Question 1:

A time series analysis:

A) is an objective function with time as the dependent variable.

B) is a regression analysis with time as the independent variable.
C) is an objective function with time as the independent variable.
D) is a regression analysis with time as the dependent variable.

Question 2:
The Lions Club is planning to sell pretzels at a local football game and has
estimated sales demand as follows.

The cost of the pretzels varies with the quantity purchased as follows.

Any unsold pretzels would be donated to the local food bank. The calculated
profits at the various sales demand levels and purchase quantities are as
follows.

Which one of the following purchase quantities would you recommend to the
Lions Club?

A) 8,000.
 B) 15,000.
C) 12,000.
D) 10,000.

Question 3:
Automite company is an automobile replacement parts dealer in a large
metropolitan community. Automite is 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 automobile sales in the
community for the last ten years have been accumulated.

If Automite wants to determine if there is an historical trend in the growth of its

sales as well as the growth of industry sales of replacement parts, the
company would employ:

A) simulation techniques.
B) statistical sampling.
C) time series analysis.
D) queuing theory.

Question 4:
In order to analyze sales as a function of advertising expenses, the sales
manager of Smith Company developed a simple regression model. The model
included the following equation, which was based on 32 monthly observations
of sales and advertising expenses with a related coefficient of determination of
0.90.

S = $10,000 + $2.50A
S = sales
A = advertising expenses

If Smith Company's advertising expenses in one month amounted to $1,000,

the related point estimate of sales would be:

A) $12,500.
B) $12,250.
 C) $2,500.
D) $11,250.

Question 5:
Reshenie Inc. is analyzing the following decision: whether to start an R&D
project or purchase a license to produce new types of sensors, the company's
major product. If the decision to conduct R&D in-house is made, the company
will have two alternatives: conduct a complex R&D project to create a new
product or proceed with a low-cost project to improve the characteristics of
existing products. Three levels of demand for sensors are considered: high,
medium and low. Expected values of project results (EV) are shown in $
millions.

Applying the decision tree analysis, select the best alternative.

A) Conduct R&D research, as its expected value is $0.65 million higher than the
license purchase alternative.
B) Conduct R&D research, as its expected value is $1.4 million higher than the
license purchase alternative.
C) Purchase a license, as its expected value is $0.25 million higher than the R&D
alternative.
D) Purchase a license, as its expected value is $1.9 million higher than the R&D
alternative.

Question 6:
A time series analysis shows that company revenues decline during
recessions and sales increase dramatically during expansions. This pattern is
an example of:

A) an irregular pattern.
B) a seasonal pattern.
C) a trend line.
D) a cyclical pattern.

Question 7:
Huron Company plans to bid on a special project which calls for a total of
24,000 units. The units will be produced in lots with the first lot consisting of
750 units. Based on prior experience, the direct labor time needed per unit of
product will be progressively smaller by a constant percentage rate as
experience is gained in the manufacturing process. The quantitative method
that would best estimate Huron's total cost for the project is:

A) learning curve techniques.

B) differential calculus.
C) linear programming.
D) cost-volume-profit analysis.

Question 8:
Johnson Software has developed a new software package. Johnson's sales
manager has prepared the following probability distribution describing the
relative likelihood of monthly sales levels and relative income (loss) for the
company's new software package.
If Johnson decides to market its new software package, the expected value of
additional monthly income will be:

A) $24,800.
B) $23,200.
C) $24,000.
D) $25,000.

Question 9:
A time series analysis shows that sales have risen steadily over the last ten
years. This is an example of:

A) a trend line.
B) a cyclical pattern.
C) an irregular pattern.
D) a seasonal pattern.

Question 10:
A time series analysis shows that sales normally have been rising but last
year there was a big drop. Analysts believe that the drop was due to massive
regional fires that hurt business. This is an example of:

A) a seasonal pattern.
B) a cyclical pattern.
C) a trend line.
D) an irregular component.
Question 11:
The modeling technique to be employed in a situation involving a sequence of
events with several possible outcomes associated with each event is:

A) network analysis.
B) Monte Carlo simulation.
C) queuing theory.
 D) decision tree analysis.

Question 12:
Sales of big-screen televisions have grown steadily during the past five years.
A dealer predicted that the demand for February would be 148 televisions.
Actual demand in February was 158 televisions. If the smoothing constant is
α=0.3, the demand forecast for March, using the exponential smoothing
model, will be:

A) 158 televisions.
B) 148 televisions.
C) 151 televisions.
D) 153 televisions.

Question 13:
Analysts at XYZ Company have run a decision tree analysis to determine
whether to purchase investment A or investment B and have selected
investment B. However, they have some concerns that investment B will not
perform as expected if the economy changes. What analysis method can they
use to test whether their decision should change if the economy does
change?

A) Regression analysis.
B) Sensitivity analysis.
C) Queuing theory.
D) PERT.
Question 14:
Bolger and Co. manufactures large gaskets for the turbine industry. Bolger's
per unit sales price and variable costs for the current year are as follows:

Bolger's total fixed costs aggregate $360,000. As Bolger's labor agreement is

expiring at the end of the year, management is concerned about the effect a
new agreement will have on its unit breakeven point. The controller performed
a sensitivity analysis to ascertain the estimated effect of a $10 per unit direct
labor increase and a $10,000 reduction in fixed costs. Based on these data, it
was determined that the breakeven point would:

A) increase by 375 units.

B) decrease by 125 units.
C) decrease by 1,000 units.
D) increase by 500 units.

Question 15:
Propeller Inc. plans to manufacture a newly designed high-technology
propeller for airplanes. Propeller forecasts that as workers gain experience,
they will need less time to complete the job. Based on prior experience,
Propeller estimates a 70% cumulative learning curve and has projected the
following costs:

If Propeller manufactures eight propellers, the total manufacturing cost would

be:

A) $50,660.
B) $112,000.
C) $62,643.
D) $54,880.

Question 16:
A beverage stand can sell either soft drinks or coffee on any given day. If the
stand sells soft drinks and the weather is hot, it will make $2,500; if the
weather is cold, the profit 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 will be
$2,000. The probability of cold weather on a given day at this time is 60
percent.

The expected payoff for selling coffee is:

A) $2,200.
B) $3,900.
C) $1,960.
D) $1,360.

Question 17:
Lake Corporation manufactures specialty components for the electronics
industry in a highly labor intensive environment. Arc Electronics has asked
Lake to bid on a component that Lake made for Arc last month. The previous
order was for 80 units and required 120 hours of direct labor to manufacture.
Arc would now like 240 additional components. Lake experiences an 80
percent learning curve on all of its jobs. The number of direct labor hours
needed for Lake to complete the 240 additional components is:

A) 307.2.
B) 256.
C) 288.
D) 187.2.

Question 18:
Regression analysis:

A) encompasses factors outside the relevant range.

B) estimates the dependent cost variable.
C) uses probability assumptions to determine total project costs.
D) estimates the independent cost variable.
Question 19:
Reeves Inc. has developed a new production process to manufacture its
product. The new process is complex and requires a high degree of technical
skill. However, management believes there is a good opportunity for the
employees to improve as they become more familiar with the production
process. The production of the first unit requires 100 direct labor hours. If a
70% learning curve is used, using the cumulative average time model, the
cumulative direct labor hours required to produce a total of eight units would
be:

A) 560 hours.
B) 274 hours.
C) 196 hours.
D) 392 hours.

Question 20:
In competing as a subcontractor on a military contract, Aerosub, Inc. has
developed a new product for spacecraft that includes the manufacturing of a
complex part. Management believes there is a good opportunity for its
technical force to learn and improve as they become accustomed to the
production process. Accordingly, management estimates an 80% learning
curve would apply to this unit. The overall contract will call for supplying eight
units. Production of the first unit requires 10,000 direct labor hours. The
estimated total direct labor hours required to produce the seven additional
units would be:

A) 56,000 hours.
B) 30,960 hours.
C) 70,000 hours.
D) 40,960 hours.

Question 21:
The probabilities shown in the table below represent the estimate of sales for
a new product.
What is the probability of the company selling between 101 and 300 units of
the new product?

A) 11%.
B) 20%.
C) 70%.
D) M25%.

Question 22:
A beverage stand can sell either soft drinks or coffee on any given day. If the
stand sells soft drinks and the weather is hot, it will make $2,500; if the
weather is cold, the profit 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 will be
$2,000. The probability of cold weather on a given day at this time is 60
percent.

The expected payoff if the vendor has perfect information is:

A) $2,200.
B) $1,360.
C) $3,900.
D) $1,960.

Question 23:
A time series analysis of a business's sales show a decline in sales every
summer, with a peak during the winter. These results could be:

A) a downward trend.
B) seasonal fluctuations.
C) cyclical fluctuations.
 D) an upward trend.

Question 24:
The results of regressing Y against X are as follows.

When the value of X is 10, the estimated value of Y is:

A) 53.84.
B) 20.63.
C) 8.05.
D) 6.78.

Question 25:
Which of the following are the shortcomings of regression analysis?

I. Regression analysis requires the collection of numerous data points to be

accurate.
II. The user must evaluate whether the relationship between the dependent
and independent variables is reasonable.
III. Regression analysis is limited to the use of one independent variable.
IV. Regression analysis can be strongly influenced by outlying data points.

A) II and IV only.
B) I, II, III, and IV.
C) I only.
D) I, II, and IV only.

Question 26:
A manufacturing firm plans to bid on a special order of 80 units that will be
manufactured in lots of 10 units each. The production manager estimates that
the direct labor hours per unit will decline by a constant percentage each time
the cumulative quantity of units produced doubles. The quantitative technique
used to capture this phenomenon and estimate the direct labor hours required
for the special order is:

A) the Markov process.

B) learning curve analysis.
C) linear programming analysis.
D) cost-profit-volume analysis.

Question 27:
Propeller Inc. plans to manufacture a newly designed high-technology
propeller for airplanes. Propeller forecasts that as workers gain experience,
they will need less time to complete the job. Based on prior experience,
Propeller estimates a 70% cumulative learning curve and has projected the
following costs.

If Propeller produces eight units, the average manufacturing cost per unit will
be:

A) $9,800.
B) $1,647.
C) $14,000.
D) $6,860.

Question 28:
Which one of the following techniques would most likely be used to analyze
reductions in the time required to perform a task as experience with that task
increases?

A) Normal probability analysis.

B) Regression analysis.
C) Learning curve analysis.
D) Sensitivity analysis.

Question 29:
Which of the following is true regarding exponential smoothing?

A) Exponential smoothing multiplies the most recent set of data by a smoothing

constant as well as the next or previous set of data.
B) Exponential smoothing uses the last three sets of data, giving equal weighting to
each.
C) Exponential smoothing uses a weighted average, with the most recent data
receiving the lowest weighting.
D) Exponential smoothing uses a weighted average of past time series, selecting
only one weight.

Question 30:
Denton Inc. manufactures industrial machinery and requires 100,000 switches
per year in its assembly process. When switches are received from a vendor
they are installed in the specific machine and tested. If the switches fail, they
are scrapped and the associated labor cost of $25 is considered lost
productivity. Denton purchases “off the shelf” switches as opposed to custom-
made switches and experiences quality problems with some vendors'
products. A decision must be made as to which vendor to buy from during the
next year based on the following information.
Which vendor should Denton's controller recommend to management?

A) Vendor Q.
B) Vendor P.
C) Vendor S.
D) Vendor R.

Question 31:
Learning curve analysis is a method for:

A) estimating declining costs based on increased learning.

B) calculating the learning rate of individuals based on previous work and
educational experiences.
C) estimating increasing costs based on the limit in the amount of learning an
individual can accomplish.
D) determining how many workers to hire based on education levels.

Question 32:
Which one of the following four probability distributions provides the highest
expected monetary value?

A) Alternative #1.
 B) Alternative #4.
C) Alternative #3.
D) Alternative #2.

Question 33:
In decision making under conditions of uncertainty, expected value refers to
the:

A) present value of alternative actions.

B) weighted average of probable outcomes of an action.
C) potential effect of an alternative action.
D) probability of a given outcome from a proposed action.

Question 34:
Meow Meow Cat Food plans on spending $120,000 to launch its newest
product. Its research indicates that there is a 20% chance for revenue of
$100,000, a 50% chance for revenue of $150,000, and a 30% chance for
revenue of $200,000. However, the company has to revise its probabilities
after receiving the latest economic forecast. Now, it is estimated that there is a
40% chance for revenue of $100,000, a 40% chance for revenue of $150,000,
and a 20% chance for revenue of $200,000. What would be the company's
decision regarding the new product before and after the revision of its
estimate?

A) Before revision: introduce product; after revision: do not introduce product.

B) Before revision: do not introduce product; after revision: do not introduce product.
C) Before revision: introduce product; after revision: introduce product.
D) Before revision: do not introduce product; after revision: introduce product.

Question 35:
Allbee Company has three possible investment opportunities. The controller
calculated the payoffs and probabilities, as follows.
The cost of investments A, B, and C are the same. Using the expected-value
criterion, which one of the following rankings of these investments, from
highest payoff to lowest payoff, is correct?

A) B, C, A.
B) A, B, C.
C) C, A, B.
D) B, A, C.

Question 36:
In order to determine how its in-house training program is affecting its
employees' performance rating, Maxis Tech performed a regression analysis
with the following results:

Performance rating = 0.2 + 0.05 Hours of training

R2 = 0.1

Given the above information, Maxis Tech can conclude that:

A) An employee's performance rating will be 0.35 if the employee receives only one
hour of training.
B) The number of training hours received has a significant impact on an employee's
performance rating.
C) There are factors other than number of training hours received that can better
explain an employee's performance rating.
 D) For every hour of training received, an employee's performance rating will
decrease by 0.05.

Question 37:
The regression equation is Y = a + bX. Which of the following is true?

A) b represents the amount of Y when X = 0.

B) X represents the dependent variable.
C) b represents fixed cost per unit.
D) a represents the amount of Y when X = 0.

Question 38:
A manufacturing company required 800 direct labor hours to produce the first
lot of four units of a new motor. Management believes that a 90% learning
curve will be experienced over the next four lots of production. How many
direct labor hours will be required to manufacture the next 12 units?

A) 1,944
B) 1,792
C) 2,160
D) 2,016

Question 39:
The sales manager of Serito Doll Company has suggested that an expanded
advertising campaign costing $40,000 would increase the sales and profits of
the company. He has developed the following probability distribution for the
effect of the advertising campaign on company sales.
The company sells the dolls at $5.20 each. The cost of each doll is $3.20.
Serito's expected incremental profit, if the advertising campaign is adopted,
would be:

A) $46,500.
B) $6,500.
C) $53,000.
D) $93,000.

Question 40:
Susan Hines has developed an estimate of the earnings per share for her firm
for the next year using the following parameters.

She is now interested in the sensitivity of earnings per share to sales forecast
changes. A 10% sales increase would increase earnings per share by:

A) 20 cents per share.

B) 13 cents per share.
C) 10.4 cents per share.
D) 7 cents per share.

Question 41:
Which of the following best describes sensitivity analysis?

A) Sensitivity analysis helps determine how changes in probabilities will change

expected outcomes.
B) Sensitivity analysis is a marketing tool that tests consumers' sensitivity to market
conditions.
 C) Sensitivity analysis measures consumers' sensitivity to changes in product
weights.
D) Sensitivity analysis determines the value of the mean square error.

Question 42:
For cost estimation simple regression differs from multiple regression in that
simple regression uses only:

A) dependent variables, while multiple regression can use both dependent and
independent variables.
B) one independent variable, while multiple regression uses more than one
independent variable.
C) one dependent variable, while multiple regression uses more than one dependent
variable.
D) one dependent variable, while multiple regression uses all available data to
estimate the cost function.

Question 43:
Aerosub, Inc. has developed a new product for spacecraft that includes the
manufacturing of a complex part. The manufacturing of this part requires a
high degree of technical skill. Management believes there is a good
opportunity for its technical force to learn and improve as they become
accustomed to the production process. The production of the first unit requires
10,000 direct labor hours. If an 80% learning curve is used and eight units are
produced, the cumulative average direct labor hours required per unit of the
product will be:

A) 8,000 hours.
B) 10,000 hours.
C) 6,400 hours.
D) 5,120 hours.

Question 44:
Which of the following are the shortcomings of learning curve analysis?
I. Most new employees will improve at their tasks.
II. The learning curve approach is not as effective when robotics perform
repetitive tasks.
III. The learning rate is assumed to be constant, but actual learning rate and
declines in production times are not constant.
IV. Data that show improvements in productivity may be mistakenly assumed
to be due to learning when they are in fact due to other factors.

A) I, II, III, and IV.

B) I and III only.
C) II, III, and IV only.
D) II and IV only.

Question 45:
Carson Products sells sweatshirts and is preparing for a World Cup Soccer
match. The cost per sweatshirt varies with the quantity purchased as follows:

Carson must purchase the shirts one month before the game and has
analyzed the market and estimated sales levels as follows.

The estimated selling price is $25 for sales made before and at the game day.
Any shirts remaining after game day can be sold at wholesale to a local
discount store for $10.

The expected profit if Carson purchased 6,000 shirts is:

A) $72,000.
B) $66,000.
C) $69,000.
D) $64,500.
Question 46:
According to recent focus sessions, Norton Corporation has a “can't miss”
consumer product on its hands. Sales forecasts indicate either excellent or
good results, with Norton's sales manager assigning a probability of 0.6 to a
good results outcome. The company is now studying various sales
compensation plans for the product and has determined the following
contribution margin data.

On the basis of this information, which of the following statements is correct ?

A) Plan 2 should be adopted because it is $10,000 more attractive than Plan 1.

B) Plan 1 should be adopted because of the sales manager's higher confidence in
good results.
C) Either Plan should be adopted, the decision being dependent on the probability of
excellent sales results.
D) Plan 1 should be adopted because it is $8,000 more attractive than Plan 2.

Question 47:
High Concept Fashion is planning its next advertising campaign to coincide
with its store expansion in the following months. Using information from the
past few years, the company was able to perform a regression analysis with
the following results:

Sales revenue = $200,000 + 15(Advertising budget)

R2 = 0.85

The company's advertising budget over the last few years usually fell between
the range of $10,000 and $15,000 a year. It plans on spending $50,000 this
year as a result of its expansion. Given its new advertising budget, High
Concept Fashion should expect:

A) Unable to make any prediction because the new budget lies outside the range of
the sample used to estimate the regression equation.
B) $900,000 in sales revenue.
C) $200,000 in sales revenue.
D) $200,750 in sales revenue.

Question 48:
The probabilities shown in the table below represent the estimate of sales for
a new product.

The sales outcome presented in the table are defined as which one of the
following kinds of events?

A) independent.
B) mutually exclusive.
C) conditional.
D) dependent.

Question 49:
Dawson Manufacturing developed the following multiple regression equation,
utilizing many years of data, and uses it to model, or estimate, the cost of its
product.

Cost = FC + a × L + b × M
Where: FC = fixed costs
L = labor rate per hour
M = material cost per pound
Which one of the following changes would have the greatest impact on
invalidating the results of this model?

A) A significant reduction in factory overheads, which are a component of fixed

costs.
B) A large drop in material costs, as a result of purchasing the material from a
foreign source.
C) A significant change in labor productivity.
D) Renegotiation of the union contract calling for much higher wage rates.

Question 50:
Martin Fabricating uses a cumulative average-time learning curve model to
monitor labor costs. Data regarding two recently completed batches of a part
that is used in tractor-trailer rigs is as follows.

If the same rate of learning continues for the next several batches produced,
which of the following best describes (1) the type (i.e., degree) of learning
curve that the firm is experiencing and (2) the average hours per unit for units
included in the 201-400 range of units produced (i.e., the last 200 units)?

A) 80% learning curve, 7.68 average hours per unit.

B) 80% learning curve, 10.24 average hours per unit.
C) 20% learning curve, 3.84 average hours per unit.
D) 20% learning curve, 10.24 average hours per unit.

Question 51:
A company has accumulated data for the last 24 months in order to determine
if there is an independent variable that could be used to estimate shipping
costs. Three possible independent variables being considered are packages
shipped, miles shipped, and pounds shipped. The quantitative technique that
should be used to determine whether any of these independent variables
might provide a good estimate for shipping costs is:

A) flexible budgeting.
B) linear programming.
C) variable costing.
D) linear regression.

Question 52:
A company is trying to determine which of two new products it should
introduce this season. Based on market research conducted for product A,
there is a 20% chance for sales of $800,000, a 50% chance for sales of $1.2
million, and 30% chance for sales of $1.5 million. The same market research
indicates that for product B, there is a 40% chance for sales of $900,000 and
60% chance for sales of $2 million. Suppose it costs the company $500,000 to
launch product A and $650,000 to launch product B, which of the two products
should the company introduce?

A) It should introduce product B because it has an expected profit of $1.56 million.

B) It should introduce product B because it has an expected profit of $910,000.
C) It should introduce product A because it has an expected profit of $710,000.
D) It should introduce product A because it has an expected profit of $1.21 million.

Question 53:
Refer to the table below. One new worker can produce a computer chip in 15
hours. Due to increased learning, the second chip can be produced in 12
hours. The same worker can produce his or her fourth chip in 9.6 hours. Using
the incremental unit-time learning model, what is the average time per unit for
producing the four computer chips?
 A) 11.78 hours per unit.
B) 12.2 hours per unit.
C) 9.6 hours per unit.
D) 12.5 hours per unit.

Question 54:
Stock X has the following probability distribution of expected future returns.

The expected rate of return on stock X would be:

A) 19%.
B) 10%.
C) 12%.
D) 16%.

Question 55:
Refer to the table below. One new worker can produce a garment in 20 hours.
Due to increased learning, the second garment can be produced in 16 hours.
The same worker can produce his or her fourth garment in 12.8 hours. Using
the cumulative average-time learning model, what is the individual time per
unit for producing the fourth garment?
 A) 12.8 hours per unit.
B) 9.08 hours per unit.
C) 12.2 hours per unit.
D) 12.12 hours per unit.

Question 56:
ABC Company has run a regression analysis and determined that sales are
related to marketing costs. The regression formula the analysts have
calculated is Y = $5,000,000 + $125(x), where Y = sales and x = marketing
costs. Use the regression formula to determine what the annual sales will be if
marketing expenditures are $1,000,000.

A) $1,625,000.
B) $5,000,000,000.
C) $130,000,000.
D) $125,005,000.

Question 57:
Novelty Inc. plans on spending $65,000 to launch its newest product. Its
research indicates that there is a 10% chance for revenue of $40,000, a 60%
chance for revenue of $80,000, and a 30% chance for revenue of $120,000.

However, the company has to revise its estimate after receiving the latest
economic forecast. Now, it is estimated that there is 50% chance for revenue
of $40,000, a 40% chance for revenue of $80,000, and a 10% chance for
revenue of $120,000. What would the company decide about introducing (or
not introducing) the new product before and after the revision of its estimate?

A) Before revision: introduce product; after revision: do not introduce product.

 B) Before revision: do not introduce product; after revision: introduce product.
C) Before revision: do not introduce product; after revision: do not introduce product.
D) Before revision: introduce product; after revision: introduce product.

Question 58:
A time series analysis shows a spike in revenues during the last quarter of
every year. This pattern is an example of:

A) a seasonal pattern.
B) a cyclical pattern.
C) a trend line.
D) an irregular pattern.

Question 59:
Larry Clement is considering adding a new product line, which would involve
constructing a new plant. The options are to construct a large plant, to
construct a small plant, or to not add the new product line. Clement has
determined there is a 60% chance that the market will be favorable, resulting
in high demand, and a 40% chance the market will be unfavorable, resulting in
low demand. Clement has constructed the following decision tree and the
payoffs under the different states of nature.
Which one of the following alternatives should be recommended to Clement?

A) Construct a small plant, as the payoff is $32,000.

B) Do not expand, as the payoff is $0.
C) Construct a large plant, as the payoff is $28,000.
D) Construct a small plant, as the payoff is $40,000.

Question 60:
Aerosub, Inc. has developed a new product for spacecraft that includes the
manufacture of a complex part. The manufacturing of this part requires a high
degree of technical skill. Management believes there is a good opportunity for
its technical force to learn and improve as they become accustomed to the
production process. The production of the first unit requires 10,000 direct
labor hours. If an 80% learning curve is used, the cumulative direct labor
hours required for producing a total of eight units would be:

A) 29,520 hours.
B) 40,960 hours.
C) 64,000 hours.
D) 80,000 hours.
Question 61:
Scarf Corporation's controller has decided to use a decision model to cope
with uncertainty. With a particular proposal, currently under consideration,
Scarf has two possible actions, invest or not invest in a joint venture with an
international firm. The controller has determined the following.

Which one of the following alternatives correctly reflects the respective

expected values of investing versus not investing?

A) ($350,000) and ($750,000).

B) $300,000 and ($100,000).
C) ($350,000) and ($100,000).
D) $300,000 and ($750,000).

Question 62:
Dawson Manufacturing developed the following multiple regression equation,
utilizing many years of data, and uses it to model, or estimate, the cost of its
product.
Which one of the following changes would have the greatest impact on
invalidating the results of this model?

A) Renegotiation of the union contract calling for much higher wage rates.
B) large drop in material costs, as a result of purchasing the material from a foreign
source.
C) A significant change in labor productivity.
D) A significant reduction in factory overheads, which are a component of fixed
costs.

Question 63:
The table below shows the estimated probabilities of the percent of defective
units resulting from a production run.

The expected percent defective is:

A) 1.9%.
B) 3.65%.
C) 2%.
 D) 2.95%.

Question 64:
A manufacturing company has the opportunity to submit a bid for 20 units of a
product on which it has already produced two 10-unit lots. The production
manager believes that the learning experience observed on the first two lots
will continue for at least the next two lots. The direct labor required on the first
two lots was as follows:

 5,000 direct labor hours for the first lot of 10 units

 3,000 additional direct labor hours for the second lot of 10 units

The learning rate experienced by the company on the first two lots of this
product is:

A) 62.5%.
B) 80%.
C) 40%.
D) 60%.

Question 65:
Automite company is an automobile replacement parts dealer in a large
metropolitan community. Automite is 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 automobile sales in the
community for the last ten years have been accumulated.

If Automite wants to determine if its sales of replacement parts are patterned

after the industry sales of replacement parts or to the sales of used and new
automobiles, the company would employ:

A) correlation and regression analysis.

B) time series analysis.
C) simulation techniques.
D) statistical sampling.
Question 66:

Maxis Tech is trying to determine how an employee's performance rating

could be explained by his/her level of education (EDU), the length of
employment (EMP) with the company, and the number of training (TRN) hours
received.

Using data from 100 of its employees, Maxis Tech performs a regression
analysis with the following results:

Performance rating = 0.2 + 0.32 EDU + 0.15 EMP + 0.07 TRN

R2 = 0.72

t for EDU = 0.013

t for EMP = 3.276

t for TRN = 4.121

The value of these terms in the parentheses (EDU, EMP, and TRN) represent
the t-statistics of the regression coefficient. Which of the following statements
best describes the statistical significance of the impact of the three factors on
employee performance ratings?

A) The impact of all three is statistically significant because the R2 is relatively high.
B) None of the factors has a statistically significant impact.
C) Only the impact of number of training hours received is statistically significant
because it has the highest t-statistics.
D) Both length of employment with the company and number of training hours
received have statistically significant impact because the absolute values of their t-
statistics are higher than the most extreme cutoff point.
ANSWERS

Question 1:
1A2-LS08

A time series analysis:

is an objective function with time as the dependent variable.

is a regression analysis with time as the independent variable.
is an objective function with time as the independent variable.
is a regression analysis with time as the dependent variable.
B) A time series analysis is a series of measurements of a variable taken at
any time interval with the objective of finding patterns in the data that can aid
in making forecasts. Time is the independent variable. An objective function is
the statement of the problem in linear programming.
Question 2:
1A2-CQ19

The Lions Club is planning to sell pretzels at a local football game and has
estimated sales demand as follows.

The cost of the pretzels varies with the quantity purchased as follows.

Any unsold pretzels would be donated to the local food bank. The calculated
profits at the various sales demand levels and purchase quantities are as
follows.
Which one of the following purchase quantities would you recommend to the
Lions Club?

8,000.
15,000.
12,000.
10,000.

C) The Lions Club would pick the purchase quantity that would maximize its
expected profits.

The expected profits for each purchase option can be calculated by taking the
sum of each of the expected profit levels multiplied its associated probability.

Expected profit for each purchase option = Σ (expected profit at each sales
demand level)(associated probability)

Expected profit for a purchase of 8,000 units = ($6,000)(0.1) + ($6,000)(0.4) +

($6,000)(0.3) + ($6,000)(0.2)
Expected profit for a purchase of 8,000 units = $220 + $2,480 + $1,800 +
$1,200
Expected profit for a purchase of 8,000 units = $6,000

Expected profit for a purchase of 10,000 units = ($4,000)(0.1) + ($8,000)(0.4)

+ ($8,000)(0.3) + ($8,000)(0.2)
Expected profit for a purchase of 10,000 units = $400 + $3,200 + $2,400 +
$1,600
Expected profit for a purchase of 10,000 units = $7,600

Expected profit for a purchase of 12,000 units = ($2,200)(0.1) + ($6,200)(0.4)

+ ($10,200)(0.3) + ($10,200)(0.2)
Expected profit for a purchase of 12,000 units = $220 + $2,480 + $3,060 +
$2,040.
Expected profit for a purchase of 12,000 units = $7,800

Expected profit for a purchase of 15,000 units = (-$500)(0.1) + ($3,500)(0.4) +

($7,500)(0.3) + ($13,500)(0.2)
Expected profit for a purchase of 15,000 units = (-$500) + $1,400 + $2,250 +
$2,700
Expected profit for a purchase of 15,000 units = $6,300

The option with the highest expected profit is 12,000 units.

Question 3:
1A2-AT14

Automite company is an automobile replacement parts dealer in a large

metropolitan community. Automite is 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 automobile sales in the
community for the last ten years have been accumulated.

If Automite wants to determine if there is an historical trend in the growth of its

sales as well as the growth of industry sales of replacement parts, the
company would employ:

simulation techniques.
statistical sampling.
time series analysis.
queuing theory.

C) Time series analysis is a series of measurements of a variable over time.

Its purpose is to find patterns (trend, cyclical, seasonal, or random) in the data
and to use these patterns to forecast future values of the variable.
Question 4:
1A2-CQ01

In order to analyze sales as a function of advertising expenses, the sales

manager of Smith Company developed a simple regression model. The model
included the following equation, which was based on 32 monthly observations
of sales and advertising expenses with a related coefficient of determination of
0.90.
S = $10,000 + $2.50A
S = sales
A = advertising expenses

If Smith Company's advertising expenses in one month amounted to $1,000,

the related point estimate of sales would be:

$12,500.
$12,250.
$2,500.
$11,250.

A) If advertising expense is $1,000, then $1,000 can be plugged into the

regression equation for variable “A” as follows:

S = $10,000 + $2.50A
S = $10,000 + $2.50($1,000)
S = $12,500
Question 5:
1A2-AT03

Reshenie Inc. is analyzing the following decision: whether to start an R&D

project or purchase a license to produce new types of sensors, the company's
major product. If the decision to conduct R&D in-house is made, the company
will have two alternatives: conduct a complex R&D project to create a new
product or proceed with a low-cost project to improve the characteristics of
existing products. Three levels of demand for sensors are considered: high,
medium and low. Expected values of project results (EV) are shown in $
millions.
Applying the decision tree analysis, select the best alternative.

Conduct R&D research, as its expected value is $0.65 million higher than the license
purchase alternative.
Conduct R&D research, as its expected value is $1.4 million higher than the license
purchase alternative.
Purchase a license, as its expected value is $0.25 million higher than the R&D
alternative.
Purchase a license, as its expected value is $1.9 million higher than the R&D
alternative.

B) There are two alternatives available: do R&D research or buy the license.

The expected value of the decision to buy the license = ($18 m × 0.7) + ($17
m × 0.1) + ($14 m × 0.2) = $17.1 m.

If R&D research is selected, there are two alternatives available: conduct

complex R&D or conduct low-cost R&D.

A complex R&D expected value = ($20 m × 0.8) + ($16 m × 0.1) + ($9 m ×

0.1) = $18.5 m.

A low-cost R&D research expected value = ($15 m × 0.6) + ($19 m × 0.2) +

($12 m × 0.2) = $15.2 m.

Since the expected value of complex R&D is higher than the expected value
of low-cost R&D, Reshenie's management will choose to conduct complex
R&D. Finally, choosing between conducting R&D and buying a license, the
expected value of conducting R&D is $1.4 m higher than the expected value
of buying a license.
Question 6:
1A2-LS10

A time series analysis shows that company revenues decline during

recessions and sales increase dramatically during expansions. This pattern is
an example of:

an irregular pattern.
a seasonal pattern.
a trend line.
a cyclical pattern.
D) A time series analysis that shows fluctuations with economic cycles
(revenues down during recessions) is an example of a cyclical pattern.
Question 7:
1A2-AT06

Huron Company plans to bid on a special project which calls for a total of
24,000 units. The units will be produced in lots with the first lot consisting of
750 units. Based on prior experience, the direct labor time needed per unit of
product will be progressively smaller by a constant percentage rate as
experience is gained in the manufacturing process. The quantitative method
that would best estimate Huron's total cost for the project is:

learning curve techniques.

differential calculus.
linear programming.
cost-volume-profit analysis.

A) Learning curve analysis is a systematic method for estimating costs when a

learning process is involved. Calculations for the analysis are based upon a
learning rate. The learning rate is the rate at which the cumulative average
time per lot produced decreases as cumulative output doubles.
Question 8:
1A2-CQ11
Johnson Software has developed a new software package. Johnson's sales
manager has prepared the following probability distribution describing the
relative likelihood of monthly sales levels and relative income (loss) for the
company's new software package.

If Johnson decides to market its new software package, the expected value of
additional monthly income will be:

$24,800.
$23,200.
$24,000.
$25,000.

B) The expected additional monthly income can be calculated using the

following formula:
Expected value = Σ p(i) I(i) from i=1 to 4

Where:
p = the probability of an income
I = the income

Expected value of additional income = (0.2)(-$4,000) + (0.3)($10,000) + (0.3)

($30,000) + (0.2)($60,000)
Expected value of additional income = (-$800) + ($3,000) + ($9,000) +
($12,000) = $23,200
Question 9:
1A2-LS11

A time series analysis shows that sales have risen steadily over the last ten
years. This is an example of:

a trend line.
 a cyclical pattern.
an irregular pattern.
a seasonal pattern.
A) A time series analysis that shows a steadily increasing or decreasing
pattern is an example of a trend line.
Question 10:
1A2-LS12

A time series analysis shows that sales normally have been rising but last
year there was a big drop. Analysts believe that the drop was due to massive
regional fires that hurt business. This is an example of:

a seasonal pattern.
a cyclical pattern.
a trend line.
an irregular component.
D) An irregular component is random variability in a time series that deviates
from values that can be observed as a trend or a pattern.
Question 11:
1A2-AT11

The modeling technique to be employed in a situation involving a sequence of

events with several possible outcomes associated with each event is:

network analysis.
Monte Carlo simulation.
queuing theory.
decision tree analysis.

D) A decision tree is a sequenced layout or diagram, of future decisions and

events, their relationships, outcomes, and probabilities. A decision tree is
useful for analyzing the long-term significance of near-term decisions given
future conditions.
Question 12:
1A2-CQ09

Sales of big-screen televisions have grown steadily during the past five years.
A dealer predicted that the demand for February would be 148 televisions.
Actual demand in February was 158 televisions. If the smoothing constant is
α=0.3, the demand forecast for March, using the exponential smoothing
model, will be:

158 televisions.
148 televisions.
151 televisions.
153 televisions.

C) The formula for exponential smoothing is:

F(t+1) = α [A(t)] + (1 − α)[F (t)]

Where:
F = the forecast
A = the actual
t = the current time period
α = the smoothing constant

February forecast = F(t) = 148

February actual = A(t) = 158

March forecast = F(t+1) = (0.3)(158) + (1 - 0.3)(148)

F(t+1) = 47.4 + 0.7(148)

F(t+1) = 47.4 + 103.6 = 151
Question 13:
1A2-LS16

Analysts at XYZ Company have run a decision tree analysis to determine

whether to purchase investment A or investment B and have selected
investment B. However, they have some concerns that investment B will not
perform as expected if the economy changes. What analysis method can they
use to test whether their decision should change if the economy does
change?

Regression analysis.
Sensitivity analysis.
Queuing theory.
PERT.
B) Sensitivity analysis helps analysts determine how changes in the
probabilities for states of nature or changes in the potential payoffs
themselves, which may be based on subjective assessments, will affect
recommended decision alternatives.
Question 14:
1A2-CQ10

Bolger and Co. manufactures large gaskets for the turbine industry. Bolger's
per unit sales price and variable costs for the current year are as follows:

Bolger's total fixed costs aggregate $360,000. As Bolger's labor agreement is

expiring at the end of the year, management is concerned about the effect a
new agreement will have on its unit breakeven point. The controller performed
a sensitivity analysis to ascertain the estimated effect of a $10 per unit direct
labor increase and a $10,000 reduction in fixed costs. Based on these data, it
was determined that the breakeven point would:

increase by 375 units.

decrease by 125 units.
decrease by 1,000 units.
increase by 500 units.

A) The breakeven point in units can be calculated by taking total fixed costs
and dividing them by the unit contribution margin.
Breakeven point in units = (Fixed Costs) / (Unit Contribution Margin)

The unit contribution margin is calculated by taking the unit selling price and
subtracting the unit variable costs.
Unit contribution margin = unit selling price − unit variable costs

Original fixed costs = $360,000

Original unit contribution = $300 selling price per unit − $210 variable cost per
unit = $90
Original breakeven = $360,000/$90 per unit = 4,000 units.

New fixed costs = $360,000 − $10,000 = $350,000

New unit contribution margin = $90 original contribution margin + $10 increase
in unit direct labor = $80
New breakeven in units = $350,000 / $80 per unit = 4,375 units

Change in Breakeven Point = New Breakeven Point − Original Breakeven

Point = 4,375 units − 4,000 units = 375 units (increase)
Question 15:
1A2-CQ22

Propeller Inc. plans to manufacture a newly designed high-technology

propeller for airplanes. Propeller forecasts that as workers gain experience,
they will need less time to complete the job. Based on prior experience,
Propeller estimates a 70% cumulative learning curve and has projected the
following costs:

If Propeller manufactures eight propellers, the total manufacturing cost would

be:
* Source: Retired ICMA CMA Exam Questions.

$50,660.
$112,000.
$62,643.
$54,880.
D) Consider the following:

Question 16:
1A2-AT12

A beverage stand can sell either soft drinks or coffee on any given day. If the
stand sells soft drinks and the weather is hot, it will make $2,500; if the
weather is cold, the profit 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 will be
$2,000. The probability of cold weather on a given day at this time is 60
percent.

The expected payoff for selling coffee is:

$2,200.
$3,900.
$1,960.
$1,360.

C) The expected payoff is the sum of the probability of each possible payoff
multiplied by the payoff. The expected payoff for selling coffee is calculated by
taking the payoff given hot weather, multiplied by the probability of hot
weather, then adding the payoff given cold weather multiplied by the
probability of cold weather.

Expected payoff for selling coffee = (hot weather payoff × probability of hot
weather) + (cold weather payoff × probability of cold weather)
Expected payoff for selling coffee = $1,900(0.4) +$2,000(0.6) = $760 + $1,200
= $1,960.
Question 17:
1A2-AT05

Lake Corporation manufactures specialty components for the electronics

industry in a highly labor intensive environment. Arc Electronics has asked
Lake to bid on a component that Lake made for Arc last month. The previous
order was for 80 units and required 120 hours of direct labor to manufacture.
Arc would now like 240 additional components. Lake experiences an 80
percent learning curve on all of its jobs. The number of direct labor hours
needed for Lake to complete the 240 additional components is:

307.2.
256.
288.
187.2.
D)

As illustrated in the above table, an 80 percent cumulative average-time

learning model states that as cumulative output doubles, the cumulative
average time per batch becomes 80 percent of the previous cumulative
average time.

The average time for the first batch of 80 units was 120 direct labor hours.
The cumulative average time per batch for two batches (160 units) would be
96 direct labor hours (0.80 × 120).

For four batches (320 units), the cumulative average time per batch would be
76.8 direct labor hours (0.80 × 96).

Therefore, the total time for four batches (320 units) would be 307.2 direct
labor hours (4 × 76.8).
The time for the 240 additional units would be 187.2 direct labor hours (the
307.2 for the 320 units less the 120 for the first 80 units.
Question 18:
1A2-AT04

Regression analysis:

encompasses factors outside the relevant range.

estimates the dependent cost variable.
uses probability assumptions to determine total project costs.
estimates the independent cost variable.

B) Linear regression determines the best linear, unbiased estimate between a

dependent variable and one or more independent variables.
Question 19:
1A2-AT01

Reeves Inc. has developed a new production process to manufacture its

product. The new process is complex and requires a high degree of technical
skill. However, management believes there is a good opportunity for the
employees to improve as they become more familiar with the production
process. The production of the first unit requires 100 direct labor hours. If a
70% learning curve is used, using the cumulative average time model, the
cumulative direct labor hours required to produce a total of eight units would
be:

560 hours.
274 hours.
196 hours.
392 hours.
B) The cumulative direct labor hours required to produce a total of eight units
is approximately 274 hours. The following table shows how this number is
derived:
Question 20:
1A2-CQ07

In competing as a subcontractor on a military contract, Aerosub, Inc. has

developed a new product for spacecraft that includes the manufacturing of a
complex part. Management believes there is a good opportunity for its
technical force to learn and improve as they become accustomed to the
production process. Accordingly, management estimates an 80% learning
curve would apply to this unit. The overall contract will call for supplying eight
units. Production of the first unit requires 10,000 direct labor hours. The
estimated total direct labor hours required to produce the seven additional
units would be:

56,000 hours.
30,960 hours.
70,000 hours.
40,960 hours.

B) Using a cumulative average time learning curve, as the cumulative output

doubles, the cumulative average direct labor hours per unit becomes the
learning curve percentage times the previous cumulative average direct labor
hours per unit. So, if the direct labor hours for the first unit are 10,000 and an
80% learning curve is assumed, then the cumulative average direct labor
hours for 2 units would be calculated as follows:

Cumulative average direct labor hours for 2 units = 0.8(10,000 direct labor
hours) = 8,000 direct labor hours

When output doubles to 4 units, the cumulative average direct labor hours
would be calculated as follows:

Cumulative average direct labor hours for 4 units = 0.8(8,000 direct labor
hours) = 6,400 direct labor hours

When output doubles again, this time to 8 units, the cumulative average direct
labor hours would be calculated as follows:

Cumulative average direct labor hours for 8 units = 0.8(6,400 direct labor
hours) = 5,120 direct labor hours

Cumulative direct labor hours for 8 units = (5,120 direct labor hours)(8 units) =
40,960 direct labor hours

The hours for the last 7 units would be calculated by taking the total number of
hours to produce the eight units, and subtracting the 10,000 hours that were
used to produce the first unit.

40,960 direct labor hours ÷ 10,000 direct labor hours = 30,960 direct labor
hours to produce the additional seven units
Question 21:
1A2-AT08

The probabilities shown in the table below represent the estimate of sales for
a new product.

What is the probability of the company selling between 101 and 300 units of
the new product?

11%.
20%.
70%.
25%.

C) The probability of selling between 101 and 300 units is calculated by taking
the probability of selling 101 to 200 units (0.45) plus the probability of selling
201 to 300 units (0.25) = (0.45 + 0.25) = 0.70, or 70 percent.
Question 22:
1A2-AT13

A beverage stand can sell either soft drinks or coffee on any given day. If the
stand sells soft drinks and the weather is hot, it will make $2,500; if the
weather is cold, the profit 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 will be
$2,000. The probability of cold weather on a given day at this time is 60
percent.

The expected payoff if the vendor has perfect information is:

 $2,200.
$1,360.
$3,900.
$1,960.

A) The expected payoff is the sum of the probability of each possible payoff
multiplied by the payoff. The expected payoff if the vendor has perfect
information is calculated by taking the highest expected payoff if the weather
is hot and adding it to the highest expected payoff if the weather is cold.

The expected payoff with perfect information = (highest expected payoff for
hot weather) + (highest expected payoff if weather is cold)
Expected payoff with perfect information = $2,500(0.4) + $2,000(0.6) = $1,000
+ $1,200 = $2,200.
Question 23:
1A2-LS23

A time series analysis of a business's sales show a decline in sales every

summer, with a peak during the winter. These results could be:

a downward trend.
seasonal fluctuations.
cyclical fluctuations.
an upward trend.
B) The seasonal component is a measure of data with time as the
independent variable within a single fiscal or calendar year. Unlike a straight
trend line, you see peaks and troughs over time with regular patterns.
Question 24:
1A2-CQ02

The results of regressing Y against X are as follows.

When the value of X is 10, the estimated value of Y is:

53.84.
 20.63.
8.05.
6.78.

B) Given this information, the regression equation would be Y = 5.23 + 1.54X.

Therefore, if X = 10, it can be plugged into the equation as follows:

Y = 5.23 + 1.54(10)
Y = 5.23 + 15.4 = 20.63
Question 25:
1A2-LS13

Which of the following are the shortcomings of regression analysis?

I. Regression analysis requires the collection of numerous data points to be

accurate.
II. The user must evaluate whether the relationship between the dependent
and independent variables is reasonable.
III. Regression analysis is limited to the use of one independent variable.
IV. Regression analysis can be strongly influenced by outlying data points.

II and IV only.
I, II, III, and IV.
I only.
I, II, and IV only.
D) Regression analysis requires the collection of multiple, representative data
points. Multiple regression will incorporate more than one independent
variable.
Question 26:
1A2-LS28

A manufacturing firm plans to bid on a special order of 80 units that will be

manufactured in lots of 10 units each. The production manager estimates that
the direct labor hours per unit will decline by a constant percentage each time
the cumulative quantity of units produced doubles. The quantitative technique
used to capture this phenomenon and estimate the direct labor hours required
for the special order is:

*Source: Retired ICMA CMA Exam Questions.

 the Markov process.
learning curve analysis.
linear programming analysis.
cost-profit-volume analysis.
B) With learning curve analysis, the more that a process is performed, the less
time it takes to complete that process.
Question 27:
1A2-CQ23

Propeller Inc. plans to manufacture a newly designed high-technology

propeller for airplanes. Propeller forecasts that as workers gain experience,
they will need less time to complete the job. Based on prior experience,
Propeller estimates a 70% cumulative learning curve and has projected the
following costs.

If Propeller produces eight units, the average manufacturing cost per unit will
be:

* Source: Retired ICMA CMA Exam Questions.

$9,800.
$1,647.
$14,000.
$6,860.
D) Consider the following:

Question 28:
1A2-LS27

Which one of the following techniques would most likely be used to analyze
reductions in the time required to perform a task as experience with that task
increases?
*Source: Retired ICMA CMA Exam Questions.

Normal probability analysis.

Regression analysis.
Learning curve analysis.
Sensitivity analysis.
C) With learning curve analysis, the more that a process is performed, the
less time it takes to complete that process.
Question 29:
1A2-LS07

Which of the following is true regarding exponential smoothing?

Exponential smoothing multiplies the most recent set of data by a smoothing

constant as well as the next or previous set of data.
Exponential smoothing uses the last three sets of data, giving equal weighting to
each.
Exponential smoothing uses a weighted average, with the most recent data
receiving the lowest weighting.
Exponential smoothing uses a weighted average of past time series, selecting only
one weight.
D) Exponential smoothing uses a weighted average of past time series,
selecting only one weight, that of the most recent set of data. The calculation
computes a value comparing the forecast and actual value for the last time
series before the series being forecast. It employs a smoothing constant
between zero and one that is derived through a series of trials and errors on
an initial set of data.
Question 30:
1A2-CQ13

Denton Inc. manufactures industrial machinery and requires 100,000 switches

per year in its assembly process. When switches are received from a vendor
they are installed in the specific machine and tested. If the switches fail, they
are scrapped and the associated labor cost of $25 is considered lost
productivity. Denton purchases “off the shelf” switches as opposed to custom-
made switches and experiences quality problems with some vendors'
products. A decision must be made as to which vendor to buy from during the
next year based on the following information.

Which vendor should Denton's controller recommend to management?

Vendor Q.
Vendor P.
Vendor S.
Vendor R.

C) Denton should pick the vendor with the minimum expected cost.

Expected cost can be calculated as follows:

Expected cost = [(purchase cost of switches) / (percentage expected to pass
test)] + scrap cost

Purchase cost of switches = (number of switches)(purchase price per switch)

Scrap cost = (number of switches)(labor cost related to scrap)(expected
percentage defective)
Expected % defective = (1 − percentage expected to pass the test)

Using these formulas, the expected cost associated with each vendor can be
computed.

Expected cost for Vendor P = [(100,000 switches)($35) / (0.9)] + (100,000)

($25)(1 − 0.9)
Expected cost for Vendor P = $3,888,889 + $250,000 = $4,138,889

Expected cost for Vendor Q = [(100,000 switches)($37) / (0.94)] + (100,000)

($25)(1 − 0.94)
Expected cost for Vendor Q = $3,936,170 + $150,000 = $4,086.170

Expected cost for Vendor R = [(100,000 switches)($39) / (0.97)] + (100,000)

($25)(1 − 0.97)
Expected cost for Vendor R = $4,020,619 + $75,000 = $4,095,619

Expected cost for Vendor S = [(100,000 switches)($40) / (0.99)] + (100,000)

($25)(1 − 0.99)
Expected cost for Vendor S = $4,040,404 + $25,000 = $4,065,404

The expected cost for Vendor S is the lowest, and should therefore be
recommended to management.
Question 31:
1A2-LS04

Learning curve analysis is a method for:

estimating declining costs based on increased learning.

calculating the learning rate of individuals based on previous work and educational
experiences.
estimating increasing costs based on the limit in the amount of learning an individual
can accomplish.
determining how many workers to hire based on education levels.
A) Learning curve analysis is a systematic method for estimating declining
costs based on increased learning by the business, group, or individual. As
experience is gained, the worker or business becomes more efficient at
production, which decreases costs.
Question 32:
1A2-CQ18

Which one of the following four probability distributions provides the highest
expected monetary value?

Alternative #1.
Alternative #4.
Alternative #3.
Alternative #2.

A) The expected monetary value for each alternative can be calculated by

taking the sum of each of the expected cash inflows and multiplying them by
their associated probabilities.

Expected monetary value = Σ (each expected cash inflow)(associated

probability)

Expected monetary value, Alternative #1 = $50,000(0.1) + $75,000(0.2) +

$100,000(0.4) + $150,000(0.3)
Expected monetary value, Alternative #1 = $5,000 + $15,000 + $40,000 +
$45,000 = $105,000.

Expected monetary value, Alternative #2 = $50,000(0.1) + $75,000(0.2) +

$100,000(0.45) + $150,000(0.25)
Expected monetary value, Alternative #2 = $5,000 + $15,000 + $45,000 +
$37,500 = $102,500

Expected monetary value, Alternative #3 = $50,000(0.1) + $75,000(0.2) +

$100,000(0.4) + $125,000(0.3)
Expected monetary value, Alternative #3 = $5,000 + $15,000 + $40,000 +
$37,500 = $97,500

Expected monetary value, Alternative #4 = $150,000(0.1) + $100,000(0.2) +

$75,000(0.4) + $50,000(0.3)
Expected monetary value, Alternative #4 = $15,000 + $20,000 + $30,000 +
$15,000 = $80,000
Question 33:
1A2-AT07

In decision making under conditions of uncertainty, expected value refers to

the:

present value of alternative actions.

weighted average of probable outcomes of an action.
potential effect of an alternative action.
probability of a given outcome from a proposed action.

B) Expected value (the mathematical expectation of mean) of a discrete

random variable is the sum of the probability of each possible outcome of the
trial multiplied by the outcome.

Mathematically, E(x) = P(x1) times x1 + P(x2) times x2 + ... + P(xn) times

xn where:
E(x) = Total expected value
x = variable representing a possible outcome
p = probability factor of each possible outcome
n = the number of possible outcomes.
Question 34:
1A2-LS22

Meow Meow Cat Food plans on spending $120,000 to launch its newest
product. Its research indicates that there is a 20% chance for revenue of
$100,000, a 50% chance for revenue of $150,000, and a 30% chance for
revenue of $200,000. However, the company has to revise its probabilities
after receiving the latest economic forecast. Now, it is estimated that there is a
40% chance for revenue of $100,000, a 40% chance for revenue of $150,000,
and a 20% chance for revenue of $200,000. What would be the company's
decision regarding the new product before and after the revision of its
estimate?

Before revision: introduce product; after revision: do not introduce product.

Before revision: do not introduce product; after revision: do not introduce product.
Before revision: introduce product; after revision: introduce product.
 Before revision: do not introduce product; after revision: introduce product.

C) Before the revision, the expected revenue of Meow Meow Cat Food's
newest product is $155,000 ($100,000 × 0.2 + $150,000 × 0.5 + $200,000 ×
0.3).
Since the cost of launching the product is $120,000, the expected profit of
newest product is $35,000 ($155,000 − $120,000).

After revising its probabilities, the expected revenue of the newest product is
now $140,000 ($100,000 × 0.4 + $150,000 × 0.4 + $200,000 × 0.2).
Since the cost of launching this product remains at $120,000, the expected
profit is now $20,000 ($140,000 − $120,000).

Based on the calculation, the company could introduce the newest product
before the revision or after the revision (because both have a positive
expected profit).
Question 35:
1A2-CQ15

Allbee Company has three possible investment opportunities. The controller

calculated the payoffs and probabilities, as follows.

The cost of investments A, B, and C are the same. Using the expected-value
criterion, which one of the following rankings of these investments, from
highest payoff to lowest payoff, is correct?

B, C, A.
A, B, C.
C, A, B.
B, A, C.
A) The expected payoff for each investment can be calculated using the
following formula:

Expected payoff = Σ (payoff amount)(probability of payoff)

Expected payoff for A = (0.3)(−$6,000) + (0.1)(−$10,000) + (0.3)($30,000) +

(0.2)($70,000) + (0.1)($100,000)
Expected payoff for A = (−$6,000) + (−$1,000) +($9,000) + ($14,000) +
($10,000) = $26,000

Expected payoff for B = (0.2)(−$20,000) + (0.2)(−$10,000) + (0.2)($30,000)

+(0.2)($70,000) + (0.2)($100,000)
Expected payoff for B = (−$4,000) + (−$2,000) + ($6,000) + ($14,000) +
($20,000) = $34,000

Expected payoff for C = (0.3)(−$20,000) + (0.1)(−$10,000) + (0.2)($30,000) +

(0.3)($70,000) + (0.1)($100,000)
Expected payoff for C = (−$6,000) + (−$1,000) + ($6,000) + ($21,000) +
($10,000) = $30,000.
Question 36:
1A2-LS17

In order to determine how its in-house training program is affecting its

employees' performance rating, Maxis Tech performed a regression analysis
with the following results:

Performance rating = 0.2 + 0.05 Hours of training

R2 = 0.1

Given the above information, Maxis Tech can conclude that:

An employee's performance rating will be 0.35 if the employee receives only one
hour of training.
The number of training hours received has a significant impact on an employee's
performance rating.
There are factors other than number of training hours received that can better
explain an employee's performance rating.
For every hour of training received, an employee's performance rating will decrease
by 0.05.
C) The R2 of 0.1 means that the number of training hours received can
explain only 10% of the variation in an employee's performance rating
(according to the regression analysis). Other factors can explain the remaining
90% of the variation in an employee's performance rating. As a result, the firm
should have performed a multiple regression analysis (with multiple
independent variables) rather than a simple regression analysis (with just one
independent variable).
Question 37:
1A2-LS01

The regression equation is Y = a + bX. Which of the following is true?

b represents the amount of Y when X = 0.

X represents the dependent variable.
b represents fixed cost per unit.
a represents the amount of Y when X = 0.
D) In the regression formula (Y = a + bX), Y represents the dependent
variable, X represents the independent variable, b is the variable cost per unit,
and a represents the amount of Y when X = 0.
Question 38:
1A2-CQ08

A manufacturing company required 800 direct labor hours to produce the first
lot of four units of a new motor. Management believes that a 90% learning
curve will be experienced over the next four lots of production. How many
direct labor hours will be required to manufacture the next 12 units?

1,944
1,792
2,160
2,016

B) Using a cumulative average time learning curve, as the cumulative output

doubles, the cumulative average direct labor hours per unit becomes the
learning curve percentage times the previous cumulative average direct labor
hours per unit. The cumulative average direct labor hours after 2 lots of four
units are produced would be calculated as follows:

Direct labor hours to produce first lot = 800 hours

Direct labor hours to produce one unit in the first lot = 800 hours / 4 units =
200 hours per unit

When output doubles to 2 lots of 4 (or 8 units), the cumulative average direct
labor hours to produce 2 lots = (0.9)(200) = 180 hours per unit

When output doubles again, to 4 lots (or 16 units), the cumulative average
direct labor hours to produce 4 lots = (0.9)(180) = 162 hours per unit

So, the total hours for the 16 units would be calculated by taking the
cumulative average direct labor hours to produce 4 lots (or 16 units), and
dividing that amount by 16 units.

Total direct labor hours required to produce 4 lots (or 16 units) = (162 hours
per unit)(16 units) = 2,592 hours

Therefore, the total hours for the 12 additional units would be calculated by
taking the total number of hours required to produce all 4 lots (or 16 units) and
subtracting the 800 hours that were required to produce the first lot (or 4
units).

Total direct labor hours required to produce the next 12 units = 2,592 hours ÷
800 hours = 1,792 hours
Question 39:
1A2-CQ16

The sales manager of Serito Doll Company has suggested that an expanded
advertising campaign costing $40,000 would increase the sales and profits of
the company. He has developed the following probability distribution for the
effect of the advertising campaign on company sales.

The company sells the dolls at $5.20 each. The cost of each doll is $3.20.
Serito's expected incremental profit, if the advertising campaign is adopted,
would be:
 $46,500.
$6,500.
$53,000.
$93,000.

C) The expected incremental profit is calculated by taking the expected

incremental sales in units, multiplied by the contribution margin per unit, then
subtracting the incremental advertising costs.

The expected incremental sales in units is calculated by taking the sum of

each expected sales increase in units and multiplying it by its associated
probability.

Expected incremental sales in units = Σ (each sales increase)(probability

associated with sales increase)

Expected incremental sales in units = (15,000)(0.1) + (30,000)(0.35) +

(45,000)(0.1) + (60,000)(0.25) + (75,000)(0.2)
Expected incremental sales in units = 1,500 + 10,500 + 4,500 + 15,000 +
15,000 = 46,500

Contribution margin per unit is calculated by taking the selling price per unit
less the unit variable costs.

Contribution margin per unit = unit selling price − unit variable costs
Contribution margin per unit = $5.20 - $3.20 = $2.00

Therefore, the expected contribution margin is calculated by taking the unit

contribution margin and multiplying it by the expected incremental sales in
units.

Expected contribution margin = (unit contribution margin)(expected

incremental sales in units)
Expected contribution margin = ($2.00)(46,500) = $93,000

The difference between the expected contribution margin of $93,000 and the
$40,000 cost of advertising is $53,000.
Question 40:
1A2-CQ21
Susan Hines has developed an estimate of the earnings per share for her firm
for the next year using the following parameters.

She is now interested in the sensitivity of earnings per share to sales forecast
changes. A 10% sales increase would increase earnings per share by:

20 cents per share.

13 cents per share.
10.4 cents per share.
7 cents per share.

B) Earnings per share (EPS) is calculated by taking net income less preferred
stock dividends, and dividing that total by the weighted average number of
common stock shares.

EPS = (Net Income − Preferred Stock Dividends) / (The Weighted Average

Number of Common Stock Shares)

In this scenario, there are no preferred stock dividends and the weighted
average number of common stock shares is given at 2,000,000.
As can be seen from the analysis above, the change in EPS from $1.04 to
$1.17 is 13 cents per share.
Question 41:
1A2-LS15

Which of the following best describes sensitivity analysis?

Sensitivity analysis helps determine how changes in probabilities will change

expected outcomes.
Sensitivity analysis is a marketing tool that tests consumers' sensitivity to market
conditions.
Sensitivity analysis measures consumers' sensitivity to changes in product weights.
Sensitivity analysis determines the value of the mean square error.
A) Sensitivity analysis helps analysts determine how changes in the
probabilities for states of nature or changes in potential payoffs, which may be
based on subjective assessments, affect recommended decision alternatives.
Question 42:
1A2-LS24
For cost estimation simple regression differs from multiple regression in that
simple regression uses only:
*Source: Retired ICMA CMA Exam Questions.

dependent variables, while multiple regression can use both dependent and
independent variables.
one independent variable, while multiple regression uses more than one
independent variable.
one dependent variable, while multiple regression uses more than one dependent
variable.
one dependent variable, while multiple regression uses all available data to estimate
the cost function.
B) From a definition standpoint, the statistical methodology of simple
regression uses only one independent variable, and multiple regression uses
more than one independent variable.
Question 43:
1A2-CQ03

Aerosub, Inc. has developed a new product for spacecraft that includes the
manufacturing of a complex part. The manufacturing of this part requires a
high degree of technical skill. Management believes there is a good
opportunity for its technical force to learn and improve as they become
accustomed to the production process. The production of the first unit requires
10,000 direct labor hours. If an 80% learning curve is used and eight units are
produced, the cumulative average direct labor hours required per unit of the
product will be:

8,000 hours.
10,000 hours.
6,400 hours.
5,120 hours.

D) Using a cumulative average time learning curve, as the cumulative output

doubles, the cumulative average direct labor hours per unit becomes the
learning curve percentage times the previous cumulative average direct labor
hours per unit. So, if the direct labor hours for the first unit are 10,000 and an
80% learning curve is used, then the cumulative average direct labor hours for
2 units would be calculated as follows:
Cumulative average direct labor hours for 2 units = 0.8(10,000 direct labor
hours) = 8,000 direct labor hours

When output doubles to 4 units, the cumulative average direct labor hours
would be calculated as follows:

Cumulative average direct labor hours for 4 units = 0.8(8,000 direct labor
hours) = 6,400 direct labor hours

When output doubles again, this time to 8 units, the cumulative average direct
labor hours would be calculated as follows:

Cumulative average direct labor hours for 8 units = 0.8(6,400 direct labor
hours) = 5,120 direct labor hours
Question 44:
1A2-LS14

Which of the following are the shortcomings of learning curve analysis?

I. Most new employees will improve at their tasks.

II. The learning curve approach is not as effective when robotics perform
repetitive tasks.
III. The learning rate is assumed to be constant, but actual learning rate and
declines in production times are not constant.
IV. Data that show improvements in productivity may be mistakenly assumed
to be due to learning when they are in fact due to other factors.

I, II, III, and IV.

I and III only.
II, III, and IV only.
II and IV only.
C) Virtually all people new to a task can learn and improve performance,
regardless of IQ and education levels.
Question 45:
1A2-AT02

Carson Products sells sweatshirts and is preparing for a World Cup Soccer
match. The cost per sweatshirt varies with the quantity purchased as follows:
Carson must purchase the shirts one month before the game and has
analyzed the market and estimated sales levels as follows.

The estimated selling price is $25 for sales made before and at the game day.
Any shirts remaining after game day can be sold at wholesale to a local
discount store for $10.

The expected profit if Carson purchased 6,000 shirts is:

$72,000.
$66,000.
$69,000.
$64,500.

D)

The total expected profit of $64,500 is the sum of the expected profits at each
of the four demand levels.
* Sales limited to 6000, since only 6000 shirts were purchased.
Question 46:
1A2-CQ12

According to recent focus sessions, Norton Corporation has a “can't miss”

consumer product on its hands. Sales forecasts indicate either excellent or
good results, with Norton's sales manager assigning a probability of 0.6 to a
good results outcome. The company is now studying various sales
compensation plans for the product and has determined the following
contribution margin data.

On the basis of this information, which of the following statements is correct ?

Plan 2 should be adopted because it is $10,000 more attractive than Plan 1.

Plan 1 should be adopted because of the sales manager's higher confidence in good
results.
Either Plan should be adopted, the decision being dependent on the probability of
excellent sales results.
Plan 1 should be adopted because it is $8,000 more attractive than Plan 2.

D) Norton would pick the option that maximizes the expected contribution
margin (CM).

Expected CM for each plan is calculated by taking the expected CM for “sales
are excellent” for that plan, multiplied by the probability that sales are
excellent, which is then added to the expected CM for “sales are good” for that
plan, multiplied by the probability that sales are good.

Expected CM for Plan 1 = (probability of excellent sales for Plan 1)(CM for
excellent sales for Plan 1)
Expected CM for Plan 1 = 0.4($300,000) + 0.6($240,000) = $120,000 +
$144,000 = $264,000

Expected CM for Plan 2 = (probability of excellent sales for Plan 2)(CM for
excellent sales for Plan 2)
Expected CM for Plan 2 = 0.4($370,000) + 0.6($180,000) = $148,000 +
$108,000 = $256,000

Plan 1 should be adopted because is has an expected contribution margin

that is $8,000 higher than Plan 2's contribution margin.
Question 47:
1A2-LS19

High Concept Fashion is planning its next advertising campaign to coincide

with its store expansion in the following months. Using information from the
past few years, the company was able to perform a regression analysis with
the following results:

Sales revenue = $200,000 + 15(Advertising budget)

R2 = 0.85

The company's advertising budget over the last few years usually fell between
the range of $10,000 and $15,000 a year. It plans on spending $50,000 this
year as a result of its expansion. Given its new advertising budget, High
Concept Fashion should expect:

Unable to make any prediction because the new budget lies outside the range of the
sample used to estimate the regression equation.
$900,000 in sales revenue.
$200,000 in sales revenue.
$200,750 in sales revenue.
A) Since the regression equation is estimated using advertising budgets that
fell between the range of $10,000 and $15,000 a year, the equation is best
used to predict sales revenue using advertising budgets that fall within that
range. When the firm uses an advertising budget that falls outside $10,000 to
$15,000 a year to predict sales revenue, the result can no longer be reliable.
Question 48:
1A2-AT09
The probabilities shown in the table below represent the estimate of sales for
a new product.

The sales outcome presented in the table are defined as which one of the
following kinds of events?

independent.
mutually exclusive.
conditional.
dependent.

B) Mutually exclusive events are those that cannot occur simultaneously.

They are mutually interdependent. The occurrence of one event precludes the
occurrence of the others.
Question 49:
1A2-LS26

Dawson Manufacturing developed the following multiple regression equation,

utilizing many years of data, and uses it to model, or estimate, the cost of its
product.

Cost = FC + a × L + b × M
Where: FC = fixed costs
L = labor rate per hour
M = material cost per pound

Which one of the following changes would have the greatest impact on
invalidating the results of this model?
*Source: Retired ICMA CMA Exam Questions.

A significant reduction in factory overheads, which are a component of fixed costs.

A large drop in material costs, as a result of purchasing the material from a foreign
source.
 A significant change in labor productivity.
Renegotiation of the union contract calling for much higher wage rates.
C) In a costing model, all fixed costs, labor costs and material costs
associated with the product are considered. In this case, a significant change
in labor productivity will have the greatest impact on invalidating the results of
the model as it would affect the 'a' coefficient in the equation and cause the
model to fluctuate at a higher rate than the other variables.
Question 50:
1A2-CQ06

Martin Fabricating uses a cumulative average-time learning curve model to

monitor labor costs. Data regarding two recently completed batches of a part
that is used in tractor-trailer rigs is as follows.

If the same rate of learning continues for the next several batches produced,
which of the following best describes (1) the type (i.e., degree) of learning
curve that the firm is experiencing and (2) the average hours per unit for units
included in the 201-400 range of units produced (i.e., the last 200 units)?

80% learning curve, 7.68 average hours per unit.

80% learning curve, 10.24 average hours per unit.
20% learning curve, 3.84 average hours per unit.
20% learning curve, 10.24 average hours per unit.

A) Using a cumulative average time learning curve, as the cumulative output

doubles, the cumulative average direct labor hours per unit becomes the
learning curve percentage times the previous cumulative average direct labor
hours per unit.

The learning curve percentage can be calculated as 16 cumulative average

hours per unit, divided by 20 cumulative average hours per unit, or 16 / 20 =
0.8, or 80%.

When output doubles to 4 batches, the cumulative average hours for 4

batches (or 200 units) would be calculated as follows:

Cumulative average direct labor hours for 4 batches (or 200 units) = 0.8(16
hours) = 12.8 hours

The total hours for the first 200 units would be 2,560 hours, which is
calculated by multiplying 12.8 hours by 200 units to arrive at 2,560 total hours.

When output doubles again, to 8 batches, the cumulative average hours for 8
batches (or 400) units would be calculated as follows:

Cumulative average direct labor hours for 8 batches (or 400 units) = 0.8(12.8)
= 10.24 hours

The total hours for 400 units would be 4,096, which is calculated by
multiplying 10.24 hours by 400 units to arrive at 4,096 total hours.

Therefore, the total hours for the second batch of 200 units (units 201 through
400) would be calculated by taking the total hours for 400 units and
subtracting the total hours for the first 200 units, as follows:

Total hours for second batch of 200 units = 4,096 hours ÷ 2,560 hours = 1,536
hours

The average hours for the second batch of 200 units would be calculated by
taking the total hours for the second batch of 200 units and dividing it by 200
units, as follows: 1,536 hours / 200 units = 7.68 hours.
Question 51:
1A2-LS25

A company has accumulated data for the last 24 months in order to determine
if there is an independent variable that could be used to estimate shipping
costs. Three possible independent variables being considered are packages
shipped, miles shipped, and pounds shipped. The quantitative technique that
should be used to determine whether any of these independent variables
might provide a good estimate for shipping costs is:
*Source: Retired ICMA CMA Exam Questions:

flexible budgeting.
linear programming.
 variable costing.
linear regression.
D) Linear regression is a statistical approach to modeling the relationship
between an independent variable and a number of dependent variables, to
create a linear model to determine which independent variable can be used to
further the analysis of the situation at hand.
Question 52:
1A2-LS20

A company is trying to determine which of two new products it should

introduce this season. Based on market research conducted for product A,
there is a 20% chance for sales of $800,000, a 50% chance for sales of $1.2
million, and 30% chance for sales of $1.5 million. The same market research
indicates that for product B, there is a 40% chance for sales of $900,000 and
60% chance for sales of $2 million. Suppose it costs the company $500,000 to
launch product A and $650,000 to launch product B, which of the two products
should the company introduce?

It should introduce product B because it has an expected profit of $1.56 million.

It should introduce product B because it has an expected profit of $910,000.
It should introduce product A because it has an expected profit of $710,000.
It should introduce product A because it has an expected profit of $1.21 million.

B) The expected revenue from sales of product A is $1,210,000 (800,000 ×

0.2 + 1,200,000 × 0.5 + 1,500,000 × 0.3).
Since the cost of introducing this product is $500,000, the expected profit from
sales of product A is $710,000 (1,210,000 − 500,000).

On the other hand, the expected revenue from sales of product B is

$1,560,000 (900,000 × 0.4 + 2,000,000 × 0.6).
Since the cost of introducing this product is $650,000, the expected profit from
sales of product B is $910,000 (1,560,000 − 650,000). The company should
introduce product B because it has a higher expected profit.
Question 53:
1A2-LS05

Refer to the table below. One new worker can produce a computer chip in 15
hours. Due to increased learning, the second chip can be produced in 12
hours. The same worker can produce his or her fourth chip in 9.6 hours. Using
the incremental unit-time learning model, what is the average time per unit for
producing the four computer chips?

11.78 hours per unit.

12.2 hours per unit.
9.6 hours per unit.
12.5 hours per unit.
A) The average time per unit, using the incremental unit-time learning model,
is the total hours divided by the number of units produced. 47.13 ÷ 4 units =
11.7825 average hours per unit.
Question 54:
1A2-CQ17

Stock X has the following probability distribution of expected future returns.

The expected rate of return on stock X would be:

19%.
10%.
12%.
16%.

C) The expected rate of return on stock X can be calculated by taking the sum
of the each of the expected returns and multiplying it by the associated
probability.

Expected rate of return = Σ (each expected return)(probability of each

expected return)
Expected rate of return = (−20%)(0.1) + (5%)(0.2) + (15%)(0.4) + (20%)(0.2) +
(30%)(0.1)
Expected rate of return = − 2% + 1% + 6% + 4% + 3% = 12%.
Question 55:
1A2-LS06

Refer to the table below. One new worker can produce a garment in 20 hours.
Due to increased learning, the second garment can be produced in 16 hours.
The same worker can produce his or her fourth garment in 12.8 hours. Using
the cumulative average-time learning model, what is the individual time per
unit for producing the fourth garment?

12.8 hours per unit.

9.08 hours per unit.
12.2 hours per unit.
12.12 hours per unit.

B) Using the cumulative average-time learning model, the individual unit time
for the Xth unit is calculated based on cumulative total time, which is in turn
derived by multiplying the cumulative average hours for the latest unit times
the number of units. The chart below shows the cumulative total hours in the
third column. The individual unit time for the Xth unit is the increase in
cumulative total hours above the previous. The individual unit times are shown
in the fourth column of the table below.
Question 56:
1A2-LS02

ABC Company has run a regression analysis and determined that sales are
related to marketing costs. The regression formula the analysts have
calculated is Y = $5,000,000 + $125(x), where Y = sales and x = marketing
costs. Use the regression formula to determine what the annual sales will be if
marketing expenditures are $1,000,000.

$1,625,000.
$5,000,000,000.
$130,000,000.
$125,005,000.

C) The regression formula states that:

Y = $5,000,000 + $125X
where Y = sales and X = marketing costs

Y = $5,000,000 + $125($1,000,000)
Y = $5,000,000 + $125,000,000
Y = $130,000,000
Question 57:
1A2-LS21

Novelty Inc. plans on spending $65,000 to launch its newest product. Its
research indicates that there is a 10% chance for revenue of $40,000, a 60%
chance for revenue of $80,000, and a 30% chance for revenue of $120,000.

However, the company has to revise its estimate after receiving the latest
economic forecast. Now, it is estimated that there is 50% chance for revenue
of $40,000, a 40% chance for revenue of $80,000, and a 10% chance for
revenue of $120,000. What would the company decide about introducing (or
not introducing) the new product before and after the revision of its estimate?
 Before revision: introduce product; after revision: do not introduce product.
Before revision: do not introduce product; after revision: introduce product.
Before revision: do not introduce product; after revision: do not introduce product.
Before revision: introduce product; after revision: introduce product.

A) Before the revision, the expected revenue of Novelty's newest product is

$88,000 ($40,000 × 0.1 + $80,000 × 0.6 + $120,000 × 0.3).
Since the cost of launching the product is $65,000, the expected profit from
sales of the newest product is $23,000 ($88,000 − $65,000).

After revising its estimate, the expected revenue from sales of the newest
product is $64,000 ($40,000 × 0.5 + $80,000 × 0.4 + $120,000 × 0.1).
Since the cost of introducing this product remains at $65,000, the expected
profit is now ($1,000), ($64,000 − $65,000).

Based on the calculation, the company should introduce the newest product
before the revision (because it has a positive expected profit) and should not
introduce the product after the revision (because it has a negative expected
profit).
Question 58:
1A2-LS09

A time series analysis shows a spike in revenues during the last quarter of
every year. This pattern is an example of:

a seasonal pattern.
a cyclical pattern.
a trend line.
an irregular pattern.
A) A time series analysis that shows fluctuations regularly during a certain part
of the year (for example, boats in the summer) is an example of a seasonal
pattern.
Question 59:
1A2-CQ20

Larry Clement is considering adding a new product line, which would involve
constructing a new plant. The options are to construct a large plant, to
construct a small plant, or to not add the new product line. Clement has
determined there is a 60% chance that the market will be favorable, resulting
in high demand, and a 40% chance the market will be unfavorable, resulting in
low demand. Clement has constructed the following decision tree and the
payoffs under the different states of nature.

Which one of the following alternatives should be recommended to Clement?

Construct a small plant, as the payoff is $32,000.

Do not expand, as the payoff is $0.
Construct a large plant, as the payoff is $28,000.
Construct a small plant, as the payoff is $40,000.

A) The expected payoff for constructing either plant can be calculated by

taking the sum of the expected payoffs related to both the plant being
successful and not being successful.

Expected payoff for each alternative = (expected payoff if the plant is

successful) + (expected payoff if the plant is not successful)

Expected payoff, large plant = (0.6)($100,000) + (0.4)(−$80,000)

Expected payoff, large plant = ($60,000) + (-$32,000) = $28,000

Expected payoff, small plant = (0.6)($60,000) + (0.4)(−$10,000)

Expected payoff, small plant = ($36,000) + (−$4,000) = $32,000

The alternative to construct a small plant provides the highest expected payoff
and should therefore be recommended.
Question 60:
1A2-CQ05

Aerosub, Inc. has developed a new product for spacecraft that includes the
manufacture of a complex part. The manufacturing of this part requires a high
degree of technical skill. Management believes there is a good opportunity for
its technical force to learn and improve as they become accustomed to the
production process. The production of the first unit requires 10,000 direct
labor hours. If an 80% learning curve is used, the cumulative direct labor
hours required for producing a total of eight units would be:

29,520 hours.
40,960 hours.
64,000 hours.
80,000 hours.

B) Using a cumulative average time learning curve, as the cumulative output

doubles, the cumulative average direct labor hours per unit becomes the
learning curve percentage times the previous cumulative average direct labor
hours per unit. So, if the direct labor hours for the first unit are 10,000 and an
80% learning curve is used, then the cumulative average direct labor hours for
2 units would be calculated as follows:

Cumulative average direct labor hours for 2 units = 0.8(10,000 direct labor
hours) = 8,000 direct labor hours

When output doubles to 4 units, the cumulative average direct labor hours
would be calculated as follows:

Cumulative average direct labor hours for 4 units = 0.8(8,000 direct labor
hours) = 6,400 direct labor hours

When output doubles again, this time to 8 units, the cumulative average direct
labor hours would be calculated as follows:

Cumulative average direct labor hours for 8 units = 0.8(6,400 direct labor
hours) = 5,120 direct labor hours

Therefore, the cumulative direct labor hours for 8 units = (5,120 direct labor
hours)(8 units) = 40,960 direct labor hours.
Question 61:
1A2-CQ14

Scarf Corporation's controller has decided to use a decision model to cope

with uncertainty. With a particular proposal, currently under consideration,
Scarf has two possible actions, invest or not invest in a joint venture with an
international firm. The controller has determined the following.

Which one of the following alternatives correctly reflects the respective

expected values of investing versus not investing?

($350,000) and ($750,000).

$300,000 and ($100,000).
($350,000) and ($100,000).
$300,000 and ($750,000).

B) The expected value of not investing is ($100,000), since this is the

additional cost that would be incurred if no investment is made.

The expected value of investing can be calculated by adding together the

expected value of when the investment is successful and the expected value
of when the investment is unsuccessful and then subtracting the initial
investment cost.
Expected value of investing = (expected value when successful) + (expected
value when unsuccessful) − (initial investment cost)

Expected value of investing = (0.6)($15,000,000) + (0.4)($2,000,000) -

$9,500,000
Expected value of investing = $9,000,000 + $800,000 - $9,500,000
Expected value of investing = $300,000

Note that the $650,000 in cost incurred up to this point are sunk costs and are
irrelevant to the analysis.
Question 62:
1A2-LS26

Dawson Manufacturing developed the following multiple regression equation,

utilizing many years of data, and uses it to model, or estimate, the cost of its
product.

Which one of the following changes would have the greatest impact on
invalidating the results of this model?
* Source: Retired ICMA CMA Exam Questions.

Renegotiation of the union contract calling for much higher wage rates.
large drop in material costs, as a result of purchasing the material from a foreign
source.
A significant change in labor productivity.
A significant reduction in factory overheads, which are a component of fixed costs.
C) In a costing model, all fixed costs, labor costs and material costs
associated with the product are considered. In this case, a significant change
in labor productivity will have the greatest impact on invalidating the results of
the model as it would cause the model to fluctuate at a higher rate than the
other variables.
Question 63:
1A2-AT10

The table below shows the estimated probabilities of the percent of defective
units resulting from a production run.

The expected percent defective is:

1.9%.
3.65%.
2%.
2.95%.

D) Expected value (the mathematical expectation of mean) of a discrete

random variable is calculated by taking the sum of the probability of each
possible outcome and multiplying it by the outcome.

Mathematically, E(x) = P(x1) times x1 + P(x2) times x2 + … + P(xn) times xn,

where:
E(x) = Total expected value
x = variable representing a possible outcome
p = probability factor of each possible outcome
n = the number of possible outcomes

In this case, the expected percent defective is 0.15(0.01) + 0.2(0.02) +

0.3(0.03) + 0.25(0.04) + 0.1(0.05) =
0.0015 + 0.004 + 0.009 + 0.01 + 0.005 = 0.0295, or 2.95 percent.
Question 64:
1A2-CQ04

A manufacturing company has the opportunity to submit a bid for 20 units of a

product on which it has already produced two 10-unit lots. The production
manager believes that the learning experience observed on the first two lots
will continue for at least the next two lots. The direct labor required on the first
two lots was as follows:

 5,000 direct labor hours for the first lot of 10 units

 3,000 additional direct labor hours for the second lot of 10 units

The learning rate experienced by the company on the first two lots of this
product is:

62.5%.
80%.
40%.
60%.

B) Using a cumulative average time learning curve, as the cumulative output

doubles, the cumulative average direct labor hours per unit becomes the
learning curve percentage times the previous cumulative average direct labor
hours per unit.

So, if the first lot used 5,000 direct labor hours and the second lot required
3,000 direct labor hours, then the total for the 2 lots would be 8,000 direct
labor hours and the cumulative average hours for the two lots would be 4,000
direct labor hours (8,000 direct labor hours / 2).

Therefore, the learning curve percentage would be calculated by taking the

cumulative average hours for the two lots (4,000 direct labor hours) and
dividing it by the number of direct labor hours used for the first lot (5,000), or
4,000 / 5,000 = 0.8, or 80%.
Question 65:
1A2-AT15

Automite company is an automobile replacement parts dealer in a large

metropolitan community. Automite is 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 automobile sales in the
community for the last ten years have been accumulated.

If Automite wants to determine if its sales of replacement parts are patterned

after the industry sales of replacement parts or to the sales of used and new
automobiles, the company would employ:

correlation and regression analysis.

time series analysis.
simulation techniques.
statistical sampling.

A) The purpose of correlation and regression analysis is to determine the

relationship between a dependent variable, and one or more independent
variables. Regression analysis determines the best linear, unbiased estimate
between a dependent variable and one or more independent variables.
Question 66:
1A2-LS18

Maxis Tech is trying to determine how an employee's performance rating

could be explained by his/her level of education (EDU), the length of
employment (EMP) with the company, and the number of training (TRN) hours
received.

Using data from 100 of its employees, Maxis Tech performs a regression
analysis with the following results:

Performance rating = 0.2 + 0.32 EDU + 0.15 EMP + 0.07 TRN

R2 = 0.72

t for EDU = 0.013

t for EMP = 3.276

t for TRN = 4.121

The value of these terms in the parentheses (EDU, EMP, and TRN) represent
the t-statistics of the regression coefficient. Which of the following statements
best describes the statistical significance of the impact of the three factors on
employee performance ratings?

The impact of all three is statistically significant because the R2 is relatively high.
None of the factors has a statistically significant impact.
 Only the impact of number of training hours received is statistically significant
because it has the highest t-statistics.
Both length of employment with the company and number of training hours received
have statistically significant impact because the absolute values of their t-statistics
are higher than the most extreme cutoff point.

D) Both length of employment with the company and number of training hours
received have statistically significant impact because the absolute values of
their t-statistics are higher than the most extreme cutoff point.

To determine if an independent variable is statistically significant, we need to

look at its t-statistics. If its t-statistics are greater than a certain cutoff point
(which is determined by the level of significance), it is considered to be
statistically significant.

Although no level of significance is provided in this scenario, the absolute

values of the t-statistics of EMP and TRN are so high that they will be
considered statistically significant even with the smallest level of significance.

On the other hand, the absolute value of the t-statistic of EDU is so low that it
will not be considered statistically significant even with the (acceptable)
largest level of significance.