1. Task
Show all calculations/reasoning
QUESTION 1 Decision Analysis
Show all calculations to support your answers. You may follow
the methods shown in the mp4 on Decision Analysis for a way
to do part (b) of this question if you wish.
(a) Distinguish between decision making under certainty and
decision making under uncertainty. To what aspects of the
decision does the uncertainty refer? What other possible sources
of uncertainty are there in decision making?
(b) Joe Black runs a manufacturing business. Because of
competition in his market Joe is considering purchasing one of
three new types of equipment, A, B or C. The conditional
profits from each given favourable or unfavourable markets are
as follows:
Favourable
Unfavourable
Market
Market
Equipment
$
$
A
300,000
-200,000
B
250,000
-100,000
C
75,000
-18,000
(i) If Joe is an optimist which type of equipment should he buy?

2. (ii) If Joe is a pessimist which type of equipment should he
buy?
(iii) Following the criterion of regret which type of equipment
should he buy?
(iv) If Joe believes that there is a 70% chance of the market
being favourable which type of equipment should he buy?
(c) The management of Wildcat Drilling N.L. is considering the
purchase of an oil exploration lease over a parcel of land, for
$200,000. If the lease is purchased a test well could be drilled
at a cost of $1,500,000. If the test well proved dry the lease
would be abandoned. If the well brought in oil the lease could
be sold immediately for $18,000,000. On known information the
probability that the well would prove dry is assessed at 0.95.
The manager has absolute faith in the ability of a mystic, Bill
Diviner, who for a fee of $500,000 can give a perfect prediction
as to whether the well would be a success or dry.
Bill Diviner would not be allowed on the land unless the lease
is purchased first..
Required:
Draw a decision tree showing the choices available to the
manager of Wildcat and the merits of each. What should the
management do?
QUESTION 2 Value of information
Show all calculations to support your answers. You may follow
the methods shown in the mp4 on Value of info for a way to
answer this question if you wish.
(a)
A firm is considering the marketing of a new product which will
either be a success or a failure. The prior probability of success
is judged to be 0.3. If the product is marketed and is a success
the firm expects to earn $500,000, while a failure is expected to
lead to a loss of $300,000.
(i) Should the product be marketed? Why?
(ii) What is the expected value of perfect information about the
success or failure of the product?
The firm is considering a market survey whose results can be

3. classified as favourable, neutral or unfavourable (meaning that
you will have to prepare 3 lots of revisions of probability, one
for each signal). Some of the conditional probabilities are:
p(favourable|success) = 0.6
p(neutral|success) = 0.3
p(neutral|failure) = 0.2,
p(unfavourable|failure) = 0.7.
(iii) What is the posterior probability of success given a
favourable survey result?
(iv) What is the maximum the firm should be willing to pay for
the market survey?
QUESTION 3
Simulation
This is a work integrated assessment item. The tasks are similar
to what would be carried out in the workplace.
The Bandicoots Football Club gains significant revenue from
ticket sales at each game played at home during the season. The
sale of programs for these games also adds to profitability. Each
program costs $2.00 to produce and sells for $5.00. Any
programs unsold at the end of any game are sent to a recycling
centre and do not produce any revenue.
Records of the programs sold for each game show the following:
Number of Programs Sold
Probability
2300
0.10
2400
0.20
2500
0.30
2600
0.25

4. 2700
0.15
(a) Your manager has asked you as the management accountant
for the club to determine the profitability of program
production. In particular you have been asked to investigate two
strategies where the number of programs to be printed are either
2500 or 2600. You decide to use Excel to simulate the sale of
programs at 10 games in a season together with the profit or
loss on programs for each game when (1) 2500 and (2) 2600
programs are printed. Include a calculation of the total
profit/loss for the season and the average profit/loss per game.
Hints: Your model should have 8 columns: Game #, RN Sales,
Demand, Production #, Sales Units, Sales Revenue, Production
Costs, Profit/Loss. The model must be completely formula
driven - there must be no data in the model or the model
formulas – all data should be in a data input section above the
model. An IF or MIN function is required in the formulas in the
Sales Units column. After completing the model you can vary
the results by pressing F9 (recalculate) a number of times to
view such variations resulting from changes in the random
numbers generated.
Show the data and the model in two printouts: (1) the results,
and (2) the formulas. Both printouts must show row and column
numbers and be copied from Excel into Word. See Spreadsheet
Advice in Interact Resources for guidance.
(b) To check on your simulation conclusions use marginal
analysis to determine the optimum number of programs to print.
(c) Write a report to your manager explaining which of the two
production strategies you would recommend and why. You may
support your report by including reference to the profits under
each strategy, noting any limitations to the methods you have
adopted to analyse the situations.

5. The report must be dated, addressed to the Manager and signed
off by you.
(Word limit: No more than 150 words)
QUESTION 4
Regression Analysis and Cost Estimation
Acme Company is trying to estimate the behaviour of overhead
costs. Data for the last 10 months has been collected, together
with possible cost drivers, as follows (DLH = direct labour
hours, MH = machine hours):
Month
Overhead
DLH
MH
1
$ 7,200
201
220
2
$ 7,400
250
240
3
$ 8,300
300
340
4
$ 8,500
350
350
5
$ 7,000
200
180

6. 6
$ 8,800
400
440
7
$ 9,600
450
470
8
$ 8,600
350
340
9
$ 10,000
500
510
10
$ 7,900
300
330
(a) Using the High-Low method of cost estimation and DLH as
the cost driver, what would be the overhead cost equation?
(b) Using Excel, perform three regression analyses to regress
overhead cost against DLH, then MH, then against both of them
simultaneously. State the cost equation from each. Analyse and
comment on the results of each regression as you perform it and
determine the best one to use as a basis for future use.
(c) If the simple regression using DLH were adopted, what
would be the predicted overhead in a month when there
were 400 DLH and 500 MH used?
QUESTION 5
CVP Analysis

7. (a) CVP Ltd has a monthly sales volume of $75,000 for its
only product. Variable costs are $45,000 and monthly
fixed costs are $7,500.
Required:
i. Monthly breakeven point in sales dollars.
ii. The required level of sales to yield a monthly profit of
$25,000 before tax.
iii. The profit before tax expected in a month in which sales
of $80,000 are realised.
iv. The unit sales volume required to earn an after-tax
monthly profit of $42,000 given a sales price of $20 per
unit and a company tax rate of 30c in the dollar.
(b) A company makes two products, X and Y. At present the
sales mix is 1 unit of X to 3 units of Y. Fixed costs per period
are $20,000. Selling prices and variable costs per unit for each
product are:
X
Y
Unit selling price $18
$15
Unit variable cost $10
$11
Required:
i. Given this sales mix, how many units of each product
must be sold in a period to make a profit of $15,000 before tax?
ii. If in a period the sales mix changed to 2 units of X to 2
units of Y, and the total number of units sold in the period were
8,000, how much profit would be earned in the period?
(c) Alpha Company produces a single product, Beta, which has
the following unit selling price and costs:

8. Selling price per unit $2000
Variable costs per unit $1500
Fixed costs per annum $2 000 000
Prices and costs are certain, but annual demand is uncertain. It
is thought that annual demand is normally distributed with
expected sales of 6000 units and a standard deviation of 1000
units.
Required:
i. Calculate expected annual profit.
ii. What is the standard deviation of expected profit?
iii. Calculate the probability of at least breaking even using
the probability distribution of profits.
Rationale
This assessment task covers: Decision analysis: uncertainty and
risk, Decision analysis: value of information, Simulation for
complex decisions. Correlation and regression analysis and
Cost-volume-profit analysis. It has been designed to ensure that
you continue to engage with the subject content on a regular
basis. More specifically, it seeks to assess your ability to:
· apply decision theory and probability concepts to business
situations
· use simulation to analyse decisions
· understand statistical hypothesis testing to interpret the
significance of regression coefficients
· apply CVP analysis to product mix decisions