Program Evaluation Review Technique (PERT).

[222] Source: CMA 1285 5-22
Parker Company is concerned about customer loyalty and D. Learning curve analysis.
has accumulated data on the extent that customers switch
among brands. Parker can best analyze the data on brand
switching by using [227] Source: CMA 1289 5-12
Baker Company has problems servicing its foundry
A. Linear programming. department with overhead cranes. The workers are idle
during much of the time that the cranes are servicing other
B. Queuing theory. departments, and management wants to determine whether
to add another crane to provide better service. To solve
C. Differential calculus. this problem, Baker Company should employ

D. Markov analysis. A. A critical path network.

B. Queuing models.
[223] Source: CMA 1285 5-23
ZorbaCo has developed a comprehensive budget using a C. Internal rate of return.
microcomputer spreadsheet. ZorbaCo's sales manager
wishes to study the effects of: (1) decreasing selling price in D. An expected value table.
order to increase sales volume, and (2) putting
salespersons on commission instead of fixed salaries.
These [228] Source: CMA 0690 5-22
options can best be studied on the microcomputer by using High Tech Industries, Inc. is in the process of preparing a
competitive bid for the sale of a customized product. High
A. Linear programming. Tech is currently manufacturing a comparable specialized
component that is labor intensive with a long production
B. Decision tree analysis. run. The method that High Tech should use to project the
cost of manufacturing the proposed new customized
C. Simulation. product is

D. Markov analysis. A. Regression analysis.

B. Expected value analysis.

[224] Source: CMA 1286 5-9
The technique used to obtain a probabilistic estimate of the C. Learning curve analysis.
 A. Dummy activity.
D. Monte Carlo simulation.
B. Latest finish.

[229] Source: CMA 1291 4-16 C. Optimistic time.

The critical path through a network is
D. Lumpy demand.
A. The shortest path through the network.

B. The longest path through the network. [234] Source: CIA 1195 III-100
A bank is designing an on-the-job training program for its
C. The path with the most variability in estimated branch managers. The bank would like to design the
times. program so that participants can complete it as quickly as
possible. The training program requires that certain
D. The least cost path. activities be completed before others. For example, a
participant cannot make credit loan decisions without first
having obtained experience in the loan department. An
[230] Source: CIA 1182 IV-20 appropriate scheduling technique for this training program is
Computer simulation has been advocated as an important
tool to assist management in decision making. Which of the A. PERT/CPM.
following is not a correct assessment of computer
simulation? B. Linear programming.

A. It can only be used on large computers. C. Queuing theory.

B. The relationships of variables in the computer D. Sensitivity analysis.

model can be changed over time.

C. The models can be refined as more evidence from [235] Source: CIA 0592 III-69
results becomes available. Activity scheduling information for the installation of a new
computer system is given below.
D. The simulation can solve for the desired levels of
several key variables given the model criteria. Activity Immediate Duration
Predecessor (Days)
-------- ----------- --------
[231] Source: CIA 0589 III-44 A - 4
Management would like to project the company's ending B - 3
cash balance. Because of the large number of variables that C A 9
could affect the ending cash balance, the wide ranges of D A 6
values that these variables may take, and the probabilities E B, D 5
associated with these values, it is not feasible to use analytic For this project, the critical path is
models to estimate the cash balance. The company plans to A. A-C.
develop a computerized model for projecting cash flows.
By varying the inputs to the model, various possible ending B. B-E.
cash balances can be estimated. This method of estimating
the distribution of the ending cash balance is C. A-D-E.

A. Simulation. D. B-D-C.

B. Simple regression analysis.

[236] Source: CIA 1191 III-37
C. Capital budgeting. In a critical path analysis, if slack time in an activity exists,
the activity
D. Linear programming.
A. Is not essential to the overall project.

[232] Source: CMA 1287 5-26 B. Is a backup activity to replace a main activity
PERT is widely used to plan and measure progress toward should it fail.
scheduled events. PERT is combined with cost data to
produce a PERT-Cost analysis to C. Could be delayed without delaying the overall
project.
A. Calculate the total project cost inclusive of the
additional slack time. D. Involves essentially no time to complete.

B. Evaluate and optimize trade-offs between time of

an event's completion and its cost to complete. [237] Source: CIA 1193 III-69
Management of a bookkeeping company observed that the
C. Implement computer-integrated manufacturing average time spent to perform identical tasks using a new
concepts. software package decreases as the number of tasks
performed increases. The following information on the use
D. Calculate expected activity times. of the new software was collected.

Number of Total Time to Average Time

[233] Source: CIA 0594 III-61 Tasks Perform All to Perform
Which of the following terms is not used in project Performed Tasks Each Task
management? --------- ------------- ------------
1 10 minutes 10 minutes
 2 18 minutes 9 minutes [241] Source: CMA 1284 5-3
4 32.4 minutes 8.1 minutes An assumption often made with queuing models is that
If this learning effect continues, what is the average time to
perform each of the first eight tasks? A. Arrival time follows a Poisson distribution and
service times are exponentially distributed.
A. 7.29 minutes.
B. Both arrival times and service times follow normal
B. 8.1 minutes. distributions as a result of the Central Limit Theorem.

C. 6.56 minutes. C. Arrival times follow a Poisson distribution and

service times follow a normal distribution.
D. 5.90 minutes.
D. The rate of arrival is greater than the rate of
service.
[238] Source: CMA 0688 5-16
When making a cost/time trade-off in PERT analysis, the
first activity that should be crashed is the activity [242] Source: CMA 0692 4-5
Lake Corporation manufactures specialty components for
A. On the critical path with the lowest unit crash cost. the electronics industry in a highly labor intensive
environment. Arc Electronics has asked Lake to bid on a
B. With the lowest unit crash cost. 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
C. With the largest amount of slack. additional components. Lake experiences an 80% learning
curve on all of its jobs. The number of direct labor hours
D. With the lowest error rate. needed for Lake to complete the 240 additional
components is

[239] Source: CMA 1288 5-24 A. 360.0.

California Building Corporation uses the critical path
method to monitor construction jobs. The company is B. 187.2.
currently 2 weeks behind schedule on Job #181, which is
subject to a $10,500-per-week completion penalty. Path C. 307.2.
A-B- C-F-G-H-I has a normal completion time of 20
weeks, and critical path A-D-E-F-G-H-I has a normal D. 256.0.
completion time of 22 weeks. The following activities can
be crashed.
[243] Source: CMA 1294 4-28
Cost to Crash Cost to Crash Seacraft Inc. received a request for a competitive bid for
Activities 1 Week 2 Weeks the sale of one of its unique boating products with a desired
---------- ------------- ------------- modification. Seacraft is now in the process of
BC $ 8,000 $15,000 manufacturing this product but with a slightly different
DE 10,000 19,600 modification for another customer. These unique products
EF 8,800 19,500 are labor intensive and both will have long production runs.
California Building desires to reduce the normal completion Which one of the following methods should Seacraft use to
time of Job #181 and, at the same time, report the highest estimate the cost of the new competitive bid?
possible income for the year. California Building should
crash A. Expected value analysis.

A. Activity BC 1 week and activity EF 1 week. B. Learning curve analysis.

B. Activity EF 2 weeks. C. Regression analysis.

C. Activity DE 1 week and activity EF 1 week. D. Continuous probability simulation.

D. Activity DE 2 weeks.
[244] Source: CMA 0683 5-8
A company is simulating the actions of a government
[240] Source: CMA 1291 4-17 agency in which 50% of the time a recall of a product is
A company is planning a multi-phase construction project. required, 40% of the time only notification of the buyer
The time estimates for a particular phase of the project are about a potential defect is required, and 10% of the time no
action on its part is required. Random numbers of 1 to 100
Optimistic 2 months are being used. An appropriate assignment of random
Most likely 4 months numbers for the recall category would be
Pessimistic 9 months
Using the Program Evaluation Review Technique (PERT), A. 1-40.
the expected completion time for this particular phase is
B. 40-90.
A. 2 months.
C. 61-100.
B. 4 months.
D. 11-60.
C. 4ｽ months.

D. 5 months. [245] Source: CMA 0688 5-13

In a PERT network, the optimistic time for a particular
activity is 9 weeks, and the pessimistic time is 21 weeks.
Which one of the following is the best estimate of the [249] Source: CMA 1288 5-24
standard deviation for the activity? California Building Corporation uses the critical path
method to monitor construction jobs. The company is
A. 2. currently 2 weeks behind schedule on Job #181, which is
subject to a $10,500-per-week completion penalty. Path
B. 6. A-B- C-F-G-H-I has a normal completion time of 20
weeks, and critical path A-D-E-F-G-H-I has a normal
C. 9. completion time of 22 weeks. The following activities can
be crashed:
D. 12.
Cost to Crash Cost to Crash
Activities 1 Week 2 Weeks
[246] Source: CMA 0688 5-17 ---------- ------------- -------------
A PERT network has only two activities on its critical path. BC $ 8,000 $15,000
These activities have standard deviations of 6 and 8, DE 10,000 19,600
respectively. The standard deviation of the project EF 8,800 19,500
completion time is California Building desires to reduce the normal completion
time of Job #181 and, at the same time, report the highest
A. 7. possible income for the year. California Building should
crash
B. 10.
A. Activity BC 1 week and activity EF 1 week.
C. 14.
B. Activity BC 2 weeks.
D. 48.
C. Activity EF 2 weeks.

[Fact Pattern #37] D. Activity DE 1 week and activity EF 1 week.

Moss Point Manufacturing recently completed and sold an
order of 50 units that had costs as follows.
[250] Source: CMA 0689 5-23
The company has now been requested to prepare a bid for PERT and the critical path method (CPM) are used for
150 units of the same product.
A. Determining the optimal product mix.
Direct materials $ 1,500
Direct labor (1,000 hours x $8.50) 8,500 B. Project planning and control.
Variable overhead (1,000 hours x $4.00)* 4,000
Fixed overhead** 1,400 C. Determining product costs.
-------
$15,400 D. Determining the number of servers needed in a
======= fast food restaurant.
*Applied on the basis of direct labor hours.
**Applied at the rate of 10% of variable cost.
[251] Source: CMA 0689 5-24
[247] Source: CMA 1288 5-19 The primary difference between PERT and CPM is that
(Refers to Fact Pattern #37)
If an 80% learning curve is applicable, Moss Point's total A. CPM uses probabilities on the activity times and
cost on this order would be estimated at PERT does not.

B. PERT considers activity costs and CPM does not.

A. $26,400.
C. PERT can assign probabilities to activity times and
B. $32,000. CPM does not.

C. $38,000. D. CPM considers activity costs and PERT does not.

D. $41,800.
[252] Source: CMA 0689 5-25
A Gantt chart
[248] Source: CMA 1288 5-20
(Refers to Fact Pattern #37) A. Shows the critical path for a project.
If Moss Point had experienced a 70% learning curve, the
bid for the 150 units would B. Is used for determining an optimal product mix.

A. Show a 30% reduction in the total direct labor C. Shows only the activities along the critical path of
hours required with no learning curve. a network.

B. Include increased fixed overhead costs. D. Does not necessarily show the critical path
through a network.
C. Be 10% lower than the total bid at an 80%
learning curve.
[253] Source: CMA 0690 5-21
D. Include 6.40 direct labor hours per unit at $8.50 Through the use of decision models, managers thoroughly
analyze many alternatives and decide on the best alternative
per hour. 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 competitive environment based on trend analysis.
company. The appropriate technique to analyze the
alternatives by using expected inputs and altering them
before a decision is made is [258] Source: CMA 1293 4-24
The average labor cost per unit for the first batch produced
A. Expected value analysis. by a new process is $120. The cumulative average labor
cost after the second batch is $72 per product. Using a
B. Linear programming. batch size of 100 and assuming the learning curve
continues, the total labor cost of four batches will be
C. Program Evaluation Review Technique (PERT).
A. $4,320.
D. Sensitivity analysis.
B. $10,368.

[254] Source: CMA 1291 4-18 C. $2,592.

A company experiences both variable usage rates and
variable lead times for its inventory items. The probability D. $17,280.
distributions for both usage and lead times are known. A
technique the company could use for determining the
optimal safety stock levels for an inventory item is [259] Source: CMA 0694 4-1
When using PERT (Program Evaluation Review
A. Queuing theory. Technique), the expected time for an activity when given an
optimistic time (A), a pessimistic time (B), and a most likely
B. Linear programming. time (m), is calculated by which one of the following
formulas?
C. Decision tree analysis.
A. (b - a) ・2.
D. Monte Carlo simulation.
B. (a + b) ・2.

[255] Source: CMA 1291 4-21 C. (a + 4m + b) ・6.

A company is designing a new regional distribution
warehouse. In order to minimize delays in loading and
D. (4abm) ・6.
unloading trucks, an adequate number of loading docks
must be built. The most relevant technique to assist in
determining the proper number of docks is
[260] Source: CMA 0694 4-2
In a PERT (Program Evaluation Review Technique) or
A. Correlation and regression analysis.
CPM (Critical Path Method) network, the critical path is
the
B. Cost-volume-profit analysis.
A. Least costly path through the network.
C. PERT-Cost analysis.
B. Most costly path through the network.
D. Queuing theory.
C. Shortest path through the network.
[256] Source: CMA 1291 4-23
D. Longest path through the network with the least
Manning Corporation is preparing a proposal for the
amount of slack.
government to produce a steam generator to be used in
nuclear submarines. Manning has three factories that can
initiate and complete the generator; however, completion
[261] Source: CMA 0694 4-3
times vary due to different technologies and older
When making a cost/time trade-off in PERT (Program
equipment within each of the three factories. The decision
Evaluation Review Technique) analysis, the first activity that
tool that would best assist Manning in its factory selection is
should be crashed is the activity
A. Queuing theory.
A. With the largest amount of slack.
B. Time series analysis.
B. With the lowest unit crash cost.
C. PERT-Cost analysis. C. On the critical path with the maximum possible
time reduction.
D. Linear programming.
D. On the critical path with the lowest unit crash cost.
[257] Source: CMA 0692 4-7
The Markov process
[262] Source: CMA 1294 4-29
Quick Response Plumbing (QRP), a wholesale distributor,
A. Assumes that the probabilities of an event depend
supplies plumbing contractors and retailers throughout the
only on the current state.
Northeast on a next-day delivery basis. QRP has a
centrally located warehouse to accept receipts of plumbing
B. Assumes that the probabilities of an event are
supplies. The warehouse has a single dock to accept and
dependent on all previous events.
unload railroad freight cars during the night. It takes five
hours to unload each freight car. QRP's prior records
C. Is useful if sequencing of related decisions is
indicate that the number of freight cars that arrive in the
necessary. course of a night range from zero to five or more, with no
indicated pattern of arrivals. If more than two freight cars
D. Is used to assess the implications of decisions in a
arrive on the same night, then some freight must be held
until the next day for unloading. QRP wants to estimate the D. Number of days an activity can be delayed
wait time when more than two freight cars arrive in the without forcing a delay for the entire project.
same night. The appropriate technique to analyze the arrival
of freight cars is
[267] Source: CMA 1285 5-27
A. Integer programming. The correlation coefficient that indicates the weakest linear
association between two variables is
B. Linear programming.
A. -0.73
C. Monte Carlo simulation.
B. -0.11
D. Regression analysis.
C. 0.12

[263] Source: CMA 0695 4-12 D. 0.35

In the Program Evaluation Review Technique (PERT),
slack is the
[268] Source: CMA 1289 5-14
A. Uncertainty associated with time estimates. Correlation is a term frequently used in conjunction with
regression analysis, and is measured by the value of the
B. Difference between the latest starting time and coefficient of correlation, r. The best explanation of the
earliest finishing time. value r is that it

C. Path that has the largest amount of time associated A. Is always positive.
with it.
B. Interprets variances in terms of the independent
D. Number of days an activity can be delayed variable.
without forcing a delay for the entire project.
C. Ranges in size from negative infinity to positive
infinity.
[264] Source: CMA 1291 4-26
Automite Company is an automobile replacement parts D. Is a measure of the relative relationship between
dealer in a large metropolitan community. Automite is two variables.
preparing its sales forecast for the coming year. Data
regarding both Automite's and industry sales of
replacement parts as well as both the used and new [269] Source: CMA 1291 4-27
automobile sales in the community for the last 10 years Automite Company is an automobile replacement parts
have been accumulated. If Automite wants to determine if dealer in a large metropolitan community. Automite is
there is a historical trend in the growth of its sales as well as preparing its sales forecast for the coming year. Data
the growth of industry sales of replacement parts, the regarding both Automite's and industry sales of
company would employ replacement parts as well as both the used and new
automobile sales in the community for the last 10 years
A. Simulation techniques. have been accumulated. If Automite wants to determine if
its sales of replacement parts are patterned after the
B. Queuing theory. industry sales of replacement parts or to the sales of used
and new automobiles, the company would employ
C. Statistical sampling.
A. Simulation techniques.
D. Time series analysis.
B. Correlation and regression analysis.

[265] Source: CMA 1293 4-25 C. Statistical sampling.

The four components of time series data are secular trend,
cyclical variation, seasonality, and random variation. The D. Time series analysis.
seasonality in the data can be removed by

A. Multiplying the data by a seasonality factor. [270] Source: CIA 0593 III-64
What coefficient of correlation results from the following
B. Ignoring it. data?

C. Taking the weighted average over four time X Y

periods. - --
1 10
D. Subtracting a seasonality factor from the data. 2 8
3 6
4 4
[266] Source: CMA 0695 4-12 5 2
In PERT, slack is the A. 0

A. Uncertainty associated with time estimates. B. -1

B. Difference between the latest starting time and C. +1

earliest finishing time.
D. Cannot be determined from the data given.
C. Path that has the largest amount of time associated
with it.
[271] Source: CIA 1194 II-46 ----------------- ----- ---- ----- ----
In regression analysis, which of the following correlation 8 1.40 1.86 2.31 2.90
coefficients represents the strongest relationship between 9 1.38 1.83 2.26 2.82
the independent and dependent variables? 10 1.37 1.81 2.23 2.76
11 1.36 1.80 2.20 2.72
A. 1.03 12 1.36 1.78 2.18 2.68
13 1.35 1.77 2.16 2.65
B. -.02 14 1.35 1.76 2.15 2.62

C. -.89 [273] Source: CMA 1290 4-27

(Refers to Fact Pattern #38)
D. .75 In the standard regression equation y = a + bx, the letter b
is best described as a(n)

[272] Source: CIA 0595 II-46 A. Independent variable.

The internal auditor of a bank has developed a multiple
regression model which has been used for a number of B. Dependent variable.
years to estimate the amount of interest income from
commercial loans. During the current year, the auditor C. Constant coefficient.
applies the model and discovers that the rｲ value has
decreased dramatically, but the model otherwise seems to D. Variable coefficient.
be working okay. Which of the following conclusions are
justified by the change?
[274] Source: CMA 1290 4-28
A. Changing to a cross-sectional regression analysis (Refers to Fact Pattern #38)
should cause rｲ to increase. The letter x in the standard regression equation is best
described as a(n)
B. Regression analysis is no longer an appropriate
technique to estimate interest income. A. Independent variable.

C. Some new factors, not included in the model, are B. Dependent variable.
causing interest income to change.
C. Constant coefficient.
D. A linear regression analysis would increase the
model's reliability. D. Coefficient of determination.

[Fact Pattern #38] [275] Source: CMA 1290 4-29

In preparing the annual profit plan for the coming year, (Refers to Fact Pattern #38)
Wilkens Company wants to determine the cost behavior Based upon the data derived from the regression analysis,
pattern of the maintenance costs. Wilkens has decided to 420 maintenance hours in a month would mean the
use linear regression by employing the equation y = a + bx maintenance costs (rounded to the nearest dollar) would be
for maintenance costs. The prior year's data regarding budgeted at
maintenance hours and costs, and the results of the
regression analysis are as follows. A. $3,780.

Average cost per hour $9.00 B. $3,600.

a 684.65
b 7.2884 C. $3,790.
Standard error of a 49.515
Standard error of b .12126 D. $3,746.
Standard error of the estimate 34.469
2
r .99724 [276] Source: CMA 1290 4-30
Hours of Maintenance (Refers to Fact Pattern #38)
Activity Costs The percentage of the total variance that can be explained
------------ ------------- by the regression equation is
January 480 $ 4,200
February 320 3,000 A. 99.724%.
March 400 3,600
April 300 2,820 B. 69.613%.
May 500 4,350
June 310 2,960 C. 80.982%.
July 320 3,030
August 520 4,470 D. 99.862%.
September 490 4,260
October 470 4,050
November 350 3,300 [277] Source: Publisher
December 340 3,160 (Refers to Fact Pattern #38)
------ ------- If Wilkens Company uses the high/low method of analysis,
Sum 4,800 $43,200 the equation for the relationship between hours of activity
====== ======= and maintenance cost would be
Average 400 $3,600
Single Tailed Values of t A. Y = 400 + 9.0X
---------------------------
t t t t B. Y = 570 + 7.5X
Degree of Freedom .100 .05 .025 .01
 C. Y = 3,600 + 400X
A. Linear programming.
D. Y = 570 + 9.0X

B. Dynamic programming.
[278] Source: Publisher
(Refers to Fact Pattern #38) C. Learning curve analysis.
What is the range of values for the marginal maintenance
cost such that Wilkens can be 95% confident that the true D. Time series analysis.
value of the marginal maintenance cost will be within this
range?
[283] Source: CMA 0697 4-26
A. $7.02 - $7.56 A regression equation

B. $7.17 - $7.41 A. Estimates the dependent variables.

C. $7.07 - $7.51 B. Encompasses factors outside the relevant range.

D. $6.29 - $8.29 C. Is based on objective and constraint functions.

D. Estimates the independent variable.

[279] Source: Publisher
(Refers to Fact Pattern #38)
At 400 hours of activity, Wilkens' management can be [284] Source: CMA 1296 4-9
approximately two-thirds confident that the maintenance The manager of a car rental agency is planning for counter
costs will be in the range of help during the next 2 weeks. He knows the approximate
number of cars that will be rented, the probability of a car's
A. $3,550.50 - $3,649.53 being returned to his agency if rented from his agency, and
the probability of its being returned to his agency if rented
B. $3,551.37 - $3,648.51 from another location. The quantitative method that the
manager would find most helpful is
C. $3,568.18 - $3,613.93
A. A transportation model.
D. $3,565.54 - $3,634.48
B. Markov analysis.

[280] Source: CIA 0595 II-47 C. Calculus-based optimization.

An internal auditor for a large automotive parts retailer
wishes to perform a risk analysis and wants to use an D. The critical path method.
appropriate statistical tool to help identify stores that would
be out of line compared to the majority of stores. The most
appropriate statistical tool to use is [285] Source: CMA 0696 4-20
A widely used approach that managers use to recognize
A. Linear time series analysis. uncertainty about individual items and to obtain an
immediate financial estimate of the consequences of
possible prediction errors is
B. Cross-sectional regression analysis.
A. Expected value analysis.
C. Cross tabulations with chi-square analysis of
significance. B. Learning curve analysis.

D. Time series multiple regression analysis to identify C. Sensitivity analysis.

changes in individual stores over time.
D. Regression analysis.

[281] Source: CMA 0697 4-21

The critical path through a network is the [286] Source: Publisher
Violation of which assumption underlying regression
A. Shortest path. analysis is prevalent in time series analysis?

B. Path with the most nodes. A. Variance of error term is constant.

C. Longest path. B. Error terms are independent.

D. Path with the most slack. C. Distribution of error terms is normal.

D. Expected value of error term equals zero.

[282] Source: CMA 0697 4-25
Corrigon Industries is preparing a bid for a special project
requiring the production of 35,000 units. The engineering [287] Source: CIA 0589 III-50
personnel have advised that the units can be produced in The moving-average method of forecasting
groups with the first group consisting of 1,000 units. A
review of prior experience indicates that the direct labor A. Is a cross-sectional forecasting method.
time needed per unit will be progressively smaller by a
constant percentage rate as experience is gained in the B. Regresses the variable of interest on a related
production process. The quantitative method that would variable to develop a forecast.
best estimate Corrigon's total cost for the project is
 C. Derives final forecasts by adjusting the initial
forecast based on the smoothing constant. [Fact Pattern #39]
A bank has two drive-in lanes to serve customers, one
D. Includes each new observation in the average as it attached to the bank itself, the second on an island. One
becomes available and discards the oldest teller serves both stations. The bank is interested in
observation. determining the average waiting times of customers and has
developed a model based on random numbers. The two
key factors are the time between successive car arrivals
[288] Source: CIA 0594 II-38 and the time customers wait in line. Assume that the
As part of a risk analysis, an auditor wishes to forecast the analysis begins with cars just arriving at both service
percentage growth in next month's sales for a particular windows, both requiring 3 minutes of service time. Car 1 is
plant using the past 30 months' sales results. Significant at the attached window and car 2 at the island window. A
changes in the organization affecting sales volumes were car will always go to the window attached to the bank
made within the last 9 months. The most effective analysis unless that window has more cars waiting than the island
technique to use would be window. The lone teller will always serve the car that
arrived first. If two cars arrive simultaneously, the one at
A. Unweighted moving average. the attached window will be served before the one at the
island.
B. Exponential smoothing.
Based on a known probability distribution, the bank assigns
C. Queuing theory. random numbers to arrival and service times:

D. Linear regression analysis. Time

Random between Random
# Arrivals: # Service Time
[289] Source: CIA 0586 III-15 ------- --------- ------- ------------
A bank has changed from a system in which lines are 1 1 minute 1, 2 1 minute
formed in front of each teller to a one-line, multiple-server 2, 3 2 minutes 3 2 minutes
system. When a teller is free, the person at the head of the 4, 5, 6 3 minutes 4, 5, 6 3 minutes
line goes to that teller. Implementing the new system will 7, 8 4 minutes 7, 8, 9 4 minutes
The bank then selects random numbers for the next two
A. Decrease the bank's wage expenses because the cars as Random Numbers Selected:
new system uses fewer tellers.
Arrival Service
B. Decrease time customers spend in the line. ------- -------
Car 3 #3 #7
C. Increase accuracy in teller reconciliations at the Car 4 #7 #8
end of the day because fewer customers are served
by each teller. [292] Source: CIA 1192 III-98
(Refers to Fact Pattern #39)
D. Improve on-the-job training for tellers because The arrival time follows which probability distribution?
each will perform different duties.
A. Binomial.

[290] Source: CIA 1187 III-39 B. Chi-square.

The drive-through service at a fast-food restaurant consists
of driving up to place an order, advancing to a window to C. Poisson.
pay for the order, and then advancing to another window
to receive the items ordered. This type of waiting-line D. Exponential.
system is

A. Single channel, single phase. [293] Source: CIA 1192 III-99

(Refers to Fact Pattern #39)
B. Single channel, multiple phase. The time that car 3 will have to wait to be serviced (not
including its own service time) is
C. Multiple channel, single phase.
A. 0-2 minutes.
D. Multiple channel, multiple phase.
B. 3 minutes.

[291] Source: CIA 0584 IV-34 C. 4 minutes.

A post office serves customers in a single line at one
service window. During peak periods, the rate of arrivals D. 5+ minutes.
has a Poisson distribution with an average of 100
customers per hour and service times that are exponentially
distributed with an average of 60 seconds per customer. [294] Source: CIA 1192 III-100
From this, one can conclude that the (Refers to Fact Pattern #39)
The time that car 4 will have to wait to be serviced (not
A. Queue will expand to infinity. including its own service time) is

A. 0-2 minutes.
B. Server will be idle one-sixth of the time.
B. 3 minutes.
C. Average rate is 100 customers per hour.
C. 4 minutes.
D. Average customer waiting time is 2.5 minutes.
D. 5+ minutes.
 C. Regression analysis.
[295] Source: CMA 0688 5-19
Under conditions of uncertainty, the rational, economic D. Game theory.
decision maker will use which one of the following decision
criteria?
[300] Source: CMA 0696 4-7
A. Maximax. It is estimated that a particular manufacturing job is subject
to an 80% learning curve. The first unit required 50 labor
B. Minimum regret. hours to complete. What is the cumulative average time per
unit after completing four units?
C. Laplace.
A. 50.0 hours.
D. Expected monetary value.
B. 40.0 hours.

[296] Source: CIA 1195 II-30 C. 32.0 hours.

A division uses a regression in which monthly advertising
expenditures are used to predict monthly product sales D. 30.0 hours.
(both in millions of dollars). The results show a regression
coefficient for the independent variable equal to 0.8. This
coefficient value indicates that [301] Source: CIA 1189 III-50
What are the four components of a time series?
A. The average monthly advertising expenditure in the
sample is $800,000. A. Trend, cyclical, seasonal, and irregular.

B. When monthly advertising is at its average level, B. Alpha, cyclical, seasonal, and irregular.
product sales will be $800,000.
C. Alpha, cyclical, seasonal, and repetitive.
C. On average, for every additional dollar in
advertising you get $0.80 in additional sales. D. Trend, cyclical, seasonal, and repetitive.

D. Advertising is not a good predictor of sales

because the coefficient is so small. [302] Source: CIA 1193 III-71
The marketing department of your company is deciding on
the price to charge for a key product. In setting this price,
[297] Source: CIA 0590 III-48 marketing needs to consider the price that a major
The analysis of decision-making situations in which one competitor will charge for a similar product because the
decision maker tries to optimize at the expense of a competitor's price will affect the demand for your
competitor is company's product. Similarly, in setting its price, the
competitor will consider what your company will charge.
A. Game theory.
An appropriate mathematical technique for analyzing such a
B. Probability theory. decision is

C. Queuing theory. A. Game theory.

D. Sensitivity analysis. B. Probability theory.

C. Linear programming.
[298] Source: CIA 1191 III-100
The decision rule that selects the strategy with the highest D. Sensitivity analysis.
utility payoff if the worst state of nature occurs is the

A. Minimize regret rule. [303] Source: CIA 0593 III-69

Only two companies manufacture Product A. The finished
B. Maximize utility rule. product is identical regardless of which company
manufactures it. The cost to manufacture Product A is $1
C. Maximin rule. and the selling price is $2. One company considers
reducing the price to achieve 100% market share but fears
D. Maximax rule. the other company will respond by further reducing the
price. Such a scenario would involve a

[299] Source: CIA 1193 III-67 A. No-win strategy.

A company has several departments that conduct technical
studies and prepare reports for clients. Recently, there have B. Dual-win strategy.
been long delays in having these reports copied at the
company's centralized copy center because of the dramatic C. One win-one lose strategy.
increase in business. Management is considering
decentralizing copy services to reduce the turnaround and D. Neutral strategy.
provide clients with timely reports. An appropriate
technique for minimizing turnaround time and the cost of
providing copy services is [304] Source: CIA 0592 III-70
One of your firm's trucks was involved in an accident with
A. Queuing theory. a car, both parties claiming the other was at fault. A court
ruled that your firm was solely responsible for all damage.
B. Linear programming. From a game theory perspective, this dispute can be
described as a .20 $500 $ 50
.70 300 400
A. Prisoner's dilemma. .10 600 800
The product line to obtain maximum utility for a risk-averse
B. Zero-sum game. decision maker is

C. Saddle point. A. X because it has the highest expected profit.

D. Minimax regret. B. Y because it has the highest expected profit.

C. Y because it has the highest dispersion.

[Fact Pattern #40]
A bank plans to open a branch in one of five locations D. X because it has the lowest dispersion.
(labeled L1, L2, L3, L4, L5). Demand for bank services
may be high, medium, or low at each of these locations.
Profits for each location-demand combination are [309] Source: CIA 0593 III-66
presented in the following payoff matrix. A cost-volume-profit model developed in a dynamic
environment determined that the estimated parameters used
Payoff Matrix may vary between limits. Subsequent testing of the model
------------- with respect to all possible values of the estimated
Location L1 L2 L3 L4 L5 parameters is termed
-------- -- -- -- -- --
Demand: A. A sensitivity analysis.
High 15 21 17 26 29
Medium 12 8 14 10 4 B. Statistical estimation.
Low 7 -2 4 -3 -6
C. Statistical hypothesis testing.
[305] Source: CIA 1191 III-96
(Refers to Fact Pattern #40) D. A time-series study.
If the bank uses the maximax criterion for selecting the
location of the branch, it will select
[310] Source: CIA 1190 III-46
A. L1 A firm is attempting to estimate the reserves for doubtful
accounts. The probabilities of these doubtful accounts
B. L2 follow a transition process over time. They evolve from
their starting value to a changed value. As such, the most
C. L3 effective technique to analyze the problem is

D. L5 A. Markov chain analysis.

B. Econometric theory.
[306] Source: CIA 1191 III-97
(Refers to Fact Pattern #40) C. Monte Carlo analysis.
If the bank uses the minimax regret criterion for selecting
the location of the branch, it will select D. Dynamic programming.

A. L2
[Fact Pattern #41]
B. L3 The following are the times required for various sequences
of activities (paths through the network) shown in a PERT
C. L4 diagram:

D. L5 Path Time in Days

------- ------------
A-B-C 27
[307] Source: CIA 1191 III-98 A-D-E-C 33
(Refers to Fact Pattern #40) A-F-C 34
If, in addition to the estimated profits, management of the A-F-G-C 36
bank assesses the probabilities of high, medium, and low
demands to be 0.3, 0.4, and 0.3, respectively, what is the [311] Source: Publisher
expected opportunity loss from selecting location L4? (Refers to Fact Pattern #41)
Which is the critical path?
A. 5.50
A. A-B-C
B. 10.90
B. A-D-E-C
C. 5.67
C. A-F-C
D. 7.00
D. A-F-G-C

[308] Source: CIA 0592 IV-21

Following is a table of probabilities for two separate [312] Source: Publisher
product lines, X and Y: (Refers to Fact Pattern #41)
How much slack time is there in path A-D-E-C?
Probability X profit Y profit
----------- -------- -------- A. 1 day.
 B. Minimize total travel time from one site to each of
B. 3 days. the other sites in a transportation system.

C. 6 days. C. Maximize throughput in networks with distinct

entry (source node) and exit (sink node) points.
D. 33 days.
D. Identify the set of connecting branches having the
shortest combined length.
[313] Source: Publisher
(Refers to Fact Pattern #41)
Path A-B-C is expected to require 27 days to complete. [318] Source: CMA 0688 5-27
This estimate was calculated using the PERT formula based Queuing models are concerned with balancing the cost of
on a most likely completion time of 25 days and a most waiting in the queue with the
optimistic completion time of 24 days. What estimate was
used for the most pessimistic completion time? A. Cost of providing service.

A. 25 days. B. Number of customers in the queue.

B. 27 days. C. Average waiting time in the queue.

C. 32 days. D. Utilization rate for the service being rendered.

D. 38 days.
[319] Source: CMA 0688 5-28
The operating condition that cannot be identified by using a
[314] Source: Publisher queuing model is the
A particular manufacturing job is subject to an estimated
80% learning curve. The first unit required 50 labor hours A. Average percentage of time that a service facility
to complete. What is the cumulative average time per unit is idle.
after eight units are completed?
B. Probability of a specified number of units in the
A. 20.0 hours. queue.

B. 25.6 hours. C. Actual amount of time each unit spends in the

queue.
C. 32.0 hours.
D. Average number of units in the system.
D. 40.0 hours.

[320] Source: Publisher

[315] Source: Publisher Jacob Corp. wishes to determine the fixed portion of its
A particular manufacturing job is subject to an estimated maintenance expense (a semivariable expense), as
80% learning curve. The first unit required 50 labor hours measured against direct labor hours, for the first 3 months
to complete. If the learning curve is based on a cumulative of the year. The inspection costs are fixed; the adjustments
average time per unit assumption, what is the time required necessitated by errors found during inspection account for
to complete the second unit? the variable portion of the maintenance costs. Information
for the first quarter is as follows:
A. 30.0 hours.
Direct Labor Hours Maintenance Expense
B. 40.0 hours. ------------------ -------------------
January 34,000 $610
C. 45.0 hours. February 31,000 $585
March 34,000 $610
D. 50.0 hours. What is the fixed portion of Jacob's maintenance expense,
rounded to the nearest dollar?

[316] Source: Publisher A. $283

A particular manufacturing job is subject to an estimated
90% learning curve. The first unit required 50 labor hours B. $327
to complete. What is the cumulative average time per unit
after four units are completed? C. $258

A. 50.0 hours. D. $541

B. 45.0 hours.
[321] Source: CMA 0685 5-7
C. 40.5 hours. The minimax regret decision rule is applicable to decision
making under conditions of
D. 40.0 hours.
A. Risk.

[317] Source: CIA 0596 III-100 B. Uncertainty.

A shortest-route algorithm is used in network models to
C. Subjective likelihoods.
A. Identify bottlenecks in a network and hence
identify the longest path. D. Objective likelihoods.
[322] Source: CMA 1288 5-6 [327] Source: CMA Samp Q4-7
The procedure for choosing the smallest maximum When simulating with the Monte Carlo technique, the
alternative loss is average simulated demand over the long run should
approximate the
A. Deterministic decision making.
A. Actual demand.
B. Queuing theory.
B. Real demand.
C. Maximax.
C. Sampled demand.
D. Minimax.
D. Expected demand.

[323] Source: Publisher

The least exact method for separating fixed and variable [Fact Pattern #42]
costs is The PERT network diagram and corresponding activity
cost chart for a manufacturing project at Networks, Inc. is
A. The least squares method. presented below. The numbers in the diagram are the
expected times (in days) to perform each activity in the
B. Computer simulation. project.

C. The high-low method. Normal Crash

Activity Cost Crash Time Cost
D. Matrix algebra. -------- ------ ---------- ------
AB $3,000 3.50 days $4,000
AC 5,000 4.50 5,250
[324] Source: CIA 1194 III-59 AD 4,000 4.00 4,750
The manager of the assembly department of a company BE 6,000 5.00 7,000
would like to estimate the fixed and variable components of CE 8,000 5.00 9,200
the department's cost. To do so, the manager has collected DE 6,000 6.50 6,750
information on total cost and output for the past 24 months. BC 2,500 .50 3,500
To estimate the fixed and variable components of total BD 2,000 .25 2,500
cost, the manager should use
[328] Source: CMA 1290 4-7
A. Regression analysis. (Refers to Fact Pattern #42)
(Refer to Figure 9.) The expected time of the critical path is
B. Game theory.
A. 12.0 days.
C. Sensitivity analysis.
B. 13.0 days.
D. Queuing theory.
C. 11.5 days.

[325] Source: Publisher D. 11.0 days.

In a simple linear regression, the standard error of the
estimate represents
[329] Source: CMA 1290 4-8
A. A measure of variability of the actual observations (Refers to Fact Pattern #42)
from the least squares line. (Refer to Figure 9.) In order to keep costs at a minimum
and decrease the completion time by 1ｽ days, Networks,
B. A variability about the least squares line that is Inc. should crash activity(ies)
uniform for all values of the independent variable in
the sample. A. AD and AB.

C. The proportion of the variance explained by B. DE.

independent variable.
C. AD.
D. A measure of the strength of the linear
relationship. D. AB and CE.

[326] Source: Publisher [330] Source: CIA 1196 III-96

Schippi Inc. is developing a new type of watch. The (Refer to Figure 10.) The network in Figure 10 describes
optimistic time to complete the project is 7 weeks, the most the interrelationships of several activities necessary to
likely time is 13 weeks, and the pessimistic time is 16 complete a project. The arrows represent the activities.
weeks. Using PERT, how long is the expected duration for The numbers between the arrows indicate the number of
this activity? months to complete each activity. The shortest time to
complete the project is
A. 6 weeks.
A. 5 months.
B. 7 weeks.
B. 6 months.
C. 12.5 weeks.
C. 8 months.
D. 13 weeks.
D. 14 months.
 [335] Source: Publisher
(Refers to Fact Pattern #44)
[Fact Pattern #43] Using the high-low method, what is Jackson's fixed cost?
Burger Joint is a fast food restaurant that is dependent upon
its quick service. Its manager wants to make sure it is A. $160
keeping up with the competition, so she compiles some
information. The average number of customers arriving is 4 B. $320
per minute, and the cashiers can serve 6 customers per
minute. C. $640

[331] Source: Publisher D. $1,040

(Refers to Fact Pattern #43)
What is the average number of customers in line or being
served at any time? [336] Source: Publisher
(Refers to Fact Pattern #44)
A. 1 customer. Jackson's management expects machine hours for the
month of May to be 1,400 hours. What is their expected
B. 2 customers. total cost for the month of May using the high-low method?

C. 3 customers. A. $560

D. 4 customers. B. $650

C. $720
[332] Source: Publisher
(Refers to Fact Pattern #43) D. $760
What is the average number of customers waiting in line,
not being served?
[337] Source: Publisher
A. .75 Rusty, the night manager at a local fast food restaurant, has
had problems with his employees not arriving on time. After
B. 1.33 doing some research, he discovered that, if his employees
were on time the night before, the probability that they
C. 4 would arrive on time again is .7. On the other hand, if they
were late the night before, the probability that they would
D. 8 arrive on time the following day is .4. What is the
probability that an employee will arrive on time the fourth
day if they arrived on time the first day?
[333] Source: Publisher
(Refers to Fact Pattern #43) A. .575
What is the average waiting time?
B. .583
A. .25 minutes.
C. .61
B. .33 minutes.
D. .7
C. .50 minutes.

D. .67 minutes. [Fact Pattern #45]

Poppin' Corn Co. has gross profits of $50 for each box of
popcorn it sells. Poppin' Corn also has a $20 holding fee
[Fact Pattern #44] for each box of popcorn it does not sell, and a $25 loss of
Jackson Co. has the following information for the first goodwill for every box of popcorn it is unable to provide to
quarter of its year: its customers. Managers are expecting to produce 1,000
boxes next month.
Machine Cleaning
Hours Expense [338] Source: Publisher
------- -------- (Refers to Fact Pattern #45)
January 2,100 $ 900 What is Poppin' Corn's expected net profit if demand is
February 2,600 1,200 predicted to be 950 boxes?
March 1,600 800
April 2,000 1,000 A. $45,000

[334] Source: Publisher B. $46,250

(Refers to Fact Pattern #44)
Using the high-low method, what is Jackson's variable cost C. $46,500
of cleaning per machine hour?
D. $47,500
A. $.40

B. $1.20 [339] Source: Publisher

(Refers to Fact Pattern #45)
C. $2.00 What is Poppin' Corn's expected net profit if demand is
predicted to be 1,100 boxes?
D. $2.50
A. 47,000
 B. 47,500 receive the bonus?

C. 48,000 A. Lucy.

D. 50,000 B. Sally.

C. Marcy.
[Fact Pattern #46]
D. Patty.
In Canada, highway tollbooth operators are given yearly
bonuses for various accomplishments. The following
information was made available: Linus has an average of 5 [Fact Pattern #47]
cars arriving in a minute and can service 7 in a minute. Donehart Corporation produces agricultural vehicles. Most
Schroeder has an average of 4 cars arriving in a minute and of the component parts for these vehicles are
can service 6 in a minute. Snoopy has an average of 5 cars
arriving in a minute and can service 8 in a minute. Pigpen subcontracted to reliable vendors. The final assembly of all
has an average of 6 cars arriving in a minute and can vehicles is accomplished at Donehart's plant. Donehart's
service 10 in a minute. Engineering Department has developed a new fuel injection
system that can be produced in-house because of the
[340] Source: Publisher availability of production capacity.
(Refers to Fact Pattern #46)
If the yearly bonus is given to the operator with the lowest The first production run of the new fuel injection system has
average number of cars waiting in line, which operator already been completed in-house. This 80-unit production
would receive the bonus? run took 60 direct labor hours per unit to produce based
on the cumulative average labor hours per fuel injection
A. Linus. unit. Donehart has experienced an 80% learning curve with
similar products, and this experience indicates that learning
B. Schroeder. tends to cease by the time 640 systems are produced.
Donehart's direct labor cost (including employee benefits)
C. Snoopy. is $18 per direct labor hour.

D. Pigpen. Donehart's management must decide whether to continue

producing the fuel injection system or to subcontract the
work. Donehart's purchasing agent, has received a
[341] Source: Publisher proposal from Midland Inc., a company specializing in fuel
(Refers to Fact Pattern #46) injection systems. From past contracts, Midland has
If the yearly bonus is given to the operator with the lowest proven to be efficient and reliable. The terms of Midland's
average number of cars in line not being serviced, which proposal are outlined below.
operator would receive the bonus?
Donehart must supply all materials required for the fuel
A. Linus. injection system units.
The first 80 units produced by Midland will require direct
B. Schroeder. labor input at the rate of 56 hours per unit. Current direct
labor cost is $20 per hour. The direct labor cost charged
C. Snoopy. to
Donehart will be the hourly rate in effect at the time the
D. Pigpen. work is performed. Midland is currently negotiating its
labor
contract which includes a 4% increase in direct labor cost
[342] Source: Publisher and
(Refers to Fact Pattern #46) should be applicable when Donehart signs the contract.
If the yearly bonus is given to the operator with the lowest A learning curve factor of 75% will be applied through the
average waiting time, which operator would receive the first 640 units produced, and all benefits derived from the
bonus? learning factor will accrue to Donehart.
Donehart must pay the actual labor cost incurred plus a
A. Linus. 5%
margin.
B. Schroeder.
[344] Source: Publisher
C. Snoopy. (Refers to Fact Pattern #47)
Assuming Donehart manufactures the units in-house, what
D. Pigpen. is the average labor hours per unit after manufacturing 640
units?

[343] Source: Publisher A. 60

Red Baron Inc. is a new competitor in the production of
airplane propellers. Red Baron has to train its employees in B. 30.72
the process of making propellers. To increase the speed of
learning, Red Baron will give a bonus to the employee with C. 23.63
the lowest cumulative average time per unit after eight units
are completed. Lucy took 50 hours to complete the first D. 23.04
unit, and she is subject to an 80% learning curve. Sally
took 60 hours to complete the first unit, and she is subject
to a 70% learning curve. Marcy took 40 hours to complete [345] Source: Publisher
the first unit, and she is subject to a 90% learning curve. (Refers to Fact Pattern #47)
Patty took 55 hours to complete the first unit, and she is Assuming Donehart manufactures the units in-house, how
subject to a 75% learning curve. Which employee will many total hours will it take to complete 1,000 units?
 A. 8,294.4 hours. C. $23,441,666

B. 19,660.8 hours. D. $42,875,000

C. 24,330 hours.
[Fact Pattern #48]
D. 27,955.2 hours. Alpha Company produces several different products and is
making plans for the introduction of a new product which it
will sell for $6 a unit. The following estimates have been
[346] Source: Publisher made for manufacturing costs on 100,000 units to be
(Refers to Fact Pattern #47) produced the first year:
Assuming Donehart manufactures the units in-house, how
much will it cost to complete the remaining units in order to Direct materials $500,000
fill the requirement? Direct labor $40,000 (the labor rate is $4/hour)
Overhead costs have not been established for the new
A. $416,793.60 product, but monthly data on total production and
overhead cost for the past 24 months have been analyzed
B. $463,104 using simple linear regression. The following results were
derived from the simple regression and provide the basis
C. $503,193.60 for overhead cost estimates for the new product.

D. $559,104 Dependent variable (y) - Factory overhead costs

Independent variable (x) - Direct labor hours
Computed values:
[347] Source: Publisher y-intercept $40,000
(Refers to Fact Pattern #47) Coefficient of independent variable $2.10
Assuming Donehart subcontracts the order to Midland, Coefficient of correlation 0.953
what is the total labor hours required to produce the 640 Standard error of estimate $2,840
units on the learning curve? Standard error of regression coefficient 0.42
Mean value of independent variable $18,000
A. 15,120 hours. Coefficient of determination 0.908

B. 18,350 hours. [351] Source: Publisher

(Refers to Fact Pattern #48)
C. 19,530 hours. What percentage of the variation in overhead costs is
explained by the independent variable?
D. 35,840 hours.
A. 90.8%

[348] Source: Publisher B. 42%

(Refers to Fact Pattern #47)
Assuming Donehart subcontracts the order to Midland, C. 48.8%
how many hours will it take to complete a unit after the
initial 640 units on the learning curve are finished? D. 95.3%

A. 11.81 hours.
[352] Source: Publisher
B. 15.75 hours. (Refers to Fact Pattern #48)
To determine a confidence interval for the parameter
C. 21.50 hours. estimated by b in the regression computation, an
appropriate t-value would be selected from a table of
D. 23.625 hours. values from student's t-distribution corresponding to the
desired level of confidence and having

[349] Source: Publisher A. 0 degrees of freedom.

(Refers to Fact Pattern #47)
Assuming Donehart subcontracts the order to Midland, B. 2 degrees of freedom.
what is the total out-of-pocket cost?
C. 10 degrees of freedom.
A. $302,400
D. 22 degrees of freedom.
B. $330,220.80

C. $390,600 [353] Source: Publisher

(Refers to Fact Pattern #48)
D. $426,535.20 Assuming that the appropriate t-value is 2.07, a 95%
confidence interval for the b values would be

[350] Source: Publisher A. (1.23, 2.97)

If PERT analysis were used to calculate revenue for
Oxford Industries, what would be the amount of that B. (0.10, 4.10)
revenue?
C. (2.1, 2.97)
A. $21,600,000
D. (0.22, 3.97)
B. $22,516,587
[354] Source: Publisher
(Refers to Fact Pattern #48)
The total overhead cost for an estimated activity level of
20,000 direct labor hours would be

A. $42,000

B. $82,000

C. $122,000

D. $222,000
 Answer (B) is correct. The probability that one
PART 4C
Quantitative Methods for department causes all the errors can be found by
multiplying the probability of each "state of nature,"
Decision Analysis i.e., the probability that each department makes
ANSWERS errors, by the percentage of business done by each
department, and adding the partial results together.

A = 50% x 2% = 1.0
[1] Source: CMA 0683 5-14
B = 30% x 5% = 1.5
C = 20% x 2.5% = .5
Answer (A) is incorrect because .755 is the average
-----
diameter. 3.0
=====
Answer (B) is incorrect because .7354 inches equals
Since A accounts for 1.0/3.0 of all probable errors,
the mean minus 1.96 times the standard deviation.
then the chances are about .33 that A is responsible
for the error in this case.
Answer (C) is incorrect because .7746 inches equals
the mean plus 1.96 times the standard deviation. Answer (C) is incorrect because .02 is the error rate
for Department A, which must be multiplied by the
Answer (D) is correct. Because a 95% confidence
percentage of sales processed. A = 50% x 2% =
interval equals 1.96 standard deviations in either
1.0; B = 1.5, C = .5. A accounts for 1.0 ・(1.0 +
direction from the mean, the desired lower boundary
1.5 + .5) of all probable errors, so the chances are
is found using the following formula:
.33 that A is responsible for the error.
_ ｽ
Answer (D) is incorrect because the probability that
x - z (s / (n) ) each department is responsible is determined as
ｽ follows:
.755 - 1.96(.01 / (100) )
.755 - .00196 = .75304 A = 50% x 2% = 1.0
B = 30% x 5% = 1.5
C = 20% x 2.5% = .5
[2] Source: CMA 0683 5-16 -----
3.0
Answer (A) is incorrect because 70% equals Firm =====
A's percentage of repeat customers. Since A accounts for 1.0/3.0 of all probable errors,
then the chances are about .33 that A is responsible
Answer (B) is incorrect because 80% equals Firm for the error.
B's percentage of repeat customers.

Answer (C) is incorrect because 60% is the [4] Source: CMA 0685 5-13
percentage of customers Firm B will have in the long
run. Answer (A) is incorrect because 1,925 is the total
sales volume, which must be divided by 11 days.
Answer (D) is correct. Each firm's retention and loss
of customers should be defined in equation form, and Answer (B) is incorrect because 100 is the mode of
the results should be solved simultaneously. Thus, the set.
100% of A's customers minus B's customers equals
70% repeat business of A plus 20% of new business Answer (C) is incorrect because 160 is the median
from B's former customers. In equation form, A's value.
customers are
Answer (D) is correct. The mean is a simple average.
.7A + .2B = 100% - B. It is computed by dividing the total sales of 1,925
Similarly, the equation for Firm B's customers is units by the 11 days. Thus, the mean is 175 units.
.8B + .3A = 100% - A
Simplifying the equations gives
100% - 1.2B 100% - 1.3A [5] Source: CMA 0685 5-14
A = ------------ B = ------------
.7 .8 Answer (A) is incorrect because 300 is the volume
Substituting the B equation into the equation for A, on the day representing the midpoint of the 11-day
100% - 1.5 (100% - 1.3A) period.
A = -------------------------
.7 Answer (B) is correct. The mode is the number that
100% - 150% + 1.95A = -50% + 1.95A occurs most often in a set. Since 100 units is the only
A = ------------------- ------------ recurring number, 100 is the mode.
.7 .7
.7A = -50% + 1.95A Answer (C) is incorrect because 160 is the median.
1.25A = 50%
A = 40% Answer (D) is incorrect because 100 is among the
responses given.
[3] Source: CMA 0683 5-17
[6] Source: CMA 0685 5-15
Answer (A) is incorrect because .50 is the
percentage of sales Department A processes. Answer (A) is incorrect because 300 is the volume
on the day representing the midpoint of the 11-day
period.
 Answer (B) is incorrect because 100 is the mode.
[10] Source: CMA 1285 5-18
Answer (C) is correct. When data are arranged in
numerical order, one-half of the values are smaller Answer (A) is incorrect because the $4.80 fixed
than the median and one-half of the values are manufacturing overhead rate equals annual fixed costs
greater. Accordingly, this value occurs at the 50th divided by machine time ($960,000 ・200,000).
percentile. With 11 days of sales, the middle value is
the sixth item. The following is the ranking of sales in Answer (B) is incorrect because the $4.80 fixed
order of volume: 100, 100, 100, 135, 150, 160, manufacturing overhead rate equals annual fixed costs
180, 190, 200, 300, 310. The middle item (median) divided by machine time ($960,000 ・200,000).
is 160.
Answer (C) is incorrect because the $4.80 fixed
Answer (D) is incorrect because 175 is the mean. manufacturing overhead rate equals annual fixed costs
divided by machine time ($960,000 ・200,000).
[7] Source: CMA 0685 5-8 Answer (D) is correct. According to the regression
equation, the monthly fixed costs are $80,000. On an
Answer (A) is incorrect because it includes annual basis, the total is $960,000. For normal
uncertainty as part of the answer. production of 50,000 cases, 200,000 hours of
machine time are required. Allocating the $960,000
Answer (B) is incorrect because it includes of fixed costs over 200,000 hours of machine time
uncertainty as part of the answer. results in a cost of $4.80 per machine hour.
Answer (C) is incorrect because under a condition of
certainty, a decision tree would not be needed. [11] Source: CMA 1285 5-26
Answer (D) is correct. Decision tree analysis is used Answer (A) is incorrect because the mode is the
when various options, their consequences, and the most common variable in a set.
probabilities of those consequences can be
ascertained with a high degree of confidence. Under Answer (B) is incorrect because the median is the
conditions of uncertainty, however, probabilities are middle value in a set.
unknown.
Answer (C) is incorrect because a coefficient of
correlation indicates the strength of the linear
[8] Source: CMA 1286 5-1 relationship among two or more variables.
Answer (A) is incorrect because management Answer (D) is correct. The standard deviation is a
decision processes fall into three categories: measure of the degree of compactness of the values
repetitive, nonprogrammed, and strategic. in a population. This measure is used to help
determine appropriate sample sizes. The formula is
Answer (B) is correct. Decision making can be
classified variously. For example, repetitive decisions 1/2
concern routine, programmable, day-to-day matters,
ﾚ ｿ
e.g., the automatic reordering of stock when it
ｳ (x - mu)ｲ ｳ
reaches a predetermined level. Nonprogrammed
decisions are the shorter-term, tactical ｳ i ｳ
implementation of the strategic decisions. Strategic Sigma = ｳ------------ｳ
decisions are aimed at setting long-term goals and ｳ N ｳ
objectives and making other overall ongoing ﾀ ﾙ
decisions for the entity.
The denominator is n - 1 when calculating the
Answer (C) is incorrect because management standard deviation of a sample.
decision processes fall into three categories:
repetitive, nonprogrammed, and strategic.
[12] Source: CMA 1286 5-7
Answer (D) is incorrect because management
decision processes fall into three categories: Answer (A) is incorrect because the t-test compares
repetitive, nonprogrammed, and strategic. means.

Answer (B) is incorrect because correlation analysis

[9] Source: CMA 1285 5-17 measures the relationship among variables.

Answer (A) is incorrect because $80,000 is the Answer (C) is incorrect because correlation analysis
amount of monthly fixed costs. measures the relationship among variables.

Answer (B) is incorrect because $320,000 is the sum Answer (D) is correct. Student's "t" distribution is a
of the fixed and variable costs. special distribution to be used when only small
samples are available and the population variance is
Answer (C) is correct. Each case requires 4 hours of not given. It is mound-shaped and symmetric like a
machine time. Thus, 5,000 cases would require normal distribution, only typically flatter with more
20,000 hours. At $12 per hour, the variable costs variation. A small sample is usually deemed to be less
would total $240,000. than 30. For samples larger than 30, the "t"
distribution gives results similar to the standard
Answer (D) is incorrect because 5,000 cases times 4 normal distribution. It is used to compare the means
machine hours times the $12 variable cost equals of two distributions to determine whether there is any
$240,000. significant difference between the two groups from
 which the means were taken. Answer (C) is incorrect because 50% is the
probability of selecting X104.

[13] Source: CMA 0688 5-19 Answer (D) is incorrect because 20% is among the
given responses.
Answer (A) is incorrect because, in game theory, the
maximax criterion is a decision rule adopted by
risk-seeking, optimistic players who desire the largest [16] Source: CMA 0688 5-26
possible payoff and are willing to accept high risk.
The player determines the payoff for each state of Answer (A) is incorrect because Model P104
nature expected to arise after each possible decision, corresponds to numbers 0 and 1.
ascertains the maximum payoff for each decision, and
then chooses the decision with the maximum payoff. Answer (B) is correct. The third customer is
simulated by the third number drawn. Therefore, the
Answer (B) is incorrect because a player who uses third customer's purchase is represented by the
the minimax decision criterion determines the number six. The numbers two through six correspond
maximum loss for each decision possibility and then to model X104. Thus, the third customer is expected
chooses the decision with the minimum loss. This rule to purchase model X104.
produces the same result as the maximin technique,
which determines the minimum payoff for each Answer (C) is incorrect because Model A104
decision and then chooses the decision with the corresponds to numbers 7 and 8.
maximum minimum payoff. Minimax and maximin are
conservative criteria. Answer (D) is incorrect because Model S104
corresponds to number 9.
Answer (C) is incorrect because the minimum regret
criterion is used by a player who wishes to minimize
the effect of a ba d decision in either direction. It [17] Source: CMA 1288 5-5
chooses the decision that has the lowest maximum
opportunity cost (profit foregone). Answer (A) is correct. In a decision tree, the events
following from a decision are mutually exclusive.
Answer (D) is correct. A rational economic decision Also, all possible events are included. Thus, the sum
maker (one completely guided by objective criteria) of the probabilities of the events is 1.0.
will use expected monetary value to maximize his/her
gains under conditions of risk because (s)he is Answer (B) is incorrect because it is a true statement
risk-neutral. For decisions involving variability in with respect to decision trees.
outcomes, the concept of expected value provides a
rational means for selecting the best choice. Expected Answer (C) is incorrect because it is a true statement
value represents the long-term average payoff for with respect to decision trees.
repeated trials. The best choice is the one having the
highest expected value (sum of the products of the Answer (D) is incorrect because it is a true statement
possible outcomes and their respective probabilities). with respect to decision trees.

[14] Source: CMA 0688 5-18 [18] Source: CMA 1288 5-14

Answer (A) is correct. The less the variability of the Answer (A) is incorrect because, if X is less than
future results of a decision, the smaller the risk 0.40, the investigation is not cost beneficial.
involved. If each choice is associated with only one
possible outcome, no variability exists, and the Answer (B) is correct. Costs will be either $6,000 or
probability of the outcome is 1.0. Such a condition is $24,000 if the variance is investigated and either $0
one of certainty (zero variance). or $33,000 if not. The probabilities at which the
expected costs of investigation are equal to the
Answer (B) is incorrect because there would be no expected costs of not investigating can be determined
risk or uncertainty if all facts were known and there from the following equation (X = the probability that
was only one possible outcome for each alternative. operations are improper):

Answer (C) is incorrect because there would be no $24,000X + $6,000 (1 - X) = $33,000X - $0 (1 - X)

risk or uncertainty if all facts were known and there $24,000X + $6,000 - 6,000X = $33,000X
was only one possible outcome for each alternative. X = .4
1 - X = .6
Answer (D) is incorrect because conflict between
alternatives may exist even when all facts are known Answer (C) is incorrect because 0.60 is the
and each choice has only one outcome. probability that the department is operating properly
and the manager is indifferent about investigating the
variance.

[15] Source: CMA 0688 5-25 Answer (D) is incorrect because the investigation
should be made if X is greater than 0.40.
Answer (A) is incorrect because 10% is the
probability of selecting S104.
[19] Source: CMA 1288 5-25
Answer (B) is correct. A total of ten random
numbers have been assigned. Of these, two (0 and 1) Answer (A) is incorrect because the standard
have been assigned to model P104. Thus, there are deviation measures dispersion (range), not the size of
two chances out of ten, or 20%, that a customer will constraints.
select that model.
Answer (B) is incorrect because frequency is given.
 Answer (C) is incorrect because the standard
deviation measures the dispersion of observations, [23] Source: CMA 0689 5-26
not probabilities.
Answer (A) is correct. The expected demand is
Answer (D) is correct. The standard deviation 300,000 units [(.4 x 200,000) + (.3 x 300,000) + (.2
measures the range (dispersion) of observations x 400,000) + (.1 x 500,000)]. Total expected cost is
around the mean. For example, about 95.5% of all therefore $170,000 [$50,000 fixed cost + ($.40 x
observations fall within two standard deviations of the 300,000) variable cost].
mean of a normally distributed variable.
Answer (B) is incorrect because $130,000 is
calculated by multiplying [($.4 x 200,000) +
[20] Source: CMA 1288 5-26 $50,000] instead of [($.4 x 300,000) + $50,000].

Answer (A) is incorrect because $2,250,000 is the Answer (C) is incorrect because $210,000 is
variance. Anser (C) is incorrect because $750 is the calculated by using 400,000 in the formula $.40X +
square root of $562,500. $50,000 instead of 300,000.

Answer (B) is correct. Substituting the cash flow Answer (D) is incorrect because $250,000 is
figures into the formula produces the following: calculated by using 500,000 in the formula $.40X +
$50,000 instead of 300,000.
_ _ _
X X (X - X)ｲ P (X - X)ｲ P
e e e e e [24] Source: CMA 0689 5-27
------ ------ ---------- ---- -----------
$4,000 $5,500 $2,250,000 x .25 = $ 562,500 Answer (A) is incorrect because the single purpose
5,000 5,500 250,000 x .50 = 125,000 machine is the best choice if expected demand is less
8,000 5,500 6,250,000 x .25 = 1,562,500 than 150,000.
Variance $2,250,000
The square root of $2,250,000 is $1,500. Answer (B) is incorrect because the automatic
machine is the best choice if expected demand
Answer (C) is incorrect because $750 is the square exceeds 350,000.
root of $562,500.
Answer (C) is correct. The semiautomatic machine
Answer (D) is incorrect because $353.55 is the has an expected cost of $170,000 based on an
square root of $125,000. expected demand of 300,000 units [(.4 X 200,000)
+ (.3 X 300,000) + (.2 X 400,000) + (.1 X
500,000)]. The single purpose machine has an
[21] Source: CMA 1288 5-27 expected cost of $200,000 [($.60 x 300,000) +
$20,000]. The automatic machine has an expected
Answer (A) is correct. The standard deviation for cost of $180,000 [($.20 x 300,000) + $120,000)].
clocks ($1,500) is lower than the standard deviation Hence, the semiautomatic machine has the lowest
for calculators. Thus, the range of outcomes is less expected cost at the expected level of demand.
dispersed and producing clocks is less risky.
Answer (D) is incorrect because the automatic
Answer (B) is incorrect because the greatest machine has the second lowest expected cost.
probability is for a lower rate of return.

Answer (C) is incorrect because both products are [25] Source: CMA 0689 5-28
profitable.
Answer (A) is incorrect because $(40) is the payoff
Answer (D) is incorrect because calculators have the amount when demand is 2 units.
higher standard deviation and the greater risk.
Answer (B) is incorrect because $80 is the payoff
amount when demand is 4 or 6 units.
[22] Source: CMA 0689 5-17
Answer (C) is correct. The approach to the solution
Answer (A) is correct. Probability distribution theory is to weight (multiply) the probabilities for each level
can be used to project sales. It is a mathematical of demand by the payoff for that level of demand.
method for making decisions about the likelihood of
future events (such as sales) in the face of uncertainty. Demand Payoff Probability Weighted Total
Various estimates of sales (generated from the sales ------ -------- ------------ --------------
force) can be weighted with different probabilities. 0 $(160) .1 $(16)
2 (40) .3 (12)
Answer (B) is incorrect because a Gantt chart is a 4 80 .4 32
bar chart used to measure progress toward a goal. 6 80 .2 16
Expected Profit $ 20
Answer (C) is incorrect because a learning curve
measures the benefit of experience in the early stages Answer (D) is incorrect because the expected profit
of a new task. of $20 equals the sum of the weighted totals when
supply is 4 units.
Answer (D) is incorrect because queuing
(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 [27] Source: CMA 0689 5-30
random.
 Answer (A) is incorrect because $68 is the amount of quantitative measure. The center line represents the
profit with perfect information. average or mean value for the process being
controlled. The other two lines are the upper control
Answer (B) is correct. The maximum amount the limit and the lower control limit. The processes are
seller should pay for perfect information is the measured periodically, and the values are plotted on
difference between the expected profit with perfect the chart. If the value falls within the control limits, no
information ($68) and the expected profit if demand action is taken. If the value falls outside the limits, the
process is considered "out of control," and an
is not known. Without the perfect information, the investigation is made for possible corrective action.
seller should purchase the supply that will result in the Another advantage of the chart is that it makes trends
maximum long-run profit. Using the information given, visible.
it can be determined that the profit will be $20 when
the supply is 4 units. It is also evident that the profit is Answer (D) is incorrect because quality control does
zero when the supply is zero. The expected profit not relate to controls over EDP operations.
must also be calculated for supply levels of 2 and 6
units. For a supply of 2 units, the expected profit is

.1($-80) + .3($40) + .4($40) + .2($40) = $28.

For a supply of 6 units, the expected loss is [31] Source: CMA 1289 5-21
.1($-240) + .3($-120) + .4($0) + .2($120) = $-36.
Thus, without perfect information, profits are Answer (A) is incorrect because 4,000 pretzels
maximized at $28 when the supply is 2 units. assumes each outcome is equally likely.
However, with perfect information, profits will be
$68. Thus, a rational seller should therefore be willing Answer (B) is incorrect because 4,400 pretzels is the
to pay up to $40 ($68 - $28). estimated demand using an expected value approach.

Answer (C) is incorrect because the price paid for Answer (C) is correct. A deterministic approach
perfect information equals the difference between assumes that a value is known with certainty. If that
profits expected with perfect information and profits value is deemed to be the most likely outcome,
without perfect information, or $40 ($68 - $28). assumed demand will be 5,000 pretzels, the volume
with the highest probability (35%).
Answer (D) is incorrect because the price paid for
perfect information equals the difference between Answer (D) is incorrect because 6,000 pretzels is
profits expected with perfect information and profits merely the greatest demand.
without perfect information, or $40 ($68 - $28).

[32] Source: CMA 1289 5-22

[28] Source: CMA 1289 5-13
Answer (A) is correct. Each pretzel costs $.30. Thus,
Answer (A) is incorrect because simple regression the cost of 4,000 pretzels is $1,200 (4,000 x $.30).
analysis assumes a linear relationship. Selling 3,000 pretzels at $1 each produces revenue
of $3,000. Subtracting the $1,200 of costs from the
Answer (B) is correct. Simple regression analysis is $3,000 of revenue results in a conditional profit of
used to find an equation for the linear relationship $1,800.
between two variables. The behavior of the
dependent variable is explained in terms of an Answer (B) is incorrect because $2,100 would be
independent variable. Multiple regression is based on the profit from selling 3,000 pretzels with 3,000
more than one independent variable. Mathematically, available; [($1 x 3,000) - ($.30 x 3,000)].
simple regression is depicted by the following
equation: Answer (C) is incorrect because $2,800 would be
the profit from selling 4,000 pretzels with 4,000
y = a + bx available; [($1 x $4,000) - ($.30 - $4,000)].
If: a = the y-axis intercept and
b = the slope of the regression line Answer (D) is incorrect because $1,800 is among the
responses given.
Answer (C) is incorrect because fixed costs can be
described by the regression equation as well as
variable costs. The y-intercept may represent fixed [33] Source: CMA 1289 5-23
costs and the slope variable costs.
Answer (A) is incorrect because $1,200 equals the
Answer (D) is incorrect because simple regression costs for 3,000 pretzels.
can be expressed on a two-dimensional graph.
Answer (B) is incorrect because $2,100 is the profit
from selling 3,000 units with 3,000 available; [($1 x
[29] Source: CMA 1289 5-15 3,000) - ($.30 x 3,000)].

Answer (A) is incorrect because quality control does Answer (C) is correct. Each pretzel costs $.30. Thus,
not relate to controls over accounting procedures. the cost of 4,000 pretzels is $1,200 (4,000 x $.30).
Selling 4,000 pretzels at $1 each produces revenue
Answer (B) is incorrect because quality control does of $4,000. Subtracting the $1,200 of costs from the
not relate to controls over labor costs. $4,000 of revenue results in a conditional profit of
$2,800.
Answer (C) is correct. Statistical control charts are
graphic aids for monitoring the status of any process Answer (D) is incorrect because $800 assumes
subject to random variations. The chart consists of 2,000 are sold.
three horizontal lines plotted on a horizontal time
scale. The vertical scale represents the appropriate
[34] Source: CMA 1289 5-24 pay for perfect information is the difference between
expected profit with perfect information and expected
Answer (A) is correct. Regardless of demand, only profit without perfect information, or $2.60 ($33 -
the 4,000 pretzels in stock can be sold. Thus, the $30.40).
conditional profit is the $2,800 difference between
the cost of 4,000 pretzels at $.30 each ($1,200) and Answer (D) is incorrect because the most Stan would
the revenue from selling 4,000 pretzels at $1 each pay for perfect information is the difference between
($4,000). expected profit with perfect information and expected
profit without perfect information, or $2.60 ($33 -
Answer (B) is incorrect because only 4,000 units can $30.40).
be sold. The profit equals $2,800 [($1 x 4,000) -
($.30 x 4,000)].
[37] Source: CMA 0690 5-19
Answer (C) is incorrect because only 4,000 units can
be sold. The profit equals $2,800 [($1 x 4,000) - Answer (A) is incorrect because linear programming
($.30 x 4,000)]. is used to optimize a function, such as profits or
costs, given certain constraints.
Answer (D) is incorrect because only 4,000 units can
be sold. The profit equals $2,800 [($1 x 4,000) - Answer (B) is incorrect because the minimax regret
($.30 x 4,000)]. criterion is a decision rule developed in game theory.
It chooses the option with the set of outcomes that
includes the lowest maximum opportunity cost.
[35] Source: CMA 0690 5-17
Answer (C) is correct. The expected value of an
Answer (A) is incorrect because 20 units does not action is found by multiplying the probability of each
have the greatest expected value. possible outcome by its payoff and summing the
products. It represents the long-term average payoff
Answer (B) is incorrect because 30 units does not for repeated trials. If estimates of sales and
have the greatest expected value. probabilities are known, expected value analysis can
be used to determine budgeted sales.
Answer (C) is correct. Expected value analysis is a
means of selecting the best option when decisions Answer (D) is incorrect because Monte Carlo
involve risk. The expected value equals the sum of simulation involves adding random numbers to
the products of the various payoffs and their otherwise deterministic models to simulate the
respective probabilities. Stocking 40 bags for each uncertainty inherent in real-world situations.
game is the action with the greatest expected value
($30.40) according to the payoff table.
[38] Source: CMA 0690 5-25
Answer (D) is incorrect because 50 units does not
have the greatest expected value. Answer (A) is incorrect because the expected value
is a long-range average; it is likely that the expected
value will never be exactly achieved for a particular
[36] Source: CMA 0690 5-18 event.

Answer (A) is incorrect because the most Stan would Answer (B) is incorrect because expected value does
pay for perfect information is the difference between not consider present values.
expected profit with perfect information and expected
profit without perfect information, or $2.60 ($33 - Answer (C) is incorrect because probability is only
$30.40). one component of expected value.

Answer (B) is correct. Expected value analysis Answer (D) is correct. The expected value of an
estimates future monetary value based on forecasts action is found by multiplying the probability of each
and their related probabilities of occurrence. The possible outcome by its payoff and summing the
expected value is found by multiplying the probability products. It represents the long-term average payoff
of each outcome by its payoff and summing the for repeated trials. In other words, expected value is
products. The expected value of perfect information the weighted average of probable outcomes.
is the difference between the expected value under
certainty and the expected value of the optimal
decision under uncertainty. The expected value under [39] Source: CMA 0692 4-4
certainty equals the sum of the products of the profit
maximizing payoffs of perfect forecasts and the Answer (A) is incorrect because the conditional value
related probabilities. is the return given a certain condition or state of
nature.
20% x $20 = $ 4.00
40% x $30 = 12.00 Answer (B) is correct. For decisions involving risk,
30% x $40 = 12.00 the concept of expected value provides a rational
10% x $50 = 5.00 means for selecting the best alternative. The expected
------ value of a decision is found by multiplying the
Total $33.00 probability of each outcome by its payoff, and
====== summing the products. The result is the long-term
Thus, with perfect information, the proprietor could average payoff for repeated trials.
achieve an average profit of $33 per game. Without
perfect information, the expected value is only Answer (C) is incorrect because the profit forgone by
$30.40. Accordingly, up to $2.60 could be paid for not choosing the best alternative is the opportunity
perfect information ($33 - $30.40). cost.

Answer (C) is incorrect because the most Stan would Answer (D) is incorrect because expected value
 represents the long-run average profit from an event. Answer (B) is incorrect because damages in the
clothing department contribute to 1% of the company
rate, but the question asks for the probability that a
[40] Source: CMA 1292 4-21 problem occurred in the clothing department.

Answer (A) is incorrect because the least the Answer (C) is incorrect because the clothing
company can make by selling coffee is $1,900. department quality problems make up 1/3 of the
overall company problems.
Answer (B) is incorrect because the most the
company can make by selling coffee is $2,000. Answer (D) is correct. Weighting the percentage of
sales by the percentage of quality control problems
Answer (C) is incorrect because the most the for each department determines the annual company
company can make by selling coffee is $2,000. rate of damaged goods as follows:

Department Sales Damages Weighted

Answer (D) is correct. The expected payoff ---------- -------- -------- -----------
calculation for coffee is: Clothing 50% 2% 1%
Hardware 30% 5% 1.5%
.4($1,900) + .6($2,000) = $1,960. Household 20% 2.5% 0.5%
------
3%
[41] Source: CMA 1292 4-22 ======
The clothing department accounts for 33-1/3% (1%
Answer (A) is incorrect because the most the vendor ・3%) of the total company rate. Thus, the
can make is $2,500 per day. probability that an observed problem is in the clothing
department is 33-1/3%.
Answer (B) is correct. The vendor would like to sell
coffee on cold days ($2,000) and soft drinks on hot
days ($2,500). Hot days are expected 40% of the [44] Source: CMA 1293 4-23
time. Hence, the probability is 40% of making
$2,500 by selling soft drinks. The chance of making Answer (A) is incorrect because $500,000 is the
$2,000 by selling coffee is 60%. The payoff equation unweighted sum of the payoffs.
is:
Answer (B) is correct. The expected value of a
.4($2,500) + .6($2,000) = $2,200. decision is found by multiplying the payoff of each
outcome by its probability and summing the products.
Answer (C) is incorrect because the least the vendor It is the long-term average payoff for repeated trials.
could make by having perfect information is $2,000 Thus, the expected contribution of the new product is
on cold days. $110,000 [(30% x $700,000) + (30% x $200,000)
+ (40% x a negative $400,000)].
Answer (D) is incorrect because the least the vendor
could make by having perfect information is $2,000 Answer (C) is incorrect because $270,000 does not
on cold days. consider the negative payoff.

Answer (D) is incorrect because $430,000 adds the

[42] Source: CMA 1292 4-23 loss from the negative payoff.

Answer (A) is incorrect because the vendor would

pay $600 for perfect information, but the forecasts [45] Source: CMA 1293 4-26
are only 50% accurate.
Answer (A) is incorrect because the expected value
Answer (B) is correct. If the weather is hot and of perfect information is the difference between the
coffee is served, the vendor earns $1,900. If the expected profit under certainty and the profit from the
vendor knows the weather will be hot, (s)he would best decision under uncertainty.
sell soft drinks and make $2,500, a $600 increase.
Thus, the vendor should be willing to pay up to $600 Answer (B) is incorrect because the expected value
for perfect information regarding hot weather. of perfect information is the excess of the total
However, if the forecasts are only 50% accurate, the conditional profits under certainty over the profit from
information is not perfect. Accordingly, the vendor the best decision under uncertainty.
should be willing to pay only $300 (50% x the $600
potential increase in profits) for the sometimes Answer (C) is incorrect because there is no expected
accurate forecasts. opportunity loss under conditions of certainty.

Answer (C) is incorrect because the most the vendor Answer (D) is correct. Perfect information permits
could profit from perfect information on hot days certainty that a future state of nature will occur. The
would be $600 ($2,500 - $1,900). expected value of perfect information determines the
maximum amount a decision maker is willing to pay
Answer (D) is incorrect because perfect information for information. It is the difference between the
is worth $600, but information that is 50% accurate expected value without perfect information, that is,
warrants only a $300 payment. the expected value of the best action under
uncertainty, and the expected value under certainty.
Under certainty, a decision maker knows in each
[43] Source: CMA 1292 4-24 case which state of nature will occur and can act
accordingly.
Answer (A) is incorrect because the rate is 50%
(1.5% ・3%) for the hardware department.
[46] Source: CMA 1293 4-28
 deviation is a measure of dispersion of a population.
Answer (A) is incorrect because the dependent cost
variable is estimated. Answer (D) is incorrect because expected value is a
prospective measure.
Answer (B) is incorrect because probability
assumptions are not used in regression analysis.
[50] Source: CMA 1286 5-5
Answer (C) is correct. Regression analysis finds an
equation for the linear relationship among variables. Answer (A) is incorrect because factor analysis tries
The behavior of the dependent variable is explained to determine factors leading to a result.
in terms of one or more independent variables.
Simple regression has one independent variable, and Answer (B) is incorrect because it is not meaningful in
multiple regression has more than one. this context.

Answer (D) is incorrect because the coefficient of Answer (C) is incorrect because correlation analysis
determination may be interpreted as the proportion of determines the degree of the linear relationship
the total variation in the dependent variable that is between variables.
explained by the regression equation.
Answer (D) is correct. Regression analysis assumes
that a change in the value of a dependent variable is
[47] Source: CMA 1293 4-29 related to the change in the value of an independent
variable. It attempts to find an equation for the linear
Answer (A) is incorrect because network analysis is relationship among variables by using the least
a means of scheduling long term projects; PERT and squares method, which minimizes the sum of the
the critical path method (CPM) are examples. squares of the vertical distance between each
observation point and the regression line.
Accordingly, regression analysis determines the
Answer (B) is correct. Decision trees may be used to amount of change in a dependent variable based
describe complex decision situations. Each branch of upon changes in one or more independent variables.
the tree represents a different decision, and each twig It is an extension of correlation analysis to find a
extending from each branch represents several formula for the relationship among variables.
possible outcomes of the decision.

Answer (C) is incorrect because Monte Carlo [51] Source: CMA 0688 5-2
simulation is a technique for experimenting with
mathematical models using a computer, which Answer (A) is incorrect because Monte Carlo
generates random values for each variable. simulation involves adding random numbers to
otherwise deterministic models to simulate the
Answer (D) is incorrect because linear programming uncertainty inherent in real-world situations.
is a means of allocating scarce resources given a
specified objective and a variety of constraints. Answer (B) is incorrect because dynamic
programming is used for problems that involve
probabilistic variables and time-staged decisions, that
[48] Source: CMA 1286 5-2 is, decisions affected by previous decisions. It
involves an iterative formulation of problems. A
Answer (A) is incorrect because a probability less decision tree with probabilities for each branch
than 1.0 would not be certainty. illustrates a time-staged decision process that could
be evaluated with dynamic programming.

Answer (B) is correct. An event is certain if there is Answer (C) is correct. Regression analysis can be
no doubt that it will occur. The probability is 1.0 if an used to estimate costs and divide them into their fixed
event is certain to occur, and 0 if it is certain not to and variable components. A dependent variable is
occur. Under conditions of certainty, consequences estimated based upon the values of one or more
are therefore deterministic, not probabilistic or independent variables. The basic regression formula
unknown. explains the behavior of a dependent variable (y) in
terms of an independent variable (x). In the formula
Answer (C) is incorrect because certainty implies a for simple linear regression, a is the y-intercept (fixed
specific outcome. cost in a cost function), b is the slope of the
regression line (variable cost), and e is the error term.
Answer (D) is incorrect because it is a nonsense The formula is
answer.
y = a + bx + e

[49] Source: CMA 1286 5-3 Answer (D) is incorrect because expected value
analysis is a means of selecting the best alternative
Answer (A) is incorrect because the standard when decisions involve risk. The expected value
deviation is a measure of dispersion of a population. equals the sum of the products of payoffs and their
respective probabilities.
Answer (B) is correct. Expected value analysis is an
estimate of future monetary value based on forecasts
and their related probabilities of occurrence. The [52] Source: CMA 0688 5-20
expected value is found by multiplying the probability
of each outcome by its payoff and summing the Answer (A) is correct. The first step is to determine
products. Expected value is thus an arithmetic mean the expected value without perfect information by
using probabilities as weights. formulating a payoff matrix. For example, the
expected payoff for the combination of State of
Answer (C) is incorrect because the standard Nature S1 and Decision 1 is $2.40 (10% probability
 x $24 outcome). The entire payoff matrix is Answer (D) is incorrect because each event must be
weighted by the probability of its occurrence.
S1 S2 S3 Total
------- -------- ------- ---------
Decision 1 $ 2.40 $7.00 $(2.40) $7.00 [55] Source: CMA 0691 4-2
Decision 2 2.00 5.00 2.00 9.00
Decision 3 (2.00) 4.00 6.00 8.00 Answer (A) is incorrect because stocking an amount
Thus, the best decision under conditions of equal to expected demand (the sum of the products
uncertainty is Decision 2 (expected value = $9). If the of the possible amounts demanded and their
decision maker knew exactly when each state of respective probabilities) does not necessarily
nature would occur, the decision would correspond maximize expected profits.
to the maximum profit opportunity for that state of
nature. For instance, if S1 is certain, the most Answer (B) is incorrect because the number of bags
profitable decision is Decision 1 ($24). Thus, the to stock is not necessarily the same as the amount
expected payoff given perfect information is $15.40. demanded with the highest probability. The inventory
decision should be based on the relation of the
Decision Profit Probability Payoff probability distribution to the monetary outcomes.
--------- -------- ----------- -------
1 $24 10% $2.40 Answer (C) is incorrect because the greatest
2 14 50 7.00 opportunity cost is not factored into the expected
3 15 40 6.00 value analysis.
The expected value of perfect information is therefore
$6.40 ($15.40 - $9.00). Answer (D) is correct. The Booster Club should
select the demand level that maximizes profits, that is,
Answer (B) is incorrect because $8.40 equals the the level with the greatest expected monetary value.
payoffs from Decisions 1 and 3 ($2.40 + $6.00). This level may not include the event with the highest
conditional profit because this profit may be
Answer (C) is incorrect because $9.00 is the best accompanied by a low probability of occurrence.
decision under conditions of uncertainty. Alternatively, the event with the highest probability of
occurrence may not be selected because it does not
Answer (D) is incorrect because the expected value offer a high conditional profit.
of perfect information is $6.40 ($15.40 - $9.00).

[56] Source: CMA 0691 4-3

[53] Source: CMA 1288 5-1
Answer (A) is incorrect because the value of perfect
Answer (A) is incorrect because CPM (critical path information is limited to the excess of the profit under
method) is a diagrammatic method of network certainty over the best return without perfect
analysis used to control complex projects. Unlike information.
PERT, a related technique, it uses deterministic
(nonprobabilistic) time and cost estimates. Answer (B) is incorrect because the value of perfect
information is limited to the excess of the profit under
Answer (B) is incorrect because linear programming certainty over the best return without perfect
is a deterministic technique to find the optimum information.
allocation of resources subject to constraints.
Answer (C) is incorrect because it may not be the
Answer (C) is correct. A decision tree may be used best act under certainty that is considered; the value
to describe decision situations. Each decision is of perfect information is based on the event that is
represented by a branch of the tree. Each event or known will happen, whether that event is the best or
state of nature resulting from that decision is a the worst.
subbranch presented with its probability and
numerical outcome. Answer (D) is correct. The expected value under
uncertainty is found by multiplying the probability of
Answer (D) is incorrect because the EOQ (economic each outcome (event) by its payoff (conditional profit
order quantity) model is used to select the optimum or loss) and summing the products. Perfect
size of each purchase order given a deterministic information is the knowledge that a future state of
demand. nature will occur with certainty. The expected value
of perfect information is the difference between the
expected value under certainty and the expected
[54] Source: CMA 0691 4-1 value of the optimal decision under uncertainty. The
expected value under certainty equals the sum of the
Answer (A) is incorrect because the conditional profit products of the profit maximizing payoffs of perfect
or loss must be weighted by the probability of each forecasts and the related probabilities.
event's occurrence.

Answer (B) is correct. Expected value analysis [57] Source: CMA 1291 4-19
estimates future monetary value based on forecasts
and their related probabilities of occurrence. The Answer (A) is incorrect because network analysis is
expected value under uncertainty is found by a project scheduling technique.
multiplying the probability of each outcome (event) by
its payoff (conditional profit or loss) and summing the Answer (B) is correct. A decision tree diagram is a
products. quantitative tool for decision making used to obtain
an optimum solution when a series of related
Answer (C) is incorrect because the best event will decisions must be made. The tree will consist of
not occur every time; less desirable events will also decision choices for each decision point, possible
occur and must enter into the calculation. events that might follow from each choice, probability
estimates for each event, and quantified outcomes. A
 decision tree facilitates calculation of the expected Answer (A) is incorrect because y is the dependent
value of a decision. variable.

Answer (C) is incorrect because the Monte Carlo Answer (B) is correct. The slope of a line is a
method adds random behavior to otherwise constant equal to the proportionate change along the
deterministic models to simulate the uncertainty y axis for each change along the x axis. Thus, in a
inherent in real-world situations. regression equation, slope represents the variable
portion of the total cost in the cost function, i.e., the
Answer (D) is incorrect because queuing theory is change in cost that occurs for each one-unit change in
used to minimize the total cost of waiting lines. activity.

Answer (C) is incorrect because x is the independent

[58] Source: Publisher variable.

Answer (A) is incorrect because it does not have an Answer (D) is incorrect because e is the error term.
error term or a slope term.

Answer (B) is incorrect because it does not have an [62] Source: Publisher
error term or a slope term.
Answer (A) is incorrect because a is the y-axis
Answer (C) is correct. The equation is based upon intercept.
application of regression analysis to observations of
the independent variable x and the dependent Answer (B) is incorrect because y is the dependent
variable y. The result equates y (the dependent variable.
variable) with the sum of a (the y-intercept), bx (b is
the slope and x is the independent variable), and e Answer (C) is incorrect because b is the slope of the
(an error term). The error term indicates the degree line.
of uncertainty.
Answer (D) is correct. The independent or
Answer (D) is incorrect because a simple regression explanatory variable is the variable that is permitted
should be a linear, not curvilinear, function. to change. These changes are used to predict values
of the dependent variable.

[59] Source: Publisher

[63] Source: Publisher
Answer (A) is incorrect because a is the y-axis
intercept. Answer (A) is incorrect because a is the y-axis
intercept.
Answer (B) is correct. The dependent variable in the
regression equation is the item to be estimated (or Answer (B) is incorrect because y is the dependent
calculated or predicted), i.e., y. In regression variable.
analysis, the objective is to predict a value of one
variable (dependent) in terms of the values of one or Answer (C) is incorrect because b is the slope of the
more other variables (independent). line.

Answer (C) is incorrect because b is the slope of the Answer (D) is correct. The error term in the equation
is e. The error term is usually assumed to have a
line. mean of zero in linear regression, thereby permitting
calculations using the formula y = a + bx.
Answer (D) is incorrect because x is the independent
variable.
[64] Source: Publisher

[60] Source: Publisher Answer (A) is correct. The confidence interval is a

range of values constructed from the regression
Answer (A) is correct. The y-axis intercept is equal results that is expected to contain the true population
to a in the equation. If the relevant range includes value. It equals the estimate of y plus or minus the
zero volume, a is a fixed cost in the usual cost number of standard errors of the estimate appropriate
function. It is the expected value of y when x is zero, for the desired level of confidence (probability that
provided that it lies within the relevant range of the the interval contains the true value). This involves
sample. The relevant range of the regression analysis taking the mean, adjusting for the standard deviation
is the portion of the least squares line between the and the appropriate probability distribution, to arrive
minimum and maximum values of the independent at the range.
variable. The predictive ability of regression should
be limited to this region. Answer (B) is incorrect because it describes constant
variance.
Answer (B) is incorrect because b is the slope of the
line. Answer (C) is incorrect because it describes the
coefficient of determination.
Answer (C) is incorrect because x is the independent
variable. Answer (D) is incorrect because the strength of the
linear relationship is measured by the coefficient of
Answer (D) is incorrect because e is the error term. correlation.

[61] Source: Publisher [65] Source: Publisher

 Answer (A) is incorrect because it describes a
confidence interval. Answer (D) is incorrect because 20% is the
difference between the probabilities of an increase in
Answer (B) is correct. Constant variance signifies a the costs of Material 1 and Material 2.
uniform deviation of points from the regression line.
This uniformity is based on the assumption that the
distribution of the observations and errors is not [69] Source: Publisher
affected by the values of the independent variable(s).
Answer (A) is incorrect because it is an attribute of a
Answer (C) is incorrect because constant variance is probability distribution.
one of the basic assumptions underlying regression
analysis. Answer (B) is incorrect because it is an attribute of a
probability distribution.
Answer (D) is incorrect because one of the basic
assumptions underlying regression analysis is that Answer (C) is correct. In probability distribution, the
observations are independent. probability of any event(s) is bounded by 0 (no
chance) and 1 (certainty). The total probability of all
possible outcomes must sum to 1. Also, a probability
[66] Source: Publisher distribution models a random variable through the use
of a formula or graph that provides the probability
Answer (A) is incorrect because all of the answers associated with the occurrence of certain values of
are correct. the random variable. If only one outcome is possible,
the variable is not random but constant and known
Answer (B) is incorrect because all of the answers with certainty.
are correct.
Answer (D) is incorrect because it is an attribute of a
Answer (C) is incorrect because all of the answers probability distribution.
are correct.

Answer (D) is correct. All four statements are true. [70] Source: CIA 1189 III-19
This ideal situation permits t-tests (i.e., use of the
normal distribution adjusted for degrees of freedom) Answer (A) is incorrect because a flowchart but not
to evaluate the significance of the estimates. a decision tree would depict this item.

Answer (B) is incorrect because a flowchart but not a

[67] Source: CIA 0589 III-21 decision tree would depict this item.

Answer (A) is correct. Decision making under risk Answer (C) is incorrect because a flowchart but not
entails consideration of multiple possible future states a decision tree would depict this item.
of nature for each choice. The decision is under risk if
a probability distribution for these states can be Answer (D) is correct. A decision tree is a logic
estimated. Thus, the states of nature will be mutually diagram used to represent sequential decision-making
exclusive, and the sum of their probabilities will equal processes. It is useful when the most beneficial series
1.0. Risk increases as the variability of outcomes of decisions is to be chosen. The possible decisions
becomes greater. In practice, however, the terms risk for each decision point, the events that might follow
and uncertainty are often treated as synonyms. from each decision, the probabilities of these events,
and the quantified outcomes of the events should be
Answer (B) is incorrect because, under uncertainty, known to develop a decision tree. A flowchart is a
the probabilities of the possible states of nature are diagram of a repetitive logical process, such as the
unknown. steps in a computer program. Thus, it is not designed
to show particular outcomes.
Answer (C) is incorrect because, under certainty, that
is, with perfect information, the outcome of each
decision choice is known; that is, its probability is [71] Source: CIA 1195 II-14
1.0.
Answer (A) is incorrect because a t-test is not valid
Answer (D) is incorrect because satisficing decisions in this case.
are satisfactory or sufficient but not optimal.
Answer (B) is incorrect because the auditor already
has a list of the entire population, and no sampling is
[68] Source: CIA 1194 III-60 needed.

Answer (A) is correct. The joint probability of Answer (C) is incorrect because a t-test can be used
occurrence of two independent events equals the with groups that differ in size.
product of their individual probabilities. The
probability that the cost of Material 1 will increase by Answer (D) is correct. The t-distribution is used for
3% is .3. The probability that the cost of Material 2 small samples but in the same way as the normal
will increase by 3% is .5. The probability that both distribution. A t-test is not valid when used with
will occur is .15 (.3 x .5). ordinal-level data. A t-test by definition is an
application of parametric statistics. Nonparametric
Answer (B) is incorrect because 40% is the average (distribution-free) statistics is applied to problems for
of the probabilities of a 3% increase in the costs of which rank order, but not a specific distribution, is
Material 1 and Material 2. known.

Answer (C) is incorrect because 80% is the sum of

the probabilities of a 3% increase in the costs of [72] Source: CIA 1188 III-44
Material 1 and Material 2.
 Answer (A) is incorrect because payoffs are outcome (regression) method is a sophisticated method of
measures such as profit or loss. identifying the fixed and variable costs.

Answer (B) is correct. Applying decision theory Answer (B) is incorrect because a computer
requires the decision maker to develop an exhaustive simulation is a more exact method of separating fixed
list of possible future events. All possible future and variable costs.
events that might occur must be included, even
though the decision maker will likely be very unsure Answer (C) is correct. The fixed and variable
as to which specific events will occur. These future portions of mixed costs may be estimated by
uncontrollable events are referred to as states of identifying the highest and the lowest costs within the
nature. relevant range. The difference in cost divided by the
difference in activity is the variable rate. Once the
Answer (C) is incorrect because probabilities are the variable rate is found, the fixed portion is
likelihood of occurrence of the states of nature. determinable. The high-low method is a simple
approximation of the mixed cost formula. The costs
Answer (D) is incorrect because nodes (junction of using more sophisticated methods sometimes
points) are decision points. outweigh the incremental accuracy achieved. In these
cases, the high-low method is sufficient.

[73] Source: CMA 1294 4-30 Answer (D) is incorrect because matrix algebra is a
precise method of separating fixed and variable costs.
Answer (A) is correct. Expected value analysis
provides a rational means for selecting the best
alternative in decisions involving risk. The expected [76] Source: CIA 0594 III-41
value of an alternative is found by multiplying the
probability of each outcome by its payoff, and Answer (A) is incorrect because knowing the
summing the products. It represents the long-term behavior of business cycles can be valuable when
average payoff for repeated trials. forecasting the required purchases of inventory.

Answer (B) is incorrect because simulation is not Answer (B) is correct. Internal accounting allocations
necessary. Several estimates are known. of costs to different segments of the firm are arbitrary
assignments of already incurred costs that are
Answer (C) is incorrect because the exponential irrelevant to forecasting its purchases.
distribution is the probability of zero occurrences in a
specified time period. Answer (C) is incorrect because understanding
seasonal variations in demand for the product can be
Answer (D) is incorrect because sensitivity analysis valuable when forecasting the required purchases of
involves making several estimates of key variables inventory.
and recalculating results based on the alternative
estimates; the objective is to determine how sensitive Answer (D) is incorrect because the use of
a solution is to changes in estimates. econometric models can be valuable when
forecasting the required purchases of inventory.

[74] Source: CIA 0593 III-34

Answer (A) is incorrect because, under risk there are [77] Source: CIA 0594 III-99
multiple outcomes; certainty exists when only one
outcome is possible. Answer (A) is correct. Cost X is a mixed cost (part
variable and part fixed). The hi-low method can be
Answer (B) is incorrect because calculation of used to determine the fixed and variable portions.
expected values is dependent upon probabilities. Dividing the total cost of X at two different
production volumes by the difference in units
Answer (C) is incorrect because decision makers produced gives a unit variable cost of $4.83
may also rely on probabilistic information under [($178,260 - $23,700) ・(35,000 units - 3,000
conditions of risk. units)]. Fixed cost must therefore be $9,210
[$178,260 cost of X for 35,000 units - ($4.83 x
Answer (D) is correct. Probability is important to 35,000 units)]. Total cost of X for 8,000 units is
$47,850 [$9,210 + ($4.83 x 8,000 units)], and the
management decision making because of the average cost is $5.98 ($47,850 ・8,000).
uncertainty of future events. Probability techniques
assist in making the best decisions in the face of Answer (B) is incorrect because $5.85 equals the
uncertainty. There are two types of probability: average cost of 9,000 units.
objective and subjective. Objective probabilities are
calculated from either logic or actual experience. Answer (C) is incorrect because $7.90 equals the
Subjective probabilities are estimates, based on average cost of 3,000 units.
judgment and past experience, of the likelihood of
future events. In business, subjective probability can Answer (D) is incorrect because $4.83 is the variable
indicate the degree of confidence a person has in cost per unit.
some outcome. Under conditions of uncertainty, a
decision maker must first establish subjective
probabilities; only then can the decision-making [78] Source: CMA 1287 5-21
process proceed as it does under conditions of risk.
Answer (A) is correct. The sum of the probabilities
that the process is in or out of control is 1.0. Thus, if
[75] Source: Publisher P is the probability that a process is in control, (1 - P)
is its complement, or the probability that the process
Answer (A) is incorrect because the least squares is not in control.
 Answer (B) is incorrect because it is a nonsense Answer (D) is incorrect because continuous
answer. monitoring and frequent feedback are two of the
important elements of statistical quality control.
Answer (C) is incorrect because it is a nonsense
answer.
[82] Source: Publisher
Answer (D) is incorrect because it is a nonsense
answer. Answer (A) is incorrect because .0577 results from
using n, not n-1, in the denominator.

[79] Source: CMA 1287 5-22 Answer (B) is correct. The sample mean is the sum
of the observations divided by the sample size. The
Answer (A) is incorrect because transforming the sample mean is typically denoted as func x BAR. The
inequality to an equality and solving for P gives the following is
expression 1 - [I ・(L - C)].
2 _2
Answer (B) is incorrect because transforming the the sample variance (s ): ・x - x) ・(n - 1). The sample
inequality to an equality and solving for P gives the i
expression 1 - [I ・(L - C)].
standard deviation (s) is the square root of the
Answer (C) is correct. The critical probability that the variance. Thus, the sample variance is .00375 [.03 ・
process is in control is defined as P. Transforming the (9 - 1)], and the sample standard deviation is .0612
inequality into an equality and solving for P (square root of .00375).
determines the value of the critical probability. For
any lesser value of P, given constant values of L, I, Answer (C) is incorrect because .0316 equals .03
and C, investigation will be justified. divided by .95.

L(1 - P) = I + C(1 - P) Answer (D) is incorrect because .00375 is the

(L - C)(1 - P) = I variance.
1 - P = I ・(L - C)
P = 1 - I ・(L - C)
For example, if I equals $18, L equals $100, and C [83] Source: Publisher
equals $10, then the lowest (critical) probability at
which the process is considered to be in control is Answer (A) is incorrect because the null hypothesis is
that the population mean is equal to or less than 1
0.8 [1 - $18 ・($100 - $10)]. At this value, the
calorie. The alternate hypothesis is that it is greater
expected value of the operating cost savings from
investigation equals the sum of the cost of than 1.
investigation and the expected value of the cost of
Answer (B) is correct. ABC asserts that its diet soda
correction.
has, on the average, 1 calorie or less. Thus, a
Answer (D) is incorrect because transforming the possible null hypothesis is Ho: ｵ ・1. The alternative
inequality to an equality and solving for P gives the hypothesis is that the mean is greater than 1, that is,
expression 1 - [I ・(L - C)]. Ha: ｵ > 1. Because the null hypothesis cannot be
rejected if the test statistic falls in the left-hand tail of
the distribution, the test is one-tailed.
[80] Source: CIA 0587 III-44
Answer (C) is incorrect because the null hypothesis is
Answer (A) is incorrect because a C chart is also an that the population mean is equal to or less than 1
attribute control chart. It shows defects per item. calorie. The alternate hypothesis is that it is greater
than 1.
Answer (B) is correct. A P chart is based on an
attribute (acceptable/not acceptable) rather than a Answer (D) is incorrect because the null hypothesis is
measure of a variable, specifically, the percentage of that the population mean is equal to or less than 1
defects in a sample. calorie. The alternate hypothesis is that it is greater
than 1.
Answer (C) is incorrect because an R chart displays
the range of dispersion of a variable, such as size or
weight. [84] Source: Publisher

Answer (D) is incorrect because an X-bar chart plots Answer (A) is incorrect because the z-statistic is
the sample mean for a variable. appropriate when the standard deviation of the
population is known or a large sample (n > 30)
permits a reasonable approximation of the population
[81] Source: CIA 0595 II-48 standard deviation.

Answer (A) is incorrect because acceptance Answer (B) is correct. The t-statistic is appropriate
sampling is a standard statistical process control for tests of hypotheses based on small samples. It
technique. measures how the sample mean differs from the
hypothesized true mean in terms of standard
Answer (B) is correct. Dollar-unit sampling has been deviations. The formula is
uniquely applied to auditing account balances. It is
not used in statistical processing control. _
x-ｵ
Answer (C) is incorrect because quality control t = --------------------
charts are an integral part of TQM approaches. s ・square root of n
 _ ｵ ・1.
If: x = sample mean,
ｵ = hypothesized true mean Answer (C) is incorrect because 1.833 is for 9
s = sample standard deviation degrees of freedom.
n = sample size.
Answer (D) is incorrect because 2.262 is for 9
Answer (C) is incorrect because the F-statistic tests degrees of freedom and a confidence level of 97.5%.
differences in variances.

Answer (D) is incorrect because Q-statistic is a [88] Source: Publisher

nonsense term.
Answer (A) is incorrect because the null hypothesis
cannot be rejected.
[85] Source: Publisher
Answer (B) is correct. The critical value of t is 1.86,
Answer (A) is correct. Given that func x BAR equals and the calculated t-statistic is -2.45. Accordingly,
.95, the hypothesized value of the true mean is 1, the the 5% rejection region includes, and lies to the right
sample standard deviation equals .0612, and the of, the t-value of 1.86. Because the computed value
sample size is 9, the value of the t-statistic is is less than (to the left of) 1.86 in this one-tailed test,
the null hypothesis cannot be rejected.
.95 - 1 -.05 -.05
t = ------------------------ = --------- = ----- = -2.45 Answer (C) is incorrect because the null hypothesis
.0612 ・square root of 9 .0612 ・3 .0204 cannot be rejected.

Answer (B) is incorrect because -.05 is the difference Answer (D) is incorrect because some sodas have
between the sample mean and the hypothesized true more than 1 calorie.
mean.

Answer (C) is incorrect because the value is negative. [89] Source: CMA 0697 4-22

Answer (D) is incorrect because the value is negative. Answer (A) is incorrect because $85,000 is the sales
estimate with the highest probability.

[86] Source: Publisher Answer (B) is incorrect because $84,000 is the

expected value of sales.

Answer (A) is correct. The degrees of freedom Answer (C) is incorrect because $68,000 is 80% of
associated with the test statistic equals the sample the sales estimate with the highest probability.
size minus the number of parameters being tested.
Measurements of calorie content were made for nine Answer (D) is correct. The expected value is
cans of diet soda; i.e., nine distinct observations were calculated by weighting each sales estimate by the
included in the sample. The only parameter tested is probability of its occurrence. Consequently, the
ｵ, the mean calorie content of the diet sodas, so the expected value of sales is $84,000 [$60,000 x .25) +
number of degrees of freedom is 8 (9 - 1). ($85,000 x .40) + ($100,000 x .35)]. Cost of goods
sold is therefore $67,200 (80% x $84,000).
Answer (B) is incorrect because 9 is the sample size.

[90] Source: CMA 0697 4-24

Answer (C) is incorrect because one parameter is
tested. Answer (A) is incorrect because queuing
(waiting-line) theory is a group of mathematical
Answer (D) is incorrect because one parameter is models of systems involving waiting lines.
tested.
Answer (B) is incorrect because dynamic
programming is an approach to solving problems, not
[87] Source: Publisher a particular algorithm. It divides a large mathematical
model into smaller, more manageable pieces in such a
Answer (A) is incorrect because 2.306 is for a way that, once the smaller problems have been
confidence level of 97.5%. solved, the result is the optimal solution to the overall
model.
Answer (B) is correct. The rejection region is
determined by the value of t at the appropriate Answer (C) is incorrect because the critical path
degrees of freedom and the specific level of method is a network model used to help control
confidence. Choosing a 95% level of confidence large-scale, complex projects.
means that the value of t will restrict the probability of
a Type 1 error (rejecting the null hypothesis when the Answer (D) is correct. Decision tree analysis is useful
null hypothesis is true) to 5%. The rejection region is when the most beneficial series of decisions is to be
bounded by this value. Hence, the null hypothesis will chosen. The possible decisions for each decision
be rejected if the t-statistic calculated from the point, the events that might follow from each decision,
formula is equal to or greater than the t-value from a the probabilities of these events, and the quantified
table of t-values. The t-value correlates the outcomes of the events should be known.
appropriate degrees of freedom (n - 1) and the
appropriate probability of making a Type 1 error
(.05). In this case, with 8 degrees of freedom, the [91] Source: Publisher
appropriate rejection region is defined by a t value of
1.86. Thus, a calculated t-statistic equal to or greater Answer (A) is incorrect because, if frost has a
than 1.86 permits rejection of the null hypothesis Ho: probability of .167, the expected value of not
 providing protection exceeds that of providing probability of selling between 201 and 600 units.
protection.
Answer (B) is incorrect because there is a 70%
Answer (B) is correct. Without protection, the probability of selling between 201 and 600 units.
company will have sales of either $80,000 or
$120,000. With protection, the company will have Answer (C) is correct. The probability of selling
sales of either $120,000 or $180,000. The $20,000 between 201 and 400 units is 45%, and the
cost of tents must be subtracted from these amounts probability of selling between 401 and 600 units is
to compute the net contribution. Thus, the 25%. Hence, the probability of selling between 201
contribution if the berries are protected will be either and 600 units is the sum of these probabilities, or
$100,000 or $160,000. The problem can be solved 70%.
algebraically with the following formula (X = the
probability of frost): Answer (D) is incorrect because 25% is the
probability of selling between 401 and 600 units.
X($80,000) + (1 - X)($120,000) = X($160,000) +
(1 - X) ($100,000)
$80,000X + $120,000 - $120,000X = $160,000X + [94] Source: Publisher
$100,000 -
$100,000X Answer (A) is incorrect because 480 is based on the
$120,000 - $40,000X = $100,000 + $60,000X maximum value in each range.
$120,000 = $100,000 + $100,000X,
$20,000 = $100,000X; Answer (B) is correct. The expected sales levels
X = .200 should be weighted by the individual probabilities of
In other words, if the probability of frost is 20%, their occurrence. The midpoint of each sales level is
management will be indifferent between providing and used as the estimate for that level. Thus, sales are
not providing protection. At a frost expectancy of expected to be 380 units.
greater than 20%, management should provide
protection. 100 x 15% = 15
300 x 45% = 135
Answer (C) is incorrect because, if the probability of 500 x 25% = 125
frost is greater than .200, an expected value analysis 700 x 15% = 105
indicates the company should provide protection. ---
380
Answer (D) is incorrect because, if the probability of ===
frost is greater than .200, an expected value analysis
indicates the company should provide protection. Answer (C) is incorrect because 400 is the maximum
value in the modal range.

[92] Source: Publisher Answer (D) is incorrect because 800 is the highest
estimate.
Answer (A) is incorrect because $(15,200) is the
annual amount the company will lose without a
generator. [95] Source: Publisher

Answer (B) is incorrect because ($1,267) is the Answer (A) is correct. To determine the expected
monthly amount the company will lose without a value, each outcome is multiplied by its probability as
generator. follows:

Answer (C) is correct. Each outage costs $800, but 1% x.20 = .20%
this expense can be avoided by paying $1,000 per 2% x.20 = .40%
month ($12,000 for the year). The expected-value 3% x.30 = .90%
approach uses the probability distribution derived 4% x.20 = .80%
from past experience to determine the average 5% x.10 = .50%
expected outages per month. -----
Total 2.80%
3 ・12 x 0 = 0. =====
2 ・12 x 1 = .16667 The expected rate of defective units is 2.80%.
4 ・12 x 2 = .66667
Answer (B) is incorrect because 3.00% is the
3 ・12 x 3 = .75000
unweighted average of the possible rates of defects.
-------
1.58334 Answer (C) is incorrect because .90% equals 30%
======= of 3%.
The company can expect to have, on average,
1.58334 outages per month. At $800 per outage, the
Answer (D) is incorrect because the expected rate of
expected cost is $1,266.67. Thus, paying $1,000 to
defects must be less than 3.00%. The probability of a
avoid an expense of $1,266.67 saves $266.67 per rate less than 3.00% is 40%, whereas the probability
month, or $3,200 per year. of a rate greater than 3.00% is 30%.
Answer (D) is incorrect because $7,200 is the
amount the company will save if two outages occur
[96] Source: Publisher
per month.
Answer (A) is incorrect because a variance occurs
unless all data points are identical.
[93] Source: Publisher
Answer (B) is incorrect because this variance is not
Answer (A) is incorrect because there is a 70% possible. None of the data points are more than
 2.2% from the mean.
Answer (C) is incorrect because .17 is the probability
Answer (C) is incorrect because 10.2% is the simple that more than 1,100 calls will be received.
sum of the squares assuming an unweighted list of
only five data points. Answer (D) is correct. Of the 200 recorded
occurrences, only 22 were over 1,150 per week: 10
Answer (D) is correct. The variance is the average of in the 1,151-1,200 range, 8 in the 1,201-1,250
the squared deviations from the mean. It is found by range, and 4 in the 1,251-1,300 range. Thus, the
subtracting the mean from each value, squaring each probability of a number of calls greater than 1,150 is
difference, adding the squared differences, and simply (10 + 8 + 4) ・200 = .11.
dividing the sum by the number of data points. The
mean, or expected value, of the percentage of
defective units is 2.80%. Moreover, there are [100] Source: Publisher
effectively 100 data points in this problem because
the probabilities of possible outcomes are given Answer (A) is incorrect because the probability is
instead of a set of actual outcomes. For example, a determined by dividing the number of outcomes
20% probability of a 1% rate is the equivalent of 20 greater than 1,150 by the total number of outcomes.
occurrences of a 1% rate in a sample of 100
production runs. Accordingly, instead of dividing by Answer (B) is correct. If each of 500 outcomes
the sum of the data points in the variance formula, (1,300 - 800) is equally likely, the probability of
each squared difference can be multiplied by the more than 1,150 calls in a week is 30% [(1,300 -
related probability as shown below: 1,150) ・500].

(1.0% - 2.80%)2 x .20 = .648 Answer (C) is incorrect because the probability is
(2.0% - 2.80%)2 x .20 = .128 determined by dividing the number of outcomes
(3.0% - 2.80%)2 x .30 = .012 greater than 1,150 by the total number of outcomes.
(4.0% - 2.80%)2 x .20 = .288
(5.0% - 2.80%)2 x .10 = .484 Answer (D) is incorrect because the probability is
----- determined by dividing the number of outcomes
Variance 1.56% greater than 1,150 by the total number of outcomes.
=====

[101] Source: Publisher

[97] Source: Publisher
Answer (A) is incorrect because the probability of at
Answer (A) is incorrect because $100 is the amount least one positive project would be greater.
that a defective unit costs the company.
Answer (B) is incorrect because the probability of at
Answer (B) is incorrect because more than $200 can least one positive project would be greater.
be paid and the company's profits will increase.
Answer (C) is correct. The probability that either one
Answer (C) is correct. The expected rate of or both of two events will occur equals the sum of
defective units is 2.80% per production run, or 2.8 their separate probabilities minus their joint
units per 100. If each defective unit costs the probability. Therefore, the probability that at least
company $100, avoiding 2.8 defective units saves the one of the two projects will have positive cash flows
company $280. Thus, any labor cost less than $280 is the probability that project 1 will have positive cash
will increase profits. flows plus the probability that project 2 will have
positive cash flows, minus the probability that both
Answer (D) is incorrect because the company's project 1 and project 2 will have positive cash flows.
profits will decline if $295 is paid to the worker. Thus, (0.5) + (0.5) - [(0.5)(0.5)] = 0.75.

Answer (D) is incorrect because there is a .25

[98] Source: CIA 1191 II-39 chance that both projects will have negative cash
flows.
Answer (A) is incorrect because the sample is
adequate.
[102] Source: Publisher
Answer (B) is incorrect because even an examination
of all 10,000 transactions would not necessarily Answer (A) is incorrect because $133,333 places
prove that there are no errors in accounts payable. too much weighting on the second option.

Answer (C) is incorrect because the null hypothesis Answer (B) is correct. The expected value of the
has not been disproved. land is determined by multiplying the probability of
each state of nature by the value under that particular
Answer (D) is correct. The null hypothesis is that the state of nature, and adding all of the products. Thus,
error rate is equal to or less than 0.5%. Given that no the land's expected value is (0.5)($200,000) +
errors were found, no basis for disproving the null (0.4)($100,000) + (0.1)($550,000) = $195,000.
hypothesis is presented.
Answer (C) is incorrect because $225,000 gives too
much weight to the third option.
[99] Source: Publisher
Answer (D) is incorrect because $283,333 uses a
Answer (A) is incorrect because .06 is the probability simple unweighted average of the returns from the
that over 1,200 calls will be received. three options.

Answer (B) is incorrect because .89 is the probability

that fewer than 1,151 calls will be received.
[103] Source: Publisher 2,600,000 x .22 = 572,000
3,300,000 x .21 = 693,000
Answer (A) is incorrect because the standard ----------
deviation is the square root of the variance. $2,033,000
==========
Answer (B) is correct. The population standard
deviation may be estimated from the sample standard
deviation. This can be found by first determining the [106] Source: Publisher
variance of the sample set, which equals the
summation of the values obtained by subtracting each Answer (A) is incorrect because it is the standard
individual monthly return from the average return for deviation.
the 6 months given (13%), squaring this difference,
and then dividing that difference by (n - 1), if n is the Answer (B) is incorrect because they were not
number of elements in the sample. Thus, (n - 1) properly weighted for the probabilities of occurrence.
equals 5. Accordingly, the sample variance is 65.2.
The standard deviation is the square root of the Answer (C) is incorrect because they were not
variance, or 8.07. properly weighted for the probabilities of occurrence.

Answer (C) is incorrect because the standard Answer (D) is correct. The population variance is the
deviation is the square root of the variance. average of the squared deviations from the mean. It is
found by subtracting the mean from each value,
Answer (D) is incorrect because the standard squaring each difference, adding these squared
deviation is the square root of the variance. differences, and dividing the sum by the number of
data points. The mean, or expected value, was
determined to be $2,033,000 in the previous
[104] Source: Publisher question. In this case, probabilities are given, so
instead of dividing by the sum of the data points in the
Answer (A) is incorrect because the standard variance formula, each squared difference can be
deviation is the square root of the variance. multiplied by the appropriately related probability, as
shown below.
Answer (B) is correct. Substituting the cash flow
figures into the probability-based formula for the ($1,000,000 - $2,033,000)ｲ x 0.18 = $192,076,020,000
population variance produces the following: ($1,200,000 - $2,033,000)ｲ x 0.15 = 104,083,350,000
($1,700,000 - $2,033,000)ｲ x 0.24 = 26,613,360,000
- -2 -2 ($2,600,000 - $2,033,000)ｲ x 0.22 = 70,727,580,000
X X (X - X) P (X - X) P
e e e e e ($3,300,000 - $2,033,000)ｲ x 0.21 = 337,110,690,000
------- ------- ---------- ---- ----------- ----------------
$ 8,000 $10,200 $4,840,000 x 0.20 = $ 968,000 Variance $730,611,000,000
================
$12,000 $10,200 $3,240,000 x 0.30 = $ 972,000
$10,000 $10,200 $ 40,000 x 0.50 = $ 20,000 The variance is an intermediate step in the calculation
2 of the standard deviation. The standard deviation is
the square root of the variance.
(Variance) ・ = $1,960,000
(Standard deviation) ・ = $ 1,400
- [107] Source: CMA Samp Q1-3
X = (0.20)($8,000) + (0.30)($12,000) + (0.50)($10,000)
= $1,600 + $3,600 + $5,000 Answer (A) is correct. The coefficient of variation is
= $10,200 useful when the rates of return and standard

deviations of two investments differ. It measures the

Answer (C) is incorrect because the standard risk per unit of return because it divides the standard
deviation is the square root of the variance. deviation
Answer (D) is incorrect because the standard /\
deviation is the square root of the variance.
(・ by the expected return (k ).
/\
Coefficient of variation = ・k
[105] Source: Publisher

Answer (A) is incorrect because they are lower than The investment in the U.S. and Britain has a
possible given any of the probabilities given. coefficient of variation of .143 (3% ・21%), whereas
the investment in the U.S. and Canada has a
Answer (B) is incorrect because they are lower than coefficient of variation of .625 (15% ・24%).
possible given any of the probabilities given. Accordingly, the company should undertake the
British investment because it has substantially less risk
Answer (C) is incorrect because it represents the per unit of return.
arithmetic average of the five possibilities, without
regard to probabilities. Answer (B) is incorrect because the Canadian
investment is significantly riskier per unit of return.
Answer (D) is correct. To determine the expected
value, each potential outcome is multiplied by its Answer (C) is incorrect because the company should
probability, and then these values are summed to give undertake the British investment. As a result, its
the expected value. return will increase and its risk will decrease.

$1,000,000 x .18 = $ 180,000 Answer (D) is incorrect because the company should
1,200,000 x .15 = 180,000 undertake the British investment. As a result, its
1,700,000 x .24 = 408,000 return will increase and its risk will decrease.
 effects of changing one or more variables.

[108] Source: Publisher Answer (D) is incorrect because dynamic

programming is a method of solving selected decision
Answer (A) is incorrect because the cost of insurance problems, usually involving only a few variables. In
and installation of an alarm system is $40,000, which dynamic programming a series of independent but
is greater than the $37,500 expected loss. related problems (decisions) are solved based on
their probabilistic nature. In other words, a problem
Answer (B) is incorrect because the cost of insurance is divided into a number of subproblems and then
alone is $50,000. worked backward, so each subproblem is solved
until the final solution is obtained. Decision trees are
Answer (C) is correct. If an alarm system is not an example of dynamic programming.
installed, the expected fire loss in the next year is
$75,000 [(90% x $0) + (5% x $100,000) + (3% x
$1,000,000) + (2% x $2,000,000)]. If an alarm [111] Source: CMA 1280 5-15
system is installed, the expected fire loss in the next
year is $37,500 (50% x $75,000 expected loss Answer (A) is incorrect because statistical sampling is
without an alarm system). Accordingly, if the building used to calculate the condition of a population based
is not insured, the enterprise's total cost if it does not on a sample from that population. A sample is not
install an alarm system is the expected uninsured loss needed because the life of the tires is already known,
of $75,000. If the alarm system is installed, the total as is the number of miles on each car.
cost is $39,500 ($2,000 installation cost + $37,500
expected uninsured loss). If the building is insured, Answer (B) is correct. Probability analysis can be
and the alarm system is not installed, the expected fire used to estimate the condition of the tires in the fleet
loss will be reimbursed, but an insurance premium of at any one time and the expected value of replacing
$50,000 must be paid. If the alarm system is all tires at once versus as they wear out.
installed, the expected fire loss will be reimbursed,
but the sum of the insurance premium and the Answer (C) is incorrect because linear programming
installation cost will be $40,000 {[(100% - 24%) x is used to find the most economic combination of a
$50,000] + $2,000}. Thus, the enterprise's best large number of scarce resources. An objective
course of action is not to self-insure, but to install an function is minimized, e.g., cost, or maximized, e.g.,
alarm system. profit, subject to a series of constraints, e.g., available
resources, necessary output, etc.
Answer (D) is incorrect because the expected
uninsured loss is $75,000 without an alarm system. Answer (D) is incorrect because learning curve
techniques are useful in measuring and estimating the
increased efficiency in increased production quantities
[109] Source: CIA 1190 III-15 due to increasing expertise on the part of the people
working on production.
Answer (A) is incorrect because random or normal
variations should fall within realistically determined
control limits. [112] Source: CMA 0681 5-10

Answer (B) is correct. Statistical quality control Answer (A) is incorrect because $8x + $0.01xｲ is the
charts are graphic aids for monitoring the status of cost function without the constant.
any process subject to random variations. For
example, an X-bar chart depicts the sample means Answer (B) is incorrect because the first derivative of
for a variable. If the values fall within the upper and $0.01xｲ is $0.02x.
lower control limits, no action is taken. Accordingly,
values outside these limits are abnormal and should
be investigated for possible corrective action. Answer (C) is correct. The marginal cost function is
the derivative of the total cost function. Remember,
Answer (C) is incorrect because random or normal the basic formula for the derivative is
variations should fall within realistically determined
control limits. n n-1
f'(Ax ) = nAx
Answer (D) is incorrect because, in time series If:
analysis, cyclic variation is the fluctuation in the value A = the constant, or number of x's
of a variable caused by change in the level of general x = the variable being differentiated
business activity. n = the exponent of the independent variable
Also recall that the derivative of the entire equation is
the sum of the derivatives of the individual elements.
[110] Source: CMA 1280 5-13 Thus, the derivative of the cost function is

Answer (A) is correct. Matrix algebra can be used to 2 2

solve the system of simultaneous equations that will f'($50 + $8x + $0.01x ) = f'($50) + f'($8x) + f'($0.01x )
result from the description of the cost for each = 0 + $8 + $0.02x
department. The equations are simultaneous because = $8 + $0.02x
the costs are simultaneously allocated among service
departments and producing departments. Answer (D) is incorrect because the derivative of the
entire equation is the sum of the derivatives of the
Answer (B) is incorrect because Boolean algebra is a individual elements.
technique used for the solution of problems in binary
arithmetic.
[113] Source: CMA 0681 5-11
Answer (C) is incorrect because the simulation
technique model is a process to permit analysis of the Answer (A) is incorrect because 520,000 gallons
 assumes the first derivative of the revenue function is Answer (B) is incorrect because statistical analysis is
26 - .05x. a mathematical technique.

Answer (B) is correct. A maximization problem is Answer (C) is correct. Goal programming permits an
solved by setting the first derivative of the revenue ordinal specification and solution to a problem with
function equal to zero and solving for x. The first multiple goals. With its ability to incorporate multiple
derivative of the revenue function is 26 - .1x. Thus, goals, goal programming has the potential to be
applied to problems with financial, social, and
.1x = 26 environmental objectives. It was first introduced as a
x = 260 means of solving linear programming problems that
Selling 260,000 gallons of cleaning fluid would did not have a feasible solution.
maximize revenues.
Answer (D) is incorrect because dynamic
Answer (C) is incorrect because 260,000 gallons programming cannot deal with multiple objectives,
maximizes revenue. although it can handle changes in constraints.

Answer (D) is incorrect because 150,000 gallons is

the profit-maximizing amount. [117] Source: CMA 1283 5-20

Answer (A) is incorrect because, although a linear

[114] Source: CMA 0681 5-12 programming problem can only be solved graphically
in two-product situations, it can incorporate
Answer (A) is incorrect because 520,000 gallons is additional alternatives with the aid of a computer.
the quantity that maximizes revenue if the first
derivative function is 26 - .05x. Answer (B) is incorrect because linear programming
can be used for product mix, raw material mix, staff
Answer (B) is incorrect because 260,000 is the assignment, and a variety of other problems.
quantity of product to be sold to maximize revenue.
Answer (C) is correct. Linear programming assumes
Answer (C) is incorrect because 150,000 gallons is straight-line relationships over a relevant range.
the profit-maximizing production.
Answer (D) is incorrect because linear programming
Answer (D) is correct. Profit is equal to the revenue can be used to solve maximization problems.
function minus the cost function

2 2 [118] Source: CMA 1286 5-27

[(-$100 + $26x - $0.05x ) - ($50 + 8x + $0.01x )].
It is not necessary to combine terms. The profit Answer (A) is incorrect because a slack variable
maximum is the first derivative of this profit function represents unused capacity.
(26 - .1x) - (8 + .02x), or 18 - .12x. Set this
derivative equal to zero and solve for x, or 150. Answer (B) is correct. A slack variable represents
Thus, producing 150,000 gallons of cleaning fluid will unused capacity. Since linear programming
maximize profit. formulations are often stated as inequalities, there is a
possibility of unused capacity even at the optimum
production level. To convert inequalities to equalities,
[115] Source: CMA 0681 5-13 slack variables are introduced to account for this
unused capacity.
Answer (A) is incorrect because $3,200,000 equals
total revenues. Answer (C) is incorrect because a slack variable
represents unused capacity.
Answer (B) is incorrect because $(50,000) equals
fixed costs. Answer (D) is incorrect because a slack variable
represents unused capacity.
Answer (C) is incorrect because $(3,350,000)
equals total costs.
[119] Source: CMA 1286 5-28
Answer (D) is correct. This question is easily solved
by substituting 300 for x in the revenue and cost Answer (A) is incorrect because differential calculus
equations. is used to identify the maxima and minima of
curvilinear functions.
Revenue = -$100 + $26(300) - $.05(90,000)
Cost = $50 + $8(300) + $.01(90,000) Answer (B) is incorrect because integral calculus is
Then the cost equation is subtracted from the revenue used to calculate the area under a curve.
equation to determine profit.
Answer (C) is incorrect because simulation is a
[-100 + 7,800 - 4,500 - (50 + 2,400 + 900)] means of experimenting with logical and mathematical
Profit = $3,200 (revenue) - $3,350 (costs) models using a computer.
= $150 (loss) per x.
Since x represents a thousand gallons, the total loss Answer (D) is correct. Matrix algebra is a method of
would be $150,000. manipulating multiple linear equations. It is used to
solve linear programming problems. The use of matrix
algebra to solve such problems is called the simplex
[116] Source: CMA 0683 5-5 method.

Answer (A) is incorrect because linear programming

cannot deal with multiple objectives. [120] Source: CMA 1287 5-23
 Answer (A) is incorrect because, assuming saving is equations are not factors in the objective function.
defined as investment, the effect on saving is
indeterminate. The stock of money may or may not Answer (D) is correct. The objective function is the
have been reduced in favor of greater investment. If equation that the company is trying to maximize.
saving is defined as money held plus investment, Since the objective is to maximize the total
however, no saving could occur. contribution margin, the function will equal an
unknown number of units of D at a unit contribution
Answer (B) is incorrect because the relationship margin of $6 plus an unknown number of units of F at
between earned income and interest income cannot a unit contribution margin of $7 (P = $6D + $7F).
be determined.

Answer (C) is incorrect because the stock of money [124] Source: CMA 1288 5-9
cannot be negative.
Answer (A) is incorrect because 2D + F ・16 is the
Answer (D) is correct. This model recognizes three constraint equation for Machine 107.
sources of funds: current period earned income, prior
period return on investment, and prior period money Answer (B) is correct. The constraint equations for
machine hours are 2D + 3F ・24 hours and 2D + 1F
held. The three uses of funds in the current period are ・16 hours. Since these equations involve two
consumption, investment, and money held. If the unknowns (D and F), they may be solved
excess of consumption spending over earned income simultaneously. Solving for F in the second equation
in period t is greater than the return on investment in
produces F ・16 - 2D. Substituting this result into the
period (t - 1), investment or the stock of money must
have declined because spending is greater than first equation produces 2D + 3(16 - 2D) ・24.
income and earnings on investments.
Answer (C) is incorrect because D equals [(16 - F)
・2].
[121] Source: CMA 1287 5-24
Answer (D) is incorrect because the constraint
Answer (A) is incorrect because the increase in equations for machine hours are 2D + 3F ・24 hours
investment may have come from a decline in the and 2D + 1F ・16 hours. Solving for F in the second
stock of money held. equation produces F ・16 - 2D. Substituting this
result into the first equation produces 2D + 3(16 -
Answer (B) is incorrect because the level of interest 2D) ・24.
rates cannot be determined.

Answer (C) is correct. If investments have increased [125] Source: CMA 1288 5-10
by more than the interest earned, some of the current
period's earnings must have been invested or the Answer (A) is incorrect because objective functions
stock of money may have decreased. are those that management is attempting to maximize
(or minimize) in a linear programming problem.
Answer (D) is incorrect because net investment
occurred. Answer (B) is incorrect because inequalities refer to
equations that do not balance. These can balance.

[122] Source: CMA 1287 5-25 Answer (C) is incorrect because deterministic
functions are those with known (determinable)
Answer (A) is incorrect because the decline in money variables.
held does not necessarily result in greater investment.
Answer (D) is correct. These are constraint
Answer (B) is correct. If a household's need to hold equations. The objective function (P = $6D + $7F) is
money declines, the stock of money in the current to be maximized subject to these constraint functions.
period will be less than the stock held in the There are four constraints altogether: (1) the 24 hours
preceding period. limitation for Machine 105, (2) the 16 hours limitation
for Machine 107, (3) the nonnegative production
Answer (C) is incorrect because consumption may assumption for product D, and (4) the nonnegative
be more or less than earnings since the additional production assumption for product F.
funds could have been used for consumption or
investment.
[126] Source: CMA 1288 5-11
Answer (D) is incorrect because the reduction in the
money stock may have been consumed or invested. Answer (A) is incorrect because, if F is 8, D must be
0.

[123] Source: CMA 1288 5-8 Answer (B) is correct. This question does not ask for
the optimum solution, only a feasible solution. Thus,
Answer (A) is incorrect because the objective the only question that is being addressed is whether
function seeks to maximize the total contribution the production level violates the constraint functions.
margin. It will equal an unknown number of units of D This problem can be solved either graphically or by
at a unit contribution margin of $6 plus an unknown means of trial and error. The graphical approach
number of units of F at a unit contribution margin of involves drawing the constraint lines on a graph and
$7 (P = $6D + $7F). outlining the feasible region. An easier approach is to
solve the problem by trial and error. For each
Answer (B) is incorrect because the constraint answer, it can be determined whether the production
equations are not factors in the objective function. levels violate the constraint functions.

Answer (C) is incorrect because the constraint

 2D + 3F ・24 respectively.
2D + 1F ・16
Answer (D) is incorrect because the product
Producing 6 units of product D and 4 units of product variables for A, B, and C must be multiplied by their
F does not violate a constraint. contribution margins, which are $3, $3, and $4,

Answer (C) is incorrect because D cannot be 12. respectively.

Answer (D) is incorrect because, if D is 8, F must be

0. [130] Source: CMA 0689 5-19

Answer (A) is incorrect because the direct labor

[127] Source: CMA 1288 5-4 variables must be multiplied by the hours needed.
Thus, the direct labor constraint is 2A + 2B + 3C ・
Answer (A) is correct. Exogenous or input variables 150.
are outside the control of the decision maker.
Exogenous means "originating externally." These Answer (B) is incorrect because a linear
influence the decision model (system) but are not programming constraint is stated as an inequality.
influenced by it.
Answer (C) is incorrect because a linear
Answer (B) is incorrect because at least one of the programming constraint is stated as an inequality.
decision variables in a model must be under the
decision maker's control; that is, at least one variable Answer (D) is correct. A linear programming
cannot be exogenous. constraint is stated as an inequality. For example,
because only 150 direct labor hours are available,
Answer (C) is incorrect because performance criteria production is constrained by (limited to) the amount
are the means of measuring the results of a decision of that resource. Each anchor bolt requires 2 hours of
after the fact. labor, each bearing 2 hours, and each caster 3 hours.
Total direct labor hours must be less than or equal to
Answer (D) is incorrect because constraints are 150 hours, so the constraint is 2A + 2B + 3C ・150.
limitations (constants, not variables) that must be
considered as part of the decision process.
[131] Source: CMA 0689 5-20

[128] Source: CMA 0689 5-13 Answer (A) is incorrect because the machine-hour
constraint is in the ratio of 1:2:2.5. It can be stated as
Answer (A) is incorrect because sensitivity analysis is A + 2B + 2.5C ・100.
not used to determine how constraints vary but rather
how the optimum solution will change if constraints Answer (B) is correct. Machine hours are not given,
do vary. but up to 100 anchor bolts can be produced with the
existing capacity. Assuming that 100 units of machine
Answer (B) is incorrect because the accuracy of the time are available (one per anchor bolt), the units of
parameters cannot be tested as a part of the model. time required to produce a bearing must be 2 (100 ・
The intent is simply to measure the impact if the 50 bearings). The time per caster is 2.5 (100 ・40
assumed parameters do vary. casters). Because the machine-hour constraint is
known to be in the ratio of 1:2:2.5, it can be stated as
Answer (C) is incorrect because the technological
matrix is developed by production managers or A + 2B + 2.5C ・100.
engineers and is an input into the model.
Answer (C) is incorrect because the machine-hour
Answer (D) is correct. Sensitivity analysis in linear
constraint is in the ratio of 1:2:2.5. It can be stated as
programming determines how the optimal solution will
A + 2B + 2.5C ・100.
change if an objective function coefficient, the limiting
value of a resource constraint, or a constraint
coefficient is varied. It also considers the effect of Answer (D) is incorrect because the machine-hour
adding a new variable or constraint. constraint is in the ratio of 1:2:2.5. It can be stated as
A + 2B + 2.5C ・100.

[129] Source: CMA 0689 5-18

[132] Source: CMA 0690 5-29
Answer (A) is correct. The purpose of linear
programming is to find the combination of resources Answer (A) is incorrect because relevant costing
subject to constraints that optimizes the objective refers to future costs that differ among decision
function. Harrington wishes to maximize the total choices.
contribution margin. Thus, the first step is to
determine the contribution margin for each of the Answer (B) is incorrect because responsibility
three products. The contribution margin is $3 ($4 - accounting is the practice of charging costs and
$1 variable cost) for anchor bolts, $3 ($3.50 - $.50) crediting revenues to those managers who have
for bearings, and $4 ($6 - $2) for casters. The responsibility for them.
objective is therefore to maximize $3A + $3B +
$4C. Answer (C) is incorrect because simple regression
analysis is a means of explaining the variation in a
Answer (B) is incorrect because the contribution dependent variable based upon an independent
margin is $3 for B and $4 for C. variable.

Answer (C) is incorrect because the contribution Answer (D) is correct. Linear programming is a
margins for A, B, and C are $3, $3, and $4, deterministic mathematical technique used to
 maximize linear revenue functions or to minimize
linear cost functions subject to linear constraints. Z = $4(5) + $2(0) = $20, or
Linear programming is often used to plan resource Z = $4(0) + $2(6) = $12.
allocations. Managers need to use resources as Thus, the better solution is to produce 5 units of
profitably or as inexpensively as possible. Solving product X, which results in a profit of $20.
linear programming problems requires the use of
independent variables, dependent variables, A third feasible solution (corner of the feasible space)
constraints, and slack variables. Slack variables are is to produce nothing (X = 0, Y = 0). This solution
used to convert equations stated as inequalities into obviously yields a profit of $0. The fourth corner is
equalities. the intersection of the two simultaneous constraint
equations (stated as equalities), which can be
determined by subtracting the second equation from
[133] Source: CMA 1290 4-25 the first:

Answer (A) is incorrect because the objective 2X + 3Y = 18

function is Z = 200B + 150C. -2X + -Y = -10
-------- ---
Answer (B) is incorrect because the objective 2Y = 8
function is Z = 200B + 150C. Y = 4 and X = 3
This solution also results in a profit of $20 [($4 x 3) +
Answer (C) is incorrect because the objective ($2 x 4)].
function is Z = 200B + 150C.
Answer (B) is incorrect because the maximum profit
Answer (D) is correct. The objective function is the is $20.
equation to maximize the contribution margin. Given
that each 100 pounds of boat wax contributes $200 Answer (C) is incorrect because the maximum profit
and each 100 pounds of car wax contributes $150, is $20.
the company's goal is to maximize the total of these
amounts. Consequently, if B is the number of Answer (D) is incorrect because the maximum profit
100-pound units of boat wax, C is the number of is $20.
100-pound units of car wax, and Z is the total
contribution margin, the objective function is Z =
$200B + $150C. [136] Source: CMA 1291 4-25

Answer (A) is incorrect because correlation and

[134] Source: CMA 1290 4-26 regression analysis is a means of measuring the
relationships among two or more variables.

Answer (A) is incorrect because the mixing constraint Answer (B) is incorrect because discounted cash
is 5B + 2.4C ・800. flow techniques are used to evaluate alternative
capital investment decisions.
Answer (B) is incorrect because the mixing constraint
is 5B + 2.4C ・800. Answer (C) is incorrect because transportation
algorithms are used to minimize transportation costs
Answer (C) is correct. The Mixing Department has when goods must be shipped from multiple factories
only 800 hours available per month, which is a to multiple customers or warehouses.
limitation (constraint) on production. Thus, the total
mixing time is less than or equal to 800 hours. Every Answer (D) is correct. Linear programming is a
100-pound batch of boat wax (B) requires 5 hours of technique used to optimize a revenue, profit, or cost
mixing time, and every 100-pound batch of car wax function subject to constraints. LP is often used for
(C) requires 2.4 hours of mixing time. Accordingly, planning resource allocations. Other business
the total mixing time available cannot exceed 5B plus applications include selecting a product mix, blending
chemical products, scheduling flight crews, assigning
2.4C, and the constraint equation is 5B + 2.4C ・
jobs to machines, and determining transportation
800.
routes.
Answer (D) is incorrect because the mixing constraint
is 5B + 2.4C ・800. [137] Source: CMA 0692 4-8

Answer (A) is incorrect because producing 2,400

[135] Source: CMA 1291 4-24
Regular models will result in a profit of only
$264,000.
Answer (A) is correct. A simple means of solving this
two-equation, two variable linear programming Answer (B) is correct. This linear programming
problem is to graph the equations. The optimal
problem can be solved graphically or algebraically.
solution is at one of the corners of the feasible space
The objective function maximizes the contribution
defined by the lines representing the equations. This margin: $110R + $175D. The constraint function for
space is the area that lies under both equations. The
assembly is: 3R + 4D ・12,000. The constraint
corners of the constraint area can be determined
algebraically. If X equals 0, Y would equal 6 in the equation for testing is: 2.5R + 1.5D ・6,000.
first constraint equation (assuming it is stated as an Accordingly, at most 4,000 units of the Regular
equality) and 10 in the second. If Y equals 0, X model (12,000 hours ・3) or 3,000 of the Deluxe
would equal 9 in the first equation and 5 in the model (12,000 hours ・4) can be assembled.
second. Thus, the maximum units of X and Y that can Moreover, at most, 2,400 units of the Regular model
be produced are 5 and 6, respectively. Substituting (6,000 hours ・2.5) or 4,000 units of the Deluxe
these corner solutions into the objective functions model (6,000 hours ・1.5) can be tested. Hence,
yields these results: two feasible solutions are to produce either 2,400
 units of the Regular model and none of the Deluxe relationships between cost, profit, and volume.
model or 3,000 units of the Deluxe model and none
of the Regular. A third feasible solution is the Answer (B) is correct. Transportation algorithms are
intersection of the constraint functions, adjusted to used to find the combination of supplies from various
state equalities and solved simultaneously. warehouses to various construction sites (i.e., various
sources and various destination points) which will
Answer (C) is incorrect because producing 1,091 minimize the total costs. Most transportation
Regular models and 2,182 Deluxe models (the algorithms are adaptations of linear programming
solution at the intersection of the constraint functions) problems.
will result in a profit of only $501,860.
Answer (C) is incorrect because discounted
Answer (D) is incorrect because producing 4,000 cash-flow techniques take into account the time value
Deluxe models violates a constraint. of money and are used to calculate the present value
of a stream of future cash payments.

[138] Source: CMA 1293 4-2 Answer (D) is incorrect because PERT/CPM
analysis is a project management scheduling
Answer (A) is incorrect because focusing on a technique.
product's gross margin may not result in an optimal
decision if that product uses a greater amount of the
scarce resource than does another product with a [141] Source: CMA 1283 5-16
lower gross margin. Moreover, gross margin includes
some fixed costs. Answer (A) is correct. The total variable cost of
Model A is $17 ($3 material + $8 DL + $6 variable
Answer (B) is incorrect because focusing on segment OH). The contribution margin is $10.50 ($27.50 unit
margin may not maximize profit if the segment uses price - $17 VC). Similarly, the total variable cost of
more than its share of the scarce resource. Model B is $43 ($7 materials + $12 DL + $24
variable OH) and the contribution margin is $32 ($75
Answer (C) is incorrect because product contribution unit price - $43 VC). Thus, the objective linear
margin and contribution margin ratio may not result in program function should maximize the total
an optimal decision if the products use differing contribution margin from both products: 10.50A +
quantities of the limited resource. 32.00B.

Answer (D) is correct. Given a constraining resource, Answer (B) is incorrect because selling price is used
total profit is maximized by manufacturing the product instead of contribution margin.
that will maximize the profit per unit of scarce
resource. Assuming machine hours are the Answer (C) is incorrect because total costs are used
constraining resource, products should be instead of contribution margin.
manufactured that will produce the greatest
contribution margin (revenue - variable cost) per Answer (D) is incorrect because variable costs are
machine hour. This analysis assumes that fixed costs used instead of contribution margin.
will be unchanged regardless of which product is
manufactured.
[142] Source: CMA 1283 5-17

[139] Source: CMA 1293 4-30 Answer (A) is incorrect because the constraint
function for direct labor must be equal to or less than
Answer (A) is incorrect because the EOQ model is the 600,000 available hours. Because every unit of
used to determine inventory order quantity and is not Model A requires 1 hour of labor and every unit of
related to the transportation model. Model B requires 1.5 hours of labor, the constraint
function is 1A + 1.5B ・600,000.
Answer (B) is incorrect because a Markov model is
useful in decision problems in which the probability of Answer (B) is incorrect because the constraint
the occurrence of a future state depends only on the function for direct labor must be equal to or less than
current state of nature. the 600,000 available hours. Because every unit of
Model A requires 1 hour of labor and every unit of
Answer (C) is correct. The transportation model is a Model B requires 1.5 hours of labor, the constraint
special type of linear programming model. A function is 1A + 1.5B ・600,000.
transportation model involves physical movement of
goods from sources of supply to destinations. The Answer (C) is incorrect because the constraint
objective function includes the transportation cost of function for direct labor must be equal to or less than
each item from each source to each destination. The the 600,000 available hours. Because every unit of
constraints are the output for each supply point and Model A requires 1 hour of labor and every unit of
the demand by each destination. Model B requires 1.5 hours of labor, the constraint
function is 1A + 1.5B ・600,000.
Answer (D) is incorrect because dynamic
programming is a type of model useful for problems Answer (D) is correct. Since 600,000 direct labor
that involve time-staged decisions such as decisions hours are available, the function must be equal to or
affected by previous decisions; typically, dynamic less than 600,000. Since every unit of Model A
programming is used for much smaller problems than requires 1 hour of labor and every unit of Model B
linear programming. requires 1.5 hours of labor, the constraint function is
1A + 1.5B ・600,000.
[140] Source: CMA 1280 5-5
[143] Source: CMA 1283 5-18
Answer (A) is incorrect because cost-volume-profit
analysis is used to estimate income, given the
 Answer (A) is incorrect because the constraint 12S + 24G.
function for machine capacity must be equal to or less
than the 200,000 hours available. Every unit of A Answer (D) is incorrect because fixed manufacturing
requires .5 hours, and every unit of B requires 2 costs were subtracted.
hours. Thus, the machine hour constraint function is
.5A + 2B ・200,000.
[146] Source: CMA 1285 5-10
Answer (B) is incorrect because the constraint
function for machine capacity must be equal to or less Answer (A) is incorrect because the constraints
than the 200,000 hours available. Every unit of A should not be combined, and all times should be in
requires .5 hours, and every unit of B requires 2 hours.
hours. Thus, the machine hour constraint function is
.5A + 2B ・200,000. Answer (B) is incorrect because the constraints
should not be combined.
Answer (C) is correct. Since 200,000 hours of
machine time are available, the function must be equal Answer (C) is incorrect because the times spent
to or less than 200,000 hours. Every unit of A cutting and finishing gloves are not negative quantities.
requires .5 hours and every unit of B requires 2
hours. Thus, the machine hour constraint function is Answer (D) is correct. A constraint equation of a
.5A + 2B ・200,000. linear programming problem depicts the constraint of
production by limiting total available hours or other
resources, assuming that those hours or other
Answer (D) is incorrect because the constraint
resources may be used on either or both the
function for machine capacity must be equal to or less
products. The cutting labor time available is 960 per
than the 200,000 hours available. Every unit of A
requires .5 hours, and every unit of B requires 2 month. The finishing labor constraint is 1,920 hours.
hours. Thus, the machine hour constraint function is Since each shirt requires 10 minutes (1/6 hr.) of
cutting time, and each pair of gloves requires six
.5A + 2B ・200,000. minutes (1/10 hr.), the cutting constraint is that 1/6S
+ 1/10G must be less than or equal to 960. Since
[144] Source: Publisher each shirt requires 15 minutes (ｼ hr.) of finishing
time, and each pair of gloves requires 30 minutes (ｽ
Answer (A) is incorrect because multiplying any hr.), the finishing constraint is that ｼS + ｽG must be
matrix by a different matrix (whether inverse or not) less than or equal to 1,920.
will not yield the same result as either of the
multiplicands.
[147] Source: CMA 1285 5-11
Answer (B) is incorrect because multiplying any
matrix by a different matrix (whether inverse or not) Answer (A) is incorrect because production cannot
will not yield the same result as either of the be negative, but it can be exactly zero. Thus, the
multiplicands. nonnegativity constraints are that production of S and
G must be greater than or equal to 0.
Answer (C) is correct. In matrix operations, ordinary
division is not possible. In lieu of division, one Answer (B) is incorrect because production cannot
multiplies by an inverse matrix. By definition, a matrix be negative, but it can be exactly zero. Thus, the
times its inverse will give an identity matrix. This nonnegativity constraints are that production of S and
operation is similar to dividing one number or one G must be greater than or equal to 0.
variable by itself and obtaining one. An identity matrix
is a matrix with zeros in all elements except the Answer (C) is incorrect because production cannot
principal diagonal, which contains ones. be negative, but it can be exactly zero. Thus, the
nonnegativity constraints are that production of S and
Answer (D) is incorrect because multiplying any G must be greater than or equal to 0.
matrix by a different matrix (whether inverse or not)
will not yield the same result as either of the Answer (D) is correct. Production cannot be
multiplicands. negative, but it can be exactly zero. Thus, the
nonnegativity constraints are that production of S and
G must be greater than or equal to 0.
[145] Source: CMA 1285 5-9

Answer (A) is incorrect because the variable unit [148] Source: CMA 1285 5-21
costs are used instead of the contribution margin.
Answer (A) is incorrect because regression analysis
Answer (B) is incorrect because the variable selling is used to determine the effect on a dependent
costs have not been included. variable of changes in independent variables.

Answer (C) is correct. Linear programming is a Answer (B) is incorrect because Markov analysis
mathematical technique used to maximize revenue involves a chain of analyses, with each link relying on
(profit) functions or to minimize cost functions subject the results of the preceding link.
to constraints. The objective function in a linear
programming model symbolically represents the Answer (C) is correct. Expected value analysis is an
revenues (profits) or costs being maximized or estimate of future monetary value based on forecasts
minimized, respectively. The contribution margin from and related probabilities of occurrence. Expected
production of the combination of shirts and pairs of value is found by multiplying the probability of each
gloves is to be maximized. The contribution margin outcome by its payoff and summing the products. The
from shirts is $12 ($22 - $10 variable unit costs). The probabilities used can be developed from experience,
contribution margin from gloves is $24 ($40 - $16 e.g., the results of past cases.
variable unit costs). Thus, the objective is to maximize
Answer (D) is incorrect because queuing theory is
 used to determine the optimum length of waiting lines. Answer (D) is correct. Linear programming is a
technique used to optimize a revenue, profit, or cost
function subject to constraints. LP is often used for
[149] Source: CMA 1286 5-25 planning resource allocations. Other business
applications include selecting a product mix, blending
Answer (A) is incorrect because revenue and cost chemical products, scheduling flight crews, assigning
functions are specific kinds of objective functions. jobs to machines, and determining transportation
routes.
Answer (B) is incorrect because the constraint
functions are the conditions under which the objective
function is to be maximized or minimized. [153] Source: CMA 1287 5-19

Answer (C) is incorrect because it is a nonsense Answer (A) is correct. The inequality functions state
answer. the constraints. They are the limitations within which
the objective function is to be optimized, such as
Answer (D) is correct. Linear programming is a labor or machine hours.
mathematical technique used to maximize revenue
(profit) functions or to minimize cost functions subject Answer (B) is incorrect because objectives are the
to constraints. Here, the function f is the objective ultimate goals of an operation. This answer is
function. The objective function in a linear essentially nonsense as used here.
programming model symbolically represents the
revenues (profits) or costs being maximized or Answer (C) is incorrect because conditions represent
minimized, respectively. the present state of the environment. This answer is
essentially nonsense as used here.

[150] Source: CMA 1286 5-26 Answer (D) is incorrect because a shadow price is
the opportunity cost of not having one additional unit
Answer (A) is incorrect because it is not meaningful of one of the constrained resources.
in this context.

Answer (B) is correct. The constraint functions are [154] Source: CMA 1287 5-20
the "subject to" functions; i.e., they state the limits on
production imposed by scarce resources. Answer (A) is incorrect because there is another
point (N = 3 and S = 3) that will optimize the
Answer (C) is incorrect because it is not meaningful objective function.
in this context.
Answer (B) is correct. The best way to answer this
Answer (D) is incorrect because the objective question is to solve the problem graphically. The
function is to be maximized or minimized subject to point at which N equals two and S equals three is a
the constraints. feasible point but not the optimal point. The optimal
point is that point at which Z will be maximized. The
given values do not violate either of the constraints.
[151] Source: CMA 0687 5-19 However, this procedure does not indicate whether
the point is the optimal point.
Answer (A) is incorrect because the material
constraint requires that 2 pounds per vase plus 2 Answer (C) is incorrect because the graph shows
pounds per bowl be less than or equal to 100. that the point does not lie in a corner where two
constraint lines meet.
Answer (B) is correct. Given 100 pounds of material,
the material constraint requires that 2 pounds per Answer (D) is incorrect because this is not a
vase plus 2 pounds per bowl be less than or equal to minimization problem; producing zero would minimize
100. The labor constraint is 3 hours per vase plus 1 costs but would not maximize revenue or profits.
hour per bowl, which must be less than or equal to
60 hours.
[155] Source: CMA 1288 5-2
Answer (C) is incorrect because the labor constraint
requires that 3 hours per vase plus 1 hour per bowl Answer (A) is incorrect because PERT and CPM
be less than or equal to 60 hours. are network diagrams designed to coordinate large,
complicated projects that are carried out over a long
Answer (D) is incorrect because material costs and period of time.
labor costs should not be combined.
Answer (B) is correct. The linear programming model
is designed to maximize income or minimize costs
[152] Source: CMA 1287 5-18 given resource constraints. It is a static model
because it does not allow for a sequence of
Answer (A) is incorrect because a parametric model decisions.
is concerned with population parameters and is based
on strict assumptions about distributions. Answer (C) is incorrect because queuing models are
designed to minimize the total cost of a system that
Answer (B) is incorrect because a present value involves a waiting line. Queuing models are dynamic
model is used to determine the present equivalent of in that they assume random applications for service.
money to be received in the future.
Answer (D) is incorrect because Markov processes
Answer (C) is incorrect because an EOQ model is are used in sequential decision problems in which the
used to determine the proper order size for inventory probability of the occurrence of a future state of
purchases based on costs and annual demand. nature depends only on the current state. The initial
state matters less and less as time goes by.
 Answer (D) is incorrect because expected value
techniques are used to solve for the long-run
[156] Source: CMA 1288 5-7 expected value given the probabilities of the events
arising from a decision and their outcomes.
Answer (A) is incorrect because the feasible solution
is within the area of possible production. A feasible
solution is one that does not violate any constraint. [159] Source: CMA 1291 4-20

Answer (B) is incorrect because constraints are the Answer (A) is incorrect because Markov analysis
given limitations on resources or market limitations. applies to sequential processes in which the
probability of an event is conditioned upon the
Answer (C) is correct. The shadow price in a linear previous event, and the most emphasis is placed on
programming problem is the return (increase in the the most recent evidence rather than on an average of
objective function) that would accrue if one more unit all evidence.
of a limited resource (a constraint in the problem)
were available. The shadow price is the maximum Answer (B) is correct. The transportation model is a
amount that one should be willing to pay for special type of linear programming problem. It
additional units of the resource. involves the analysis of the physical movement of
goods from sources of supply to destinations. The
Answer (D) is incorrect because the objective objective function includes the transportation cost of
function is the equation that is to be maximized or each item from each source to each destination. The
minimized in a linear programming problem. For objective is to minimize the total transportation cost
example, a typical objective function is to maximize subject to such constraints as warehouse capabilities
contribution margin by selling products A and B, and customer locations.
which have known contribution margins per unit.
Answer (C) is incorrect because dynamic
programming is a variant of mathematical
[157] Source: CMA 1288 5-11 programming that applies to sequential
decision-making situations.
Answer (A) is incorrect because, if D is 2 and F is 8,
the first constraint is violated. Answer (D) is incorrect because the critical path
method is a project scheduling technique.
Answer (B) is correct. This question does not ask for
the optimum solution, only a feasible solution. Thus,
the only question that is being addressed is whether [160] Source: CMA 0694 4-10
the production level violates the constraint functions.
This problem can be solved either graphically or by Answer (A) is incorrect because a simulation model
means of trial and error. The graphical approach is a technique for experimenting with models using a
involves drawing the constraint lines on a graph and computer. It does not necessarily use maximization
outlining the feasible region. An easier approach is to and constraint functions.
solve the problem by trial and error. For each
answer, it can be determined whether the production Answer (B) is correct. When making a cost-time
levels violate the constraint functions. trade-off, the first activity to be crashed (have its
completion time accelerated) is one on the critical
2D + 3F ・24 path. To select an activity on another path would not
2D + 1F ・16 reduce the total time of completion. The initial activity
chosen should be the one with the completion time
Substituting the production levels in the answer that can be accelerated at the lowest cost per unit of
choices shows that only D=6 and F=4 does not time saved.
violate a constraint.
Answer (C) is incorrect because the EOQ is based
Answer (C) is incorrect because, if D is 12 and F is on a single equation that includes a square root.
0, the second constraint is violated.
Answer (D) is incorrect because the present value
Answer (D) is incorrect because, if D is 8 and E is 3, model is based on a single equation that incorporates
both constraints are violated. a rate of return.

[158] Source: CMA 1288 5-18 [161] Source: CMA 0694 4-11

Answer (A) is incorrect because regression explains Answer (A) is incorrect because contributions to
the behavior of a dependent variable (such as total revenue are included in the objective (maximization)
costs) in terms of one or more independent variables equation.
(such as units produced).
Answer (B) is incorrect because a shadow point, or
Answer (B) is correct. Linear programming is used to shadow price, is the amount by which the value of the
maximize an objective function, such as contribution optimal solution of the objective function will change
margin, given a number of constraints. The constraints if a one-unit change is made in a binding constraint.
represent limits on sales (product demand) and
limitations on the supply of resources, such as raw Answer (C) is incorrect because conditions are
materials, labor, and machine hours. usually not shown through inequalities.

Answer (C) is incorrect because mix variance Answer (D) is correct. The restrictions on the optimal
analysis is the analysis of the variance between actual value of the objective function in a linear
and planned contribution margin that is caused by a programming problem are known as constraints.
difference between actual and planned product mix. They are depicted by means of inequalities.
 of X and 40 units of Y is the feasible level that yields
[162] Source: CMA 0694 4-12 the maximum contribution margin of $2,800 [(120 x
$15) + (40 x $25)]. This mix is feasible because it
Answer (A) is incorrect because nothing can be said requires 600 pounds of A[(3 lbs. x 120) + (4 lbs. x
with respect to costs. Costs are not mentioned in any 40)] and 880 feet of B[(6 ft. x 120) + (4ft. x 40)].
of the equations.
Answer (D) is incorrect because producing 120 units
Answer (B) is incorrect because the point does not of Y violates the constraint for Material A.
lie in a corner.

Answer (C) is correct. The point at which M= 2 and [165] Source: CMA 0695 4-11
S = 3 is a feasible point because it does not violate
either of the constraint functions. A graphic depiction Answer (A) is correct. A shadow price is the amount
of the constraints will show whether the point lies in a by which the value of the optimal solution of the
corner, which is not the case. Because it does not lie objective function will change if a one-unit change is
in a corner, it could not be the optimal solution point. made in a binding constraint. The calculation of
In a linear programming problem, the optimal solution shadow prices is an example of sensitivity analysis,
lies at a corner in the feasible area. Thus, all that can which is any procedure that tests the responsiveness
be said for certain about the point is that it lies within of a solution to changes in variables.
the feasible area.
Answer (B) is incorrect because the change is in the
Answer (D) is incorrect because the point does lie limited resource, not in the contribution margin of one
within the feasible area. of the variables.

Answer (C) is incorrect because shadow prices are

[163] Source: CMA 1294 4-2 concerned with binding constraints, not nonbinding
constraints; the shadow price of unused capacity, a
Answer (A) is incorrect because the company can nonbinding constraint, is zero.
sell as much of each product as it can produce. Thus,
sales are limited by production constraints, e.g., Answer (D) is incorrect because shadow prices are
machine hours. The company should therefore seek not used in the final solution of a linear programming
to maximize its return per unit of the constraint. model.

Answer (B) is incorrect because the company can

sell as much of each product as it can produce. Thus, [166] Source: CMA 0697 4-23
sales are limited by production constraints, e.g.,
machine hours. The company should therefore seek Answer (A) is incorrect because the critical path
to maximize its return per unit of the constraint. method is a network model used to plan large
projects.
Answer (C) is incorrect because the contribution
margin ratio is only important as it translates to Answer (B) is correct. The transportation model is a
dollars. A high margin on a low sales volume will not special type of linear programming model. A
be profitable. transportation model involves physical movement of
goods from sources of supply to destinations. The
Answer (D) is correct. When demand far exceeds a objective function includes the transportation cost of
company's ability to supply the marketplace, each item from each source to each destination. The
management will want to maximize its profits per unit constraints are the output for each supply point and
of scarce resource. If the scarce resource is raw the demand by each destination.
materials, the products that provide the greatest
contribution margin per unit of raw materials are the Answer (C) is incorrect because queuing theory
products to emphasize. If machine hours are the attempts to minimize the total costs, including service
constraint, profits are maximized by emphasizing the and waiting costs, of systems involving waiting lines.
contribution margin per machine hour.
Answer (D) is incorrect because Monte Carlo
simulation is a means of simulating real-world
[164] Source: CMA 0695 4-10 situations using random numbers.

Answer (A) is incorrect because 146 units of X and

0 units of Y yield a contribution margin of $2,190. [167] Source: CMA 0696 4-8

Answer (B) is incorrect because 0 units of X and 100 Answer (A) is correct. Cell D2 is sales for year 3.
units of Y yield a contribution margin of $2,500. Given that sales are expected to increase 20% each
year, the amount in that cell should be 120% of the
Answer (C) is correct. Linear programming is used to preceding year's sales. The formula is C2 x 1.2.
maximize a contribution margin function, or minimize
a cost function, subject to constraints, such as scarce Answer (B) is incorrect because +B2 x 1.2 is the
resources or minimum/maximum levels of production. formula for cell C2.
In this problem, the equation to be maximized (the
objective function, or 15X + 25Y) is to be maximized Answer (C) is incorrect because +C2 + (.2 x B2)
subject to the two constraint functions (Material A: bases the increase in sales on 20% of the year 1
3X + 6Y < 600 and Material B: 6X + 4Y < 880). amount instead of the year 2 amount.
One way to solve this problem is to graph the
constraint lines and determine the feasible area. The Answer (D) is incorrect because +B2 + (.2 x B2) is
optimal production level is at an extreme point within an alternative formula for cell C2.
the feasible area. However, a simple alternative is to
calculate the contribution margin for each feasible
answer choice. Thus, a production level of 120 units [168] Source: CMA 0696 4-9
 Answer (A) is incorrect because cell D4 (D2 - D3) Answer (A) is correct. Matrix algebra is a
reflects proper applications of formulas, although the mathematical technique for solving a set of
amount is incorrect as a result of errors in other cells. simultaneous equations. Matrices consisting of the
coefficients of the variables of the equations may be
Answer (B) is incorrect because cell D8 (40% x D7) manipulated by addition, subtraction, multiplication,
reflects proper applications of formulas, although the and inversion. Because the two service departments
amount is incorrect as a result of errors in other cells. simultaneously provide services to each other,
recognition of these reciprocal services requires
Answer (C) is correct. Cell E6 contains the amount solution of a set of simultaneous equations.
of administrative expenses for year 4. These
expenses are expected to increase at the rate of 10% Answer (B) is incorrect because regression analysis is
annually. This rate of increase is reflected in cells C6 a statistical procedure for estimation of the relation
and D6. However, the amount in cell E6 is 120% of between variables.
the amount in cell D6 (1.2 x $48,400 = $58,080).
The proper amount is $53,240 (1.1 x $48,400). Answer (C) is incorrect because game theory is a
mathematical approach to decision making in which
Answer (D) is incorrect because C1 is the date. each decision maker takes into account the actions of
competitors.

[169] Source: CMA 0696 4-10 Answer (D) is incorrect because sensitivity analysis is
a method of studying the effects of changes in one or
Answer (A) is incorrect because $21,858 results more variables on the results of a decision model.
from not considering the changes in sales and cost of
goods sold in year 3 and the impact those changes
had in year 4. [172] Source: CIA 1187 III-45

Answer (B) is correct. If the error in cell D2 is Answer (A) is incorrect because 49 and 17 are
corrected, the sales for year 3 become $576,000 constants, not coefficients.
(1.2 x $480,000). Cell E2 should therefore be
$691,200 (1.2 x $576,000). Cell C3 is correct, but Answer (B) is correct. Systems of linear equations
cell D3 is not. Thus, cell E3 should be $535,680 (1.2 can often be more conveniently manipulated by using
x 1.2 x $372,000), and the gross profit in cell E4 matrix notation and matrix algebra techniques. In this
should be $155,520 ($691, 200 - $535,680). Selling format, the ordered numerical coefficients of the
expenses in cell E5 are correct at $39,930. unknowns are presented in a matrix (in this case, two
Administrative expenses in cell E6 should be $53,240 rows by two columns). The variables are described
(1.1 x $48,400). Hence, gross profit in cell E7 is by a row or, in this problem, a column vector. Finally,
$62,350 ($155,520 - $39,930 - $53,240). Income the right side of the system is described by a vector
taxes (cell E8) become $24,940 (.4 x $62,350). (here, a column) of constants.
Finally, net income in cell E9 is $37,410 ($62,350 -
$24,940). Answer (C) is incorrect because the variables vector
and the constants vector are misplaced.
Answer (C) is incorrect because $90,978 results
from not considering the change in cost of goods sold Answer (D) is incorrect because the coefficients
in year 3 and the impact it had on year 4. matrix and the variables vector are misplaced.

Answer (D) is incorrect because $88,074 results

from not considering the change in cost of goods sold [173] Source: CIA 0581 IV-25
in year 3 or the change in administrative expenses in
year 4. Answer (A) is incorrect because a 1-by-3 matrix
times a 3-by-3 matrix results in a 1-by-3 matrix, i.e.,
3 separate numbers.
[170] Source: CMA 1296 4-10
Answer (B) is incorrect because a 3-by-1 matrix
Answer (A) is correct. The transportation model is a times a 1-by-3 matrix results in a 3-by-3 matrix, i.e.,
special application of linear programming to a type of 9 numbers.
network flow problem. It determines the minimum
cost of, or maximum profit or revenue derived from, Answer (C) is incorrect because a 3-by-1 matrix
physically moving goods or delivering services from times a 3-by-1 matrix results in a 3-by-1 matrix, i.e.,
sources of supply (warehouses) to other destinations 3 numbers.
(retail stores).
Answer (D) is correct. The objective is to multiply
Answer (B) is incorrect because Markov analysis is the number of pounds of each material times the cost
useful in decision problems in which the probability of of each material and sum the answers. This matrix
the occurrence of a future state depends only on the appears in answer (D).
current state of a model.
(3 x 7.95) + (1 x 3.28) + (4 x 6.14)
Answer (C) is incorrect because calculus-based When multiplying two matrices together, multiply the
optimization does not incorporate the constraints of a items in each row (horizontal) of the first matrix times
transportation problem. each item in the second matrix's column (vertical),
and then add the products. Here, a 1-by-3 matrix is
Answer (D) is incorrect because a queuing model is a multiplied by a 3-by-1 matrix, resulting in a 1-by-1
group of mathematical functions for systems involving matrix representing the cost. Thus, the dimensions of
waiting lines. the matrix resulting from multiplying 2 matrices
together are equal to the number of rows in the first
and the number of columns in the second.
[171] Source: CIA 1191 III-38
 units of Y is less than the $5,600 yielded by 120 units
[174] Source: CIA 1189 III-47 of X and 40 units of Y.

Answer (A) is incorrect because integral calculus is Answer (B) is incorrect because the $5,000 of
used to compute the area under a curve. It finds contribution margin yielded by 0 units of X and 100
antiderivatives; that is, the first derivative of the units of Y is less than the $5,600 yielded by 120 units
integral is the function that was integrated. of X and 40 units of Y.

Answer (B) is correct. Differential calculus is used to Answer (C) is correct. Linear programming is a
identify the maxima or minima of nonlinear functions. technique used to maximize a contribution margin
The derivative of a function measures the slope or function or to minimize a cost function, subject to
rate of change of that function. Maxima or minima constraints such as scarce resources or
occur where the slope is equal to zero. A maximum minimum/maximum levels of production. Thus, linear
exists when the derivative of the first derivative of the programming is often used for planning resource
function is negative. A minimum exists when the allocations. In this problem, the equation to be
second derivative is positive. maximized, called the objective function, is: $30X +
$50Y. This equation is to be maximized subject to
Answer (C) is incorrect because operations research the constraints on materials. The two constraint
is a broad term for the application of scientific and functions are:
quantitative methods to the understanding of systems,
especially human-machine systems used in business. Material A: 6X + 12Y ・1,200
Material B: 12X + 8Y ・1,760
Answer (D) is incorrect because regression analysis
creates an equation to explain the variation in a One way to solve this problem is to graph the
dependent variable caused by changes in one or constraint lines and determine the feasible area. The
more independent variables. optimal production level is at an extreme point within
the feasible area. The graph shows that a production
level of 120 units of X and 40 units of Y is a feasible
[175] Source: CIA 1191 III-39 production level that maximizes the contribution
margin.
Answer (A) is correct. Marginal cost is the
incremental cost incurred to produce one additional Answer (D) is incorrect because 40 units of X and
unit of output. The derivative of the total cost function 120 units of Y is not within the feasible production
is the change in total cost per unit change in output area. It violates the constraint on Material A.
quantity. Accordingly, it is the same as marginal cost.
Marginal cost increases or decreases as the
derivative (slope) of the total cost function increases [178] Source: CIA 1193 III-72
or decreases.
Answer (A) is incorrect because the formula is
Answer (B) is incorrect because marginal cost may nonlinear and there are no stated constraints.
increase or decrease as total cost increases. Whether
it increases or decreases depends on whether the Answer (B) is incorrect because least squares is
derivative of the total cost function increases or related to regression analysis.
decreases.
Answer (C) is correct. Only differential calculus can
Answer (C) is incorrect because marginal cost may be used to derive the normal equations for regression
increase or decrease as total cost increases. (least squares) analysis. This form of calculus
identifies the maxima or minima of curvilinear
Answer (D) is incorrect because marginal cost may functions. Hence, it is applicable to the problem of
increase or decrease as total cost increases. finding the function that minimizes the squared
deviations of the observed values from the regression
line.
[176] Source: CIA 1195 III-11
Answer (D) is incorrect because integral calculus
Answer (A) is correct. The objective of a scatter concerns areas and volume.
diagram is to demonstrate correlations. Each
observation is represented by a dot on a graph
corresponding to a particular value of X (the [179] Source: CIA 1194 III-58
independent variable) and Y (the dependent
variable). Answer (A) is correct. Linear programming is a
mathematical technique for planning resource
Answer (B) is incorrect because the objective of a allocation that optimizes a given objective function
histogram is to show frequency distribution in graphic that is subject to certain constraints. In this case, the
form. maximum investment is constrained by a 70% limit on
either investment choice.
Answer (C) is incorrect because the objective of
stratification is to divide a universe of data into Answer (B) is incorrect because capital budgeting is
homogeneous groups. used to analyze and evaluate long-term capital
investments.
Answer (D) is incorrect because regression analysis
is used to find trend lines. Answer (C) is incorrect because differential analysis
is used for decision making when differences in costs

[177] Source: Publisher (revenues) for two or more options are compared.

Answer (A) is incorrect because the $4,380 of Answer (D) is incorrect because queuing theory is
contribution margin yielded by 146 units of X and 0 used to minimize the sum of the costs of waiting lines
 and servicing waiting lines when items arrive
randomly at a service point and are serviced
sequentially. [183] Source: Publisher

Answer (A) is correct. The three simultaneous

[180] Source: CIA 0593 IV-21 equations can be solved using substitution. Plug in the
values previously found for the maintenance and
Answer (A) is incorrect because relevant costs are cleaning departments into the food service equation.
expected future costs that will vary with the decision
taken. They are reflected in the objective function and F = $50,000 + .1($57,895) + .45($71,579)
constraints of linear programming problems. F = $50,000 + $5,790 + $32,211
F = $88,001
Answer (B) is incorrect because a differential cost is
the net relevant cost. Answer (B) is incorrect because $55,790 does not
include the 45% of the cleaning department that the
Answer (C) is incorrect because the term alternative food service department is dependent upon.
costs is seldom used in either managerial/cost
accounting textbooks or the literature on decision Answer (C) is incorrect because $82,211 does not
theory. include the 10% of the maintenance department that
the food service department is dependent upon.
Answer (D) is correct. A shadow price is the amount
by which the value of the optimal solution of the Answer (D) is incorrect because $83,211 reverses
objective function in a linear programming problem the 10% of maintenance in the equation with the 45%
will change if a one-unit change is made in a binding of cleaning in the equation.
constraint. The calculation of a shadow price is a
simple example of sensitivity analysis. An opportunity
cost is the maximum benefit forgone by using a scarce [184] Source: Publisher
resource for a given purpose. It is the benefit from the
next best use of that resource. Thus, shadow prices Answer (A) is incorrect because 25 Inactive Dog
and opportunity costs are related concepts. units and 0 Puppy units yield a contribution margin of
$375.

[181] Source: Publisher Answer (B) is incorrect because 20 Puppy units and
10 Inactive Dog units yield a contribution margin of
Answer (A) is incorrect because it is based on a 35% $350.
allocation rather than a 50% allocation.
Answer (C) is incorrect because 10 Puppy units and
Answer (B) is correct. Under the direct method, the 20 Inactive Dog units yield a contribution margin of
costs incurred in a service department are allocated $400.
directly to production without consideration of
services performed for other service departments. Answer (D) is correct. Linear programming is used to
Thus, $40,000 of maintenance costs would be maximize a contribution margin function or minimize a
allocated to production. Since the same amount of cost function, subject to constraints, such as scarce
work is performed for each production department, resources or minimum/ maximum levels of
they would each be allocated $20,000. production. In this problem, the equation to be
maximized, 10x + 15y, is to be maximized subject to
Answer (C) is incorrect because they are not based two constraint functions; Corn: 2x + 4y ・100, and
on the direct method in that they include some Wheat: 3x + 2y ・80. Solve these two equations:
interdepartmental allocations.
2x + 4y ・100 --------> 2x + 4y ・100
Answer (D) is incorrect because they are not based 3x + 2y ・80 --------> 6x + 4y ・160
on the direct method in that they include some
interdepartmental allocations. -4x ・ 60
x ・15

[182] Source: Publisher Substitute into 2x + 4y ・100, and get y = 17.5.

Thus, a contribution margin of $412.50.
Answer (A) is incorrect because $57,895 is the cost
allocated to the maintenance department.
[185] Source: CIA 1195 III-15
Answer (B) is correct. The three simultaneous
equations can be solved using substitution. Substitute Answer (A) is incorrect because more detailed
the maintenance department into the cleaning information is not available. The Pareto diagram does
department equation. not focus on the total quantity of computer
complaints.
C = $60,000 + .2($40,000 + .25C)
C = $60,000 + $8,000 + .05C Answer (B) is incorrect because complaints about
.95C = $68,000 diskettes and software are infrequent.
C = $71,579
Answer (C) is correct. Complaints based on lack of
Answer (C) is incorrect because $68,000 does not user knowledge and hardware problems are by far
include the 25% of the cleaning department that the most frequent according to this chart.
maintenance is dependent upon. Consequently, the company should devote its
resources primarily to these issues.
Answer (D) is incorrect because $60,000 does not
include the 20% of the maintenance department that Answer (D) is incorrect because cost information is
the cleaning department is dependent upon. not provided.
 $375.

[186] Source: CIA 1195 III-16 Answer (B) is incorrect because 20 Puppy units and
10 Inactive Dog units yield a contribution margin of
Answer (A) is incorrect because the chart does not $350.
display the arithmetic means of each type of
complaint. Answer (C) is incorrect because 10 Puppy units and
20 Inactive Dog units yield a contribution margin of
Answer (B) is incorrect because the chart does not $400.
display the relative frequencies of each type of
complaint. Answer (D) is correct. Linear programming is used to
maximize a contribution margin function or minimize a
Answer (C) is incorrect because the chart does not cost function, subject to constraints, such as scarce
display the medians of each type of complaint. resources or minimum/maximum levels of production.
In this problem, the equation to be maximized, 10x +
Answer (D) is correct. This Pareto diagram depicts 15y, is to be maximized subject to two constraint
the frequencies of complaints in absolute terms. It functions; Corn: 2x + 4y ・100, and Wheat: 3x + 2y
displays the actual number of each type of complaint. ・80. Solve these two equations.

2x + 4y ・100 2x + 4y ・100
[187] Source: CIA 1192 III-41 3x + 2y ・80 6x + 4y ・160
Answer (A) is correct. A model consisting of a 4x ・ 60
system of functions may be used to optimize an x ・15
objective function. If the functions in the model are all
linear, the model is a linear programming model. Substitute into 2x + 4y ・100, and get y = 17.5.
Linear programming is a technique to determine Thus, a contribution margin of $412.50.
optimal resource allocation. Several solution methods
are available to solve linear programming problems.
The graphical method, the easiest technique, is limited [190] Source: Publisher
to simple problems. Here, the graph consists of three
lines, each representing a production constraint. The Answer (A) is incorrect because Redler's amount of
lines connecting points 3, 4, 6, and 7 bound the cleaning fluid to maximize revenue is 260,000 gallons.
feasible solution region. Product mixes of X and Y
that lie outside this boundary cannot be produced Answer (B) is correct. A maximization problem is
and/or sold because the demand constraint (line 3,4), solved by setting the first derivative of the revenue
the labor constraint (line 4,6), and the material function equal to zero and solving for x. The first
constraint (line 6,7) are binding. derivative of the Funz-N-Oonz revenue function is 22
- .08x. Thus,
Answer (B) is incorrect because points 1, 5, and 8
.08x = 22
are outside the boundary. x = 275
Selling 275,000 gallons of cleaning fluid will maximize
Answer (C) is incorrect because points 2, 5, and 8 revenues at Funz-N- Oonz.
are outside the boundary.
Answer (C) is incorrect because Moonsammy's
Answer (D) is incorrect because point 5 is outside amount of cleaning fluid to maximize revenue is
the boundary. 125,000 gallons.

Answer (D) is incorrect because Step-N-Wolf's

[188] Source: CIA 1192 III-42 amount of cleaning fluid to maximize revenue is
129,000 gallons.
Answer (A) is correct. A profit line has negative
slope because the profit from sales of one product
increases as the profit from sales of the other product [191] Source: Publisher
declines. Moving the profit line rightward (while
maintaining its slope) to the last point in the feasible Answer (A) is correct. Profit is equal to the revenue
region determines the solution. function minus the cost function which for Redler is
[(-$100 + $26x $.05x2) ($50 x $8x + $.01x2)]. It is
Answer (B) is incorrect because the last point in the not necessary to combine terms. The profit maximum
feasible solution region touched by a profit line is the first derivative of this profit function (26 .1x) -
determines the solution. (8 + .02x), or 18 - .12x. Set the derivative equal to
zero and solve for x, or 150. Thus, producing
Answer (C) is incorrect because the last point in the 150,000 gallons of cleaning fluid will maximize profit.

feasible solution region touched by a profit line Answer (B) is incorrect because Funz-N-Oonz's
determines the solution. profit will be maximized at a production level of
100,000 gallons.
Answer (D) is incorrect because the last point in the
feasible solution region touched by a profit line Answer (C) is incorrect because Moonsammy's
determines the solution. profit will be maximized at a production level of
36,000 gallons.

[189] Source: Publisher Answer (D) is incorrect because Step-N-Wolf's

profit will be maximized at a production level of
Answer (A) is incorrect because 25 Inactive Dog 59,000 gallons.
units and 0 Puppy units yield a contribution margin of
 the "90% test" used in determining whether a lease is
[192] Source: Publisher a capital or operating lease (the present value of the
lease payments is 90% or more of the fair value of
Answer (A) is correct. This question is easily solved the leased property). "Minor" refers to a transfer of
by substituting 100 for x in the two given equations 10% or less of the use of the property in the lease.
for each company. For Redler, it is:
For Ruhl Corp., the $60,800 present value of the
Revenue = $100 + $26(100) - $.05(10,000) lease rentals is greater than 10% and less than 90%
Cost = $50 + $8(100) - $.01(10,000) of the fair value of the leased property as measured
The cost equation is subtracted from the revenue by the sales price. Thus, $9,200 in excess profit
equation to determine profit or loss per gallon of x. should be recognized.

[-$100 + $2,600 - $500 - ($50 + $800 + $100)] Sales price $220,000

Profit = $2,000 (revenue) - $950 (costs) Book value (150,000)
= $1,050 (profit) --------
Because x is stated in thousands of gallons, the total Profit $ 70,000
profit is $1,050,000. Minus PV of lease payments (60,800)
--------
Answer (B) is incorrect because Funz-N-Oonz has a Profit recognized $ 9,200
profit of only $445,000. ========
The $60,800 remaining gain on the sale-leaseback
Answer (C) is incorrect because Moonsammy has a should be amortized in proportion to the gross rentals
total loss of $430,000. expensed over the lease term because the leaseback
is classified as an operating lease (none of the criteria
Answer (D) is incorrect because Step-N-Wolf has a for a capital lease is met). At 12/31/01, the date of
profit of only $20,000. the inception of the lease, the entire $60,800 should
be reported in the balance sheet as deferred revenue
from the sale of the equipment.
[193] Source: CPA 0591 I-44
Answer (D) is incorrect because $70,000 is the total
Answer (A) is incorrect because $50,000 is the total profit.
deferred gain at the inception of the lease.

Answer (B) is correct. A profit or loss on the sale in [195] Source: CPA 0590 I-31
a sale-leaseback transaction is ordinarily deferred
and amortized in proportion to the amortization of the Answer (A) is incorrect because $34,100 is the
leased asset if the leaseback is classified as a capital present value of reasonable lease rentals.
lease. At 12/31/01, a gain proportionate to the lease
amortization will be recognized [($150,000 - Answer (B) is incorrect because $30,000 is the profit
$100,000) ・10 years = $5,000]. Hence, the recognized.
deferred gain will be $45,000 ($50,000 - $5,000).
Answer (C) is incorrect because $4,100 is the excess
Answer (C) is incorrect because $25,588 is the of the present value of reasonable lease rentals over
difference between the total deferred gain and the the profit recognized.
periodic lease payment.
Answer (D) is correct. The general rule is that profit
Answer (D) is incorrect because the seller-lessee has or loss on the sale in a sale-leaseback transaction is
retained substantially all of the use of the property deferred and amortized over the life of the lease.
and should therefore defer gain. However, SFAS 28 provides for certain exceptions.
One exception applies when the seller-lessee
relinquishes the right to substantially all of the
[194] Source: CPA 0588 I-32 remaining use of the property sold and retains only a
minor portion of such use. This exception is indicated
Answer (A) is incorrect because the profit not if the present value of a reasonable amount of rentals
recognized should be deferred. for the leaseback represents 10% or less of the fair
value of the asset sold. In this case, the seller-lessee
Answer (B) is incorrect because $9,200 is the profit should account for the sale and the leaseback as
recognized. separate transactions based upon their respective
terms. Because the $34,100 present value of the
Answer (C) is correct. In an ordinary sale and reasonable lease rentals is less than 10% of the
leaseback, any profit or loss on the sale is amortized $360,000 sales price (the fair value), Bain should
over the life of the lease. But SFAS 28 provides for recognize the entire $30,000 difference between the
exceptions. One exception applies when a $360,000 sales price and the $330,000 carrying
seller-lessee retains more than a minor part but less amount as a gain from the sale. The leaseback should
than substantially all of the use of the property then be accounted for as if it were unrelated to the
through the leaseback. The "excess" profit on the sale sale, because the leaseback is considered to be
is recognized at the date of the sale if the seller-lessee minor.
in this situation realizes a profit on the sale in excess
of either
[196] Source: CPA 0593 I-31
1. The present value of the minimum lease payments over
the lease Answer (A) is incorrect because $950,000 includes
term if the leaseback is an operating lease, or the gain on plane #2.
2. The recorded amount of the leased asset if the
leaseback is Answer (B) is correct. The lease of plane #1 is a
classified as a capital lease. capital lease because its 8-year term exceeds 75% of
"Substantially all" has essentially the same meaning as the 10-year estimated remaining economic life of the
 plane. In a sale and leaseback transaction, any profit
or loss on the sale is ordinarily required to be [199] Source: Publisher
deferred and amortized in proportion to the
amortization of the leased asset if the lease is a capital Answer (A) is correct. The amount of available
lease. The amortization is in proportion to the gross machine hours using linear programming is found by
rental payments expensed over the lease term if the subtracting the product of the demand of the other
lease is an operating lease. At the inception of this products and the hours required to manufacture those
lease, the $500,000 gain ($600,000 sales price - products from the machine capacity. In this example:
$100,000 carrying amount) should be reported as
deferred revenue. The lease of plane #2 is an Machine hour capacity 1,400
operating lease that falls under an exception provided Machine hours to produce minimum number of A (200)
Machine hours to produce maximum number of C (600)
by SFAS 28. When the seller-lessee relinquishes the -----
right to substantially all of the remaining use of the Available machine hours for production of B 600
property sold and retains only a minor portion of such =====
use (in this case, less than 10% of the remaining
useful life), the seller-lessee should account for the Answer (B) is incorrect because 800 hours is the
sale and the leaseback as separate transactions based amount allocated to products A and C.
upon their respective terms. Dirk should recognize
the entire $450,000 gain ($1,000,000 sales price - Answer (C) is incorrect because 1,150 hours is
$550,000 carrying amount). Thus, only the $500,000 found by not multiplying the demand for A and C by
gain from the sale of plane #1 is deferred. the number of hours required to produce them.

Answer (C) is incorrect because $450,000 equals Answer (D) is incorrect because 1,400 hours is the
the gain on plane #2. machine hour capacity of machine X.

Answer (D) is incorrect because the gain on plane #1

should be deferred. [200] Source: Publisher

Answer (A) is incorrect because 1,400 units is found

[197] Source: CPA 0592 T-32 by not multiplying by hours per unit of products A
and C, and by not dividing by hours per unit of
Answer (A) is incorrect because the gain is ordinarily product B.
deferred.
Answer (B) is incorrect because 800 units is found
Answer (B) is incorrect because a contra asset (an by not dividing by hours per unit of product B.
asset valuation allowance) would be reported if the
lease qualified as a capital lease. Answer (C) is incorrect because 700 units is found
by not multiplying by hours per unit of products A
Answer (C) is incorrect because the gain is usually and C.
reported as a deferred credit.
Answer (D) is correct. The maximum number of units
Answer (D) is correct. A gain on the sale in a of a product that can be produced is found by
sale-leaseback normally should be deferred and subtracting the product of the demand of the other
amortized. When the seller-lessee classifies the lease products and the hours required to manufacture those
arising from the sale-leaseback as an operating lease, products from the machine capacity. This number is
no asset is shown on the balance sheet, and the then divided by the machine hours required for each
deferral cannot be presented as a contra asset. unit of the product. In this example:
Accordingly, the usual practice is to report the gain as
a deferred credit. Machine hour capacity 1,650
Machine hours to produce maximum number of C
(450)
[198] Source: CPA 1192 I-35 Machine hours to produce minimum number of A
(400)
Answer (A) is incorrect because $35,000 is the -----
excess of the fair value over the price. Available machine hours for production of B 800
=====
Answer (B) is correct. Any profit or loss on the sale Machine hours required for each unit of B 2
in a sale-leaseback transaction is ordinarily deferred Maximum number of units of B that can be produced
and amortized. Immediate recognition of the loss is 400
permitted, however, when the fair value at the time of =====
the transaction is less than the undepreciated cost
(SFAS 28). Given a fair value of $465,000 and a
carrying amount of $450,000, that exception does [201] Source: Publisher
not apply. Consequently, the $20,000 ($450,000 -
$430,000) excess of the carrying amount over the Answer (A) is incorrect because 550 is the combined
sales price should be deferred. number of products manufactured.

Answer (C) is incorrect because $15,000 is the Answer (B) is incorrect because $1,000 is the net
excess of the fair value over the carrying amount. profit after fixed costs.

Answer (D) is incorrect because full recognition of Answer (C) is correct. The contribution margin is the
the loss ($0 deferred loss) is not appropriate when selling price minus the variable cost. The contribution
the fair value is greater than the carrying amount. In margin is then multiplied by the number of units sold.
these circumstances, the loss is essentially a prepaid In this example, products A and C are fixed. The
rental expense. number of units of product B must be found using
linear programming.
 of another bakery.
Machine hour capacity 2,100
Machine hours to produce maximum number of C Answer (C) is incorrect because learning curve
(300) techniques are used to analyze the increases in
Machine hours to produce minimum number of A volume efficiency due to the augmented experience of
(300) employees.
-----
Available machine hours for production of B 1,500 Answer (D) is incorrect because correlation and
===== regression analyses are used to describe the strength
Machine hours required for each unit of B 5 and direction, i.e., positive or negative, of
Maximum number of units of B that can be produced relationships between variables.
300
=====
A B C
---- ---- ---- [204] Source: CMA 1287 5-26
Selling price $ 7 $ 6 $ 5
Variable cost 5 3 1 Answer (A) is incorrect because slack time is an
---- ---- ---- inherent part of the noncritical paths on PERT
Contribution margin $ 2 $ 3 $ 4 projects.
Number of units 100 300 150
---- ---- ---- Answer (B) is correct. Combining PERT with cost
Total contribution margin $200 $900 $600 data permits decisions as to whether the benefits of
==== ==== ==== earlier completion of a project are justified in terms of
Combined contribution margin $200 + $900 + $600 = the additional costs of completion. For this purpose,
$1,700. activity times and costs must be estimated for both
normal and crash efforts.
Answer (D) is incorrect because $3,250 is the
combined amount of sales. Answer (C) is incorrect because PERT-Cost can be
used without computerization.

[202] Source: CMA 1291 4-18 Answer (D) is incorrect because costs are not
needed for these calculations.
Answer (A) is incorrect because queuing theory is
used to minimize the costs of waiting lines.
[205] Source: CMA 0688 5-1
Answer (B) is incorrect because linear programming
is used to minimize a cost function or maximize a Answer (A) is incorrect because queuing theory is
profit function given constraints. used to minimize the sum of the costs of waiting lines
and of servicing them.
Answer (C) is incorrect because decision trees are
diagrams that analyze sequences of probabilistic Answer (B) is correct. Expected value analysis can
decisions, the events that may follow each decision, be used to analyze anticipated sales. The estimates of
and their outcomes. anticipated sales can be assigned probabilities. The
expected value will be the sum of the products of the
Answer (D) is correct. Simulation is a technique for outcomes (sales) and the probabilities.
experimenting with mathematical models using a
computer. Monte Carlo simulation is a technique to Answer (C) is incorrect because Markov analysis is
generate the individual values for a random variable. used when the probability of a future state depends
A random number generator is used to produce only upon the current state. This would probably not
numbers with a uniform probability distribution. The be true for sales of a new product.
second step of the Monte Carlo process then
transforms the random numbers into values consistent Answer (D) is incorrect because contribution margin
with the desired distribution. The performance of a analysis concerns the relationship of sales and
model under conditions of uncertainty may be variable costs.
investigated by randomly selecting values for each of
the variables in the model based on the probability
distribution of each variable and then calculating the [206] Source: CMA 0688 5-7
value of the solution. Advantages of Monte Carlo
simulation are that time can be compressed, Answer (A) is incorrect because the rate of learning
alternative policies can be considered, and complex is determined as follows: The cumulative average unit
systems can be analyzed. labor cost for 10 units was $12,000 ($120,000 ・
10). The cumulative cost for 20 units was $9,600.
The cost for 40 units was $7,680. Because $9,600 is
[203] Source: CMA 1280 5-11 80% of $12,000 and $7,680 is 80% of $9,600, an
80% rate of learning occurred.
Answer (A) is incorrect because expected value
analysis is useful when finding the anticipated payoff Answer (B) is incorrect because the rate of learning is
from a probability distribution of payoffs and the determined as follows: The cumulative average unit
probability of each payoff. labor cost for 10 units was $12,000 ($120,000 ・
10). The cumulative cost for 20 units was $9,600.
Answer (B) is correct. Markov analysis is used when The cost for 40 units was $7,680. Because $9,600 is
a decision involves a number of separate states of 80% of $12,000 and $7,680 is 80% of $9,600, an
nature, and the probability of moving from one state 80% rate of learning occurred.
to another is dependent only upon the current state.
We are presented with consumers who are loyal to Answer (C) is correct. The learning curve reflects a
one bakery, and given a probability of their moving percentage reduction in time to complete a task for
away from that bakery or becoming new customers each doubling of cumulative production. An analysis
 of the materials costs shows that these costs are Answer (D) is incorrect because $708,640 includes
strictly variable. However, the labor costs are not $100,000 of fixed costs.
strictly variable because the cumulative amount at the
end of the second year (for which production is
double that of the first year) is not exactly double that [209] Source: CMA 0688 5-14
for Year One. The same is true of the second- and
third-year labor costs. The cumulative average unit Answer (A) is incorrect because the most likely time
labor cost for 10 units was $12,000 ($120,000 ・ is multiplied by 4, not the optimistic or pessimistic
10). The cumulative average unit labor cost for 20 times.
units (representing a doubling of production) was
$9,600 ($192,000 ・20). The cumulative unit Answer (B) is correct. The expected times used in a
average for the next doubling was $7,680 ($307,200 PERT analysis are determined by applying a 1-4-1
ratio. The optimistic time is multiplied by one, the
・40). Since $9,600 is 80% of $12,000 and $7,680
most likely time by four, and the pessimistic time by
is 80% of $9,600, an 80% rate of learning occurred.
one. The products are added and the sum is divided
Answer (D) is incorrect because the rate of learning by six. Thus, the three time estimates are weighted
1/6, 4/6, and 1/6.
is determined as follows: The cumulative average unit
labor cost for 10 units was $12,000 ($120,000 ・ Answer (C) is incorrect because the formula includes
10). The cumulative cost for 20 units was $9,600.
4 times the most likely time in the numerator, with a
The cost for 40 units was $7,680. Because $9,600 is
denominator of 6.
80% of $12,000 and $7,680 is 80% of $9,600, an
80% rate of learning occurred. Answer (D) is incorrect because the numerator
equals the optimistic time, plus 4 times the most likely
time, plus the pessimistic time. The denominator is 6.
[207] Source: CMA 0688 5-8

Answer (A) is incorrect because $760,800 equals [210] Source: CMA 0688 5-15
125% times $608,640, which is full cost without
including $100,000 fixed overhead.
Answer (A) is correct. PERT and CPM emphasize
time. The critical path is thus the path that requires the
Answer (B) is incorrect because $608,640 is full cost longest time through the network. It is the path with
without including $100,000 fixed overhead. the least amount of slack because any delay on the
critical path increases project length. Hence, slack
Answer (C) is correct. The company is permitted to
time on the critical path is zero. Slack time is found
bid 25% above full cost (including fixed overhead).
on all other paths. It is the time by which the path is
Given a learning curve of 80% and a cumulative shorter than the critical path. For example, if a critical
average unit labor cost for 40 units of $7,680 path requires 14 weeks and another path 13 weeks,
($307,200 ・40), the additional labor costs for the the alternative has 1 week of slack time. The work on
next 40 units can be determined. Cumulative average the noncritical path can be delayed by 1 week and
unit labor cost for 80 units is estimated to be $6,144 the completion time of the total project will not be
(80% x $7,680). Estimated total labor cost for 80 lengthened.
units is $491,520 (80 units x $6,144). Thus, the
incremental labor cost of the last 40 units is expected Answer (B) is incorrect because the critical path is
to be $184,320 ($491,520 - $307,200). Variable the longest but not necessarily the most costly.
overhead is $1 per direct labor dollar, or $184,320.
Adding $240,000 for materials and $100,000 for Answer (C) is incorrect because the critical path is
fixed overhead results in a full cost of $708,640 the longest but not necessarily the most costly.
($184,320 DL + $184,320 VOH + $240,000 DM
+ $100,000 FOH). Consequently, the bid price Answer (D) is incorrect because the critical path is
should be $885,800 (125% x $708,640 full cost). the longest but not necessarily the most costly.
Answer (D) is incorrect because $708,640 equals full
cost. The maximum bid price equals full cost times [211] Source: CMA 0688 5-16
125%.
Answer (A) is incorrect because the activity must be
on the path with the least slack (the critical path).
[208] Source: CMA 0688 5-9
Answer (B) is correct. When making a cost/time
Answer (A) is incorrect because $760,800 equals trade-off, the first activity to be crashed (have its
125% times $608,640, which is the full cost without completion time accelerated) is one on the critical
including the fixed cost. path. To select an activity on another path would not
reduce the total time of completion. The activity
Answer (B) is correct. The full cost of the incremental chosen should be that whose completion time can be
production is $708,640 ($184,320 DL + 184,320 accelerated at the lowest possible cost per unit of
VOH + $240,000 DM + $100,000 FOH). time saved.
However, that amount includes $100,000 of fixed
overhead that would presumably not increase as a Answer (C) is incorrect because the time reduction
result of the production. Thus, if the company obtains should be related to its cost.
the contract at a price of $608,640 ($708,640 -
$100,000), it will break even. The minimum bid is Answer (D) is incorrect because the activity with the
therefore $608,640: the incremental cost of labor, lowest unit crash cost may not be on the critical path.
variable overhead, and raw materials. The activity selected must be on the critical path.
Answer (C) is incorrect because $885,800 equals
the maximum bid. [212] Source: CMA 0689 5-13
 Answer (A) is incorrect because sensitivity analysis is Answer (D) is incorrect because PERT is a type of
not used to determine how constraints vary but rather network analysis used to plan and control large
how the optimum solution will change if constraints projects.
do vary.

Answer (B) is incorrect because the accuracy of the [215] Source: CMA 1291 4-17
parameters cannot be tested as a part of the model.
The intent is simply to measure the impact if the Answer (A) is incorrect because the PERT estimate
assumed parameters do vary. is 4.5 months.

Answer (C) is incorrect because the technological Answer (B) is correct. The PERT method weights
matrix is developed by production managers or expected completion times using a 1-4-1 ratio. The
engineers and is an input into the model. most optimistic and pessimistic estimates are
weighted equally, but the most likely completion time
Answer (D) is correct. Sensitivity analysis in linear is weighted four times more heavily than the others.
programming determines how the optimal solution will Thus, the PERT estimate is 4.5 months {[(1 x 2) + (4
change if an objective function coefficient, the limiting x 4) + (1 x 9)] ・6}.
value of a resource constraint, or a constraint
coefficient is varied. It also considers the effect of Answer (C) is incorrect because the PERT estimate
adding a new variable or constraint. is 4.5 months.

Answer (D) is incorrect because the PERT estimate

[213] Source: CMA 0689 5-15 is 4.5 months.

Answer (A) is incorrect because regression analysis

is based on past data and is often used to determine [216] Source: CMA 1291 4-22
trends or divide costs into their fixed and variable
components. Answer (A) is correct. Learning curves reflect the
increased rate at which people perform as they gain
Answer (B) is correct. The term "rates of return" experience at a new task. Because the time to
suggests the net present value and internal rate of perform the task becomes progressively shorter in the
return methods in this context, but simulation analysis early stages of a new activity, the direct labor costs
can also be used. Simulation is a mathematical involved decline. The curve is often expressed as a
modeling technique for performing a what-if analysis percentage reduction in time for each doubling of
of estimated data. For instance, it may determine how cumulative production. Two models are in common
profitable a company will be if Machine A is use. One assumes that the cumulative average time
purchased rather than Machine B. per unit declines by a constant percentage each time
cumulative production doubles. The other assumes
Answer (C) is incorrect because Markov chain that the time required for the last unit declines by a
analysis is used in decision problems in which the constant percentage when cumulative production
probability of the occurrence of a future state doubles.
depends only on the current state. A characteristic of
the Markov process is that the initial state matters Answer (B) is incorrect because differential calculus
less and less as times goes on, because the process is used primarily to identify the maxima or minima of
will eventually reach its steady state. curvilinear functions.

Answer (D) is incorrect because Gantt charting Answer (C) is incorrect because discounted cash
involves drawing a bar chart showing the progress of flow techniques are used to evaluate capital
a project. investment decisions.

Answer (D) is incorrect because linear programming

[214] Source: CMA 0690 5-20 is a tool for optimizing a cost or profit function given
scarce resources and specified restraints.
Answer (A) is correct. Simulation is a technique for
experimenting with mathematical models using a
computer. Monte Carlo simulation is a technique to [217] Source: CMA 1293 4-27
generate the individual values for a random variable
(such as arrivals of freight cars). The performance of Answer (A) is incorrect because the critical path is
a model under conditions of uncertainty may be the longest path, not the shortest path.
investigated by randomly selecting values for each of
the variables in the model based on the probability Answer (B) is correct. Under either PERT or the
distribution of each variable and then calculating the critical path method, the critical path is the longest
value of the solution. Advantages of Monte Carlo path of sequential activities through a network. It is
simulation are that time can be compressed, critical because, if any activity on the critical path
alternative policies can be considered, and complex takes longer than expected, the entire project will be
systems can be analyzed. delayed. PERT analysis includes probabilistic
estimates of activity completion times. Three time
Answer (B) is incorrect because expected value estimates are made: optimistic, most likely, and
analysis is used to determine an anticipated return or pessimistic. PERT approximates the mean of the
cost based upon probabilities of events and their likely time distributions by dividing the sum of the
related outcomes. optimistic time, the pessimistic time, and four times
the most likely time by six.
Answer (C) is incorrect because the minimax regret
criterion is a decision rule developed in game theory. Answer (C) is incorrect because PERT is based on
It chooses the action with lowest maximum the most likely time, the optimistic time, and the
opportunity cost. pessimistic time.
 Answer (D) is incorrect because PERT is also based the pessimistic times for an activity). CPM uses
on most likely and optimistic times. deterministic time and cost estimates. It also uses time
and cost estimates for normal and "crash" efforts.

[218] Source: CMA 1280 5-6

[221] Source: CMA 0685 5-11
Answer (A) is incorrect because queuing theory is
used to decide how many service facilities to have Answer (A) is correct. Computer simulation is used
when their work arrives randomly. An example is the when an optimization model cannot be developed,
arrival of cars at a toll collection facility on a highway. e.g., because the variables exceed the equations
Queuing theory helps calculate the number of toll describing them. Simulation involves constructing a
collection facilities required to minimize the total costs mathematical/logical model incorporating most of the
of waiting for service and of providing additional features of the problem. This model is tested in a
service facilities. variety of hypothetical situations, and the modeled
responses can then be measured.
Answer (B) is incorrect because time series analysis
is used to describe the variation of a certain quantity Answer (B) is incorrect because simulation is not
over time, e.g., GNP. used to pinpoint random variations in industrial
processes or for short-run allocation models.
Answer (C) is correct. PERT/CPM analysis is a
project management and scheduling technique which Answer (C) is incorrect because regression analysis
identifies the longest path from the starting point to (or some other method) is used to separate costs into
the completion point, and allows the project manager fixed and variable portions.
to put most of his effort on this longest path, thereby
minimizing the total time for the completion of the Answer (D) is incorrect because simulation is not an
project. Remember, PERT stands for Program EOQ model.
Evaluation and Review Technique and CPM stands
for Critical Path Method. They are closely related.
[222] Source: CMA 1285 5-22
Answer (D) is incorrect because linear programming
is used to minimize the total cost or maximize profits Answer (A) is incorrect because linear programming
subject to a series of linear constraints, e.g., scarce is used to maximize (or minimize) an objective
resources. function given a variety of limitations.

Answer (B) is incorrect because queuing theory is

[219] Source: CMA 1283 5-19 used to optimize waiting line situations.

Answer (A) is incorrect because both the simplex Answer (C) is incorrect because differential calculus
method and iterative analysis are ways of working a is used to find derivatives of functions and to
linear programming problem by hand. determine the points of maximization or minimization.

Answer (B) is incorrect because regression analysis is Answer (D) is correct. In a Markov chain, the
a means of finding the relationship between two or probability of an event is conditioned upon the
more variables. previous event. Many card games reflect the Markov
process because the probabilities are altered by the
Answer (C) is correct. Sensitivity analysis is a cards already played. Markov analysis is thus an
process to determine how sensitive the final result appropriate technique for forecasting consumer
(solution) is to changes in variables. It is often used in buying habits because it relies on recent evidence
capital budgeting decisions to incorporate various rather than on an average of all evidence.
levels of risk.

Answer (D) is incorrect because matrix analysis is [223] Source: CMA 1285 5-23
another mathematical tool used to solve a variety of
problem types. Answer (A) is incorrect because linear programming
is used to maximize or minimize an objective function
given a number of limiting factors.
[220] Source: CMA 1284 5-9

Answer (A) is incorrect because basic PERT does Answer (B) is incorrect because decision tree
analysis is used to study the results of various
not consider cost. decisions that have a number of outcomes, all with
different risks.
Answer (B) is incorrect because basic PERT does
not consider cost. Answer (C) is correct. Simulation involves
developing a computer model in logical and
Answer (C) is incorrect because slack times occur mathematical form. The model is a representation of a
under both methods of analysis. system that relates the relevant variables, their
behavior, and their interactions. Varying the
Answer (D) is correct. Both PERT (program assumptions in the model permits sensitivity analysis,
evaluation and review technique) and CPM (critical for example, of the effects of changing prices.
path method) are useful in the planning and control of
a large system or process. PERT and CPM both Answer (D) is incorrect because Markov analysis is
construct a network of time relationships between useful when a problem involves a variety of states of
each subunit or subproject to identify the subprojects nature and the probability of moving from one to
that have a direct effect on the completion date of the another depends only upon the current state.
project. PERT uses probabilistic time estimates
(usually based on the most likely, the optimistic, and
[224] Source: CMA 1286 5-9 in time through the network. It is critical in that if any
activity on the critical path takes longer than
Answer (A) is incorrect because a GANTT chart is a expected, the entire project will be delayed. Paths
bar chart used to keep a record of the steps in a that are not critical have slack time. One advantage of
project that have already been completed. PERT is that it identifies this slack time, which
represents unused resources that can be diverted to
Answer (B) is incorrect because CPM is similar to the critical path.
PERT, but uses deterministic estimates of time.
Answer (D) is incorrect because learning curve
Answer (C) is correct. PERT is used to obtain a analysis is based on the observation that people
probabilistic estimate of the completion time for a perform tasks more rapidly as they gain experience.
project. The PERT method is sometimes known as
the 1-4-1 three-estimate method because the most
optimistic and pessimistic estimates are each [227] Source: CMA 1289 5-12
weighted by one and the most likely estimate is
weighted by four. The sum of these three weighted Answer (A) is incorrect because a critical path
estimates is then divided by six to arrive at the network is used to plan and measure the progress
probable completion time. through a complex project by emphasizing the
longest, or critical, path.
Answer (D) is incorrect because Markov analysis is
useful when a problem involves a variety of states of Answer (B) is correct. Queuing theory is a group of
nature and the probability of moving from one to mathematical models for systems involving waiting
another depends only upon the current state. lines. In general, a queuing system consists of a
waiting line and a service facility (a crane in this case).
The objective of queuing theory is to minimize the
[225] Source: CMA 0688 5-3 total cost of the system, including both service and
waiting costs, for a given rate of arrivals.
Answer (A) is correct. Monte Carlo simulation is
used to generate the individual values for a random Answer (C) is incorrect because the IRR is a
variable. The performance of a model under discounted cash flow technique used to evaluate
conditions of uncertainty may be investigated by investment projects.
randomly selecting values for each of the variables in
the model based on the probability distribution of Answer (D) is incorrect because the expected value
each variable and then calculating the value of the of a decision is found by multiplying the probability of
solution. Advantages of Monte Carlo simulation are each outcome by its payoff and summing the
that time can be compressed, alternative policies can products.
be considered, and complex systems can be
analyzed.
[228] Source: CMA 0690 5-22
Answer (B) is incorrect because expected value
analysis is used when specific outcomes can be Answer (A) is incorrect because regression analysis
associated with particular events and probabilities can explains the behavior of a dependent variable (such
be assigned to those events. as total cost) in terms of one or more independent
variables (such as units produced).
Answer (C) is incorrect because multiple regression
analysis explains the behavior of a dependent variable Answer (B) is incorrect because expected value
based on the value of one or several independent analysis is used to determine an anticipated return or
variables. cost based upon probabilities of events and their
related outcomes.
Answer (D) is incorrect because contribution margin
Answer (C) is correct. Learning curves reflect the
analysis is used to explore changes in sales and increased rate at which people perform tasks as they
variable costs. gain experience. The time to perform a given task
becomes progressively shorter during the early stages
of production. The curve is expressed as a
[226] Source: CMA 0688 5-6 percentage reduction in time to complete a task for
each doubling of cumulative production. A learning
Answer (A) is incorrect because queuing curve percentage of 80% is common.
(waiting-line) theory is used for systems involving
waiting lines (such as cash registers in a store or teller Answer (D) is incorrect because Monte Carlo
windows in a bank). Its objective is to minimize the simulation is used to generate values for random
total cost of the system (service and waiting costs). variables in computer models.

Answer (B) is incorrect because regression analysis

explains the value of a dependent variable in terms of [229] Source: CMA 1291 4-16

one or more independent variables. Answer (A) is incorrect because the critical path is
the longest path.
Answer (C) is correct. PERT is a network analysis
technique that uses probabilistic time and cost Answer (B) is correct. The critical path is the longest
estimates to aid managers in planning and controlling path through a network. It is critical because any
large-scale, complex projects having many increase in time for an activity on this path will delay
the entire project. Moreover, any decrease in time for
interrelated activities. PERT diagrams are free-form an activity not on the critical path will not shorten the
networks showing each activity as a line between project.
events. A sequence of lines shows interrelationships
among activities. The critical path is the longest path Answer (C) is incorrect because variability of
 estimated times is not the distinguishing characteristic needed for these calculations.
of the critical path. Indeed, CPM does not assign
probabilities to activity times.
[233] Source: CIA 0594 III-61
Answer (D) is incorrect because time, not cost,
determines whether a path is critical. Answer (A) is incorrect because a dummy activity is
one that consumes no time but establishes
precedence among activities. It is used specifically in
[230] Source: CIA 1182 IV-20 project management.

Answer (A) is correct. Computer simulations are Answer (B) is incorrect because the latest finish is the
used to examine what-if questions. Variables may be latest that an activity can finish without causing delay
changed, assumptions modified, and models refined. in the completion of the project.
Computer simulations may be used in various types
of problems, including production and financial Answer (C) is incorrect because optimistic time is the
models. Simulation techniques can be used on time for completing a project if all goes well.
microcomputers as well as larger installations.
Answer (D) is correct. Project management concerns
Answer (B) is incorrect because time-based managing teams assigned to special projects. Lumpy
simulations are a common simulation technique. demand refers to periodic demand for a product or
service that increases in large, lumpy increments.
Answer (C) is incorrect because the refinement of
models leads to more informed management decision
making. [234] Source: CIA 1195 III-100

Answer (D) is incorrect because goal-seeking Answer (A) is correct. PERT/CPM is a network
analyses solve for the desired level of several key technique for scheduling interrelated time series
variables given the model criteria. This analysis is a activities and identifying any critical paths in the series
common simulation technique. of activities. The critical path is the longest path
through the network.

[231] Source: CIA 0589 III-44 Answer (B) is incorrect because linear programming
is a mathematical technique for maximizing or
Answer (A) is correct. Simulation is a technique for minimizing a given objective subject to certain
experimenting with logical-mathematical models using constraints.
a computer. Despite the power of mathematics, many
problems cannot be solved by known analytical Answer (C) is incorrect because queuing theory is
methods because of the behavior of the variables and used to minimize the costs of waiting lines when items
the complexity of their interactions. However, the arrive randomly at a service point and are serviced
performance of a quantitative model under sequentially.
uncertainty may be investigated by randomly selecting
values for each of the variables in the model (based Answer (D) is incorrect because sensitivity analysis is
on the probability distribution of each variable) and a method for studying the effects of changes in one or
then calculating the value of the solution. If this more variables on the results of a decision model.
process is performed a large number of times, the
distribution of results from the model will be obtained.
[235] Source: CIA 0592 III-69
Answer (B) is incorrect because regression analysis
finds an equation for the relationship among variables. Answer (A) is incorrect because the path length of
A-C is 13.
Answer (C) is incorrect because capital budgeting is
a methodology to maximize the returns on long-term Answer (B) is incorrect because the path length of
investment decisions. B-E is 8.

Answer (D) is incorrect because linear programming Answer (C) is correct. The critical path is the longest
is a technique used to maximize a revenue or profit path because it defines the minimum duration of the
function or minimize a cost function subject to project. A-D-E (4 + 6 + 5 = 15) is the critical path.
constraints.
Answer (D) is incorrect because B-D-C is not a
path. The predecessor of C is A.
[232] Source: CMA 1287 5-26

Answer (A) is incorrect because slack time is an [236] Source: CIA 1191 III-37
inherent part of the noncritical paths on PERT
projects. Answer (A) is incorrect because an activity with
slack may nevertheless be essential to the overall
Answer (B) is correct. Combining PERT with cost project.
data permits decisions as to whether the benefits of
earlier completion of a project are justified in terms of Answer (B) is incorrect because it is not a backup
the additional costs of completion. For this purpose, activity.
activity times and costs must be estimated for both
normal and crash efforts. Answer (C) is correct. Slack is the free time
associated with each activity. In other words, paths
Answer (C) is incorrect because PERT-Cost can be that are not critical have slack time. Slack represents
used without computerization. unused resources that can be diverted to the critical
path.
Answer (D) is incorrect because costs are not
 Answer (D) is incorrect because time is involved in a 2-week delay penalty.
slack activity.
Answer (D) is incorrect because the cost to crash
activity DE for 2 weeks is $800 higher than the cost
[237] Source: CIA 1193 III-69 to crash activities DE and EF for one week ($19,600
- $18,800).
Answer (A) is correct. Learning curves reflect the
increased rate at which people perform tasks as they
gain experience. The time required to perform a given [240] Source: CMA 1291 4-17
task becomes progressively shorter. This technique is
applicable only to the early stages of production or to Answer (A) is incorrect because 2 months is the most
any new task. One common assumption is that the optimistic estimate.
cumulative average time per unit is reduced by a fixed
percentage each time cumulative production is Answer (B) is incorrect because 4 months is the most
doubled. Based on the given data, this company has likely estimate.
a 90% learning curve (90% x 10 minutes = 9
minutes, and 90% x 9 minutes = 8.1 minutes). Answer (C) is correct. The PERT method weights
Accordingly, the cumulative average time to perform expected completion times using a 1-4-1 ratio. The
eight tasks is 7.29 minutes (90% x 8.1 minutes). most optimistic and pessimistic estimates are
weighted equally, but the most likely completion time
Answer (B) is incorrect because 8.1 minutes is the is weighted four times more heavily than the others.
cumulative time for four tasks. Thus, the PERT estimate is 4.5 months {[(1 x 2) + (4
x 4) + (1 x 9)] ・6}.
Answer (C) is incorrect because 6.56 minutes is the
cumulative average time for 16 tasks. Answer (D) is incorrect because 5 months is the
difference between the most likely estimate and the
Answer (D) is incorrect because 5.90 minutes is the pessimistic estimate.
cumulative average time for 32 tasks.

[241] Source: CMA 1284 5-3

[238] Source: CMA 0688 5-16
Answer (A) is correct. Queuing theory assumes that
Answer (A) is correct. When making a cost/time arrivals are completely random and follow a Poisson
trade-off, the first activity to be crashed (have its distribution. This discrete distribution indicates the
completion time accelerated) is one on the critical probability that a specified number of occurrences of
path. To select an activity on another path would not a random event will occur within an interval of time. It
reduce the total time of completion. The activity applies when the occurrences of the event are
chosen should be that whose completion time can be independent; the number of the occurrences of the
accelerated at the lowest possible cost per unit of event in the interval is theoretically unlimited; the
time saved. probability of a single occurrence of the event is
proportional to the length of the interval; and in any
Answer (B) is incorrect because the activity with the extremely small portion of the interval the likelihood
lowest unit crash cost may not be on the critical path. of more than one occurrence is very small. Queuing
The activity selected must be on the critical path. theory also assumes that departures are completely
random. Departures occur at the end of service and
Answer (C) is incorrect because the activity must be thus are a function of service time. A continuous
on the path with the least slack (the critical path). distribution (the exponential distribution, which is
related to the Poisson) is needed to decide service
Answer (D) is incorrect because the activity chosen times.
should be that whose completion time can be
accelerated at the lowest possible cost per unit of Answer (B) is incorrect because arrival times are
time saved. based on a Poisson distribution and service times are
exponentially distributed.

[239] Source: CMA 1288 5-24 Answer (C) is incorrect because arrival times are
based on a Poisson distribution and service times are
Answer (A) is incorrect because the activity to be exponentially distributed.
crashed must be on the critical path. Activity BC is
not on the critical path. Answer (D) is incorrect because if the arrival rate
were greater than the rate of service, the line would
Answer (B) is incorrect because the cost to crash be infinitely long.
activity EF for 2 weeks is $700 higher than the cost
to crash activities DE and EF for one week ($19,500
- $18,800). [242] Source: CMA 0692 4-5

Answer (C) is correct. Activities that are to be Answer (A) is incorrect because 360 hours assumes
crashed in a CPM problem should be ones that are no learning curve effect.
on the critical (longest) path. Thus, activity BC should
not be selected because it is not on the critical path. Answer (B) is correct. One common assumption
To finish activity BC 2 weeks early would not reduce made in a learning curve model is that the cumulative
the total time to complete the project. Thus, the only average time per unit is reduced by a certain
feasible choices are DE and EF on the critical path. percentage each time production doubles. An 80%
The total cost to crash DE and EF for 1 week each is learning curve results in the following performance for
$18,800 ($10,000 + $8,800), which is less than the the lots shown:
cost to crash either activity for 2 weeks. Thus, DE
and EF should be crashed for 1 week each because Cumulative
the total cost is less than the $21,000 ($10,500 x 2) Units Average Hours
 ---------- -------------------- approximated by dividing the difference between the
80 1.5 hours (120 ・80) pessimistic and optimistic times by six. The basis for
160 1.2 hours (.8 x 1.5) the latter approximation is that various probability
320 .96 hours (.8 x 1.2) distributions have tails that lie about plus or minus
Thus, to produce 320 units, total production time will three standard deviations from the mean. For
be 307.2 hours (.96 x 320). The total time for the last example, 99.9% of observations in the normal
240 units will be 187.2 hours (307.2 - 120). distribution are expected to lie within this range.
Accordingly, if the pessimistic and optimistic times
Answer (C) is incorrect because 307.2 hours is the are 21 and 9 weeks, respectively, the standard
total time for completing 320 units. deviation is 2 weeks (12 ・6).

Answer (D) is incorrect because 256 hours is a Answer (B) is incorrect because 6 is the approximate
nonsense answer. number of standard deviations between the tails of
the normal distribution.

[243] Source: CMA 1294 4-28 Answer (C) is incorrect because 9 weeks is the
pessimistic estimate.
Answer (A) is incorrect because expected value
analysis selects the best alternative for decisions Answer (D) is incorrect because 12 weeks is the
involving risk by multiplying the probability of each difference between the optimistic and pessimistic
outcome by its payoff, and summing the products. estimates.

Answer (B) is correct. Learning curves reflect the

increased rate at which people perform tasks as they [246] Source: CMA 0688 5-17
gain experience. The time required to perform a given
task becomes progressively shorter as the workers Answer (A) is incorrect because 7 is the average of
better learn their jobs. Ordinarily, the curve is the two standard deviations.
expressed as a percentage of reduced time to
complete a task for each doubling of cumulative Answer (B) is correct. The mean time for the critical
production. This methodology is appropriate when path is simply the sum of the means of the activity
submitting a bid for a product for which the firm times. However, the standard deviation equals the
already has experience. The experience should lead square root of the sum of the variances (squares of
to shorter production time and lower costs. the standard deviations) of the times for activities on
the critical path. The standard deviation of the project
Answer (C) is incorrect because regression analysis completion time (time for the critical path) is therefore
is used to find an equation for the linear relationships the square root of 100 (6 squared + 8 squared), or
among variables. 10.

Answer (D) is incorrect because simulation would not Answer (C) is incorrect because 14 is the sum of the
be appropriate when a single project is being bid two standard deviations.
upon.
Answer (D) is incorrect because 48 is the product of
the standard deviations.
[244] Source: CMA 0683 5-8

Answer (A) is incorrect because 1-40 is an [247] Source: CMA 1288 5-19
appropriate assignment of random numbers for the
notification category. Answer (A) is correct. Assuming that the cumulative
average time model applies, an 80% learning curve
Answer (B) is incorrect because 40-90 includes 51 means that the cumulative average time per unit (and
numbers. labor cost, given a constant labor rate) declines by
20% each time unit output doubles in the early stages
Answer (C) is incorrect because 61-100 is an of production. The first lot size was 50 units, which
appropriate assignment of random numbers for the was produced at a total cost of $15,400 ($1,500 for
notification category. materials and $13,900 for labor and overhead).
Materials costs are strictly variable and should remain
Answer (D) is correct. Given a 50% chance of a proportional to production. The labor ($8,500) and
recall, 50 different numbers should be assigned to variable overhead ($4,000) costs (labor-related),
that alternative. The answer (11-60) is the only however, will be affected by the learning curve. The
alternative with 50 numbers. average cost per lot for labor and variable overhead
after 100 units have been produced should be 80%
of the costs of the first lot of 50 units. Thus, the
[245] Source: CMA 0688 5-13 average labor and variable overhead cost per 50-unit
lot will be $10,000 (80% x $12,500). If production
Answer (A) is correct. PERT analysis includes doubles again (to a total production of 200 units or
probabilistic estimates of activity completion times. four lots of 50 each), the cumulative average cost for
Three time estimates are made: optimistic, most labor and variable overhead will be $8,000 per lot
likely, and pessimistic. The time estimates for an (80% x $10,000). Given four lots of 50 each, at an
activity are assumed to approximate a beta average cost of $8,000 per lot, the total cost for
probability distribution. In contrast to the normal labor and variable overhead must be $32,000.
distribution, this distribution has finite endpoints (the Adding $6,000 for raw materials ($1,500 per 50-unit
optimistic and pessimistic estimates) and is unimodal; lot) gives a total variable cost of $38,000 for 200
that is, it has only one mode (the most likely time). units. Fixed overhead is 10% of total variable cost,
PERT approximates the mean of the beta distribution so total cost is $41,800. The total cost for the last
by dividing the sum of the optimistic time, the 150 units is $26,400 ($41,800 - $15,400).
pessimistic time, and four times the most likely time
(the mode) by six. The standard deviation is Answer (B) is incorrect because $32,000 is the total
 cost for labor and variable overhead for 200 units. the network. If any activity on this path takes longer
than expected, the entire project will be delayed
Answer (C) is incorrect because $38,000 is the total (slack time is zero). Every project has at least one
variable cost for 200 units. critical path. Some have more than one.

Answer (D) is incorrect because $41,800 is the total Answer (C) is incorrect because product costs are
cost for 200 units. determined by cost accounting.

Answer (D) is incorrect because queuing theory

[248] Source: CMA 1288 5-20 determines the number of servers needed in a
restaurant.
Answer (A) is incorrect because with no learning
curve effect, estimated total hours would be 4,000
instead of 1,960, a change of more than 50%. [251] Source: CMA 0689 5-24

Answer (B) is incorrect because fixed costs applied Answer (A) is incorrect because CPM specifies the
per lot would decline because they are based on activity times (uses deterministic estimates).
labor hours, which are declining.
Answer (B) is incorrect because CPM but not PERT
Answer (C) is incorrect because with no learning uses activity costs and considers crash times.
curve effect, estimated total hours would be 4,000
instead of 1,960, a change of more than 50%. Answer (C) is incorrect because a less significant
difference between PERT and CPM is that PERT
Answer (D) is correct. The sum of the direct labor uses probabilistic estimates of completion times.
hours for the initial lot of 50 units was 1,000. A CPM times are deterministic. The 1:4:1 method is
second lot of 50 would reduce the cumulative hours typically used in PERT. Under this method, the most
per lot to 700 (70% x 1,000). A doubling to four lots optimistic and pessimistic estimates are weighted
would reduce the cumulative hours per lot to 490 equally, but the most likely estimate is weighted four
(70% x 700). Thus, for an output of 200 units, the times more heavily than the others.
total hours worked would be 1,960 (4 x 490).
Subtracting the 1,000 hours required for the first 50 Answer (D) is correct. Both PERT and CPM are
units from the 1,960-hour total gives 960 hours for network analysis techniques. But CPM was
the last 150 units. Dividing 960 hours by 150 units
produces a per-unit time of 6.4 hours. developed independently of PERT and is widely used
in the construction industry. CPM may be thought of
as a subset of PERT. Like PERT, it is a network
[249] Source: CMA 1288 5-24 technique, but, unlike PERT, it uses deterministic time
and cost estimates. Its advantages include cost
Answer (A) is incorrect because activity BC is not on estimates plus the concept of "crash" efforts and
the critical path. costs. Activity times are estimated for normal effort
and crash effort. Crash time is the time to complete
Answer (B) is incorrect because activity BC is not on an activity assuming that all available resources were
the critical path.
devoted to the task (overtime, extra crew, etc.).
Answer (C) is incorrect because the cost of crashing Activity costs are also estimated for normal and crash
EF 2 weeks is $19,500, which is greater than the efforts. These estimates allow the project manager to
total cost to crash DE and EF for 1 week each. estimate the costs of completing the project if some
of the activities are completed on a crash basis. The
Answer (D) is correct. Activities that are to be network diagram is constructed in the same manner
crashed in a critical path problem should be ones that as PERT diagrams. Once the diagram is constructed,
are on the critical (longest) path. Thus, activity BC the critical paths are found for normal and crash
should not be selected because it is not on the critical times. More than one critical path may exist for each
path. To finish activity BC 2 weeks early would not diagram.
reduce the total time to complete the project.
Therefore, the only feasible choices are DE and EF
on the critical path. The total cost to crash DE and [252] Source: CMA 0689 5-25
EF for 1 week each is $18,800 ($10,000 + $8,800),
which is less than the cost to crash either activity for 2 Answer (A) is incorrect because the critical path is
weeks. Thus, DE and EF should be crashed for 1 not shown.
week each since the total cost is less than the
$21,000 ($10,500 x 2) 2-week delay penalty. Answer (B) is incorrect because linear programming
is used to determine an optimal product mix.

[250] Source: CMA 0689 5-23 Answer (C) is incorrect because a Gantt chart shows
the activities to be completed but does not reflect
Answer (A) is incorrect because determining product their relationships (sequencing) or define a critical
mix can be accomplished by using linear path.
programming.
Answer (D) is correct. A Gantt or bar chart is
Answer (B) is correct. The Program Evaluation and sometimes used in conjunction with PERT or CPM
Review Technique and critical path method are useful to show the progress of a special project. Time is
in the planning and control of a complex system or shown on the horizontal axis, the length of a bar
process. PERT and CPM both construct a network equals the length of an activity, and shading indicates
of time relationships between each event or the degree of completion. However, the Gantt chart
subproject to identify the subprojects that have a is not as sophisticated as PERT or CPM in that it
direct effect on the completion date of the project as does not reflect the relationships among the activities
a whole. The critical path is the longest path through or define a critical path.
 Answer (B) is incorrect because time series analysis
[253] Source: CMA 0690 5-21 is based on past experience. In time series analysis, a
dependent variable is regressed on time (the
Answer (A) is incorrect because expected value independent variable).
analysis is used to determine an anticipated return or
cost based upon probabilities of events and their Answer (C) is correct. PERT is a network analysis
related outcomes. technique that uses probabilistic time estimates to aid
managers in planning and controlling large-scale,
Answer (B) is incorrect because linear programming complex projects having many interrelated activities.
optimizes a function given certain constraints. PERT diagrams are free-form networks showing
each activity as a line between events. A sequence of
Answer (C) is incorrect because PERT is a network lines shows interrelationships among activities.
technique used to plan and control large projects. PERT-Cost is a modification that permits the effect of
any change in a given task to be determined in terms
Answer (D) is correct. Sensitivity modeling can be of cost as well as time. Basically, PERT-Cost is
used to determine the outcome of a variety of simply an application of cost figures to traditional
decisions. A trial-and-error method may be adopted, network analysis.
usually in a computer model, to calculate the
sensitivity of the solution (variability of outcomes) to Answer (D) is incorrect because linear programming
changes in a variable. is a tool for optimizing a cost or profit function given
specified constraints.

[254] Source: CMA 1291 4-18

[257] Source: CMA 0692 4-7
Answer (A) is incorrect because queuing theory is
used to minimize the costs of waiting lines. Answer (A) is correct. Markov processes are useful
in decision problems in which the probability of the
Answer (B) is incorrect because linear programming occurrence of a future state depends only on the
is used to minimize a cost function or maximize a current state. A characteristic of the Markov process
profit function given constraints. is that the initial state matters less and less as time
goes on because the process will eventually reach its
Answer (C) is incorrect because decision trees are steady state.
diagrams that analyze sequences of probabilistic
decisions, the events that may follow each decision, Answer (B) is incorrect because Markov processes
and their outcomes. eventually reach a steady state; earlier probabilities
are less important.
Answer (D) is correct. Monte Carlo simulation is
often used to generate the individual values for Answer (C) is incorrect because sequencing is not
random variables, such as lead times and usage rates. important in a Markov process.
Performance under uncertainty can be investigated by
randomly selecting values for each of the variables in Answer (D) is incorrect because earlier trends are
the model (based on the probability distribution of weighted less than later trends.
each variable) and then calculating the value of the
solution. If this process is performed a large number
of times, the distribution of results can be obtained. [258] Source: CMA 1293 4-24

Answer (A) is incorrect because $4,320 equals the

[255] Source: CMA 1291 4-21 cost of the items in the fourth batch.

Answer (A) is incorrect because correlation and Answer (B) is incorrect because $10,368 is based on
regression analysis is a means of determining the the assumption that the cumulative average unit labor
degree of the relationship among two or more cost is reduced by the learning curve percentage with
variables. each batch, not each doubling of output.

Answer (B) is incorrect because CVP analysis is Answer (C) is incorrect because $2,592 represents
used to analyze the relationship among fixed costs, the labor cost of 100 units at the unit rate expected
variable costs, sales volume, and profit or loss. after another doubling of production to eight batches.

Answer (C) is incorrect because PERT-Cost is a Answer (D) is correct. The learning curve reflects the
means of network analysis that assigns costs to all increased rate at which people perform tasks as they
activities so that the effect of any change in a given gain experience. The time required to perform a given
task on cost as well as on time may be estimated. task becomes progressively shorter. Ordinarily, the
curve is expressed in a percentage of reduced time to
Answer (D) is correct. Queuing theory is a group of complete a task for each doubling of cumulative
mathematical models for systems involving waiting production. One common assumption in a learning
lines. In general, a queuing system consists of a curve model is that the cumulative average time (and
waiting line and a service facility (loading docks in this labor cost) per unit is reduced by a certain
case). The objective of queuing theory is to minimize percentage each time production doubles. Given a
the total cost of the system, including both service $120 cost per unit for the first 100 units and a $72
and waiting costs, for a given rate of arrivals. cost per unit when cumulative production doubled to
200 units, the learning curve percentage must be 60%
($72 ・$120). If production is again doubled to 400
[256] Source: CMA 1291 4-23 units (four batches), the average unit labor cost
should be $43.20 (60% x $72). Hence, total labor
Answer (A) is incorrect because queuing theory is cost for 400 units is estimated to be $17,280 (400 x
used to minimize the cost of waiting lines. $43.20).
 Answer (B) is incorrect because linear programming
is a technique used to maximize a revenue or profit
[259] Source: CMA 0694 4-1 function, or minimize a cost function, subject to
constraints such as limited resources or minimum (or
Answer (A) is incorrect because the most likely time maximum) levels of production time.
estimate should be included in the formula.
Answer (C) is correct. The Monte Carlo simulation
Answer (B) is incorrect because the most likely time method is often used to generate the individual values
estimate should be included in the formula. for a random variable. The performance of a
quantitative model under uncertainty may be
Answer (C) is correct. PERT was developed to aid investigated by randomly selecting values for each
managers in controlling large, complex projects. variable in the model (based on the probability
PERT analysis includes probabilistic estimates of distribution of each variable) and then calculating the
activity completion times. Three time estimates are value of the solution. If this process is performed
made: optimistic, most likely, and pessimistic. The many times, the distribution of results from the model
time estimates for an activity are assumed to will be obtained.
approximate a beta probability distribution. PERT
approximates the mean of the beta distribution by Answer (D) is incorrect because regression analysis
dividing the sum of the optimistic time, the pessimistic is used to find an equation for the linear relationships
time, and four times the most likely time by six. among variables.

Answer (D) is incorrect because all time estimates

are not weighted equally. [263] Source: CMA 0695 4-12

Answer (A) is incorrect because uncertainty is

[260] Source: CMA 0694 4-2 reflected in the use of probabilistic estimates of
completion times.
Answer (A) is incorrect because the critical path
relates to time, not cost. Answer (B) is incorrect because the difference
between the latest starting time and earliest finishing
Answer (B) is incorrect because the critical path time is irrelevant.
relates to time, not cost.
Answer (C) is incorrect because the path with the
Answer (C) is incorrect because the shortest path has largest amount of time associated with it is the critical
the most slack and is therefore not critical. path.

Answer (D) is correct. In a PERT or critical path Answer (D) is correct. PERT diagrams are free-form
network, the critical path is the longest path in time networks showing each activity in a large project as a
through the network. The longest path is critical in line between events. The critical path is the longest
that if any activity on the critical path takes longer path in time through the network. That path is critical
than expected, the entire project will be delayed. in that if any activity on the critical path takes longer
Every network has at least one critical path. Paths than expected, the entire project will be delayed.
that are not critical have slack time. Paths that are not critical have slack time. Slack is the
number of days an activity can be delayed without
forcing a delay for the entire project.
[261] Source: CMA 0694 4-3

Answer (A) is incorrect because eliminating an [264] Source: CMA 1291 4-26
activity with slack will not reduce the total time of the
project. Answer (A) is incorrect because simulation is a
means of experimenting with logical or mathematical
Answer (B) is incorrect because the lowest unit crash models using a computer.
cost may not result in a major time savings.
Answer (B) is incorrect because queuing theory is
Answer (C) is incorrect because the time reduction used to minimize the cost of waiting lines.
should be related to its cost. The maximum time
reduction may not be cost effective. Answer (C) is incorrect because statistical sampling is
a means of estimating the characteristics of a
Answer (D) is correct. When making a cost-time population by examining a few of its units.
trade-off, the first activity to be crashed (have its
completion time accelerated) is one on the critical Answer (D) is correct. Time series analysis would be
path. To select an activity on another path would not appropriate because it relies on past experience.
reduce the total time of completion. The initial activity Changes in the value of a variable (such as sales) may
chosen should be the one with the completion time have several possible components, e.g., a change in
that can be accelerated at the lowest possible cost demand for the product or a change in market share.
per unit of time saved. These changes are regressed on time (the
independent variable).

[262] Source: CMA 1294 4-29

[265] Source: CMA 1293 4-25
Answer (A) is incorrect because integer programming
is a variation of linear programming that concerns Answer (A) is incorrect because adding a seasonality
problems in which some variables are not continuous. factor to, or subtracting it from, a forecast based on
Integer programming problems are also known as trend analysis is a means of adjusting for seasonality.
discrete models because the variables take on
discrete, noncontinuous values. Answer (B) is incorrect because seasonality factors
cannot be ignored; they are reflected in the data and
 must be considered for a model to be accurate. coefficient varies between -1.0 and +1.0.

Answer (C) is correct. Time series analysis relies on Answer (D) is correct. The coefficient of correlation
past experience. Changes in the value of a variable (r) measures the strength of the linear relationship
may have several possible components including between the dependent and independent variables.
secular trends, cyclical variation, seasonality, and The magnitude of r is independent of the scales of
random variation. Seasonal variations are common in measurement of x and y. The coefficient lies between
many businesses. A variety of methods exist for -1.0 and +1.0. A value of zero indicates no linear
including seasonal variations in a forecasting model, relationship between the x and y variables. A value of
but most methods use a seasonal index. Alternatively, +1.0 indicates a perfectly direct relationship, and a
seasonal variations can be removed from data by value of -1.0 indicates a perfectly inverse relationship.
using a weighted average of several time periods
instead of data from individual periods.
[269] Source: CMA 1291 4-27
Answer (D) is incorrect because the seasonality
adjustment for a single season's data may be an Answer (A) is incorrect because simulation is a
increase or a decrease. means of experimenting with logical or mathematical
models using a computer.

[266] Source: CMA 0695 4-12 Answer (B) is correct. Correlation and regression
analysis can be used to determine if a relationship
Answer (A) is incorrect because uncertainty is exists among two or more variables. The degree of
reflected in the use of probabilistic estimates of that relationship is assessed by means of correlation
completion times. analysis. Thus, regressing sales (the dependent
variable) on both sales of replacement parts and sales
Answer (B) is incorrect because the difference of automobiles (independent variables) would
between the latest starting time and earliest finishing determine the extent of the dependence.
time is irrelevant.
Answer (C) is incorrect because statistical sampling is
Answer (C) is incorrect because the path with the a means of choosing and analyzing a sample to
largest amount of time associated with it is the critical estimate population characteristics.
path.
Answer (D) is incorrect because time series or trend
Answer (D) is correct. PERT diagrams are free-form analysis regresses the dependent variable on time (the
networks showing each activity in a large project as a independent variable).
line between events. The critical path is the longest
path in time through the network. That path is critical
in that, if any activity on the critical path takes longer [270] Source: CIA 0593 III-64
than expected, the entire project will be delayed.
Paths that are not critical have slack time. Slack is the Answer (A) is incorrect because a perfect negative
number of days an activity can be delayed without correlation exists.
forcing a delay for the entire project.
Answer (B) is correct. The coefficient of correlation
(in standard notation, r) measures the strength of the
[267] Source: CMA 1285 5-27 linear relationship. The magnitude of r is independent
of the scales of measurement of X and Y. Its range is
Answer (A) is incorrect because -0.73 signifies a -1.0 to 1.0. A value of -1.0 indicates a perfectly
strong negative correlation. inverse linear relationship between X and Y. A value
of zero indicates no linear relationship between X and
Answer (B) is correct. The correlation coefficient can Y. A value of +1.0 indicates a perfectly direct
vary from -1 to +1. A -1 relationship indicates a relationship between X and Y. As X increases by 1,
perfect negative correlation, and a +1 relationship Y consistently decreases by 2. Hence, a perfectly
indicates a perfect positive correlation. A zero inverse relationship exists, and r must be equal to
correlation coefficient would indicate no association -1.0.
between the variables. Therefore, the correlation
coefficient that is nearest to zero would indicate the Answer (C) is incorrect because an inverse, not a
weakest linear association. Of the options given in the direct, relationship exists.
question, the correlation coefficient that is nearest to
zero is -0.11.
Answer (D) is incorrect because a linear relationship
Answer (C) is incorrect because 0.12 is a slightly exists between X and Y.
stronger correlation.

Answer (D) is incorrect because 0.35 is a [271] Source: CIA 1194 II-46
considerably stronger correlation.
Answer (A) is incorrect because 1.03 is an
impossible value.
[268] Source: CMA 1289 5-14
Answer (B) is incorrect because -.02 is a very weak
Answer (A) is incorrect because the coefficient is correlation coefficient.
negative if the relationship between the variables is
inverse. Answer (C) is correct. Because the range of values is
between -1.0 and 1.0, -.89 suggests a very strong
Answer (B) is incorrect because the coefficient inverse relationship between the independent and
relates the two variables to each other. dependent variables. A value of -1.0 signifies a
perfect inverse relationship, and a value of 1.0
Answer (C) is incorrect because the size of the signifies a perfect direct relationship.
 Answer (D) is incorrect because .75 is .25 from the Answer (C) is incorrect because the budgeted
maximum value, whereas - .89 is .11 from the maintenance costs are $3,746.
minimum value.
Answer (D) is correct. Substituting the given data into
the regression equation results in a budgeted cost of
[272] Source: CIA 0595 II-46 $3,746 (rounded to the nearest dollar).

Answer (A) is incorrect because cross-sectional y = a + bx

regression analysis is inappropriate. The auditor is y = 684.65 + 7.2884(420)
trying to estimate changes in a single account balance y = $3,746
over time.

Answer (B) is incorrect because regression analysis [276] Source: CMA 1290 4-30
may still be the most appropriate methodology to
estimate interest income, but the auditor should first Answer (A) is correct. The coefficient of
understand the factors that may be causing rｲ to determination (rｲ) measures the percentage of the
decrease. The reason may be a systematic error in total variance in cost that can be explained by the
the account balance. regression equation. If the coefficient of determination
is .99724, 99.724% of the variance is explained by
Answer (C) is correct. The coefficient of the regression equation. Thus, the values in the
determination (rｲ) is the amount of variation in the regression equation explain virtually the entire amount
dependent variable (interest income) that is explained of total cost.
by the independent variables. In this case, less of the
change in interest income is explained by the model. Answer (B) is incorrect because the percentage of
Thus, some other factor must be causing interest the total variance explained by the regression
income to change. This change merits audit equation is 99.724% which corresponds to the
investigation. coefficient of determination (rｲ), or .99724.

Answer (D) is incorrect because linear regression Answer (C) is incorrect because the percentage of
models are simpler models, but the auditor should be the total variance explained by the regression
searching for a systematic error in the account equation is 99.724% which corresponds to the
balance or applying a more complex model. coefficient of determination (rｲ), or .99724.

Answer (D) is incorrect because the percentage of

[273] Source: CMA 1290 4-27 the total variance explained by the regression
equation is 99.724% which corresponds to the
Answer (A) is incorrect because x is the independent coefficient of determination (rｲ), or .99724.
variable.

Answer (B) is incorrect because the dependent [277] Source: Publisher

variable is y.
Answer (A) is incorrect because the fixed cost and
Answer (C) is incorrect because the constant variable cost are wrong.
coefficient is a.
Answer (B) is correct. First, determine the months
Answer (D) is correct. In the standard regression with the highest (520 hours in August) and lowest
equation, b represents the variable coefficient. For (300 hours in April) levels of activity.
example, in a cost determination regression, y equals
total costs, b is the variable cost per unit, x is the August 520 hours $4,470
number of units produced, and a is fixed cost. April 300 hours $2,820
----- --------- ------
Difference 220 hours $1,650
[274] Source: CMA 1290 4-28 As the hours increased by 220, cost increased by
$1,650, which is $7.50 per hour. Thus, at 300 hours
Answer (A) is correct. The letter x in the standard of activity, the total variable costs are $2,250 ($7.50
regression equation is the independent variable. For x 300 hours). Since the total cost was $2,820, the
example, in a regression to determine the total cost of $570 above the variable costs must be fixed costs.
production, x equals units produced. Substituting into the standard regression equation of y
= a + bx gives Y = $570 + $7.50X.
Answer (B) is incorrect because the dependent
variable is y. Answer (C) is incorrect because both fixed and
variable costs are wrong.
Answer (C) is incorrect because the constant
coefficient is a. Answer (D) is incorrect because the variable cost is
wrong.
Answer (D) is incorrect because rｲ is the coefficient
of determination.
[278] Source: Publisher

[275] Source: CMA 1290 4-29 Answer (A) is correct. Given so few observations
(fewer than 30), t-values must be used. The company
Answer (A) is incorrect because the budgeted wants 95% confidence, which means 47.5% at the
maintenance costs are $3,746. top of the range and 47.5% at the bottom. Thus, the
appropriate column of the t-table to use is .025 (half
Answer (B) is incorrect because the budgeted of the 5% error allowance is at the top 50% and half
maintenance costs are $3,746.
 at the bottom). Given 12 observations and two
variables, and thus only 10 degrees of freedom (12 - Answer (C) is correct. The critical path is the longest
2), the appropriate t-value from the table is 2.23. The path through the network. If any activity on this path
standard error of the b coefficient (0.12126) takes longer than expected, the entire project will be
multiplied by the t-value (2.23) equals the range delayed (slack time is zero). Every project has at
above and below the mean. The variable coefficient least one critical path. Some have more than one.
7.2884 plus the range of .2704 (2.23 x .12126)
equals 7.558. 7.2884 - 0.2704 equals 7.0180. The Answer (D) is incorrect because a critical path has no
range is thus $7.02 to $7.56 (to the nearest cent). slack.

Answer (B) is incorrect because it does not cover

two standard deviations of the range. [282] Source: CMA 0697 4-25

Answer (C) is incorrect because it does not cover Answer (A) is incorrect because linear programming
two standard deviations of the range. is an optimizing model used to determine a minimum
or maximum, e.g., of a cost or revenue function, given
Answer (D) is incorrect because it does not cover certain constraints on resources.
two standard deviations of the range.
Answer (B) is incorrect because dynamic
programming is an approach to solving problems, not
[279] Source: Publisher a particular algorithm. It divides a large mathematical
model into smaller, more manageable pieces in such a
Answer (A) is incorrect because it includes more than way that, once the smaller problems have been
one standard deviation from the mean. solved, the result is the optimal solution to the overall
model.
Answer (B) is incorrect because it includes more than
one standard deviation from the mean. Answer (C) is correct. Learning curves reflect the
increased rate at which people perform tasks as they
Answer (C) is incorrect because it includes less than gain experience. Thus, the time required to perform a
one standard deviation from the mean. given task becomes progressively shorter. Ordinarily,
the learning curve is expressed as a percentage of
Answer (D) is correct. Based on the regression reduced time to complete a task for each doubling of
equation, the total cost at 400 hours would be cumulative production.
$684.65 of fixed costs (the constant coefficient) plus
$2,915.36 (400 x 7.2884) of variable costs, for a Answer (D) is incorrect because time series analysis
total of $3,600.01. The standard error of the estimate applies to data gathered at successive moments in
is given as $34.469, or $34.47. Thus, one standard time. It is a forecasting technique in which the
deviation either way would be $3,600.01 - $34.47 = dependent variable is regressed on time.
$3,565.54 and $3,600.01 + $34.47 = $3,634.48. A
two-thirds confidence level falls within one standard
deviation (approximately from the mean). [283] Source: CMA 0697 4-26

Answer (A) is correct. Regression analysis is used to

[280] Source: CIA 0595 II-47 find an equation for the linear relationship among
variables. The behavior of the dependent variable is
Answer (A) is incorrect because linear time series explained in terms of one or more independent
analysis is inapplicable. It is a simple model that variables. Regression analysis is often used to
compares data for an individual store over time. estimate a dependent variable (such as cost) given a
known independent variable (such as production).
Answer (B) is correct. Time series data pertain to a
given entity over a number of prior time periods. Answer (B) is incorrect because regression results
Cross-sectional data, however, pertain to different are limited to observations within the relevant range.
entities for a given time period or at a given time.
Thus, cross-sectional regression analysis is the most Answer (C) is incorrect because regression analysis
appropriate statistical tool because it compares does not use constraint functions.
attributes of all stores' operating statistics at one
moment in time. Answer (D) is incorrect because the dependent
variable is estimated using regression analysis.
Answer (C) is incorrect because cross tabulations
have to be built on a model of expectations. Unless
the model is built, the analysis is not useful. [284] Source: CMA 1296 4-9

Answer (D) is incorrect because the objective is to Answer (A) is incorrect because a transportation
compare stores at one moment in time. Multiple model is a form of linear programming used to
regression time series analysis compares the allocate shipments most economically. Transition
performance of an individual store over a period of probabilities are not used in a transportation model.
time.
Answer (B) is correct. Markov analysis is useful in
decision problems in which the transition probability
[281] Source: CMA 0697 4-21 of the occurrence of a future state depends only on
the current state. Thus, it is employed to analyze how
Answer (A) is incorrect because the critical path is certain systems evolve over repeated trials, with the
the longest path. initial state mattering less and less as time passes. The
objective is to estimate the probability that the system
Answer (B) is incorrect because whether a path is will be in a given state at a moment in the future. This
critical is a function of its completion time, not the problem could probably also have been solved using
number of nodes. queuing theory, but that was not one of the answer
 choices. method is a smoothing technique that uses the
experience of the past N periods (through time
Answer (C) is incorrect because calculus is used to period t) to forecast a value for the next period. Thus,
optimize a nonlinear model, for example, a cost the average includes each new observation and
function. discards the oldest observation. The forecast formula
for the next period (for time period t+1) is the sum of
Answer (D) is incorrect because the critical path the last N observations divided by N.
method is used to plan and control large projects.
The longest path through the network of activities is
the critical path. [288] Source: CIA 0594 II-38

Answer (A) is incorrect because an unweighted

[285] Source: CMA 0696 4-20 average will not give more importance to more recent
data.
Answer (A) is incorrect because expected value is
the probabilistically weighted average of the Answer (B) is correct. Under exponential smoothing,
outcomes of an action. each forecast equals the sum of the last observation
times the smoothing constant, plus the last forecast
Answer (B) is incorrect because learning curve times one minus the constant. Thus, exponential
analysis quantifies how labor costs decline as means that greater weight is placed on the most
employees learn their jobs through repetition. recent data, with the weights of all data falling off
exponentially as the data age. This feature is
Answer (C) is correct. Sensitivity analysis determines important because of the organizational changes that
how a result varies with changes in a given variable or affected sales volume.
parameter in a mathematical decision model. For
example, in a present value analysis, a manager might Answer (C) is incorrect because queuing theory is
first calculate the net present value or internal rate of used to minimize the cost of waiting lines.
return assuming that a new asset has a 10-year life.
The NPV or IRR can then be recalculated using a Answer (D) is incorrect because linear regression
5-year life to determine how sensitive the result is to analysis determines the equation for the relationship
the change in the assumption. among variables. It does not give more importance to
more recent data.
Answer (D) is incorrect because regression, or least
squares, analysis determines the average change in
the dependent variable given a unit change in one or [289] Source: CIA 0586 III-15
more independent variables.
Answer (A) is incorrect because the number of
employees is unlikely to change due to the new
[286] Source: Publisher system.

Answer (A) is incorrect because, in time series Answer (B) is correct. When all customers must wait
analysis, variance of the error term is usually constant. in a single queue, a decrease in waiting time is
possible given multiple servers. An added effect is to
Answer (B) is correct. Time series analysis is a increase customer satisfaction.
regression model in which the independent variable is
time. In time series analysis, the value of the next time Answer (C) is incorrect because, assuming a Poisson
period is frequently dependent on the value of the process, the number of customers per teller will not
time period before that. Hence, the error terms are change.
usually correlated or dependent on the prior period;
i.e., they are characterized by autocorrelation (serial Answer (D) is incorrect because tellers' duties will
correlation). not change, so on-the-job training will not improve.

Answer (C) is incorrect because, in time series

analysis, distribution of the error terms is normal. [290] Source: CIA 1187 III-39

Answer (D) is incorrect because, in time series Answer (A) is incorrect because service by one
analysis, the expected value of the error term usually ticket-seller at a movie theater is an example of a
equals zero. single-channel, single-phase system.

Answer (B) is correct. The drive-through represents

[287] Source: CIA 0589 III-50 a single queue (channel). Because this waiting line has
three services in series, it may be said to be multiple
Answer (A) is incorrect because cross-sectional
regression analysis examines relationships among phase. Another example is the typical factory
large amounts of data (e.g., many or different assembly line. This terminology (channel, phase),
production methods or locations) at a particular however, is not used by all writers on queuing theory.
moment in time.
Answer (C) is incorrect because supermarket
Answer (B) is incorrect because regression analysis checkout lines are a common example of multiple
relates the forecast to changes in particular variables. single-phase servers servicing multiple lines.

Answer (C) is incorrect because, under exponential Answer (D) is incorrect because an example of a
smoothing, each forecast equals the sum of the last multiple-channel, multiple-phase system is a set of
observation times the smoothing constant, plus the supermarket checkout lines each of which is served in
last forecast times one minus the constant. sequence by a cashier and a person who packs
grocery bags.
Answer (D) is correct. The simple moving-average
 Answer (A) is incorrect because car 4 must wait 4
[291] Source: CIA 0584 IV-34 minutes.

Answer (A) is correct. One hundred customers arrive Answer (B) is incorrect because car 4 must wait 4
in line per hour and only 60 are serviced per hour. minutes.
Accordingly, the queue will expand to infinity during
peak periods. Answer (C) is correct. Car 4 arrives at the
just-vacated island window 4 minutes after car 3. It
Answer (B) is incorrect because insufficient must wait 4 minutes for car 3 to be serviced.
information is given to determine overall idle time.
The question gives only peak period data. Answer (D) is incorrect because car 4 must wait 4
minutes.
Answer (C) is incorrect because peak customer
service is only 60 per hour.
[295] Source: CMA 0688 5-19
Answer (D) is incorrect because insufficient
information is given to determine average customer
waiting time. The question gives only peak period Answer (A) is incorrect because, in game theory, the
data. maximax criterion is a decision rule adopted by
risk-seeking, optimistic players who desire the largest
possible payoff and are willing to accept high risk.
[292] Source: CIA 1192 III-98 The player determines the payoff for each state of
nature expected to arise after each possible decision,
Answer (A) is incorrect because the binomial ascertains the maximum payoff for each decision, and
distribution is a discrete distribution in which each trial then chooses the decision with the maximum payoff.
has just two outcomes.
Answer (B) is incorrect because the minimum regret
Answer (B) is incorrect because the chi-square criterion is used by a player who wishes to minimize
distribution is a continuous distribution used to the effect of a bad decision in either direction. It
measure the fit between actual data and the chooses the decision that has the lowest maximum
theoretical distribution. opportunity cost (benefit forgone).

Answer (C) is correct. Queuing models assume that Answer (C) is incorrect because the insufficient
arrivals follow a Poisson process: the events (arrivals) reason (Laplace) criterion applies when the decision
are independent, any number of events must be maker cannot assign probabilities to the states of
possible in the interval of time, the probability of an nature arising after a decision. The reasoning is that, if
event is proportional to the length of the interval, and no probability distribution can be assigned, the
the probability of more than one event is negligible if probabilities must be equal, and the expected value is
the interval is sufficiently small. If Y is the average calculated accordingly. This criterion is risk-neutral.
number of events in a given interval, k is the number
of events, and e is the natural logarithm (2.71828...), Answer (D) is correct. A rational economic decision
the probability of k is maker (one completely guided by objective criteria)
will use expected monetary value to maximize gains
k -Y under conditions of uncertainty because (s)he is
Y e risk-neutral (the utility of a gain equals the disutility of
f(k) = ------ a loss of the same absolute amount). For decisions
k! involving variability in outcomes, the concept of
expected value provides a rational means for
Answer (D) is incorrect because service time has an selecting the best choice. Expected value represents
exponential distribution. This distribution gives the the long-term average payoff for repeated trials. The
probability of zero events in a given interval, i.e., the best choice is the one having the highest expected
probability of a specified time between arrivals. value (sum of the products of the possible outcomes
and their respective probabilities).

[293] Source: CIA 1192 III-99

[296] Source: CIA 1195 II-30
Answer (A) is incorrect because car 3 must wait for
4 minutes. Answer (A) is incorrect because a regression
coefficient is unrelated to the means of the variables.
Answer (B) is incorrect because car 3 must wait for
4 minutes. Answer (B) is incorrect because, to predict a specific
value of sales, the value of the independent variable is
Answer (C) is correct. Car 1 is at the attached multiplied by the coefficient. The product is then
window and will require 3 minutes to service. Car 2 added to the y-intercept value.
must wait for car 1 to be serviced (3 minutes in the
queue + 3 minutes to be serviced = 6 minutes). Car 3 Answer (C) is correct. The regression coefficient
arrived at the attached window 2 minutes after cars 1 represents the change in the dependent variable
and 2. It must wait 1 minute for car 1 to be serviced corresponding to a unit change in the independent
and 3 minutes for car 2 to be serviced, a waiting time variable. Thus, it is the slope of the regression line.
of 4 minutes.
Answer (D) is incorrect because the absolute size of
Answer (D) is incorrect because car 3 must wait for the coefficient bears no necessary relationship to the
4 minutes. importance of the variable.

[294] Source: CIA 1192 III-100 [297] Source: CIA 0590 III-48
 Answer (A) is correct. Game (or decision) theory is a approach to decision making that considers the
mathematical approach to decision making when actions of competitors.
confronted with an enemy or competitor. Games are
classified according to the number of players and the
algebraic sum of the payoffs. In a two-person game, [300] Source: CMA 0696 4-7
if the payoff is given by the loser to the winner, the
algebraic sum is zero and the game is called a Answer (A) is incorrect because 50 hours is the time
zero-sum game. If it is possible for both players to for the first unit.
profit, however, the game is a positive-sum game.
Mathematical models have been developed to select Answer (B) is incorrect because 40 hours is the
optimal strategies for certain simple games. cumulative average completion time for two units.

Answer (B) is incorrect because probability theory Answer (C) is correct. Learning curve models reflect
assists in making the best decisions in the face of the increased rate at which people perform tasks as
uncertainty by providing mathematical methods for they gain experience. One common assumption is that
expressing doubt or assurance about the occurrence the cumulative average time per unit is reduced by a
of a chance event. certain percentage when production doubles during
the early stages of production. An 80% learning
Answer (C) is incorrect because queuing theory is a curve indicates that a doubling of production reduces
mathematical technique for minimizing the total cost of the time required by 20%. For example, if the first
a queue (cost of providing service + the cost of unit requires 50 hours, the cumulative average
allowing idle resources to stand in the queue) when completion time is 40 hours (80% x 50 hours) for
items arrive randomly at a service point and are two units and 32 hours (80% x 40 hours) for four
serviced sequentially. units.

Answer (D) is incorrect because sensitivity analysis is Answer (D) is incorrect because 30 hours is the time
a trial-and-error method, usually employed with a necessary to complete the second unit.
computer, for studying the effects of changes in one
or more variables on the results of a decision model.
[301] Source: CIA 1189 III-50

[298] Source: CIA 1191 III-100 Answer (A) is correct. Time series analysis or trend
analysis relies on past experience. Changes in the
Answer (A) is incorrect because the minimize regret value of a variable (e.g., unit sales of a product) may
rule selects the action or strategy that minimizes the have several possible components. In time series
sum of the regrets for the strategy. analysis, the dependent variable is regressed on time
(the independent variable). The secular trend is the
Answer (B) is incorrect because the maximize utility long-term change that occurs in a series. It is
rule is not a decision rule. represented by a straight line or curve on a graph.
Seasonal variations are common in many businesses.
Answer (C) is correct. According to game theory, a A variety of methods include seasonal variations in a
player who uses the minimax decision criterion forecasting model, but most methods adjust data by a
determines the maximum loss for each decision seasonal index. Cyclical fluctuations are variations in
possibility and then chooses the decision with the the level of activity in business periods. Whereas
minimum maximum loss. This rule produces the same some of these fluctuations are beyond the control of
result as the maximin technique, which determines the the firm, they need to be considered in forecasting.
minimum payoff for each decision and then chooses They are usually incorporated as index numbers.
the decision with the maximum minimum payoff. Irregular or random variations are any variations not
Minimax and maximin are conservative criteria included in the three categories above. Business can
adopted by risk-averse players, that is, those for be affected by random happenings, e.g., weather,
whom the disutility of a loss exceeds the utility of an strikes, or fires.
equal gain.
Answer (B) is incorrect because alpha is not a
Answer (D) is incorrect because the maximax rule meaningful term in this context.
selects the strategy or choice that provides the
greatest payoff if the most favorable state of nature Answer (C) is incorrect because alpha and repetitive
occurs. are not meaningful terms in this context.

Answer (D) is incorrect because repetitive is not a

[299] Source: CIA 1193 III-67 meaningful term in this context.

Answer (A) is correct. Queuing theory is a group of

mathematical models for systems involving waiting [302] Source: CIA 1193 III-71
lines. In general, a queuing system consists of a
waiting line and a service facility (a copy center in this Answer (A) is correct. Game (or decision) theory is a
case). The objective is to minimize total costs, mathematical approach to decision making when
including both service and waiting costs (turnaround confronted with an enemy or competitor. Games are
time), for a given rate of arrivals. classified according to the number of players and the
algebraic sum of the payoffs. In a two-person game,
Answer (B) is incorrect because linear programming if the payoff is given by the loser to the winner, the
optimizes a given objective function subject to algebraic sum is zero and the game is called a
constraints. zero-sum game. If it is possible for both players to
profit, however, the game is a positive-sum game.
Answer (C) is incorrect because regression analysis Mathematical models have been developed to select
estimates the relation among variables. optimal strategies for certain simple games.

Answer (D) is incorrect because game theory is an Answer (B) is incorrect because probability theory is
 a mathematical technique used to express ---------------------------------------------
quantitatively the likelihood of occurrence of an Maximum Profit 15 21 17 26 29
event. ---------------------------------------------
The location with the greatest potential profit is L5.
Answer (C) is incorrect because linear programming
is a mathematical technique for optimizing a given
objective subject to certain constraints. [306] Source: CIA 1191 III-97

Answer (D) is incorrect because sensitivity analysis is Answer (A) is correct. Under the minimax regret
a method for studying the effects of changes in one or criterion, the decision-maker selects the choice that
more variables on the results of a decision model. minimizes the maximum regret (opportunity loss). The
maximum regret for each location is determined from
the opportunity loss matrix (see Discussion of the
[303] Source: CIA 0593 III-69 next question). The maximum regret for each location
is the highest number in each column as indicated
Answer (A) is correct. If both firms reduce the selling below:
price of Product A, neither will gain sales and the
resultant price war will cause both firms to earn lower Location L1 L2 L3 L4 L5
profits. This is inevitable when reduced profit margins -------------------------------------------
do not result in a significant increase in sales. The Maximum Regret 14 9 12 10 13
effect is a no-win strategy. -------------------------------------------
The location with the minimum regret is L2. If
Answer (B) is incorrect because both firms will demand is low, L2 has a payoff of -2, whereas L1
experience lower profits. has a payoff of 7.

Answer (C) is incorrect because both firms will Answer (B) is incorrect because the location with the
experience lower profits. minimum regret is L2.

Answer (D) is incorrect because both firms will Answer (C) is incorrect because the location with the
experience lower profits. minimum regret is L2.

Answer (D) is incorrect because the location with the

[304] Source: CIA 0592 III-70 minimum regret is L2.

Answer (A) is incorrect because the prisoner's

dilemma is a special outcome of a partly competitive [307] Source: CIA 1191 III-98
game. In these games, each player has a strategy that
dominates all others, and the outcome from each Answer (A) is correct. The opportunity loss matrix is
player's choice of his/her dominant strategy is less as follows:
favorable to both players than some other outcome.
Location L1 L2 L3 L4 L5
Answer (B) is correct. Game (or decision) theory is a ------------------------------------------------------
mathematical approach to decision making when Demand:
confronted with an "enemy" or competitor. Games High 14 = 8 = 12 = 3 = 0=
are classified according to the number of players and 29-15 29-21 29-17 29-26 29-29
the algebraic sum of the payoffs. In a two-person Medium 2 = 6= 0= 4= 10 =
game, if the payoff is given by the loser to the winner, 14-12 14-8 14-14 14-10 14-4
the algebraic sum is zero and the game is called a Low 0= 9= 3= 10 = 13 =
zero-sum game. If it is possible for both players to 7-7 7-(-2) 7-4 7-(-3) 7-(-6)
profit, however, it is called a positive-sum game. ------------------------------------------------------
The expected opportunity loss from selecting location
Answer (C) is incorrect because a saddle point is an L4 is 5.5 [(3 x 0.3) + (4 x 0.4) + (10 x 0.3)].
optimal strategy point.
Answer (B) is incorrect because the expected
Answer (D) is incorrect because the minimax regret opportunity loss from selecting location L4 is 5.5.
decision criterion chooses the strategy that minimizes
the maximum opportunity cost (profit forgone). Answer (C) is incorrect because the expected
opportunity loss from selecting location L4 is 5.5.

[305] Source: CIA 1191 III-96 Answer (D) is incorrect because the expected
opportunity loss from selecting location L4 is 5.5.
Answer (A) is incorrect because the location with the
greatest potential profit is L5.
[308] Source: CIA 0592 IV-21
Answer (B) is incorrect because the location with the
greatest potential profit is L5. Answer (A) is incorrect because the expected values
of X and Y are equal.

Answer (C) is incorrect because the location with the Answer (B) is incorrect because the expected values
greatest potential profit is L5. of X and Y are equal.

Answer (D) is correct. Under the maximax criterion, Answer (C) is incorrect because a risk-averse
the decision maker selects the choice that maximizes decision maker would want the least amount of risk
the maximum profit. The maximum profits for the five
locations are: for a given expected value of return. Given that the
expected values are the same, the product with the
Location L1 L2 L3 L4 L5 least risk should be chosen.
 Answer (D) is correct. For a risk-averse decision
maker, the utility of a gain is less than the disutility of [312] Source: Publisher
an equal loss. A risk-averse decision maker therefore
tends to prefer a stable pattern of returns, in this case, Answer (A) is incorrect because 1 day is the
a lower maximum return and a higher minimum return. difference between A-D-E-C and the next longest
Accordingly, X should be chosen because the path, not the longest path in the network.
dispersion of values is lower than that of Y.
Answer (B) is correct. PERT diagrams are free-form
networks showing each activity in a large project as a
[309] Source: CIA 0593 III-66 line between events. The critical path is the longest
path in time through the network. That path is critical
Answer (A) is correct. After a problem has been because, if any activity on the critical path takes
formulated into any mathematical model, it may be longer than expected, the entire project will be
subjected to sensitivity analysis. Sensitivity analysis is delayed. Paths that are not critical have slack time.
a method for studying the effects of changes in one or Slack is the number of days an activity can be
more variables on the results of a decision model. delayed without forcing a delay for the entire project.
Given that path A-D-E-C is 33 days long, and the
Answer (B) is incorrect because statistical estimation critical path is 36 days long, the slack is the 3-day
involves the estimation of parameters. difference. In other words, work along path
A-D-E-C can be delayed by 3 days without affecting
Answer (C) is incorrect because statistical hypothesis the final completion time.
testing calculates the conditional probability that both
the hypothesis is true and the sample results have Answer (C) is incorrect because 6 days is the
occurred. difference between A-D-E-C and the shortest path.

Answer (D) is incorrect because a time-series study Answer (D) is incorrect because 33 days is the time
involves forecasting data over time.
required to complete path A-D-E-C.

[310] Source: CIA 1190 III-46 [313] Source: Publisher

Answer (A) is correct. A Markov chain is a series of Answer (A) is incorrect because 25 days is the most
events in which the probability of an event depends likely completion time.
on the immediately preceding event. An example is
the game of blackjack in which the probability of Answer (B) is incorrect because 27 days is the
certain cards being dealt is dependent upon what expected completion time.
cards have already been dealt. In the analysis of bad
debts, preceding events, such as collections, credit Answer (C) is incorrect because 32 days is based on
policy changes, and writeoffs, affect the probabilities a simple arithmetic average.
of future losses.
Answer (D) is correct. A PERT analysis incorporates
Answer (B) is incorrect because econometrics uncertainty by using probabilistic estimates of activity
forecasts the impact of different economic policies completion times. The most optimistic, most likely,
and conditions. and most pessimistic times are weighted on a basis of
1 to 4 to 1, respectively. Given an expected
Answer (C) is incorrect because Monte Carlo completion time of 27 days, a most likely completion
analysis is a simulation technique that uses time of 25 days, and a most optimistic completion
random-number procedures to create values for time of 24 days, the following formula may be solved
probabilistic components. for the most pessimistic completion time (X):

Answer (D) is incorrect because dynamic (1 x 24) + (4 x 25) + (1 x X) = (6 x 27)

programming is a problem-solving approach that 24 + 100 + X = 162
breaks a large mathematical model into a number of X = 38
smaller, manageable problems.

[314] Source: Publisher

[311] Source: Publisher
Answer (A) is incorrect because 20.0 hours assumes
Answer (A) is incorrect because A-B-C, A-D-E-C, three successive reductions of 10 hours [50 - (80% x
and A-F-C require 27, 33, and 34 days, 50)] each.
respectively.
Answer (B) is correct. The learning curve reflects the
Answer (B) is incorrect because A-B-C, A-D-E-C, increased rate at which people perform tasks as they
and A-F-C require 27, 33, and 34 days, gain experience. The time required to perform a given
respectively. task becomes progressively shorter. Ordinarily, the
curve is expressed in a percentage of reduced time to
Answer (C) is incorrect because A-B-C, A-D-E-C, complete a task for each doubling of cumulative
and A-F-C require 27, 33, and 34 days, production. One common assumption in a learning
respectively. curve model is that the cumulative average time (and
labor cost) per unit is reduced by a certain
Answer (D) is correct. The critical path is the longest percentage each time production doubles. Thus, an
path in a network. The reason that path is critical is 80% learning curve indicates that a doubling of
that any delays along the critical path will cause production will reduce the cumulative average unit
delays in the completion of the overall project. The completion time by 20%. For example, if the first unit
longest path in the network is A-F-G-C (36 days). required 50 hours to complete, the average
 completion time after two units will be 40 hours (80% Answer (D) is incorrect because 40.0 hours assumes
x 50 hours). If production is again doubled (to four two successive reductions of 5 hours [50 - (90% x
units), the average completion time will be 32 hours 50)] each.
(80% x 40 hours). When production is doubled again
to eight units, the cumulative average completion time
will be 25.6 hours (80% x 32 hours). [317] Source: CIA 0596 III-100

Answer (C) is incorrect because 32 is the average Answer (A) is incorrect because the critical path
completion time after four units have been produced. method (CPM) is intended to identify bottlenecks in a
network and hence identify the longest path.
Answer (D) is incorrect because 40 is the average
time after two units have been produced. Answer (B) is correct. Network models are used to
solve managerial problems pertaining to project
scheduling, information systems design, and
[315] Source: Publisher transportation systems design. Networks consisting
of nodes and arcs may be created to represent in
Answer (A) is correct. The learning curve reflects the graphic form problems related to transportation,
increased rate at which people perform tasks as they
gain experience. The time required to perform a given assignment, and transshipment. The shortest-route,
task becomes progressively shorter. Ordinarily, the minimal spanning tree, and maximal flow problems
curve is expressed in a percentage of reduced time to are other applications of network models. A
complete a task for each doubling of cumulative shortest-route algorithm minimizes total travel time
production. One common assumption in a learning from one site to each of the other sites in a
curve model is that the cumulative average time (and transportation system.
labor cost) per unit is reduced by a certain
percentage each time production doubles. Thus, an Answer (C) is incorrect because the maximal flow
80% learning curve indicates that a doubling of algorithm maximizes throughput in networks with
production will reduce the cumulative average unit distinct entry (source node) and exit (sink node)
completion time by 20%. For example, if the first unit points. Examples of applications are highway
required 50 hours to complete, the average transportation systems and oil pipelines. Flows are
completion time after two units will be 40 hours (80% limited by capacities of the arcs (e.g., highways or
x 50 hours). If total production time is 80 hours (2 x pipes).
40 cumulative average time), and the first unit
required 50 hours, the time to produce the second Answer (D) is incorrect because the minimal spanning
unit must be 30 hours. tree algorithm identifies the set of connecting
branches having the shortest combined length. A
Answer (B) is incorrect because 40.0 hours is based spanning tree is a group of branches (arcs) that
on the assumption that the time to produce the last connects each node in the network to every other
unit (the incremental unit-time assumption) is reduced node. An example problem is the determination of the
by 20%. shortest telecommunications linkage among users at
remote sites and a central computer.
Answer (C) is incorrect because 45.0 hours is based
on a 90% learning curve and the incremental unit-time
assumption. [318] Source: CMA 0688 5-27

Answer (D) is incorrect because 50.0 hours is the Answer (A) is correct. Two basic costs are involved
completion time for the first unit. in queuing (waiting-line) models: (1) the cost of
providing service (including facility costs and
operating costs) and (2) the cost of idle resources
[316] Source: Publisher waiting in line. The latter may be a direct cost if paid
employees are waiting or an opportunity cost in the
Answer (A) is incorrect because 50 hours is the case of waiting customers. The objective of the
completion time for the first unit. queuing theory is to minimize the total cost of the
system, including both service and waiting costs, for a
Answer (B) is incorrect because 45 is the cumulative given rate of arrivals. This minimization occurs at the
average completion time after production of two point where the cost of waiting is balanced by the
units. cost of providing service.

Answer (C) is correct. The learning curve reflects the Answer (B) is incorrect because queuing theory is a
increased rate at which people perform tasks as they cost minimization technique.
gain experience. The time required to perform a given
task becomes progressively shorter. Ordinarily, the Answer (C) is incorrect because queuing theory is a
curve is expressed in a percentage of reduced time to cost minimization technique.
complete a task for each doubling of cumulative
production. One common assumption in a learning Answer (D) is incorrect because queuing theory is a
curve model is that the cumulative average time (and cost minimization technique.
labor cost) per unit is reduced by a certain
percentage each time production doubles. Thus, a
90% learning curve indicates that a doubling of
production will reduce the cumulative average unit [319] Source: CMA 0688 5-28
completion time by 10%. For example, if the first unit
required 50 hours to complete, the average Answer (A) is incorrect because each can be
completion time after two units will be 45 hours (90% calculated using the queuing model.
x 50 hours). If production is again doubled (to four
units), the cumulative average completion time will be Answer (B) is incorrect because each can be
40.5 hours (90% x 45 hours). calculated using the queuing model.
 Answer (C) is correct. The objective of a queuing
model is to minimize the total cost of a system, Answer (A) is incorrect because deterministic
including both service and waiting costs, for a given decision making is based upon fixed
rate of arrivals. The arrivals and services in a queuing (nonprobabilistic) inputs into the decision process.
model occur in accordance with a Poisson process;
i.e., the probability of occurrence of an event is Answer (B) is incorrect because queuing theory is
constant, and the occurrence is independent of what used to minimize the sum of waiting and service costs
has happened immediately preceding the current for a waiting line.
observation. The Poisson probability distribution is
used to predict the probability of the occurrence of a Answer (C) is incorrect because maximax is a
given number of events in a given time, given the criterion chosen by a risk-seeking player who prefers
expected number of events per unit of time and the the strategy that maximizes the maximum possible
length of time. The formula assumes a specified profit.
number of service facilities and random arrivals. Also,
the formula calculates the average number in line or Answer (D) is correct. In game theory, the minimax
being serviced, the average waiting time, and the decision criterion selects the strategy that will
average percent of time that a service facility is idle. minimize the maximum possible loss. It is a technique
The actual waiting time cannot be determined from used by a risk-averse player. The maximin criterion,
use of the model. which chooses the strategy with the maximum
minimum payoff, gives the same results as the
Answer (D) is incorrect because the average number minimax procedure.
of units in the system (in line or being serviced) can
be calculated.
[323] Source: Publisher

[320] Source: Publisher Answer (A) is incorrect because the least squares
method is a sophisticated method of identifying the
Answer (A) is incorrect because $283 equals fixed and variable costs.
variable cost for January or March.
Answer (B) is incorrect because a computer
Answer (B) is correct. The high-low method can be simulation is a more exact method of separating fixed
used to determine the fixed and variable cost and variable costs.
components of a mixed cost. The variable cost is
found by dividing the change in total cost (TC) by the Answer (C) is correct. The fixed and variable
change in activity, e.g., DLH. The fixed cost is found portions of mixed costs may be estimated by
by substituting the variable cost into either of the identifying the highest and the lowest costs within the
activity/cost functions. Alternatively, the fixed cost is relevant range. The difference in cost divided by the
the cost given a zero level of activity. difference in activity is the variable rate. Once the
variable rate is found, the fixed portion is
Change in TC $25 determinable. The high-low method is a simple
----- = $.00833 approximation of the mixed cost formula. The costs
Change in DLH 3,000 of using more sophisticated methods sometimes
FC = TC - VC outweigh the incremental accuracy achieved. In these
FC = $585 - (31,000 x $.00833) = $327 cases, the high-low method is sufficient.
FC = $610 - (34,000 x $.00833) = $327
Answer (D) is incorrect because matrix algebra is a
Answer (C) is incorrect because $258 equals precise method of separating fixed and variable costs.
variable cost for February.

Answer (D) is incorrect because $541 equals [324] Source: CIA 1194 III-59
variable cost for February and March.
Answer (A) is correct. Regression analysis is a
statistical technique for measuring the relationship
[321] Source: CMA 0685 5-7 between variables. It estimates the component of the
dependent variable that varies with changes in the
Answer (A) is incorrect because, in decision making independent variable and the component that does
under risk, the probabilities of the consequences of not vary.
possible actions are known with a higher degree of
confidence. Answer (B) is incorrect because game theory is a
mathematical approach to decision making in which
Answer (B) is correct. The minimax regret decision the actions of competitors are considered.
rule is applicable under conditions of uncertainty, that
is, when the probabilities of future consequences are Answer (C) is incorrect because sensitivity analysis
not known. Using this criterion, management studies how changes in one or more variables affect
constructs a decision table based on opportunity the optimal solution in a linear programming model.
costs for each possible action and state of nature that
may exist and then selects the act that minimizes the Answer (D) is incorrect because queuing theory is
maximum possible opportunity cost. used to minimize the sum of the costs of waiting lines
and servicing waiting lines when items arrive
Answer (C) is incorrect because probabilities can randomly at a service point and are serviced
also be determined objectively. sequentially.

Answer (D) is incorrect because probabilities can

also be determined subjectively. [325] Source: Publisher

Answer (A) is correct. The standard error of the

[322] Source: CMA 1288 5-6 estimate represents the deviation of the actual
 observations from the regression line. It is calculated the critical path is 13.0 days.
based upon the sample drawn from the population.
Answer (D) is incorrect because the expected time of
Answer (B) is incorrect because it describes constant the critical path is 13.0 days.
variance.

Answer (C) is incorrect because it describes the [329] Source: CMA 1290 4-8
coefficient of determination.
Answer (A) is correct. The critical (longest) path is
A-D-E, which has an expected time of 13 days.
Answer (D) is incorrect because the coefficient of However, to decrease the project's completion time
correlation measures the strength of the linear by 1.5 days, paths A-B-C-E (4.5 + 1.0 + 6.5 = 12
relationship. days) and A-B-D-E (4.5 + .5 + 7.5 = 12.5 days) as
well as A-D-E must also be shortened. Hence,
A-D-E must be reduced by 1.5 days, A-B-C-E by
[326] Source: Publisher .5 day, and A-B-D-E by 1.0 day. The only way to
decrease A-D-E by 1.5 days is to crash activity AD
Answer (A) is incorrect because 6 weeks is the result (5.5 expective time - 4.0 crash time = 1.5 days).
of failing to multiply the most likely time by 4. Crashing DE results in a 1.0-day saving (7.5 - 6.5)
only. Crashing AB is the efficient way to reduce both
Answer (B) is incorrect because 7 weeks is the A-B-C-E and A-B-D-E by the desired amount of
optimistic time. time because it is part of both paths. The incremental
cost of crashing AB is $1,000 ($4,000 crash cost -
Answer (C) is correct. The expected duration of an $3,000 normal cost) to shorten the completion time
activity in a PERT network can be found by taking by 1.0 day (4.5 - 3.5). The alternatives for
the sum of the optimistic time, the pessimistic time, decreasing both A-B-C-E and A-B-D-E are more
and four times the most likely time and dividing it by costly.
6. Hence, the expected duration is 12.5 weeks.
Answer (B) is incorrect because crashing activity DE
{[7 + (4 x 13) + 16] ・6} = 12.5 weeks saves only 1.0 day (7.5 - 6.5) on the critical path and
does not reduce the time needed for A-B-C-E.
Answer (D) is incorrect because 13 weeks is the
most likely time. Answer (C) is incorrect because crashing AD does
not reduce the time necessary to complete A-B-C-E
or A-B-D-E.
[327] Source: CMA Samp Q4-7
Answer (D) is incorrect because AB and CE are not
Answer (A) is incorrect because actual (real) demand on the critical path.
is not known until it has occurred. Simulation is a
forecasting tool.
[330] Source: CIA 1196 III-96
Answer (B) is incorrect because actual (real) demand
is not known until it has occurred. Simulation is a Answer (A) is incorrect because the project cannot
forecasting tool. be completed in less than 8 months.

Answer (C) is incorrect because sampling actual Answer (B) is incorrect because the project cannot
demand for prior periods does not necessarily yield be completed in less than 8 months.
the expected demand given changes in future
circumstances. Answer (C) is correct. The longest, or critical, path in
the network from node (A) to node (F) is path
Answer (D) is correct. The Monte Carlo simulation A-C-D-F. All other paths are shorter than path
method is often used to generate the individual values A-C-D-F, so the activities along those paths can be
for a random variable. The performance of a completed before the activities along path A-C-D-F.
quantitative model under uncertainty may be Thus, the shortest time to complete the project is 8
investigated by randomly selecting values for each months (3 + 3 + 2).
variable in the model (based on the probability
distribution of each variable), and then calculating the Answer (D) is incorrect because no path through the
value of the solution. If this process is performed network requires 14 months.
many times, the distribution of results from the model
will be obtained. Thus, random numbers are assigned
so that the probability of an outcome in the model is [331] Source: Publisher
the same as that in the actual circumstances. Average
simulated long-term demand must therefore equal Answer (A) is incorrect because the average number
expected demand. of customers in line or being served at any time is 2.

Answer (B) is correct. The average number of work

[328] Source: CMA 1290 4-7 units waiting in line can be found by taking the
average number of customers arriving, and dividing
Answer (A) is incorrect because the expected time of that by the difference between the number of
the critical path is 13.0 days. customers a cashier can service and the average
number of customers. Therefore, the equation is
Answer (B) is correct. The critical path is the longest
path. The longest path in the diagram is A-D-E, 4 4
which requires 13 days (5.5 + 7.5) based on ------ = - = 2 customers in line at any time
expected times. (6 - 4) 2

Answer (C) is incorrect because the expected time of Answer (C) is incorrect because the average number
 of customers in line or being served at any time is 2. hour.

Answer (D) is incorrect because the average number Answer (B) is incorrect because the variable cost of
of customers in line or being served at any time is 2. cleaning is $.40 per machine hour.

Answer (C) is incorrect because the variable cost of

[332] Source: Publisher cleaning is $.40 per machine hour.

Answer (A) is incorrect because the average number Answer (D) is incorrect because the variable cost of
of customers waiting in line, not being served, is 1.33. cleaning is $.40 per machine hour.

Answer (B) is correct. The average number of

customers waiting in line can be found by squaring the [335] Source: Publisher
average number of customers arriving, and dividing
that by the number of customers able to be served Answer (A) is correct. The fixed cost using the
times the difference between the number of high-low method can be found by multiplying the
customers a cashier can serve and the average variable cost per machine hour, $.40, by the number
number of customers. Therefore, the equation is of machine hours of either month. This number is then
subtracted from the total cost of that respective
16 16 16 month. Therefore, using the month of February, it
-------- = ---- = -- = 1.33 customers waiting in line, not would be:
6(6 - 4) 6(2) 12 being served
$.40 x 2,600 hours = $1,040 $1,200 Total Cost
Answer (C) is incorrect because the average number 1,040 Variable Cost
of customers waiting in line, not being served, is 1.33. ------
$ 160 Fixed Cost
Answer (D) is incorrect because the average number ======
of customers waiting in line, not being served, is 1.33.
Answer (B) is incorrect because $160 is the fixed
cost for Jackson Co.
[333] Source: Publisher
Answer (C) is incorrect because $160 is the fixed
Answer (A) is incorrect because the average waiting cost for Jackson Co.
time is .33 minutes.
Answer (D) is incorrect because $160 is the fixed
Answer (B) is correct. The average waiting time can cost for Jackson Co.
be found by taking the average number of customers
waiting in line and dividing that by the average
number of customers arriving per minute. The [336] Source: Publisher
average number of customers waiting in line can be
found by squaring the average number of customers Answer (A) is incorrect because $560 is the variable
arriving, and dividing that by the number of customers cost, not the total cost.
able to be served times the difference between the
number of customers a cashier can serve and the Answer (B) is incorrect because $720 is the
average number of customers. Therefore, the expected total cost for the month of May.
equation is
Answer (C) is correct. The expected total cost, using
16 16 16 the high-low method, can be found by taking the
-------- = ---- = -- = 1.33 customers waiting in line, not number of expected machine hours and multiplying it
6(6 - 4) 6(2) 12 line, not being served by the variable cost per machine hour. This number is
Therefore, using the 1.33 people waiting in line, not then added to the fixed cost.
being served, the equation is
1,400 hours x $.40 per hour = $560 + $160 = $720
1.33
---- = .33 Answer (D) is incorrect because $720 is the
4 expected total cost for the month of May.

Answer (C) is incorrect because the average waiting

time is .33 minutes. [337] Source: Publisher

Answer (D) is incorrect because the average waiting Answer (A) is incorrect because .575 is the
time is .33 minutes. probability of an employee arriving on time the 5th
day.

[334] Source: Publisher Answer (B) is correct. Markov processes are useful
in decision problems in which the probability of the
Answer (A) is correct. The high-low method is used occurrence of a future state depends only on the
to generate a regression line by basing the equation current state. For this problem, the process should be
on only the highest and lowest of a series of set up as follows:
observations. In this problem, March was the lowest
and February the highest. To
-----------------
February $1,200 for 2,600 hours From On Time Late
March 800 for 1,600 hours ------- ------- ----
------ ----- On time .7 .3
Increase $ 400 for 1,000 hours Late .4 .6
Thus, it costs $400 for 1,000 hours, or $.40 for an In Out Pr
 -------------------------------------------------------------- N = ----- or N = -------- = - = 1.5 cars
Day 2 (1.0) x (.7) = .7 (1-.7) = .3 T-B (10 - 6) 4
Day 3 (.7) x (.7) + (.3) x (.4) = .61 (1-.61) = .39
Day 4 (.61) x (.7) + (.39) x (.4) = .583 (1-.58) = .417
[341] Source: Publisher
Answer (C) is incorrect because .61 is the probability
of an employee arriving on time the 3rd day. Answer (A) is incorrect because Linus has an
average of 1.79 cars in his line, not being serviced.
Answer (D) is incorrect because .7 is the probability
of an employee arriving on time the 2nd day. Answer (B) is incorrect because Schroeder has an
average of 1.33 cars in his line, not being serviced.

[338] Source: Publisher Answer (C) is incorrect because Snoopy has an

average of 1.04 cars in his line, not being serviced.
Answer (A) is incorrect because it results from
deducting too much for holding fees. Answer (D) is correct. The first step in finding the
average number of cars waiting in line, not being
Answer (B) is incorrect because it results from serviced, is to subtract the average number of work
deducting too much for holding fees. units serviced in a unit of time (T). This number is
then multiplied by T. The product of this calculation is
Answer (C) is correct. If Q ・D in an inventory then divided into B squared. In this example, for
simulation, then holding cost per unit times the Pigpen, the calculation is
difference between Q and D is subtracted from gross
profit times D to get net profit. 2
B 36 36
Net profit = $50D - $20(Q - D) N = -------- or N = ---------- = -- = .9 cars
Net profit = $50(950) - $20(1,000 - 950) q T(T - B) q 10(10 - 6) 40
Net profit = $47,500 - $1,000
Net profit = $46,500
[342] Source: Publisher
Answer (D) is incorrect because it results from a
failure to deduct holding fees. Answer (A) is incorrect because Linus has an
average waiting time of .357 minutes.

[339] Source: Publisher Answer (B) is incorrect because Schroeder has an

average waiting time of .333 minutes.
Answer (A) is incorrect because it results from
deducting the wrong amount for goodwill loss. Answer (C) is incorrect because Snoopy has an
average waiting time of .208 minutes.

Answer (B) is correct. If Q < D in an inventory Answer (D) is correct. The average waiting time is
simulation, then shortage cost per unit times the found by dividing the average number waiting in line,
difference between Q and D is subtracted from gross not being serviced, by the average number of work
profit times Q to get net profit. units arriving in a unit of time. In this example,
Pigpen's customers have the shortest wait.
Net profit = $50Q - $25(D - Q)
Net profit = $50(1,000) - $25(1,100 - 1,000) N
Net profit = $50,000 - $2,500 q .9
Net profit = $47,500 W = -- or W = -- = .15 minutes
B 6
Answer (C) is incorrect because it results from
deducting the wrong amount for goodwill loss.
[343] Source: Publisher
Answer (D) is incorrect because it results from a
failure to make a deduction for goodwill loss. Answer (A) is incorrect because Lucy has a
cumulative average time per unit of 25.6 hours.

[340] Source: Publisher Answer (B) is correct. The learning curve reflects the
increased rate at which people perform tasks as they
Answer (A) is incorrect because Linus has an gain experience. The time required to perform a given
average of 2.5 cars in line at any time. task becomes progressively shorter. One common
assumption in a learning curve model is that the
Answer (B) is incorrect because Schroeder has an cumulative average time per unit is reduced by a
average of 2 cars in line at any time. certain percentage each time production doubles.
Therefore, for Sally, if the first unit required 60 hours
Answer (C) is incorrect because Snoopy has an to complete, her average completion time after two
average of 1.67 cars in line at any time. units will be 42 hours (70% x 60 hours). If
production is doubled to 4 units, her average
Answer (D) is correct. The average number of cars completion time will be 29.4 hours (70% x 42 hours).
waiting in line is found by initially subtracting the When production is then doubled to 8 units, her
average number of work units arriving in a unit of time average completion time will be 20.6 hours (70% x
from the average number of work units serviced in a 29.4 hours). This is the best among the four workers.
unit of time. This number is then divided into the
average number of work units serviced in a unit of Answer (C) is incorrect because Marcy has a
time. In this example, for Pigpen, the calculation is cumulative average time per unit of 29.16 hours.

B 6 6 Answer (D) is incorrect because Patty has a

 cumulative average time per unit of 21.66 hours. -----------
$416,793.60
===========
[344] Source: Publisher
Answer (B) is incorrect because $463,104 is found
Answer (A) is incorrect because 60 hours is the by using the direct labor cost related to outsourcing
average labor hours per unit on the first production to Midland.
run.
Answer (C) is incorrect because $503,193.60 is
Answer (B) is correct. Learning curves reflect the found by not subtracting the cost of the initial 80
increased rate at which people perform tasks as they units.
gain experience. For this example, the learning curve
has the following affect: Answer (D) is incorrect because $559,104 is found
by using the direct labor cost related to outsourcing
Average Labor Average to Midland.
Run Number Units Hours per Unit Labor Hours
---------- ----- -------------- -----------
1 80 60 4,800 [347] Source: Publisher
2 160 48 7,680
3 320 38.40 12,288 Answer (A) is correct. Learning curves reflect the
4 640 30.72 19,660.80 increased rate at which people perform tasks as they
Therefore, the average labor hours per unit is 30.72 gain experience. For this example, the learning curve
hours. has the following effect:

Answer (C) is incorrect because 23.63 hours is the Average Labor Total
average labor hours per unit for Midland Inc. Run Number Units Hours per Unit Labor Hours
---------- ----- -------------- -----------
Answer (D) is incorrect because 23.04 hours is 1 80 56 4,400
incremental hours per unit after 320 units have been 2 160 42 6,720
produced. 3 320 31.5 10,080
4 640 23.625 15,120
Therefore, the total hours required to produce the
[345] Source: Publisher 640 units is 15,120.

Answer (A) is incorrect because 8,294.4 hours is the Answer (B) is incorrect because 18,350 hours is
time required to complete the remaining 360 units found by using an 80% learning curve.
after the learning curve.
Answer (C) is incorrect because 19,530 hours is the
Answer (B) is incorrect because 19,660.8 hours is total hours required to complete the project.
the time required to complete the 640 units on the
learning curve. Answer (D) is incorrect because 35,840 hours is the
amount of time necessary assuming no learning curve.
Answer (C) is incorrect because 24,330 hours is the
time required to complete 1,000 units if
subcontracted to Midland Inc. [348] Source: Publisher

Answer (D) is correct. The total hours required to Answer (A) is incorrect because 11.81 hours is the
complete a project with a learning curve is found by time needed to finish additional units after 1,280 units,
adding the total labor hours required to produce the assuming the learning curve did not end at 640 units.
last set of units on the learning curve with the
remaining number of units times the final hours per Answer (B) is correct. The hours per unit required to
incremental unit. The following chart shows the final finish additional units after a point on the learning
hours per incremental unit: curve is found by subtracting the total hours required
to finish the previous point on the learning curve from
Units in Run Hours in Run Hours per Unit the current one. Then, this number is divided by the
------------ ------------ -------------- increase in units produced. For example,
80 4,800 60
80 2,880 36 15,120 hours (amount needed to finish 640 units)
160 4,608 28.80 -10,080 hours (amount needed to finish 320 units)
320 7,372.8 23.04 ------------
Therefore, 23.04 hours per unit times 360 remaining 5,040 hours
units gives 8,294.40 hours. This number added to the 5,040 hours ・320 units = 15.75 hours
19,660.8 hours required to complete the 640 hours
on the learning curve equals 27,955.2 hours. Answer (C) is incorrect because 21.50 hours is the
time needed to finish additional assuming an 80%
learning curve.
[346] Source: Publisher
Answer (D) is incorrect because 23.625 hours is the
Answer (A) is correct. The best method to determine average labor hours per unit to finish 640 units.
the total out-of-pocket costs to complete a project is
to first multiply the total hours required by the cost
per hour. After this, subtract the initial costs of [349] Source: Publisher
producing the first batch. This will result in the total
out-of-pocket costs to complete a project. Answer (A) is incorrect because $302,400 ignores
the hours required for the additional units and it
27,955.2 hours x $18 per hour = $503,193.60 ignores the increases in the direct labor rate.
80 units x 60 hours x $18 per hour = - 86,400.00
 Answer (B) is incorrect because $330,220.80
ignores the hours required for the additional units. Answer (D) is incorrect because 95.3% is the square
root of the correct answer.
Answer (C) is incorrect because $390,600 ignores
the increases in the direct labor rate.
[352] Source: Publisher
Answer (D) is correct. The total out-of-pocket cost
for outsourcing is found by adding the total labor Answer (A) is incorrect because the degrees of
hours required to finish the units on the learning curve freedom necessary are (n - 2).
to the product of additional units and hours per
additional unit. This number is then multiplied by the Answer (B) is incorrect because the degrees of
direct labor cost. In this example: freedom necessary are (n - 2).

15,120 hours + (280 units x 15.75 hours per unit) Answer (C) is incorrect because the degrees of
19,530 freedom necessary are (n - 2).
Direct labor rate [$20.00 x (1 + .04 labor increase)
x (1 + .05 cost margin)] $ 21.84 Answer (D) is correct. The formula for the
----------- confidence interval of a regression using the student's
$426,535.20 t-distribution is calculated as (n - 2) or 22 degrees of
=========== freedom.

[350] Source: Publisher [353] Source: Publisher

Answer (A) is incorrect because $21,600,000 is Answer (A) is correct. The confidence interval is b ｱ
based on the expected column. t (standard error of b). Thus, $2.10 ｱ 2.07(0.42), or
$2.10 ｱ 0.87, which is $1.23 to $2.97.
Answer (B) is correct. The first step is to determine
market size, market share, and unit price under the Answer (B) is incorrect because they do not
1-4-1 ratio of PERT. Market size would be: represent a 95% confidence interval.
60,000 x 1 = 60,000 Answer (C) is incorrect because they do not
90,000 x 4 = 360,000 represent a 95% confidence interval.
140,000 x 1 = 140,000
------- Answer (D) is incorrect because they do not
560,000 ・6 = 93,333 represent a 95% confidence interval.
Market share would be:
25% x 1 = 25
30% x 4 = 120 [354] Source: Publisher
35% x 1 = 35
---- Answer (A) is incorrect because $42,000 represents
180 ・6 = 30% only variable costs.
Price would be:
750 x 1 = 750 Answer (B) is correct. The overhead may be
800 x 4 = 3,200 calculated from the regression equation as: y = a + bx.
875 x 1 = 875
---------- OH = $40,000 + [($2.10)(20,000)]
4,825 ・6 = $804.1667 OH = $82,000
Total revenue would be: Note that the fixed costs are $40,000 and the
93,333 x 30% x $804.1667 = $22,516,587 variable costs are $2.10 per direct labor hour.

Answer (C) is incorrect because $23,441,666 is Answer (C) is incorrect because they overstate the
based on an unweighted average of the three variable cost portion of the total.
possibilities.
Answer (D) is incorrect because they overstate the
Answer (D) is incorrect because $42,875,000 is variable cost portion of the total.
based on the optimistic column.

[351] Source: Publisher

Answer (A) is correct. The coefficient of

determination (rｲ) is the square of the coefficient of
correlation (r). The coefficient of determination, rｲ,
may be interpreted as the percent of variation in the
dependent variable "explained" by the variation in the
independent variable. The coefficient of correlation is
an index of the amount of association between the
two variables, and is also known as the covariance.
Here, r = 0.953, and rｲ = 0.908.

Answer (B) is incorrect because 42% is the standard

error of the regression coefficient.

Answer (C) is incorrect because 48.8% is a

nonsense response.