GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 1 A company is an automobile replacement parts dealer in a large metropolitan community. The
company is preparing its sales forecast for the coming year. Data regarding both the company’s and
industry sales of replacement parts as well as both the used and new automobile sales in the
community for the last 10 years have been accumulated. If the company wants to determine whether its
sales of replacement parts are dependent upon the industry sales of replacement parts or upon the
sales of used and new automobiles, the company should employ

A. Simulation techniques.

B. Correlation and regression analysis.

Answer (B) is correct.
Correlation and regression analysis can be used to determine whether a relationship
exists among two or more variables. The degree of that relationship is assessed by
means of correlation analysis. Thus, regressing sales (the dependent variable) on
both sales of replacement parts and sales of automobiles (independent variables)
determines the extent of the dependence.

C. Statistical sampling.

D. Time series analysis.

Question: 2A 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. Linear regression.
Answer (C) is correct.
Regression analysis, also called least-squares analysis, is the process of deriving the linear equation
that describes the relationship between two (or more) variables with a nonzero coefficient of
correlation.

D. Variable costing.

Question: 3 In the standard regression equation y = a + bx, the letter b is best described as a(n)

A. Independent variable.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. Dependent variable.

C. Constant coefficient.

D. Variable coefficient.
Answer (D) is correct.
In the standard regression equation, b represents the variable coefficient. For
example, in a cost determination regression, y equals total costs, b is the variable
cost per unit, x is the number of units produced, and a is fixed cost.

Question: 4 The correlation coefficient that indicates the weakest linear association between two variables is

A. –0.73

B. –0.11
Answer (B) is correct.
The correlation coefficient can vary from –1 to +1. A –1 relationship indicates a
perfect negative correlation, and a +1 relationship indicates a perfect positive
correlation. A zero correlation coefficient indicates no linear association between
the variables. Thus, the correlation coefficient that is nearest to zero indicates the
weakest linear association. Of the options given in the question, the correlation
coefficient that is nearest to zero is –0.11.

C. 0.12

D. 0.35

Question: 5 Correlation is a term frequently used in conjunction with regression analysis and is measured by the
value of the coefficient of correlation, r. The best explanation of the value r is that it

A. Is always positive.

B. Interprets variances in terms of the independent variable.

C. Ranges in size from negative infinity to positive infinity.

D. Is a measure of the relative relationship between two variables.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Answer (D) is correct.

The coefficient of correlation (r) measures the strength of the linear relationship
between the dependent and independent variables. The magnitude of r is
independent of the scales of measurement of x and y. The coefficient lies between –
1.0 and +1.0. A value of zero indicates no linear relationship between
the x and y variables. A value of +1.0 indicates a perfectly direct relationship, and a
value of –1.0 indicates a perfectly inverse relationship.

Question: 6 A regression equation

A. Estimates the dependent variable.

Answer (A) is correct.
Regression analysis is used to find an equation for the linear relationship among
variables. The behavior of the dependent variable is explained in terms of one or
more independent variables. Regression analysis is often used to estimate a
dependent variable (such as cost) given a known independent variable (such as
production).

B. Encompasses factors outside the relevant range.

C. Is based on objective and constraint functions.

D. Estimates the independent variable.

Question: 7 What coefficient of correlation results from the following data?

X Y

1 10

2 8

3 6

4 4

5 2

A. 0
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. –1
Answer (B) is correct.
The coefficient of correlation, r, measures the strength of the linear relationship.
The magnitude of r is independent of the scales of measurement of X and Y. Its
range is –1.0 to 1.0. A value of –1.0 indicates a perfectly inverse linear relationship
between X and Y. A value of zero indicates no linear relationship between X and
Y. A value of +1.0 indicates a perfectly direct relationship between X and Y. As X
increases by 1, Y consistently decreases by 2. Hence, a perfectly inverse
relationship exists, and r must be equal to –1.0.

C. +1

D. Cannot be determined from the data given.

Question: 8 All of the following are assumptions underlying the validity of linear regression output except

A. The errors are normally distributed.

B. The mean of the errors is zero.

C. Certainty.
Answer (C) is correct.
Linear regression is based on several assumptions; for example, that there is no
change in the environment, that errors in the values of the dependent variables are
normally distributed with a mean of zero, that the standard deviation of these errors
is constant, that the values of the dependent variables are statistically independent
of each other, and that the independent variables are not correlated with each other.
However, regression is only a means of predicting the future; it cannot provide
certainty.

D. The standard deviation of the errors is constant.

Fact Pattern:
In preparing the Hours of Maintenanc
annual profit e
plan for the Activit Costs
coming year, y
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Wilkens January 480 $ 4,200

Company wants February 320 3,000
to determine the March 400 3,600
cost behavior April 300 2,820
pattern of the
May 500 4,350
maintenance
costs. Wilkens June 310 2,960
has decided to July 320 3,030
use linear August 520 4,470
regression by Septembe 490 4,260
employing the r
equation y = a October 470 4,050
+ bx for November 350 3,300
maintenance December 340 3,160
costs. The prior
year’s data Sum 4,800 $43,200
regarding Average 400 $ 3,600
maintenance
hours and costs,
and the results
of the
regression
analysis, are
given below
and in the
opposite
column.

Average $9.00
cost per
hour
a 684.6
5
b 7.288
4
Standar 49.51
d error 5
of a
Standar .1212
d error 6
of b
Standar 34.46
d error 9
of the
estimate
r2 .9972
4
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 9 Based upon the data derived from the regression

analysis, 420 maintenance hours in a month would mean
that Wilkens Co.’s maintenance costs (rounded to the
nearest dollar) would be budgeted at

A. $3,780

B. $3,600

C. $3,790

D. $3,746
Answer (D) is correct.
Substituting the given data into the regression
equation results in a budgeted cost of $3,746
(rounded to the nearest dollar).
y = a + bx

y = 684.65 + 7.2884(420)

y = $3,746

Fact Pattern:
In preparing the Hours of Maintenanc
annual profit e
plan for the Activit Costs
coming year, y
Wilkens January 480 $ 4,200
Company wants February 320 3,000
to determine the March 400 3,600
cost behavior April 300 2,820
pattern of the
May 500 4,350
maintenance
costs. Wilkens June 310 2,960
has decided to July 320 3,030
use linear August 520 4,470
regression by Septembe 490 4,260
employing the r
equation y = a October 470 4,050
+ bx for
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

maintenance November 350 3,300

costs. The prior December 340 3,160
year’s data
Sum 4,800 $43,200
regarding
maintenance Average 400 $ 3,600
hours and costs,
and the results
of the
regression
analysis, are
given below
and in the
opposite
column.

Average $9.00
cost per
hour
a 684.6
5
b 7.288
4
Standar 49.51
d error 5
of a
Standar .1212
d error 6
of b
Standar 34.46
d error 9
of the
estimate
r2 .9972
4

Question: 10 The percentage of Wilkens Co.’s total variance that can

be explained by the regression equation is

A. 99.724%
Answer (A) is correct.
The coefficient of determination (r2)
measures the percentage of the total variance
in cost that can be explained by the
regression equation. If the coefficient of
determination is .99724, 99.724% of the
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

variance is explained by the regression

equation. Thus, the values in the regression
equation explain virtually the entire amount
of total cost.

B. 69.613%

C. 80.982%

D. 99.862%

Question: 11 The letter x in the standard regression equation is best described as a(n)

A. Independent variable.
Answer (A) is correct.
The letter x in the standard regression equation is the independent variable. For
example, in a regression to determine the total cost of production, x equals units
produced.

B. Dependent variable.

C. Constant coefficient.

D. Coefficient of determination.

Question: 12 In regression analysis, which of the following correlation coefficients represents the strongest
relationship between the independent and dependent variables?

A. 1.03

B. –.02
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

C. –.89
Answer (C) is correct.
Because the range of values is between –1.0 and 1.0, –.89 suggests a very strong
inverse relationship between the independent and dependent variables. A value of –
1.0 signifies a perfect inverse relationship, and a value of 1.0 signifies a perfect
direct relationship.

D. .75

Question: 13 The internal auditor of a bank has developed a multiple regression model which has been used
for a number of years to estimate the amount of interest income from commercial loans.
During the current year, the auditor applies the model and discovers that the r 2 value has
decreased dramatically, but the model otherwise seems to be working okay. Which of the
following conclusions are justified by the change?

A. Changing to a cross-sectional regression analysis should cause r 2 to increase.

B. Regression analysis is no longer an appropriate technique to estimate interest income.

C. Some new factors, not included in the model, are causing interest income to change.
Answer (C) is correct.
The coefficient of determination (r 2) is the amount of variation in the dependent
variable (interest income) that is explained by the independent variables. In this
case, less of the change in interest income is explained by the model. Thus, some
other factor must be causing interest income to change. This change merits audit
investigation.

D. A linear regression analysis would increase the model’s reliability.

Fact Pattern: Alpha

Company produces
several different products
and is making plans for
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

the introduction of a new

product, which it will sell
for $6 a unit.
The following estimates
have been made for
manufacturing costs on
100,000 units to be
produced the first year:
Direct $500,000
materials

Direct $40,000 (the

labor labor rate is
$4/hour)
Overhead costs have not
been established for the
new product, but monthly
data on total production
and overhead cost for the
past 24 months have been
analyzed using simple
linear regression. The
results belowwere derived
from the simple
regression and provide
the basis for overhead
cost estimates for the new
product.
Dependent variable (y)
-- Factory overhead
costs

Independent variable
(x) -- Direct labor hours
Computed
values:
y intercept $40,00
0
Coefficient of $2.10
independent
variable
Coefficient of 0.953
correlation
Standard error $2,840
of estimate
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Standard error 0.42

of regression
coefficient
Mean value of $18,00
independent 0
variable
Coefficient of 0.908
determination

Question: 14 What percentage of the variation in Alpha’s overhead costs is explained by the
independent variable?

A. 90.8%
Answer (A) is correct.
The coefficient of determination (r2) is the square of the coefficient of
correlation (r). The coefficient of determination, r2, may be interpreted as
the percent of variation in the dependent variable “explained” by the
variation in the independent variable. The coefficient of correlation is an
index of the amount of association between the two variables and is also
known as the covariance. Here, r = 0.953, and r2 = 0.908.

B. 42%

C. 48.8%

D. 95.3%

Fact Pattern: Alpha

Company produces
several different products
and is making plans for
the introduction of a new
product, which it will sell
for $6 a unit.
The following estimates
have been made for
manufacturing costs on
100,000 units to be
produced the first year:
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Direct $500,000
materials

Direct $40,000 (the

labor labor rate is
$4/hour)
Overhead costs have not
been established for the
new product, but monthly
data on total production
and overhead cost for the
past 24 months have been
analyzed using simple
linear regression. The
results belowwere derived
from the simple
regression and provide
the basis for overhead
cost estimates for the new
product.
Dependent variable (y)
-- Factory overhead
costs

Independent variable
(x) -- Direct labor hours
Computed
values:
y intercept $40,00
0
Coefficient of $2.10
independent
variable
Coefficient of 0.953
correlation
Standard error $2,840
of estimate
Standard error 0.42
of regression
coefficient
Mean value of $18,00
independent 0
variable
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Coefficient of 0.908
determination

Question: 15 Alpha’s total overhead cost for an estimated activity level of 20,000 direct labor
hours would be

A. $42,000

B. $82,000
Answer (B) is correct.
The total overhead may be estimated using the regression equation as y =
a + bx.
Total overhead = $40,000 + [($2.10) × (20,000)]

= $82,000
Note that the fixed costs are $40,000 and the variable costs are $2.10 per
direct labor hour.

C. $122,000

D. $222,000

Question: 16 The manager of the assembly department of a company would like to estimate the fixed and
variable components of the department’s cost. To do so, the manager has collected information
on total cost and output for the past 24 months. To estimate the fixed and variable components
of total cost, the manager should use

A. Regression analysis.
Answer (A) is correct.
Regression analysis is a statistical technique for measuring the relationship between
variables. It estimates the component of the dependent variable that varies with
changes in the independent variable and the component that does not vary.

B. Game theory.

C. Sensitivity analysis.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. Queuing theory.

Question: 17 In determining cost behavior in business, the cost function is often expressed as y = a + bx.
Which one of the following cost estimation methods should not be used in estimating fixed
and variable costs for the equation?

A. Graphic method.

B. Simple regression.

C. High and low point method.

D. Multiple regression.
Answer (D) is correct.
Regression analysis can be used to find an equation for the linear relationship
among variables. However, multiple regression is not used to generate an equation
of the type y = a + bx because multiple regression has more than one independent
variable. In other words, a multiple regression equation would take the form y = a +
b1x1 + b2x2 + b3x3 + . . . .

Question: 18 For cost estimation, simple regression differs from multiple regression in that simple
regression uses only

A. One dependent variable, while multiple regression uses all available data to estimate
the cost function.

B. Dependent variables, while multiple regression can use both dependent and
independent variables.

C. One independent variable, while multiple regression uses more than one independent
variable.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Answer (C) is correct.

Simple regression uses the algebraic formula for a straight line, y = a + bx, where x
is the independent variable. Multiple regression is used when there is more than one
independent variable. Multiple regression allows a firm to identify many factors
(independent variables) and to weight each one according to its influences on the
overall outcome (y = a + b1x1 + b2x2 + b3x3 + etc.).

D. One dependent variable, while multiple regression uses more than one dependent
variable.

Question: 19 A manufacturer 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. Renegotiation of the union contract calling for much higher wage rates.

C. A large drop in material costs, as a result of purchasing the material from a foreign
source.

D. A significant change in labor productivity.

Answer (D) is correct.
In multiple regression, a large difference between the expected value and the actual
value of one of the coefficients has the most impact in rendering the model invalid.
A change in costs would be incorporated into the equation automatically, but a
change in productivity per hour would not.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 20 In order to analyze sales as a function of advertising expenses, the sales manager 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 .90.
Sales = $10,000 + (2.5 × Advertising expenses)
If the advertising expenses in one month amounted to $1,000, the related point estimate of
sales would be

A. $2,500

B. $11,250

C. $12,250

D. $12,500
Answer (D) is correct.
The simple regression equation can be solved as follows:
Sales = $10,000 + (2.5 × Advertising expenses)

= $10,000 + (2.5 × $1,000)

= $10,000 + $2,500

= $12,500

Question: 21 The results of regressing Y against X are as follows:

Coefficient

Intercept 5.23

Slope 1.54
When the value of X is 10, the estimated value of Y is

A. 6.77
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. 8.05

C. 20.63
Answer (C) is correct.
A simple regression can be calculated using the formula for a straight line:
y = a + bx
Where: y = the dependent variable

a = the Y-axis intercept

b = the slope of the regression line

x = the independent variable

Solving with the information given yields the following results:
y = a + bx

= 5.23 + (1.54 × 10)

= 5.23 + 15.4

= 20.63

D. 53.84

Question: 22 While gathering information to use in preparing the annual budget, a company identifies cost
drivers associated with manufacturing costs. Which one of the following is a quantitative
analysis method the company can use to measure the average change in the manufacturing
costs associated with a change in a cost driver?

A. Time series analysis.

B. Exponential smoothing.

C. Regression analysis.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Answer (C) is correct.

Regression analysis is the process of deriving a linear equation to describe the
relationship between two variables.

D. Learning curve analysis.

Question: 23 A company uses simple regression to predict one of its semi-variable costs. The computed
equation of y = –25,000 + 2.5x appears to have a good visual fit. The cause of the negative
term in this equation could be that

A. The zero level of output is outside of the relevant range.

Answer (A) is correct.
The linear relationship established for x and y is only valid across the relevant
range. The company must identify the relevant range and ensure that it does not
project the relationship beyond the relevant range. A negative y intercept in the
simple regression equation usually indicates that it is outside the relevant range.

B. Too many outliers were included in the data.

C. An inappropriate cost driver was used as the independent variable.

D. The cost does not exhibit semi-variable behavior.

Question: 24 A single-product company uses regression to predict one of its factory overhead costs with
materials used as the independent variable. The regression equation is as follows: Y = 542,000
+ 0.0000253X. Based on R², management has determined that this model captures a significant
portion of the relationship.
The behavior of this company’s factory overhead cost with respect to units of finished goods
produced is

A. Fixed.
Answer (A) is correct.
The behavior of the factory overhead cost with respect to units of finished goods
produced for this company represents a fixed cost pattern. Fixed costs in total
remain unchanged in the short run regardless of production level. The Y-axis
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

intercept, or $542,000 in this case, represents the fixed portion. This number is not
affected by the number of finished goods produced in the short run. For example, if
1 unit is produced, the cost would equal $542,000 (rounded to the nearest whole
number). If 10,000 units are produced, the cost would still equal $542,000 (rounded
to the nearest whole number). Even though the cost equation makes it seem that
factory overhead is variable or semivariable, because the variable aspect (i.e., the
slope of .0000253) is essentially zero (0), factory overhead is considered a fixed
cost.

B. Semivariable.

C. Variable.

D. Not determinable from the provided information.

Question: 25 A nationwide retail mattress firm will begin selling high-end crib mattresses next year.
Management believes sales for this product will be driven primarily by birth rates but will be
influenced to a lesser extent by income levels. The best method to use to predict next year’s
sales is

A. Simple regression.

B. Time-series regression.

C. Multiple regression.
Answer (C) is correct.
Management believes sales will be driven by birthrates and, to a lesser extent,
income levels, which matches the multiple regression method. Multiple regression
is used when there is more than one independent variable. The two independent
variables are (1) birthrates and (2) income levels.

D. Maximum likelihood regression.

Question: 26 A cleaning company is evaluating the costs to clean a standard office. The controller has done
a linear regression of the hours spent cleaning various offices and the total costs (labor,
supplies, transportation) for each office cleaned. The regression analysis yielded the following
information.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

y = $25x + $75

y = the total cost to clean an office

x = the hours spent cleaning an office

What is the best description of the costs of cleaning an office based on this regression
analysis?

A. The cost is $100 per hour to clean an office.

B. There is $25 of fixed costs and $75 of variable costs per hour to clean an office.

C. There is $25 of variable costs per hour and $75 of fixed costs to clean an office.
Answer (C) is correct.
In the standard regression equation y = a + bx, b represents the variable coefficient.
In a cost determination regression, y equals total costs, b is the variable cost per
unit, x is the number of units produced, and a is the fixed cost. Thus, $25 is the
variable cost per hour, and $75 is the fixed cost.

D. The cost is $25 per hour to clean an office.

Question: 27 A company uses regression analysis in which monthly advertising expenses are used to predict
monthly product sales, both in millions of dollars. The results show a regression coefficient for
the independent variable equal to 0.8. This coefficient value indicates that

A. On average, every additional dollar of advertising results in $0.8 of additional sales.

Answer (A) is correct.
In the standard regression equation y = a + bx, b represents the change in the
dependent variable corresponding to a unit change in the independent variable.
Thus, it is the slope of the regression line.

B. Advertising is not a good predictor of sales because the coefficient is so small.

C. When monthly advertising is at its average level, product sales will be $800,000.

D. The average monthly advertising expenditure in the sample is $800,000.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 28An entity is preparing a bid for a special project requiring the production of 35,000 units. The
engineering personnel have advised that the units can be produced in groups with the first group consisting of
1,000 units. A review of prior experience indicates that the direct labor time needed per unit will be
progressively smaller by a constant percentage rate as experience is gained in the production process. The
quantitative method that would best estimate the entity’s total cost for the project is

A. Linear programming.

B. Dynamic programming.

C. Learning curve analysis.

Answer (C) is correct.
Learning curves reflect the increased rate at which people perform tasks as they gain experience.
Thus, the time required to perform a given task becomes progressively shorter. Ordinarily, the
learning curve is expressed as a percentage of reduced time to complete a task for each doubling of
cumulative production.

D. Time series analysis.

Question: 29The average labor cost per unit for the first batch produced by a new process is $120. The
cumulative average labor cost after the second batch is $72 per product. Using a batch size of 100 and assuming
the learning curve continues, the total labor cost of four batches will be

A. $4,320

B. $10,368

C. $2,592

D. $17,280
Answer (D) is correct.
The learning curve reflects the increased rate at which people perform tasks as they gain experience.
The time required to perform a given task becomes progressively shorter. Ordinarily, the curve is
expressed in a percentage of reduced time to complete a task for each doubling of cumulative
production. One common assumption in a learning curve model is that the cumulative average time
(and labor cost) per unit is reduced by a certain percentage each time production doubles. Given a
$120 cost per unit for the first 100 units and a $72 cost per unit when cumulative production doubled
to 200 units, the learning curve percentage must be 60% ($72 ÷ $120). If production is again
doubled to 400 units (four batches), the average unit labor cost should be $43.20 ($72 × 60%).
Hence, total labor cost for 400 units is estimated to be $17,280 (400 units × $43.20).

Fact Pattern:
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Moss Point Manufacturing recently completed and sold Direct materials $ 1,500
an order of 50 units that had costs as shown in the next Direct labor ($8.50 × 1,000 hours) 8,500
column. Variable overhead (1,000 hours × $4.00)* 4,000
Fixed overhead** 1,400
The company has now been requested to prepare a bid for $15,400
150 units of the same product.
*Applied on the basis of direct labor hours.
**Applied at the rate of 10% of variable cost.
Question: 30If an 80% learning curve is applicable, Moss Point’s total cost on this order would be estimated at

A. $26,400
Answer (A) is correct.
Assuming that the cumulative average time model applies, an 80% learning curve means that the
cumulative average time per unit (and labor cost, given a constant labor rate) declines by 20% each
time unit output doubles in the early stages of production. The first lot size was 50 units, which was
produced at a total cost of $15,400 ($1,500 for materials and $13,900 for labor and overhead).
Materials costs are strictly variable and should remain proportional to production. The labor ($8,500)
and variable overhead ($4,000) costs (labor-related), however, will be affected by the learning curve.
The average cost per lot for labor and variable overhead after 100 units have been produced should
be 80% of the costs of the first lot of 50 units. Thus, the average labor and variable overhead cost per
50-unit lot will be $10,000 ($12,500 × 80%). If production doubles again (to a total production of
200 units or four lots of 50 each), the cumulative average cost for labor and variable overhead will
be $8,000 per lot ($10,000 × 80%). Given four lots of 50 each, at an average cost of $8,000 per lot,
the total cost for labor and variable overhead must be $32,000. Adding $6,000 for raw materials
($1,500 per 50-unit lot) gives a total variable cost of $38,000 for 200 units. Fixed overhead is 10%
of total variable cost, so total cost is $41,800. The total cost for the last 150 units is $26,400
($41,800 – $15,400).

B. $32,000

C. $38,000

D. $41,800

Fact Pattern:
Moss Point Manufacturing recently completed and sold Direct materials $ 1,500
an order of 50 units that had costs as shown in the next Direct labor ($8.50 × 1,000 hours) 8,500
column. Variable overhead (1,000 hours × $4.00)* 4,000
Fixed overhead** 1,400
The company has now been requested to prepare a bid for $15,400
150 units of the same product.
*Applied on the basis of direct labor hours.
**Applied at the rate of 10% of variable cost.
Question: 31If Moss Point had experienced a 70% learning curve, the bid for the 150 units would

A. Show a 30% reduction in the total direct labor hours required with no learning curve.

B. Include increased fixed overhead costs.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

C. Be 10% lower than the total bid at an 80% learning curve.

D. Include 6.40 direct labor hours per unit at $8.50 per hour.
Answer (D) is correct.
The sum of the direct labor hours for the initial lot of 50 units was 1,000. A second lot of 50 would
reduce the cumulative hours per lot to 700 (70% × 1,000 hours). A doubling to four lots would
reduce the cumulative hours per lot to 490 (70% × 700 hours). Thus, for an output of 200 units, the
total hours worked would be 1,960 (4 lots × 490 hours). Subtracting the 1,000 hours required for the
first 50 units from the 1,960-hour total gives 960 hours for the last 150 units. Dividing 960 hours by
150 units produces a per-unit time of 6.4 hours.

Question: 32A corporation manufactures specialty components for the electronics industry in a highly labor
intensive environment. A manufacturer has asked the corporation to bid on a component that the corporation
made for the manufacturer last month. The previous order was for 80 units and required 120 hours of direct
labor to manufacture. The manufacturer would now like 240 additional components. The corporation
experiences an 80% learning curve on all of its jobs. The number of direct labor hours needed for the
corporation to complete the 240 additional components is

A. 360.0

B. 187.2
Answer (B) is correct.
One common assumption made in a learning curve model is that the cumulative average time per
unit is reduced by a certain percentage each time production doubles. An 80% learning curve results
in the following performance for the lots shown:
Cumulative

Units Average Hours

80 1.5 hours (120 ÷ 80)

160 1.2 hours (1.5 × .8)

320 .96 hours (1.2 × .8)

Thus, to produce 320 units, total production time will be 307.2 hours (320 × .96). The total time for
the last 240 units will be 187.2 hours (307.2 – 120).

C. 307.2

D. 256.0
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 33A particular manufacturing job is subject to an estimated 90% learning curve. The first unit
required 50 labor hours to complete. What is the cumulative average time per unit after four units are
completed?

A. 50.0 hours.

B. 45.0 hours.

C. 40.5 hours.
Answer (C) is correct.
The learning curve reflects the increased rate at which people perform tasks as they gain experience.
The time required to perform a given task becomes progressively shorter. Ordinarily, the curve is
expressed in a percentage of reduced time to complete a task for each doubling of cumulative
production. One common assumption in a learning curve model is that the cumulative average time
(and labor cost) per unit is reduced by a certain percentage each time production doubles. Thus, a
90% learning curve indicates that a doubling of production will reduce the cumulative average unit
completion time by 10%. For example, if the first unit required 50 hours to complete, the average
completion time after two units will be 45 hours (90% × 50 hours). If production is again doubled
(to four units), the cumulative average completion time will be 40.5 hours (90% × 45 hours).

D. 40.0 hours.

Question: 34A particular manufacturing job is subject to an estimated 80% learning curve. The first unit
required 50 labor hours to complete. What is the cumulative average time per unit after eight units are
completed?

A. 20.0 hours.

B. 25.6 hours.
Answer (B) is correct.
The learning curve reflects the increased rate at which people perform tasks as they gain experience.
The time required to perform a given task becomes progressively shorter. Ordinarily, the curve is
expressed in a percentage of reduced time to complete a task for each doubling of cumulative
production. One common assumption in a learning curve model is that the cumulative average time
(and labor cost) per unit is reduced by a certain percentage each time production doubles. Thus, an
80% learning curve indicates that a doubling of production will reduce the cumulative average unit
completion time by 20%. For example, if the first unit required 50 hours to complete, the average
completion time after two units will be 40 hours (50 hours × 80%). If production is again doubled (to
four units), the average completion time will be 32 hours (40 hours × 80%). When production is
doubled again to eight units, the cumulative average completion time will be 25.6 hours (32 hours ×
80%).

C. 32.0 hours.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. 40.0 hours.

Question: 35A particular manufacturing job is subject to an estimated 80% learning curve. The first unit
required 50 labor hours to complete. If the learning curve is based on a cumulative average time per unit
assumption, what is the time required to complete the second unit?

A. 30.0 hours.
Answer (A) is correct.
The learning curve reflects the increased rate at which people perform tasks as they gain experience.
The time required to perform a given task becomes progressively shorter. Ordinarily, the curve is
expressed in a percentage of reduced time to complete a task for each doubling of cumulative
production. One common assumption in a learning curve model is that the cumulative average time
(and labor cost) per unit is reduced by a certain percentage each time production doubles. Thus, an
80% learning curve indicates that a doubling of production will reduce the cumulative average unit
completion time by 20%. For example, if the first unit required 50 hours to complete, the average
completion time after two units will be 40 hours (50 hours × 80%). If total production time is 80
hours (2 × 40 cumulative average time), and the first unit required 50 hours, the time to produce the
second unit must be 30 hours.

B. 40.0 hours.

C. 45.0 hours.

D. 50.0 hours.

Question: 36A learning curve of 80% assumes that direct labor costs are reduced by 20% for each doubling of
output. What is the incremental cost of the sixteenth unit produced as an approximate percentage of the first unit
produced?

A. 41%

B. 31%
Answer (B) is correct.
With an 80% learning curve, the average cost after 8 units is 51.20% of the cost of the first unit
(100% × 80% × 80% × 80%). After 16 units, the average cost is 40.96% (51.20% × 80%). Thus, the
average cost of units in the last batch (units 9 through 16) must have been 30.72% [(40.96% × 2) –
51.20%].

C. 80%

D. 64%
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 37A new manufacturer in the production of airplane propellers has to train its employees in the
process of making propellers. To increase the speed of learning, the manufacturer will give a bonus to the
employee with the lowest cumulative average time per unit after eight units are completed. L took 50 hours to
complete the first unit, and she is subject to an 80% learning curve. S took 60 hours to complete the first unit,
and she is subject to a 70% learning curve. M took 40 hours to complete the first unit, and she is subject to a
90% learning curve. P took 55 hours to complete the first unit, and she is subject to a 75% learning curve.
Which employee will receive the bonus?

A. L.

B. S.
Answer (B) is correct.
The learning curve reflects the increased rate at which people perform tasks as they gain experience.
The time required to perform a given task becomes progressively shorter. One common assumption
in a learning curve model is that the cumulative average time per unit is reduced by a certain
percentage each time production doubles. Therefore, for S, if the first unit required 60 hours to
complete, her average completion time after two units will be 42 hours (70% × 60 hours). If
production is doubled to 4 units, her average completion time will be 29.4 hours (70% × 42 hours).
When production is then doubled to 8 units, her average completion time will be 20.6 hours (70% ×
29.4 hours). This is the best among the four workers.

C. M.

D. P.

Question: 38It is estimated that a particular manufacturing job is subject to an 80% learning curve. The first
unit required 50 labor hours to complete. What is the cumulative average time per unit after completing four
units?

A. 50.0 hours.

B. 40.0 hours.

C. 32.0 hours.
Answer (C) is correct.
Learning curve models reflect the increased rate at which people perform tasks as they gain
experience. One common assumption is that the cumulative average time per unit is reduced by a
certain percentage when production doubles during the early stages of production. An 80% learning
curve indicates that a doubling of production reduces the time required by 20%. For example, if the
first unit requires 50 hours, the cumulative average completion time is 40 hours (80% × 50 hours) for
two units and 32 hours (80% × 40 hours) for four units.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. 30.0 hours.

Question: 39A company plans to bid on a special project that 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 the company’s total cost for the
project is

A. Learning curve techniques.

Answer (A) is correct.
Learning curves reflect the increased rate at which people perform as they gain experience at a new
task. Because the time to perform the task becomes progressively shorter in the early stages of a new
activity, the direct labor costs involved decline. The curve is often expressed as a percentage
reduction in time for each doubling of cumulative production. Two models are in common use. One
assumes that the cumulative average time per unit declines by a constant percentage each time
cumulative production doubles. The other assumes that the time required for the last unit declines by
a constant percentage when cumulative production doubles.

B. Differential calculus.

C. Discounted cash flow techniques.

D. Linear programming.

Question: 40An entity received a request for a competitive bid for the sale of one of its unique boating products
with a desired modification. The entity is now in the process of manufacturing this product but with a slightly
different modification for another customer. These unique products are labor intensive and both will have long
production runs. Which one of the following methods should be used to estimate the cost of the new
competitive bid?

A. Expected value analysis.

B. Learning curve analysis.

Answer (B) is correct.
Learning curves reflect the increased rate at which people perform tasks as they gain experience. The
time required to perform a given task becomes progressively shorter as the workers better learn their
jobs. Ordinarily, the curve is expressed as a percentage of reduced time to complete a task for each
doubling of cumulative production. This methodology is appropriate when submitting a bid for a
product for which the firm already has experience. The experience should lead to shorter production
time and lower costs.

C. Regression analysis.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. Continuous probability simulation.

Question: 41The technique used to predict the change in direct labor hours as a new process stabilizes is

A. Simple regression.

B. Multiple regression.

C. Time series analysis.

D. Learning curve analysis.

Answer (D) is correct.
Learning curves reflect the increased rate at which people perform tasks as they gain experience. The
time to perform a given task becomes progressively shorter during the early stages of production.
The curve is expressed as a percentage reduction in time to complete a task for each doubling of
cumulative production. A learning curve percentage of 80% is common. One model assumes that the
cumulative average time per unit for all production is reduced by a constant percentage. Another
assumes that the average time to produce the last unit is reduced by a constant percentage.

Fact Pattern: LCB, Inc., is preparing a bid to produce engines. The company has experienced the following
costs:
Cumulative Total Cumulative Costs

Units Produced Materials Labor

10 $ 60,000 $120,000

20 120,000 192,000

40 240,000 307,200
At LCB, variable overhead is applied on the basis of $1.00 per direct labor dollar. Based on historical costs,
LCB knows that the production of 40 engines will incur $100,000 of fixed overhead costs. The bid request is for
an additional 40 units; all companies submitting bids are allowed to charge a maximum of 25% above full cost
for each order. Question: 42In order to ensure that the company would not lose money on the project, LCB’s
minimum bid for the 40 units would be

A. $760,800

B. $608,640
Answer (B) is correct.
The company is permitted to bid 25% above full cost (including fixed overhead). Given a learning
curve of 80% and a cumulative average unit labor cost for 40 units of $7,680 ($307,200 ÷ 40), the
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

additional labor costs for the next 40 units can be determined. Cumulative average unit labor cost for
80 units is estimated to be $6,144 ($7,680 × 80%). Estimated total labor cost for 80 units is $491,520
(80 units × $6,144). Thus, the incremental labor cost of the last 40 units is expected to be $184,320
($491,520 – $307,200). Variable overhead is $1 per direct labor dollar, or $184,320. Adding
$240,000 for materials and $100,000 for fixed overhead results in a full cost of $708,640 ($184,320
DL + $184,320 VOH + $240,000 DM + $100,000 FOH). However, that amount includes $100,000
of fixed overhead that would presumably not increase as a result of the production. Thus, if the
company obtains the contract at a price of $608,640 ($708,640 – $100,000), it will break even. The
minimum bid is therefore $608,640: the incremental cost of labor, variable overhead, and raw
materials.

C. $885,800

D. $708,640

Fact Pattern: LCB, Inc., is preparing a bid to produce engines. The company has experienced the following
costs:
Cumulative Total Cumulative Costs

Units Produced Materials Labor

10 $ 60,000 $120,000

20 120,000 192,000

40 240,000 307,200
At LCB, variable overhead is applied on the basis of $1.00 per direct labor dollar. Based on historical costs,
LCB knows that the production of 40 engines will incur $100,000 of fixed overhead costs. The bid request is for
an additional 40 units; all companies submitting bids are allowed to charge a maximum of 25% above full cost
for each order. Question: 43LCB’s rate of learning on the 3-year engine contract is

A. 75.5%

B. 79.0%

C. 80.0%
Answer (C) is correct.
The learning curve reflects a percentage reduction in time to complete a task for each doubling of
cumulative production. An analysis of the materials costs shows that these costs are strictly variable.
However, the labor costs are not strictly variable because the cumulative amount at the end of the
second year (for which production is double that of the first year) is not exactly double that for Year
One. The same is true of the second- and third-year labor costs. The cumulative average unit labor
cost for 10 units was $12,000 ($120,000 ÷ 10). The cumulative average unit labor cost for 20 units
(representing a doubling of production) was $9,600 ($192,000 ÷ 20). The cumulative unit average
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

for the next doubling was $7,680 ($307,200 ÷ 40). Since $9,600 is 80% of $12,000 and $7,680 is
80% of $9,600, an 80% rate of learning occurred.

D. 62.6%

Fact Pattern: LCB, Inc., is preparing a bid to produce engines. The company has experienced the following
costs:
Cumulative Total Cumulative Costs

Units Produced Materials Labor

10 $ 60,000 $120,000

20 120,000 192,000

40 240,000 307,200
At LCB, variable overhead is applied on the basis of $1.00 per direct labor dollar. Based on historical costs,
LCB knows that the production of 40 engines will incur $100,000 of fixed overhead costs. The bid request is for
an additional 40 units; all companies submitting bids are allowed to charge a maximum of 25% above full cost
for each order. Question: 44The maximum bid price that LCB, Inc., could submit to the Department of the Navy
for the 40 units is

A. $760,800

B. $608,640

C. $885,800
Answer (C) is correct.
The company is permitted to bid 25% above full cost (including fixed overhead). Given a learning
curve of 80% and a cumulative average unit labor cost for 40 units of $7,680 ($307,200 ÷ 40), the
additional labor costs for the next 40 units can be determined. Cumulative average unit labor cost for
80 units is estimated to be $6,144 ($7,680 × 80%). Estimated total labor cost for 80 units is $491,520
(80 units × $6,144). Thus, the incremental labor cost of the last 40 units is expected to be $184,320
($491,520 – $307,200). Variable overhead is $1 per direct labor dollar, or $184,320. Adding
$240,000 for materials and $100,000 for fixed overhead results in a full cost of $708,640 ($184,320
DL + $184,320 VOH + $240,000 DM + $100,000 FOH). Consequently, the bid price should be
$885,800 ($708,640 full cost × 125%).

D. $708,640

Fact Pattern: Donehart Corporation produces agricultural vehicles. Most of the component parts for these
vehicles are subcontracted to reliable vendors. The final assembly of all vehicles is accomplished at Donehart’s
plant. Donehart’s Engineering Department has developed a new fuel injection system that can be produced in-
house because of the availability of production capacity. The first production run of the new fuel injection
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

system has already been completed in-house. This 80-unit production run took 60 direct labor hours per unit to
produce based on the cumulative average labor hours per fuel injection unit. Donehart has experienced an 80%
learning curve with similar products, and this experience indicates that learning tends to cease by the time 640
systems are produced. Donehart’s direct labor cost (including employee benefits) is $18 per direct labor hour.
Donehart’s management must decide whether to continue producing the fuel injection system or to subcontract
the work. Donehart’s purchasing agent has received a proposal from Midland, Inc., a company specializing in
fuel injection systems. From past contracts, Midland has proven to be efficient and reliable. The terms of
Midland’s proposal are outlined below.
- Donehart must supply all materials required for the fuel injection system units.
- The first 80 units produced by Midland will require direct labor input at the rate of 56 hours per unit. Current
direct labor cost is $20 per hour.
- The direct labor cost charged to Donehart will be the hourly rate in effect at the time the work is performed.
Midland is currently negotiating its labor contract, which includes a 4% increase in direct labor cost and
should be applicable when Donehart signs the contract.
- A learning curve factor of 75% will be applied through the first 640 units produced, and all benefits derived
from the learning factor will accrue to Donehart.
- Donehart must pay the actual labor cost incurred plus a 5% margin.
Question: 45If Donehart manufactures the units in-house, what is the average labor hours per unit after
manufacturing 640 units?

A. 60

B. 30.72
Answer (B) is correct.
Learning curves reflect the increased rate at which people perform tasks as they gain experience. For
this example, the learning curve has the following effect:
Cumulative Average

Batch Units Average Labor

Number Produced per Unit

1 80 60

2 160 48 (60 × 80%)

3 320 38.4 (48 × 80%)

4 640 30.72 (38.4 × 80%)

Therefore, the average labor hours per unit is 30.72 hours.

C. 23.63
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. 23.04

Fact Pattern: Donehart Corporation produces agricultural vehicles. Most of the component parts for these
vehicles are subcontracted to reliable vendors. The final assembly of all vehicles is accomplished at Donehart’s
plant. Donehart’s Engineering Department has developed a new fuel injection system that can be produced in-
house because of the availability of production capacity. The first production run of the new fuel injection
system has already been completed in-house. This 80-unit production run took 60 direct labor hours per unit to
produce based on the cumulative average labor hours per fuel injection unit. Donehart has experienced an 80%
learning curve with similar products, and this experience indicates that learning tends to cease by the time 640
systems are produced. Donehart’s direct labor cost (including employee benefits) is $18 per direct labor hour.
Donehart’s management must decide whether to continue producing the fuel injection system or to subcontract
the work. Donehart’s purchasing agent has received a proposal from Midland, Inc., a company specializing in
fuel injection systems. From past contracts, Midland has proven to be efficient and reliable. The terms of
Midland’s proposal are outlined below.
- Donehart must supply all materials required for the fuel injection system units.
- The first 80 units produced by Midland will require direct labor input at the rate of 56 hours per unit. Current
direct labor cost is $20 per hour.
- The direct labor cost charged to Donehart will be the hourly rate in effect at the time the work is performed.
Midland is currently negotiating its labor contract, which includes a 4% increase in direct labor cost and
should be applicable when Donehart signs the contract.
- A learning curve factor of 75% will be applied through the first 640 units produced, and all benefits derived
from the learning factor will accrue to Donehart.
- Donehart must pay the actual labor cost incurred plus a 5% margin.
Question: 46If Donehart manufactures the units in-house, how many total hours will it take to complete 1,000
units?

A. 8,294.4 hours.

B. 19,660.8 hours.

C. 24,330 hours.

D. 27,955.2 hours.
Answer (D) is correct.
The total hours required to complete a project with a learning curve is found by adding the total
labor hours required to produce the last set of units on the learning curve with the remaining number
of units times the final hours per incremental unit. The following chart shows the final hours per
incremental unit:
Cumulative Average Hours Number of Hours Spent

Batch Units Labor Hours Cumulative Spent Units in on Each Unit

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Number Produced per Unit Total Hours on Batch Batch in Batch

1 80 60 4,800 4,800 80 60

2 160 48 7,680 2,880 80 36

3 320 38.4 12,288 4,608 160 28.8

4 640 30.72 19,660.8 7,372.8 320 23.04

After the fourth batch, it is assumed that the learning curve will have peaked. Thus, all units
produced thereafter will require 23.04 hours. To complete 1,000 units, 360 must be produced after
the fourth batch. This fifth batch will require 8,294.4 hours (360 units × 23.04 hours per unit). This
number added to the 19,660.8 hours required to complete the 640 hours on the learning curve equals
27,955.2 hours.

Fact Pattern: Donehart Corporation produces agricultural vehicles. Most of the component parts for these
vehicles are subcontracted to reliable vendors. The final assembly of all vehicles is accomplished at Donehart’s
plant. Donehart’s Engineering Department has developed a new fuel injection system that can be produced in-
house because of the availability of production capacity. The first production run of the new fuel injection
system has already been completed in-house. This 80-unit production run took 60 direct labor hours per unit to
produce based on the cumulative average labor hours per fuel injection unit. Donehart has experienced an 80%
learning curve with similar products, and this experience indicates that learning tends to cease by the time 640
systems are produced. Donehart’s direct labor cost (including employee benefits) is $18 per direct labor hour.
Donehart’s management must decide whether to continue producing the fuel injection system or to subcontract
the work. Donehart’s purchasing agent has received a proposal from Midland, Inc., a company specializing in
fuel injection systems. From past contracts, Midland has proven to be efficient and reliable. The terms of
Midland’s proposal are outlined below.
- Donehart must supply all materials required for the fuel injection system units.
- The first 80 units produced by Midland will require direct labor input at the rate of 56 hours per unit. Current
direct labor cost is $20 per hour.
- The direct labor cost charged to Donehart will be the hourly rate in effect at the time the work is performed.
Midland is currently negotiating its labor contract, which includes a 4% increase in direct labor cost and
should be applicable when Donehart signs the contract.
- A learning curve factor of 75% will be applied through the first 640 units produced, and all benefits derived
from the learning factor will accrue to Donehart.
- Donehart must pay the actual labor cost incurred plus a 5% margin.
Question: 47If Donehart manufactures the units in-house, how much additional cost will the company incur
after the first batch in order to produce a total of 1,000 units?

A. $416,793.60
Answer (A) is correct.
The best method to determine the total out-of-pocket costs to complete a project is to first multiply
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

the total hours required by the cost per hour. After this, subtract the initial costs of producing the first
batch. This will result in the total out-of-pocket costs to complete a project.
Cost for 1,000 units (27,955.2 hours × $18 per hour) $503,193.60

Cost for first batch (80 units × 60 hours × $18 per hour) (86,400.00)

Cost for 920 units $416,793.60

The total hours required to complete the project of 27,955.2 hours is calculated as follows:

Cumulative Average Hours Number of Hours Spent

Batch Units Labor Hours Cumulative Spent Units in on Each Unit

Number Produced per Unit Total Hours on Batch Batch in Batch

1 80 60 4,800 4,800 80 60

2 160 48 7,680 2,880 80 36

3 320 38.4 12,288 4,608 160 28.8

4 640 30.72 19,660.8 7,372.8 320 23.04

After the fourth batch, it is assumed that the learning curve will have peaked. Thus, all units
produced thereafter will require 23.04 hours. To complete 1,000 units, 360 must be produced after
the fourth batch. This fifth batch will require 8,294.4 hours (360 units × 23.04 hours per unit). This
number added to the 19,660.8 hours required to complete the 640 hours on the learning curve equals
27,955.2 hours.

B. $463,104

C. $503,193.60

D. $559,104

Fact Pattern: Donehart Corporation produces agricultural vehicles. Most of the component parts for these
vehicles are subcontracted to reliable vendors. The final assembly of all vehicles is accomplished at Donehart’s
plant. Donehart’s Engineering Department has developed a new fuel injection system that can be produced in-
house because of the availability of production capacity. The first production run of the new fuel injection
system has already been completed in-house. This 80-unit production run took 60 direct labor hours per unit to
produce based on the cumulative average labor hours per fuel injection unit. Donehart has experienced an 80%
learning curve with similar products, and this experience indicates that learning tends to cease by the time 640
systems are produced. Donehart’s direct labor cost (including employee benefits) is $18 per direct labor hour.
Donehart’s management must decide whether to continue producing the fuel injection system or to subcontract
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

the work. Donehart’s purchasing agent has received a proposal from Midland, Inc., a company specializing in
fuel injection systems. From past contracts, Midland has proven to be efficient and reliable. The terms of
Midland’s proposal are outlined below.
- Donehart must supply all materials required for the fuel injection system units.
- The first 80 units produced by Midland will require direct labor input at the rate of 56 hours per unit. Current
direct labor cost is $20 per hour.
- The direct labor cost charged to Donehart will be the hourly rate in effect at the time the work is performed.
Midland is currently negotiating its labor contract, which includes a 4% increase in direct labor cost and
should be applicable when Donehart signs the contract.
- A learning curve factor of 75% will be applied through the first 640 units produced, and all benefits derived
from the learning factor will accrue to Donehart.
- Donehart must pay the actual labor cost incurred plus a 5% margin.
Question: 48If Donehart subcontracts the order to Midland, what is the total number of labor hours required to
produce the 640 units on the learning curve?

A. 15,120 hours.
Answer (A) is correct.
Learning curves reflect the increased rate at which people perform tasks as they gain experience. For
this example, the learning curve has the following effect:
Cumulative

Batch Units Average Labor Cumulative

Number Produced Hours per Unit Hours

1 80 56 4,480

2 160 42 (56 × 75%) 6,720

3 320 31.5 (42 × 75%) 10,080

4 640 23.625 (31.5 × 75%) 15,120

B. 18,350 hours.

C. 19,530 hours.

D. 35,840 hours.

Fact Pattern: Donehart Corporation produces agricultural vehicles. Most of the component parts for these
vehicles are subcontracted to reliable vendors. The final assembly of all vehicles is accomplished at Donehart’s
plant. Donehart’s Engineering Department has developed a new fuel injection system that can be produced in-
house because of the availability of production capacity. The first production run of the new fuel injection
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

system has already been completed in-house. This 80-unit production run took 60 direct labor hours per unit to
produce based on the cumulative average labor hours per fuel injection unit. Donehart has experienced an 80%
learning curve with similar products, and this experience indicates that learning tends to cease by the time 640
systems are produced. Donehart’s direct labor cost (including employee benefits) is $18 per direct labor hour.
Donehart’s management must decide whether to continue producing the fuel injection system or to subcontract
the work. Donehart’s purchasing agent has received a proposal from Midland, Inc., a company specializing in
fuel injection systems. From past contracts, Midland has proven to be efficient and reliable. The terms of
Midland’s proposal are outlined below.
- Donehart must supply all materials required for the fuel injection system units.
- The first 80 units produced by Midland will require direct labor input at the rate of 56 hours per unit. Current
direct labor cost is $20 per hour.
- The direct labor cost charged to Donehart will be the hourly rate in effect at the time the work is performed.
Midland is currently negotiating its labor contract, which includes a 4% increase in direct labor cost and
should be applicable when Donehart signs the contract.
- A learning curve factor of 75% will be applied through the first 640 units produced, and all benefits derived
from the learning factor will accrue to Donehart.
- Donehart must pay the actual labor cost incurred plus a 5% margin.
Question: 49If Donehart subcontracts the order to Midland, how many hours will it take to complete a unit after
the initial 640 units on the learning curve are finished?

A. 11.81 hours.

B. 15.75 hours.
Answer (B) is correct.
Learning curves reflect the increased rate at which people perform tasks as they gain experience. The
learning curve has the following effect:
Batch Cumulative Unit Output Average Labor Hours per Unit Cumulative Hours
1 80 56 4,480 (80 × 56)
2 160 42 (56 × .75) 6,720 (160 × 42)
3 320 31.5 (42 × .75) 10,080 (320 × 31.5)
4 640 23.625 (31.5 × .75) 15,120 (640 × 23.625)
The hours per unit required to finish additional units after a point on the learning curve is found by
subtracting the total hours required to finish the previous point on the learning curve from the current
one. Then, this number is divided by the increase in units produced. In Midland’s case, the
calculation is
Hours needed to produce 640 units 15,120

Hours needed to produce first half (10,080)

Hours needed to produce second half 5,040

Thus, each individual unit in the second group of 320 units will take 15.75 hours a piece (5,040 ÷
320).
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

C. 21.50 hours.

D. 23.625 hours.

Fact Pattern: Donehart Corporation produces agricultural vehicles. Most of the component parts for these
vehicles are subcontracted to reliable vendors. The final assembly of all vehicles is accomplished at Donehart’s
plant. Donehart’s Engineering Department has developed a new fuel injection system that can be produced in-
house because of the availability of production capacity. The first production run of the new fuel injection
system has already been completed in-house. This 80-unit production run took 60 direct labor hours per unit to
produce based on the cumulative average labor hours per fuel injection unit. Donehart has experienced an 80%
learning curve with similar products, and this experience indicates that learning tends to cease by the time 640
systems are produced. Donehart’s direct labor cost (including employee benefits) is $18 per direct labor hour.
Donehart’s management must decide whether to continue producing the fuel injection system or to subcontract
the work. Donehart’s purchasing agent has received a proposal from Midland, Inc., a company specializing in
fuel injection systems. From past contracts, Midland has proven to be efficient and reliable. The terms of
Midland’s proposal are outlined below.
- Donehart must supply all materials required for the fuel injection system units.
- The first 80 units produced by Midland will require direct labor input at the rate of 56 hours per unit. Current
direct labor cost is $20 per hour.
- The direct labor cost charged to Donehart will be the hourly rate in effect at the time the work is performed.
Midland is currently negotiating its labor contract, which includes a 4% increase in direct labor cost and
should be applicable when Donehart signs the contract.
- A learning curve factor of 75% will be applied through the first 640 units produced, and all benefits derived
from the learning factor will accrue to Donehart.
- Donehart must pay the actual labor cost incurred plus a 5% margin.
Question: 50If Donehart subcontracts the order to Midland, how much additional cost will Donehart incur after
the first batch in order to obtain a total of 1,000 units?

A. $302,400

B. $330,220.80

C. $390,600

D. $426,535.20
Answer (D) is correct.
The total out-of-pocket cost for outsourcing is found by adding the total labor hours required to
finish the units on the learning curve to the product of additional units and hours per additional unit.
This number is then multiplied by the direct labor cost. Since Donehart has already produced a batch
of 80 units, only 920 are needed from Midland. The first 640 of this 920 are on the learning curve
and will require a total of 15,120 hours to produce. This leaves 280 units at 15.75 hours apiece, for a
total hours needed of 19,530 [15,120 + (280 × 15.75)]. The direct labor rate is $21.84 [$20.00 × (1 +
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

.04 labor increase) × (1 + .05 cost margin)]. Donehart’s cost for the 920 units outsourced to Midland
is therefore $426,535.20 (19,530 × $21.84).

Question: 51Management of a bookkeeping company observed that the average time spent to perform identical
tasks using a new software package decreases as the number of tasks performed increases. The following
information on the use of the new software was collected.
Number of Total Time to Average Time

Tasks Perform All to Perform

Performed Tasks Each Task

1 10 minutes 10 minutes

2 18 minutes 9 minutes

4 32.4 minutes 8.1 minutes

If this learning effect continues, what is the average time to perform each of the first eight tasks?

A. 7.29 minutes.
Answer (A) is correct.
Learning curves reflect the increased rate at which people perform tasks as they gain experience. The
time required to perform a given task becomes progressively shorter. This technique is applicable
only to the early stages of production or to any new task. One common assumption is that the
cumulative average time per unit is reduced by a fixed percentage each time cumulative production
is doubled. Based on the given data, this company has a 90% learning curve (90% × 10 minutes = 9
minutes, and 90% × 9 minutes = 8.1 minutes). Accordingly, the cumulative average time to perform
eight tasks is 7.29 minutes (90% × 8.1 minutes).

B. 8.1 minutes.

C. 6.56 minutes.

D. 5.90 minutes.

Question: 52Learning curves are best used to predict

A. Unit material costs.

B. Overhead variances.

C. Total unit costs.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. Unit direct labor costs.

Answer (D) is correct.
Learning curves reflect the increased rate at which people perform tasks as they gain experience.
Thus, they are useful in predicting unit direct labor costs.

Fact Pattern: Aerosub, Inc., has developed a new product for spacecraft that includes the production of a
complex part. The manufacture 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. Management projects an 80%
learning curve and wants to produce a total of eight units. Question: 53Upon completion of the eighth unit,
Aerosub’s cumulative average direct labor hours required per unit of the product will be

A. 5,120 hours.
Answer (A) is correct.
The underlying assumption of learning curve analysis is that workers gain productivity at a
predictable rate as they gain experience with a new process. A common assumption is that the
number of hours required for each doubling of output will be 80% of the hours required for the
previous doubling. The effects of Aerosub’s projected learning curve on this product can be
calculated as follows:
Cumulative Cumulative

Units Average

Batch Produced Labor Hours

1 1 10,000

2 2 8,000 (10,000 × 80%)

3 4 6,400 (8,000 × 80%)

4 8 5,120 (6,400 × 80%)

B. 6,400 hours.

C. 8,000 hours.

D. 10,000 hours.

Fact Pattern: Aerosub, Inc., has developed a new product for spacecraft that includes the production of a
complex part. The manufacture 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. Management projects an 80%
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

learning curve and wants to produce a total of eight units. Question: 54Upon completion of the eighth unit,
Aerosub’s cumulative direct labor hours will be

A. 29,520 hours.

B. 40,960 hours.
Answer (B) is correct.
The underlying assumption of learning curve analysis is that workers gain productivity at a
predictable rate as they gain experience with a new process. A common assumption is that the
number of hours required for each doubling of output will be 80% of the hours required for the
previous doubling. The effects of Aerosub’s projected learning curve on this product can be
calculated as follows:
Cumulative Cumulative Cumulative

Units Average Total

Batch Produced Labor Hours Labor Hours

1 1 10,000 10,000

2 2 8,000 (10,000 × 80%) 16,000

3 4 6,400 (8,000 × 80%) 25,600

4 8 5,120 (6,400 × 80%) 40,960

C. 64,000 hours.

D. 80,000 hours.

Fact Pattern: Aerosub, Inc., has developed a new product for spacecraft that includes the production of a
complex part. The manufacture 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. Management projects an 80%
learning curve and wants to produce a total of eight units. Question: 55After completing the first unit, the
estimated total direct labor hours Aerosub will require to produce the seven additional units will be

A. 30,960 hours.
Answer (A) is correct.
The cumulative total hours spent on the units can be calculated as follows:
Cumulative Cumulative Cumulative

Units Average Total

Batch Produced Labor Hours Labor Hours

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

1 1 10,000 10,000

2 2 8,000 (10,000 × 80%) 16,000

3 4 6,400 (8,000 × 80%) 25,600

4 8 5,120 (6,400 × 80%) 40,960

Since it took a total of 40,960 hours to complete all eight units and 10,000 to complete the first one,
units 2 through 8 took 30,960 hours (40,960 – 10,000).

B. 40,960 hours.

C. 56,000 hours.

D. 70,000 hours.

Question: 56A 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. 40.0%

B. 60.0%

C. 62.5%

D. 80.0%
Answer (D) is correct.
Learning curve analysis is used to project productivity gains resulting from the increased rate at
which people perform tasks as they gain experience. The underlying assumption of learning curve
analysis is that workers gain productivity at a predictable rate as they gain experience with a new
process. For this company, a total of 8,000 hours was spent to complete two lots of product. The
cumulative average spent on the two lots was therefore 4,000 hours per lot (8,000 ÷ 2). This
cumulative average of 4,000 is 80% of the 5,000 hours that were spent on the first lot. The learning
curve is therefore 80%.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

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

of Units Produced Average Cost per Unit Total Costs

1 $20,000 $20,000

2 14,000 28,000
Question: 57If Proper Propeller produces eight units, the average manufacturing cost per unit will be

A. $1,647

B. $6,860
Answer (B) is correct.
Learning curve analysis is used to project productivity gains resulting from the increased rate at
which people perform tasks as they gain experience. The underlying assumption of learning curve
analysis is that workers gain productivity at a predictable rate as they gain experience with a new
process. In this situation, the company is assuming that the total costs required for each doubling of
output will be 70% of the costs required for the previous doubling. The effects of Proper Propeller’s
projected learning curve can be calculated as follows:
Cumulative Cumulative

Units Average

Batch Produced Cost

1 1 $20,000

2 2 $14,000 ($20,000 × 70%)

3 4 $ 9,800 ($14,000 × 70%)

4 8 $ 6,860 ($9,800 × 70%)

C. $9,800

D. $14,000

Fact Pattern: Proper Propeller, Inc., plans to manufacture a newly designed high-technology propeller for
airplanes. Proper Propeller forecasts that as workers gain experience, they will need less time to complete the
job. Based on prior experience, Proper Propeller estimates a 70% cumulative learning curve and has projected
the following costs:
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Cumulative Number Manufacturing Projections

of Units Produced Average Cost per Unit Total Costs

1 $20,000 $20,000

2 14,000 28,000
Question: 58If Proper Propeller produces eight units, the total manufacturing cost will be

A. $50,660

B. $54,880
Answer (B) is correct.
Learning curve analysis is used to project productivity gains resulting from the increased rate at
which people perform tasks as they gain experience. The underlying assumption of learning curve
analysis is that workers gain productivity at a predictable rate as they gain experience with a new
process. In this situation, the company is assuming that the total costs required for each doubling of
output will be 70% of the costs required for the previous doubling. The effects of Proper Propeller’s
projected learning curve can be calculated as follows:
Cumulative Cumulative Cumulative

Units Average Total

Batch Produced Cost Cost

1 1 $20,000 $20,000

2 2 $14,000 ($20,000 × 70%) 28,000

3 4 $9,800 ($14,000 × 70%) 39,200

4 8 $6,860 ($9,800 × 70%) 54,880

C. $62,643

D. $112,000

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

of Units Produced Average Cost per Unit Total Costs

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

1 $20,000 $20,000

2 14,000 28,000
Question: 59After completing production of the first propeller, the estimated cost for Proper Propeller to fill an
order for seven additional propellers is

A. $34,880
Answer (A) is correct.
The effects of Proper Propeller’s projected learning curve can be calculated as follows:
Cumulative Cumulative Cumulative

Units Average Total

Batch Produced Cost Cost

1 1 $20,000 $20,000

2 2 $14,000 ($20,000 × 70%) 28,000

3 4 $9,800 ($14,000 × 70%) 39,200

4 8 $6,860 ($9,800 × 70%) 54,880

Since eight propellers require $54,880 and the first one off the assembly line cost $20,000, the cost
of units 2 through 8 will be $34,880 ($54,880 – $20,000).

B. $54,880

C. $92,000

D. $98,000

Question: 60A manufacturer 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:
Batch Number Cumulative Average

Number of Units Hours Per Unit

1 50 20

2 50 16
If the same rate of learning continues for the next several batches produced, which of the
following bestdescribes (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)?
Type (Degree) of Average Hours Per
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Learning Curve Unit for Units 201-400

A. 20% 10.24

B. 80% 10.24

C. 80% 7.68

Answer (C) is correct.

The learning curve percentage is determined by noting the hours used in producing the first doubling
of output as a percentage of the hours used in the original batch. Since 16 is 80% of 20, the
manufacturer is experiencing an 80% learning curve. The average hours used to produce the 4th
batch of output (units 201 – 400) can be calculated as follows:
Units Cumulative Cumulative Cumulative Time Spent Time Spent

in Units Average Total on on Units

Batch Batch Produced Labor Hours Time Batch in Batch

1 50 50 20 1,000 1,000 20

2 50 100 16 1,600 600 12

3 100 200 12.8 2,560 960 9.6

4 200 400 10.24 4,096 1,536 7.68

D. 20% 3.84

Question: 61A 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 four lots of production.
How many direct labor hours will be required to manufacture the next 12 units?

A. 1,792
Answer (A) is correct.
With a 90% learning curve, the cumulative production times would be as follows:
Cumulative

Batch Units Average Time Time

1 1-4 800 800

2 5-8 720 (800 × 90%) 1,440

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

3 9-16 648 (720 × 90%) 2,592

Subtracting the 800 hours spent on the first batch from the cumulative time for three batches leaves
1,792 hours for the last three groups of units (12 units).

B. 1,944

C. 2,016

D. 2,160

Question: 62Which one of the following will allow a better use of standard costs and variance analysis to help
improve managerial decision-making?

A. Company A does not differentiate between variable and fixed overhead in calculating its overhead
variances.

B. Company B uses the prior year’s average actual cost as the current year’s standard.

C. Company C investigates only negative variances.

D. Company D constantly revises standards to reflect learning curves.

Answer (D) is correct.
Learning curves are an established phenomenon. Workers learn a new task at a predictable rate and
the resulting improvements in productivity should be factored into standard setting and variance
analysis.

Question: 63Which 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. Regression analysis.

B. Learning curve analysis.

Answer (B) is correct.
Learning curve analysis is used to project productivity gains resulting from the increased rate at
which people perform tasks as they gain experience.

C. Sensitivity analysis.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. Normal probability analysis.

Question: 64A 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. Cost-profit-volume analysis.

B. The Markov process.

C. Linear programming analysis.

D. Learning curve analysis.

Answer (D) is correct.
Learning curve analysis is used to project productivity gains resulting from the increased rate at
which people perform tasks as they gain experience.

Question: 65Which one of the following statements best demonstrates the concept of the learning curve?

A. A learning curve is a linear cost behavior influenced by learning.

B. A learning curve is a judgmental method of estimating costs when learning is present.

C. A learning curve is a percentage by which average time per unit produced decreases as output doubles.
Answer (C) is correct.
A learning curve analysis reflects the increased rate at which people perform tasks as they gain
experience. The curve is usually expressed as a percentage of reduced time to complete a task for
each doubling of cumulative production.

D. A learning curve is a percentage by which average time falls as output increases by 1.

Question: 66A corporation is developing a new product that will be manufactured in pairs. The company
recently produced the first two units of this product using 200 hours of direct labor time. If the corporation has a
90% learning curve and uses the cumulative average-time learning model, the total direct labor time to
manufacture the first four units of this new product is

A. 400 hours.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. 380 hours.

C. 360 hours.
Answer (C) is correct.
With the cumulative average-time learning model, the cumulative average time for production will
be a certain percentage of what it previously was every time production doubled. The first batch has
an average time of 100 hours per unit. Therefore, after four units, the cumulative average time for all
units will be 90 hours per unit, as production has doubled from the first point. As four units have
been made, the cumulative time will be 360 hours.

D. 324 hours.

Question: 67The quantitative technique used to project the direct labor costs for full-scale production of a
product from the initial run of the product is

A. Learning curve analysis.

Answer (A) is correct.
Learning curve analysis reflects the increased rate at which people perform tasks as they gain
experience. It is a quantitative technique used to project the direct labor costs for full-scale
production of a product from the initial run of the project.

B. Linear programming.

C. Monte Carlo simulation.

D. Expected value analysis.

Question: 68A company experiences a cumulative learning curve of 75% on the manufacturing of a particular
electrical product. It takes 100 hours to make the first 500 units. How many hours will it take to make
2,000 units in total?

A. 225.00
Answer (A) is correct.
The effects of the company’s projected learning curve of 75% can be calculated as follows:
Batches Cumulative Units Produced Cumulative Average Batch Time Cumulative Total Time

1 500 100 100 (1 × 100)

2 1,000 75 (100 × 75%) 150 (2 × 75)

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

4 2,000 56.25 (75 × 75%) 225 (4 × 56.25)

It will take 225 hours to produce 2,000 units in total.

B. 231.25

C. 250.00

D. 300.00

Question: 69A distributor of video discs is developing its budgeted cost of goods sold for next year. The
distributor has developed the following range of sales estimates and associated probabilities for the year:
Sales Estimate Probability

$ 60,000 25%

85,000 40

100,000 35
The distributor’s cost of goods sold averages 80% of sales. What is the expected value of the distributor’s
budgeted cost of goods sold?

A. $85,000

B. $84,000

C. $68,000

D. $67,200
Answer (D) is correct.
The expected value is calculated by weighting each sales estimate by the probability of its
occurrence. Consequently, the expected value of sales is $84,000 [($60,000 × .25) + ($85,000 × .40)
+ ($100,000 × .35)]. Cost of goods sold is therefore $67,200 ($84,000 × .80).

Question: 70The expected value of perfect information is the

A. Same as the expected profit under certainty.

B. Sum of the conditional profit (loss) for the best event of each act times the probability of each event
occurring.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

C. Difference between the expected profit under certainty and the expected opportunity loss.

D. Difference between the expected profit under certainty and the expected monetary value of the best act
under uncertainty.
Answer (D) is correct.
Perfect information permits certainty that a future state of nature will occur. The expected value of
perfect information determines the maximum amount a decision maker is willing to pay for
information. It is the difference between the expected value without perfect information, that is, the
expected value of the best action under uncertainty and the expected value under certainty. Under
certainty, a decision maker knows in each case which state of nature will occur and can act
accordingly.

Fact Pattern: The probabilities shown in the table below represent the estimate of sales for a new product.
Sales (Units) Probability
0-200 15%
201-400 45%
401-600 25%
601-800 15%
Question: 71What is the probability of selling between 201 and 600 units of the product?

A. 0%

B. 11.25%

C. 70%
Answer (C) is correct.
The probability of selling between 201 and 400 units is 45%, and the probability of selling between
401 and 600 units is 25%. Hence, the probability of selling between 201 and 600 units is the sum of
these probabilities, or 70%.

D. 25%

Fact Pattern: The probabilities shown in the table below represent the estimate of sales for a new product.
Sales (Units) Probability
0-200 15%
201-400 45%
401-600 25%
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

601-800 15%
Question: 72What is the best estimate of the expected sales of the new product?

A. 480

B. 380
Answer (B) is correct.
The expected sales levels should be weighted by the individual probabilities of their occurrence. The
midpoint of each sales level is used as the estimate for that level. Thus, sales are expected to be 380
units.
100 × 15% = 15

300 × 45% = 135

500 × 25% = 125

700 × 15% = 105

380

C. 400

D. 800

Question: 73In decision making under conditions of uncertainty, expected value refers to the

A. Likely outcome of a proposed action.

B. Present value of alternative actions.

C. Probability of a given outcome from a proposed action.

D. Weighted average of probable outcomes of an action.

Answer (D) is correct.
The expected value of an action is found by multiplying the probability of each possible outcome by
its payoff and summing the products. It represents the long-term average payoff for repeated trials.
In other words, expected value is the weighted average of probable outcomes.

Fact Pattern: 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
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

probability of cold weather on a given day at this time is 60%. Question: 74If the probability of hot weather,
given a hot weather forecast, is 50%, how much would the vendor be willing to pay for the forecast?

A. $600

B. $300
Answer (B) is correct.
If the weather is hot and coffee is served, the vendor earns $1,900. If the vendor knows the weather
will be hot, (s)he would sell soft drinks and make $2,500, a $600 increase. Thus, the vendor should
be willing to pay up to $600 for perfect information regarding hot weather. However, if the forecasts
are only 50% accurate, the information is not perfect. Accordingly, the vendor should be willing to
pay only $300 (the $600 potential increase in profits × 50%) for the sometimes accurate forecasts.

C. $1,000

D. $500

Fact Pattern: Butler and Burnside are projecting market conditions for the upcoming month. They have
prepared the following payoff table:
Demand in Units
0 2 4 6
Probability of Demand
Supply
in Units 0.1 0.3 0.4 0.2
0 $ 0 $ 0 $ 0 $ 0
2 (80) 40 40 40
4 (160) (40) 80 80
6 (240) (120) 0 120
Question: 75Butler and Burnside’s expected profit when supply equals 4 units is

A. $(40)

B. $80

C. $20
Answer (C) is correct.
The approach to the solution is to weight (multiply) the probabilities for each level of demand by the
payoff for that level of demand.
Demand Payoff Probability Weighted Payoffs

0 $(160) × .1 = $(16)

2 (40) × .3 = (12)
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

4 80 × .4 = 32

6 80 × .2 = 16

Expected Profit $ 20

D. $120

Fact Pattern: Butler and Burnside are projecting market conditions for the upcoming month. They have
prepared the following payoff table:
Demand in Units
0 2 4 6
Probability of Demand
Supply
in Units 0.1 0.3 0.4 0.2
0 $ 0 $ 0 $ 0 $ 0
2 (80) 40 40 40
4 (160) (40) 80 80
6 (240) (120) 0 120
Question: 76Butler and Burnside’s expected profit with perfect information is

A. $28

B. $20

C. $(36)

D. $68
Answer (D) is correct.
With perfect information, the seller could order the inventory each day to meet the exact demand.
For example, if demand were zero, supply would be zero and the seller would not lose any money. If
demand were 2 units, the seller would acquire an equal supply and make a profit of $40. The total
profit can be calculated by weighting the payoff from each best option.
Demand Supply Payoff Probability Weighted Payoffs

0 0 $ 0 × .1 =$ 0

2 2 40 × .3 = 12

4 4 80 × .4 = 32

6 6 120 × .2 = 24
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Expected Profit $68

Fact Pattern: Butler and Burnside are projecting market conditions for the upcoming month. They have
prepared the following payoff table:
Demand in Units
0 2 4 6
Probability of Demand
Supply
in Units 0.1 0.3 0.4 0.2
0 $ 0 $ 0 $ 0 $ 0
2 (80) 40 40 40
4 (160) (40) 80 80
6 (240) (120) 0 120
Question: 77The price Butler and Burnside are willing to pay for perfect information is

A. $68

B. $40
Answer (B) is correct.
The maximum amount the seller should pay for perfect information is the difference between the
expected profit with perfect information and the expected profit if demand is not known. With
perfect information, supply is the correct amount of units to maximize profit at each level of
demand. Thus, the expected profit with perfect information is computed as follows:
Demand Supply Payoff Probability Weighted Payoffs

0 0 $ 0 × .1 =$ 0

2 2 40 × .3 = 12

4 4 80 × .4 = 32

6 6 120 × .2 = 24

Expected Profit $68

Without perfect information, the seller should purchase the supply that will result in the maximum
long-run profit. Using the information given, it can be determined that the profit will be $20 when
the supply is 4 units. It is also evident that the profit is zero when the supply is zero. The expected
profit must also be calculated for supply levels of 2 and 6 units. For a supply of 2 units, the expected
profit is
.1(–$80) + .3($40) + .4($40) + .2($40) = $28
For a supply of 6 units, the expected loss is
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

.1(–$240) + .3(–$120) + .4($0) + .2($120) = $(36)

Thus, without perfect information, profits are maximized at $28 when the supply is 2 units.
However, with perfect information, profits will be $68. Thus, a rational seller should therefore be
willing to pay up to $40 ($68 – $28).

C. $48

D. $104

Question: 78A company’s managers are attempting to value a piece of land they own. One potential occurrence
is that the old road bordering the land gets paved. Another possibility is that the road does not get paved. A third
outcome is that the road might be destroyed and completely replaced by a new road. Based on the following
future states of nature, their probabilities, and subsequent values of the land, what is the expected value of the
land?
Future States of Nature (SN) Probability

SN 1: Current road gets paved .5

SN 2: Road does not get paved .4

SN 3: Current road destroyed and

replaced with new road .1

Estimates of land value under each possible future state of nature:
Value if SN 1: $200,000
Value if SN 2: $100,000
Value if SN 3: $550,000

A. $133,333

B. $195,000
Answer (B) is correct.
The expected value of the land is determined by multiplying the probability of each state of nature
by the value under that particular state of nature and adding all of the products. Thus, the land’s
expected value is $195,000 [(0.5)($200,000) + (0.4)($100,000) + (0.1)($550,000)].

C. $225,000

D. $283,333
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 79Under favorable weather conditions, the management of a farm expects its raspberry crop to have
a $120,000 market value. An unprotected crop subject to frost has an expected market value of $80,000. If the
farm protects the raspberries against frost, the market value of the crop is still expected to be $120,000 under
frost-free conditions and $180,000 if a frost occurs. What must be the probability of a frost for the farm to be
indifferent to spending $20,000 for tents to provide frost protection?

A. .167

B. .200
Answer (B) is correct.
Without protection, the company will have sales of either $80,000 or $120,000. With protection, the
company will have sales of either $120,000 or $180,000. The $20,000 cost of tents must be
subtracted from these amounts to compute the net contribution. Thus, the contribution if the berries
are protected will be either $100,000 or $160,000. The problem can be solved algebraically with the
following formula (X = the probability of frost):
X($80,000) + (1 – X)($120,000) = X($160,000) + (1 – X) ($100,000)

$80,000X + $120,000 – $120,000X = $160,000X + $100,000 – $100,000X

$120,000 – $40,000X = $100,000 + $60,000X

$120,000 = $100,000 + $100,000X

$20,000 = $100,000X

X = .200
In other words, if the probability of frost is 20%, management will be indifferent between providing
and not providing protection. At a frost expectancy of greater than 20%, management should provide
protection.

C. .250

D. .333

Question: 80During the past few years, a company has experienced the following average number of power
outages:
Number per Month Number of Months

0 3

1 2

2 4
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

3 3

12

Each power outage results in out-of-pocket costs of $800. For $1,000 per month, the company can lease a
generator to provide power during outages. If the company leases a generator in the coming year, the estimated
savings (or additional expense) for the year will be

A. $(15,200)

B. $(1,267)

C. $3,200
Answer (C) is correct.
Each outage costs $800, but this expense can be avoided by paying $1,000 per month ($12,000 for
the year). The expected-value approach uses the probability distribution derived from past
experience to determine the average expected outages per month.
3 ÷ 12 × 0 = 0.0

2 ÷ 12 × 1 = 0.16667

4 ÷ 12 × 2 = 0.66667

3 ÷ 12 × 3 = 0.75000

1.58334

The company can expect to have, on average, 1.58334 outages per month. At $800 per outage, the
expected cost is $1,266.67. Thus, paying $1,000 to avoid an expense of $1,266.67 saves $266.67 per
month, or $3,200 per year.

D. $7,200

Fact Pattern: The College Honor Society sells hot pretzels at the home football games. The pretzels are sold
for $1.00 each, and the cost per pretzel is $.30. Any unsold pretzels are discarded because they will be stale
before the next home game.
The frequency distribution of the demand for pretzels per game is presented as follows:
Unit Sales Volume Probability
2,000 pretzels .10
3,000 pretzels .15
4,000 pretzels .20
5,000 pretzels .35
6,000 pretzels .20
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 81The estimated demand for pretzels at the next home football game using an expected value
approach is

A. 4,000 pretzels.

B. 4,400 pretzels.
Answer (B) is correct.
The calculation using an expected value approach weights each possible sales volume by its
probability. Thus, the estimated demand is 4,400 pretzels.
Volume Probability Result

2,000 × .10 = 200

3,000 × .15 = 450

4,000 × .20 = 800

5,000 × .35 = 1,750

6,000 × .20 = 1,200

Expected value 4,400

C. 5,000 pretzels.

D. Some amount other than those given.

Fact Pattern: The College Honor Society sells hot pretzels at the home football games. The pretzels are sold
for $1.00 each, and the cost per pretzel is $.30. Any unsold pretzels are discarded because they will be stale
before the next home game.
The frequency distribution of the demand for pretzels per game is presented as follows:
Unit Sales Volume Probability
2,000 pretzels .10
3,000 pretzels .15
4,000 pretzels .20
5,000 pretzels .35
6,000 pretzels .20
Question: 82The estimated demand for pretzels at the next home football game using a deterministic approach
based on the most likely outcome is

A. 4,000 pretzels.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. 4,400 pretzels.

C. 5,000 pretzels.
Answer (C) is correct.
A deterministic approach assumes that a value is known with certainty. If that value is deemed to be
the most likely outcome, assumed demand will be 5,000 pretzels, the volume with the highest
probability (35%).

D. 6,000 pretzels.

Fact Pattern: The College Honor Society sells hot pretzels at the home football games. The pretzels are sold
for $1.00 each, and the cost per pretzel is $.30. Any unsold pretzels are discarded because they will be stale
before the next home game.
The frequency distribution of the demand for pretzels per game is presented as follows:
Unit Sales Volume Probability
2,000 pretzels .10
3,000 pretzels .15
4,000 pretzels .20
5,000 pretzels .35
6,000 pretzels .20
Question: 83The conditional profit per game of having 4,000 pretzels available but only selling 3,000 pretzels
is

A. $1,800
Answer (A) is correct.
Each pretzel costs $.30. Thus, the cost of 4,000 pretzels is $1,200 (4,000 × $.30). Selling 3,000
pretzels at $1 each produces revenue of $3,000. Subtracting the $1,200 of costs from the $3,000 of
revenue results in a conditional profit of $1,800.

B. $2,100

C. $2,800

D. Some amount other than those given.

Fact Pattern: The College Honor Society sells hot pretzels at the home football games. The pretzels are sold
for $1.00 each, and the cost per pretzel is $.30. Any unsold pretzels are discarded because they will be stale
before the next home game.
The frequency distribution of the demand for pretzels per game is presented as follows:
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Unit Sales Volume Probability

2,000 pretzels .10
3,000 pretzels .15
4,000 pretzels .20
5,000 pretzels .35
6,000 pretzels .20
Question: 84The conditional profit per game of having 4,000 pretzels available and selling all 4,000 pretzels is

A. $1,200

B. $2,100

C. $2,800
Answer (C) is correct.
Each pretzel costs $.30. Thus, the cost of 4,000 pretzels is $1,200 (4,000 × $.30). Selling 4,000
pretzels at $1 each produces revenue of $4,000. Subtracting the $1,200 of costs from the $4,000 of
revenue results in a conditional profit of $2,800.

D. $800

Question: 85A company is in the process of preparing its budget. As part of the process, the company has
prepared sales estimates and estimated the probability associated with each sales estimate. Which one of the
following techniques should be used by the company to determine sales for budgeting purposes?

A. Linear programming.

B. Minimax regret criteria.

C. Expected value analysis.

Answer (C) is correct.
The expected value of an action is found by multiplying the probability of each possible outcome by
its payoff and summing the products. It represents the long-term average payoff for repeated trials. If
estimates of sales and probabilities are known, expected value analysis can be used to determine
budgeted sales.

D. Monte Carlo simulation.

Question: 86The expected monetary value of an event

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

A. Is equal to the conditional value or profit of the event.

B. Is equal to the payoff of the event times the probability the event will occur.
Answer (B) is correct.
For decisions involving risk, the concept of expected value provides a rational means for selecting
the best alternative. The expected value of a decision is found by multiplying the probability of each
outcome by its payoff, and summing the products. The result is the long-term average payoff for
repeated trials.

C. Is the profit forgone by not choosing the best alternative.

D. Is the absolute profit from a particular event.

Question: 87Expected value in decision analysis is

A. A standard deviation using the probabilities as weights.

B. An arithmetic mean using the probabilities as weights.

Answer (B) is correct.
Expected value analysis is an estimate of future monetary value based on forecasts and their related
probabilities of occurrence. The expected value is found by multiplying the probability of each
outcome by its payoff and summing the products. Expected value is thus an arithmetic mean using
probabilities as weights.

C. The square root of the squared deviations.

D. A measure of the difference between the best possible outcome and the outcome of the original
decision.

Question: 88The following table contains the profit outcomes for each state of nature and decision combination
for a firm:
States of Nature

S1 S2 S3

Decision 1 $ 24 $14 $ (6)

Decision 2 $ 20 $10 $ 5

Decision 3 $(20) $ 8 $15

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Probabilities 0.10 0.50 0.40

The expected value of perfect information for this firm in this case is

A. $6.40
Answer (A) is correct.
The first step is to determine the expected value without perfect information by formulating a payoff
matrix. For example, the expected payoff for the combination of State of Nature S1 and Decision 1
is $2.40 (10% probability × $24 outcome). The entire payoff matrix is
S1 S2 S3 Total

Decision 1 $ 2.40 $7.00 $(2.40) $7.00

Decision 2 2.00 5.00 2.00 9.00

Decision 3 (2.00) 4.00 6.00 8.00

Thus, the best decision under conditions of uncertainty is Decision 2 (expected value = $9). If the
decision maker knew exactly when each state of nature would occur, the decision would correspond
to the maximum profit opportunity for that state of nature. For instance, if S1 is certain, the most
profitable decision is Decision 1 ($24). Thus, the expected payoff given perfect information is
$15.40.
State of Nature Profit Probability Payoff

1 $24 10% $2.40

2 14 50 7.00

3 15 40 6.00
The expected value of perfect information is therefore $6.40 ($15.40 – $9.00).

B. $8.40

C. $9.00

D. $8.60

Question: 89The expected monetary value of an act is the

A. Sum of the conditional profit (loss) for each event.

B. Sum of the conditional profit (loss) for each event times the probability of each event’s occurrence.
Answer (B) is correct.
Expected value analysis estimates future monetary value based on forecasts and their related
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

probabilities of occurrence. The expected value under uncertainty is found by multiplying the
probability of each outcome (event) by its payoff (conditional profit or loss) and summing the
products.

C. Conditional profit (loss) for the best event times the probability of each event’s occurrence.

D. Revenue minus the costs for the act.

Question: 90In decision theory, those uncontrollable future events that can affect the outcome of a decision are

A. Payoffs.

B. States of nature.
Answer (B) is correct.
Applying decision theory requires the decision maker to develop an exhaustive list of possible future
events. All possible future events that might occur must be included, even though the decision maker
will likely be very unsure as to which specific events will occur. These future uncontrollable events
are referred to as states of nature.

C. Probabilities.

D. Nodes.

Fact Pattern: The Booster Club at Blair College sells hot dogs at home basketball games. The group has a
frequency distribution of the demand for hot dogs per game and plans to apply the expected value decision rule
to determine the number of hot dogs to stock. Question: 91The Booster Club should select the demand level that

A. Is closest to the expected demand.

B. Has the greatest probability of occurring.

C. Has the greatest expected opportunity cost.

D. Has the greatest expected monetary value.

Answer (D) is correct.
The Booster Club should select the demand level that maximizes profits, that is, the level with the
greatest expected monetary value. This level may not include the event with the highest conditional
profit because this profit may be accompanied by a low probability of occurrence. Alternatively, the
event with the highest probability of occurrence may not be selected because it does not offer a high
conditional profit.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Fact Pattern: A company is considering three alternative machines to produce a new product. The cost
structures (unit variable costs plus avoidable fixed costs) for the three machines are shown as follows. The
selling price is unaffected by the machine used.
Single purpose machine $.60x + $20,000

Semiautomatic machine $.40x + $50,000

Automatic machine $.20x + $120,000

The demand for units of the new product is described by the following probability distribution.
Demand Probability

200,000 0.4

300,000 0.3

400,000 0.2

500,000 0.1
Question: 92Ignoring the time value of money, the expected cost of using the semiautomatic machine is

A. $170,000
Answer (A) is correct.
The expected demand is 300,000 units [(.4 × 200,000) + (.3 × 300,000) + (.2 × 400,000) + (.1 ×
500,000)]. Total expected cost is therefore $170,000 [$50,000 fixed cost + ($.40 × 300,000) variable
cost].

B. $130,000

C. $210,000

D. $250,000

Fact Pattern: A company is considering three alternative machines to produce a new product. The cost
structures (unit variable costs plus avoidable fixed costs) for the three machines are shown as follows. The
selling price is unaffected by the machine used.
Single purpose machine $.60x + $20,000

Semiautomatic machine $.40x + $50,000

Automatic machine $.20x + $120,000

The demand for units of the new product is described by the following probability distribution.
Demand Probability
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

200,000 0.4

300,000 0.3

400,000 0.2

500,000 0.1
Question: 93Using the expected value criterion,

A. The single purpose machine should be used because of the low expected demand.

B. The automatic machine should be used because of the high expected demand.

C. The semiautomatic machine should be used because it has the lowest expected cost.
Answer (C) is correct.
The semiautomatic machine has an expected cost of $170,000 based on an expected demand of
300,000 units [(.4 × 200,000) + (.3 × 300,000) + (.2 × 400,000) + (.1 × 500,000)]. The single
purpose machine has an expected cost of $200,000 [($.60 × 300,000) + $20,000]. The automatic
machine has an expected cost of $180,000 [($.20 × 300,000) + $120,000)]. Hence, the
semiautomatic machine has the lowest expected cost at the expected level of demand.

D. The automatic machine has the lowest expected cost.

Fact Pattern: Stan Berry is considering selling peanuts at the Keefer High School football games. The peanuts
would cost $.50 per bag and could be sold for $1.50 per bag. No other costs would be incurred to sell the
peanuts. All unsold bags can be returned to the supplier for $.30 each. Berry estimated the demand for peanuts
at each football game and constructed the payoff table that follows.
Demand Probability Action (Bags to Stock)

(Bags) of Demand 20 30 40 50

20 .2 $20 $18 $16 $14

30 .4 $20 $30 $28 $26

40 .3 $20 $30 $40 $38

50 .1 $20 $30 $40 $50

Question: 94The optimum number of bags of peanuts for Stan Berry to stock is

A. 20

B. 30

C. 40
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Answer (C) is correct.

The expected value without perfect information is found by calculating the expected value of each
potential decision and selecting the highest result. Stan Berry can calculate the expected value of
each of his four possible actions as follows:
Bags Expected

Stocked Value

20 .2($20) + .4($20) + .3($20) + .1($20) = $20.00

30 .2($18) + .4($30) + .3($30) + .1($30) = 27.60

40 .2($16) + .4($28) + .3($40) + .1($40) = 30.40

50 .2($14) + .4($26) + .3($38) + .1($50) = 29.60

The action with the highest expected payoff is to stock 40 bags.

D. 50

Fact Pattern: Stan Berry is considering selling peanuts at the Keefer High School football games. The peanuts
would cost $.50 per bag and could be sold for $1.50 per bag. No other costs would be incurred to sell the
peanuts. All unsold bags can be returned to the supplier for $.30 each. Berry estimated the demand for peanuts
at each football game and constructed the payoff table that follows.
Demand Probability Action (Bags to Stock)

(Bags) of Demand 20 30 40 50

20 .2 $20 $18 $16 $14

30 .4 $20 $30 $28 $26

40 .3 $20 $30 $40 $38

50 .1 $20 $30 $40 $50

Question: 95The maximum that Stan Berry should pay for perfect information so that he could always stock the
correct number of bags of peanuts is

A. $.80

B. $2.60
Answer (B) is correct.
Expected value analysis estimates future monetary value based on forecasts and their related
probabilities of occurrence. The expected value is found by multiplying the probability of each
outcome by its payoff and summing the products. The expected value of perfect information is the
difference between the expected value under certainty and the expected value of the optimal decision
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

under uncertainty. The expected value under certainty equals the sum of the products of the profit
maximizing payoffs of perfect forecasts and the related probabilities.
20% × $20 = $ 4.00

40% × $30 = 12.00

30% × $40 = 12.00

10% × $50 = 5.00

Expected payoff with perfect information $33.00

Thus, with perfect information, the proprietor could achieve an average profit of $33 per game.
Without perfect information, the expected value is only $30.40. Accordingly, up to $2.60 could be
paid for perfect information ($33 – $30.40).

The expected value without perfect information is found by calculating the expected value of each
potential decision and selecting the highest result. Stan Berry can calculate the expected value of
each of his four possible actions as follows:

Bags Expected
Stocked Value
20 .2($20) + .4($20) + .3($20) + .1($20) = $20.00
30 .2($18) + .4($30) + .3($30) + .1($30) = 27.60
40 .2($16) + .4($28) + .3($40) + .1($40) = 30.40
50 .2($14) + .4($26) + .3($38) + .1($50) = 29.60

The action with the highest expected payoff is to stock 40 bags. Therefore, the expected value
without perfect information equals $30.40, and the maximum amount that Stan Berry should pay for
perfect information is $2.60 ($33.00 – 30.40).

C. $10.40

D. $30.00

Question: 96An entity sells sweatshirts and is preparing for a World Cup Soccer match. The cost per sweatshirt
varies with the quantity purchased as follows:
Quantity Unit Cost

4,000 $14.00

5,000 13.50

6,000 13.00
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

7,000 12.50
The entity must purchase the sweatshirts one month before the game and has analyzed the market and estimated
sales levels as follows:
Unit sales 4,000 5,000 6,000 7,000

Probability 15% 20% 35% 30%

The estimated selling price is $25 for sales made before and during game day. Any sweatshirts remaining after
game day can be sold at wholesale to a local discount store for $10.
The expected profit if the entity purchased 6,000 shirts is

A. $64,500
Answer (A) is correct.
An expected value for each level of demand is derived by weighting the profit for that level by the
probability of its occurrence. The cost of goods is the same in every case because 6,000 sweatshirts
are being purchased without certain knowledge of what demand will be. The entity can sell any
sweatshirts remaining after game day at wholesale for $10. So, if demand is 4,000, then the entity
will have 2,000 unsold sweatshirts after game day (6,000 – 4,000). These shirts will be sold for
$20,000 (2,000 shirts × $10). Likewise, if demand is 5,000, then the entity will have 1,000 shirts
leftover (6,000 – 5,000). These will be sold for $10,000 (1,000 shirts × $10). If demand is 6,000 or
7,000, there will be no shirts remaining after game day. The expected profit if the entity purchased
6,000 shirts is calculated as follows:
Demand Level

4,000 5,000 6,000 7,000 Total

Game day revenue at $25 ea. $100,000 $125,000 $150,000 $150,000

Cost of goods (6,000 at $13 ea.) (78,000) (78,000) (78,000) (78,000)

Remainder revenue

(2,000 at $10 ea.) 20,000

(1,000 at $10 ea.) 10,000

(0 at $10 ea.) 0 0

Total profit $ 42,000 $ 57,000 $ 72,000 $ 72,000

Probability × 15% × 20% × 35% × 30%

Expected value $ 6,300 $ 11,400 $ 25,200 $ 21,600 $64,500

B. $66,000
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

C. $69,000

D. $72,000

Fact Pattern: A computer store sells four computer models designated as P104, X104, A104, and S104. The
store manager has made random number assignments to represent customer choices based on past sales data.
The assignments are shown below.
Model Random Numbers
P104 0-1
X104 2-6
A104 7-8
S104 9
Question: 97The probability that a customer will select model P104 is

A. 10%

B. 20%
Answer (B) is correct.
Ten random numbers have been assigned. Of these, two (0 and 1) have been assigned to model
P104. Thus, there are two chances out of ten, or 20%, that a customer will select that model.

C. 50%

D. Some percentage other than those given.

Fact Pattern: A computer store sells four computer models designated as P104, X104, A104, and S104. The
store manager has made random number assignments to represent customer choices based on past sales data.
The assignments are shown below.
Model Random Numbers
P104 0-1
X104 2-6
A104 7-8
S104 9
Question: 98In running a simulation of the computer demand, the following numbers are drawn in sequence: 2,
8, and 6. The simulation indicates that the third customer will purchase.

A. Model P104.

B. Model X104.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Answer (B) is correct.

The third customer is simulated by the third number drawn. Therefore, the third customer’s purchase
is represented by the number 6. The numbers 2 through 6 correspond to model X104. Thus, the third
customer is expected to purchase model X104.

C. Model A104.

D. Model S104.

Question: 99A company is simulating the actions of a government agency in which 50% of the time a recall of
a product is required, 40% of the time only notification of the buyer about a potential defect is required, and
10% of the time no action on its part is required. Random numbers of 1 to 100 are being used. An appropriate
assignment of random numbers for the recall category would be

A. 1-40

B. 40-90

C. 61-100

D. 11-60
Answer (D) is correct.
Given a 50% chance of a recall, 50 different numbers should be assigned to that alternative. The
answer (11-60) is the only alternative with 50 numbers.

Question: 100A software company has developed a new software package. The 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.
Monthly Sales

In Units Probability Income(Loss)

10,000 .2 $(4,000)

20,000 .3 10,000

30,000 .3 30,000

40,000 .2 60,000
If the software company decides to market its new software package, the expected value of additional monthly
income will be
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

A. $23,200
Answer (A) is correct.
Expected value is a means of associating a dollar amount with each of the possible outcomes of a
probability distribution. The outcome yielding the highest expected value (which may or may not be
the most likely one) is the optimal alternative. The expected value of each outcome, and of the
project as a whole, can be determined through the preparation of a payoff table, as follows:
Monthly

Sales Income Expected

In Units Probability (Loss) Value

10,000 .2 × $(4,000) = $ (800)

20,000 .3 × 10,000 = 3,000

30,000 .3 × 30,000 = 9,000

40,000 .2 × 60,000 = 12,000

$23,200

B. $24,000

C. $24,800

D. $25,000

Question: 101According to recent focus sessions, a corporation has a “can’t miss” consumer product on its
hands. Sales forecasts indicate either excellent or good results, with the sales manager assigning a probability of
.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:
Contribution

Margin

If sales are excellent and

Plan 1 is adopted $300,000

Plan 2 is adopted 370,000

If sales are good and
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Plan 1 is adopted 240,000

Plan 2 is adopted 180,000
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 it is $8,000 more attractive than Plan 2.

Answer (B) is correct.
When monetary outcomes and probabilities can be reasonably estimated, a payoff table can be
constructed to determine the best course of action:
Decision State of Contribution Expected

Alternative Nature Margin Probability Value

Plan 1 Excellent $300,000 × 0.4 = $120,000

Good 240,000 × 0.6 = 144,000

$264,000

Plan 2 Excellent $370,000 × 0.4 = $148,000

Good 180,000 × 0.6 = 108,000
$256,000

After weighting the possible monetary outcomes by their respective probabilities, the expected value
of Plan 1 is $8,000 higher than the expected value of Plan 2.

C. Plan 1 should be adopted because of the sales manager’s higher confidence in good results.

D. Either Plan should be adopted, the decision being dependent on the probability of excellent sales
results.

Question: 102An entity 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.
The entity 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.
Percentage Expected

Vendor Price per Switch to Pass the Test

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

P $35 90%

Q 37 94%

R 39 97%

S 40 99%
Which vendor should the controller recommend to management?

A. Vendor P.

B. Vendor Q.

C. Vendor R.

D. Vendor S.
Answer (D) is correct.
The total cost of buying from each vendor consists of two components: purchase price and cost of
scrapping.

The total number of units to purchase is calculated as follows:

Annual

Quantity Failure Total

Vendor Needed Rate Needed

P 100,000 ÷ 90% = 111,111.111

Q 100,000 ÷ 94% = 106,382.979

R 100,000 ÷ 97% = 103,092.784

S 100,000 ÷ 99% = 101,010.101

Total purchase price is calculated as follows:
Annual

Quantity Unit Purchase

Vendor Purchased Price Price

P 111,111.111 × $35 = $3,888,889

Q 106,382.979 × 37 = 3,936,170
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

R 103,092.784 × 39 = 4,020,619

S 101,010.101 × 40 = 4,040,404
The cost of scrapping is determined as follows:
Quantity Unit Total Cost

Vendor Unusable Price of Scrapping

P 11,111 × $25 = $277,778

Q 6,383 × 25 = 159,574

R 3,093 × 25 = 77,320

S 1,010 × 25 = 25,253
These costs are combined to arrive at the total cost for each vendor:
Purchase Total Cost Total
Vendor Price of Scrapping Cost

P $3,888,889 + $277,778 = $4,166,667

Q 3,936,170 + 159,574 = 4,095,745
R 4,020,619 + 77,320 = 4,097,938
S 4,040,404 + 25,253 = 4,065,657
Vendor S has the lowest total cost.

Question: 103A controller has decided to use a decision model to cope with uncertainty. With a particular
proposal, currently under consideration, the controller has two possible actions, invest or not invest in a joint
venture with an international firm. The controller has determined the following:
Action: Invest in the Joint Venture
Events and Probabilities:

Probability of success = 60%

Cost of investment = $9.5 million

Cash flow if investment is successful = $15.0 million

Cash flow if investment is unsuccessful = $2.0 million

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Additional costs to be paid = $0

Costs incurred up to this point = $650,000

Action: Do Not Invest in the Joint Venture

Events:

Costs incurred up to this point = $650,000

Additional costs to be paid = $100,000

Which one of the following alternatives correctly reflects the respective expected values of investing versus not
investing?

A. $300,000 and $(750,000).

B. $(350,000) and $(100,000).

C. $300,000 and $(100,000).

Answer (C) is correct.
When monetary outcomes and probabilities can be reasonably estimated, a payoff table can be
constructed to determine the best course of action:
Decision State of Expected

Alternative Nature Cash Inflow Probability Value

Invest Success $15,000,000 × 0.6 = $ 9,000,000

No success 2,000,000 × 0.4 = 800,000

Cost of investment (9,500,000)

Additional costs 0

Net expected value $ 300,000

Do Not Invest Success $ 0× 0.6 = $ 0

No success 0× 0.4 = 0
Cost of investment 0
Additional costs (100,000)
Net expected value $ (100,000)

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

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 104A company has three possible investment opportunities. The controller calculated the payoffs and
probabilities as follows:
Probabilities

Payoffs Investment A Investment B Investment C

$(20,000) .3 .2 .3

(10,000) .1 .2 .1

30,000 .3 .2 .2

70,000 .2 .2 .3

100,000 .1 .2 .1
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. A, B, C.

B. B, A, C.

C. C, A, B.

D. B, C, A.
Answer (D) is correct.
When monetary outcomes and probabilities can be reasonably estimated, a payoff table can be
constructed to determine the best course of action:
Investment A Investment B

Expected Expected

Payoffs Probability Value Payoffs Probability Value

$(20,000) 0.3 $ (6,000) $(20,000) 0.2 $ (4,000)

(10,000) 0.1 (1,000) (10,000) 0.2 (2,000)

30,000 0.3 9,000 30,000 0.2 6,000

70,000 0.2 14,000 70,000 0.2 14,000

100,000 0.1 10,000 100,000 0.2 20,000

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Total $26,000 Total $34,000

Investment C

Expected

Payoffs Probability Value

$(20,000) 0.3 $ (6,000)

(10,000) 0.1 (1,000)

30,000 0.2 6,000

70,000 0.3 21,000

100,000 0.1 10,000

Total $30,000

Question: 105The sales manager 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:
Sales Increase

(Units) Probability

15,000 .10

30,000 .35

45,000 .10

60,000 .25

75,000 .20
The company sells the dolls at $5.20 each. The cost of each doll is $3.20. The expected incremental profit, if the
advertising campaign is adopted, is

A. $6,500

B. $46,500

C. $53,000
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Answer (C) is correct.

When monetary outcomes and probabilities can be reasonably estimated, a payoff table can be
constructed to determine the best course of action [incremental profit on each doll sold is $2.00
($5.20 – $3.20)]:
Unit Expected

Sales Unit Incr. Expected

Increase Probability Increase Profit Profit

15,000 × 0.10 = 1,500 × $2 = $ 3,000

30,000 × 0.35 = 10,500 × $2 = 21,000

45,000 × 0.10 = 4,500 × $2 = 9,000

60,000 × 0.25 = 15,000 × $2 = 30,000

75,000 × 0.20 = 15,000 × $2 = 30,000

Expected gross profit $93,000

Cost of advertising (40,000)

Expected net profit $53,000

D. $93,000

Question: 106Stock X has the following probability distribution of expected future returns:
Expected

Probability Return

.1 –20%

.2 5%

.4 15%

.2 20%

.1 30%
The expected rate of return on Stock X is

A. 10%
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. 12%
Answer (B) is correct.
Expected value computation can be applied to rates of return as well as to dollar amounts.
Weighted

Expected Expected

Probability Return Return

0.1 –20% –2%

0.2 5% 1%

0.4 15% 6%

0.2 20% 4%

0.1 30% 3%

12%

C. 16%

D. 19%

Question: 107Which one of the following four probability distributions provides the highest expected monetary
value?
Alternative #1 Alternative #2

Cash Cash

Prob Inflows Prob Inflows

10% $ 50,000 10% $ 50,000

20% 75,000 20% 75,000

40% 100,000 45% 100,000

30% 150,000 25% 150,000

Alternative #3 Alternative #4
Cash Cash
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Prob Inflows Prob Inflows

10% $ 50,000 10% $150,000
20% 75,000 20% 100,000
40% 100,000 40% 75,000
30% 125,000 30% 50,000

A. Alternative #1.
Answer (A) is correct.
When monetary outcomes and probabilities can be reasonably estimated, a payoff table can be
constructed to determine the best course of action:
Alternative #1 Alternative #2

Expected Expected

Probability Payoffs Value Probability Payoffs Value

10% $ 50,000 $ 5,000 10% $ 50,000 $ 5,000

20% 75,000 15,000 20% 75,000 15,000

40% 100,000 40,000 45% 100,000 45,000

30% 150,000 45,000 25% 150,000 37,500

Total $105,000 Total $102,500

Alternative #3 Alternative #4
Expected Expected
Probability Payoffs Value Probability Payoffs Value
10% $ 50,000 $ 5,000 10% $150,000 $15,000
20% 75,000 15,000 20% 100,000 20,000
40% 100,000 40,000 40% 75,000 30,000
30% 125,000 37,500 30% 50,000 15,000
Total $97,500 Total $80,000

B. Alternative #2.

C. Alternative #3.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. Alternative #4.

Question: 108A company is preparing its budget and, taking into consideration the recent pace of economic
recovery, has developed several sales forecasts and the estimated probability associated with each sales forecast.
To determine the sales forecast to be used for budgeting purposes, which one of the following techniques should
be used?

A. Expected value analysis.

Answer (A) is correct.
Expected value analysis provides a rational means for selecting the best alternative in decisions
involving risk. The expected value of an alternative is found by multiplying the probability of each
outcome by its payoff and summing the products. It represents the long-term average payoff for
repeated trials.

B. Continuous probability simulation.

C. Exponential distribution analysis.

D. Sensitivity analysis.

Fact Pattern: Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for
introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore,
Gleason has conducted a market study at a cost of $26,000, to determine which product will be more profitable.
The results of the study follow.
Sales of Desserts at Sales of Rolls at
$1.80/unit $1.20/unit

Volume Probability Volume Probability

250,000 .30 200,000 .20

300,000 .40 250,000 .50

350,000 .20 300,000 .20

400,000 .10 350,000 .10

The costs associated with the two products have been estimated by Gleason’s cost accounting department and
are as follows:
Dessert Rolls

Ingredients per unit $ .40 $ .25

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Direct labor per unit .35 .30

Variable overhead per unit .40 .20

Production tooling* 48,000 25,000

Advertising 30,000 20,000

*Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed
asset. Question: 109According to Gleason’s market study, the expected value of the sales volume of the
breakfast rolls is

A. 125,000 units.

B. 260,000 units.
Answer (B) is correct.
The expected value is found by multiplying the probability of each possibility by the potential
volumes:
200,000 × .20 = 40,000

250,000 × .50 = 125,000

300,000 × .20 = 60,000

350,000 × .10 = 35,000

Total units 260,000

C. 275,000 units.

D. Some amount other than those given.

Fact Pattern: Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for
introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore,
Gleason has conducted a market study at a cost of $26,000, to determine which product will be more profitable.
The results of the study follow.
Sales of Desserts at Sales of Rolls at
$1.80/unit $1.20/unit

Volume Probability Volume Probability

250,000 .30 200,000 .20

300,000 .40 250,000 .50

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

350,000 .20 300,000 .20

400,000 .10 350,000 .10

The costs associated with the two products have been estimated by Gleason’s cost accounting department and
are as follows:
Dessert Rolls

Ingredients per unit $ .40 $ .25

Direct labor per unit .35 .30

Variable overhead per unit .40 .20

Production tooling* 48,000 25,000

Advertising 30,000 20,000

*Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed
asset. Question: 110Applying a deterministic approach, Gleason’s revenue from sales of frozen desserts would
be

A. $550,000

B. $540,000
Answer (B) is correct.
The word deterministic is used to characterize processes that are not probabilistic. Such an approach
uses the most likely value. In this case, sales of desserts would most likely be 300,000 units. At
$1.80 each, total revenue would be $540,000.

C. $216,000

D. Some amount other than those given.

Fact Pattern: Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls, ready for
introduction. However, plant capacity is limited, and only one product can be introduced at present. Therefore,
Gleason has conducted a market study at a cost of $26,000, to determine which product will be more profitable.
The results of the study follow.
Sales of Desserts at Sales of Rolls at
$1.80/unit $1.20/unit

Volume Probability Volume Probability

250,000 .30 200,000 .20

300,000 .40 250,000 .50

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

350,000 .20 300,000 .20

400,000 .10 350,000 .10

The costs associated with the two products have been estimated by Gleason’s cost accounting department and
are as follows:
Dessert Rolls

Ingredients per unit $ .40 $ .25

Direct labor per unit .35 .30

Variable overhead per unit .40 .20

Production tooling* 48,000 25,000

Advertising 30,000 20,000

*Gleason treats production tooling as a current operating expense rather than capitalizing it as a fixed
asset. Question: 111The expected value of Gleason’s operating profit directly traceable to the sale of frozen
desserts is

A. $198,250

B. $150,250

C. $120,250
Answer (C) is correct.
The expected volume for sales of frozen desserts is 305,000 [(250,000 × .30) + (300,000 × .40) +
(350,000 × .20) + (400,000 × .10)]. At $1.80 each, the total revenue from 305,000 units would be
$549,000. Variable costs would total $1.15 each ($.40 + $.35 + $.40), or $350,750 for 305,000 units.
Fixed costs total $78,000 ($48,000 + $30,000). Thus, operating profit would be $120,250 ($549,000
– $350,750 – $78,000).

D. Some amount other than those given.

Question: 112Ryotel is conducting market research to determine whether or not to launch a new product.
Management believes there is a 60% probability the research will yield favorable results and a 40% probability
the results will be unfavorable. If the results are favorable, there is a 70% probability the product will be
successful; if the results are unfavorable, the probability the product will be unsuccessful is 75%. If the product
is successful, Ryotel anticipates annual profits of $10,000,000, but if the product is unsuccessful, Ryotel will
lose $4,000,000 each year. The expected value of the new product’s annual profit is

A. $3,000,000

B. $3,280,000
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Answer (B) is correct.

There is a 42% chance (60% × 70%) that the results will be favorable and the product will be
successful, and there is an 18% chance (60% × 30%) that the results will be favorable but the
product will be unsuccessful. There is a 10% chance (40% × 25%) that the results will be
unfavorable but the product will be successful, and there is a 30% chance that the results will be
unfavorable and the product will be unsuccessful. Therefore, the total probability of success is 52%
(42% + 10%), and the probability that the product will be unsuccessful is 48% (18% + 30%). The
expected value is then calculated as follows:
52% × $10,000,000 + 48% × –$4,000,000 = $5,200,000 – $1,920,000

= $3,280,000

C. $4,000,000

D. $5,300,000

Question: 113Last year, a corporation’s sales totaled $200 million. In the current year, the corporation believes
there is a 10% chance sales will decrease to $180 million due to the loss of a major customer. The corporation
also estimates there is a 40% probability sales will remain constant, a 30% chance sales will increase to $240
million, and a 20% probability sales will increase to $250 million. The expected value of the corporation’s sales
in millions for the current year is

A. $160

B. $184

C. $202

D. $220
Answer (D) is correct.
The expected value is calculated by multiplying the probability of each outcome by the results of the
outcome, which is done as follows:
Expected value = (10% × 180) + (40% × 200) + (30% × 240) + (20% × 250)
= 18 + 80 + 72 + 50
= $220

Question: 114An entity sells its product for $100 per unit while incurring variable operating costs of $60 per
unit and $25,000,000 of fixed operating costs. The management team believes there is a 20% probability sales
for the upcoming period will be 600,000 units, a 50% probability sales will be 800,000 units, and a 30%
probability sales will be 1,000,000 units. The expected value of the entity’s operating profit for the upcoming
period is
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

A. $32,800,000

B. $8,200,000

C. $7,800,000
Answer (C) is correct.
The expected value of an event is calculated by multiplying the probability of each outcome by its
payoff and summing the products. The expected value of $7,800,000 is calculated as follows:

1. 0.20 [($100 × 600,000) – ($60 × 600,000)] = 4,800,000

2. 0.50 [($100 × 800,000) – ($60 × 800,000)] = 16,000,000
3. 0.30 [($100 × 1,000,000) – ($60 × 1,000,000)] = 12,000,000
4. (4,800,000 + 16,000,000 + 12,000,000) – 25,000,000 fixed cost = 7,800,000

D. $7,000,000

Question: 115A veterinary clinic schedules weekend staff based on the number of animals being boarded. The
clinic has a total of four staff members available to work on weekends. Based on state regulations, the clinic is
required to have one staff member on site for up to 10 animals. Two staff members are required for 11-
23 animals, three staff for 24-36 animals and all four staff members must work if there are 37-45 animals being
boarded. The clinic has experienced the following average number of animals in the past 12 weekends.
Average Number
of Animals Number of Weekends

12 1

20 4

25 3

35 2

40 2
Using expected value analysis, how many staff members should the clinic schedule for each weekend during the
upcoming month?

A. 1

B. 2

C. 3
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Answer (C) is correct.

Using expected value analysis, the average number of animals is weighted based on the probability
of that number of animals occurring in the following month. The expected value for the following
month is 26.42 animals {[(12 animals × 1 weekend) + (20 animals × 4 weekends) + (25 animals ×
3 weekends) + (35 animals × 2 weekends) + (40 animals × 2 weekends)] ÷ 12 total weekends}.
Assuming 26.42 animals, three members of staff should be scheduled for the clinic over the weekend
in the upcoming month.

D. 4

Question: 116An entrepreneur has four booth rental options at the county fair where he plans to sell his new
product for $37.50 per unit with a cost of $12.50. The booth rental options are shown below.
Option 1: $1,000 fixed fee

Option 2: $750 fixed fee + 5% of all revenues generated at the fair

Option 3: 20% of all revenues generated at the fair

Option 4: $200 fixed fee + 16% of all revenues generated at the fair
Assuming there is a 40% probability that 70 units will be sold and a 60% probability that 40 units will be sold,
which option maximizes income?

A. Option 1.

B. Option 2.

C. Option 3.
Answer (C) is correct.
The option with the lowest rental expense will maximize the entrepreneur’s income. Option 3 has the
lowest expected value. The expected value of rental expense is calculated as follows:
Expected value= 40% × [($37.50 × 70 units) × 20%] + 60% × [($37.50 × 40 units) × 20%]

= 40% × $525 + 60% × $300

= $210 + $180

= $390

D. Option 4.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 117A manager is reviewing a potential investment, which has significant uncertainty related to its
ultimate financial outcome. The manager has estimated the following probabilities for the various levels of net
cash flows that may result from the investment.
Likelihood of Outcome Net Cash Flows

10% $(300,000)

20% 0

50% 100,000

20% 600,000
What is the expected value of net cash flows that the manager should use in evaluating the investment?

A. $100,000

B. $137,000

C. $140,000
Answer (C) is correct.
The expected value is calculated by multiplying the probability of each outcome by its payoff and
summing the products. Thus, the expected value of net cash flows is $140,000 (10% × –$300,000 +
20% × $0 + 50% × $100,000 + 20% × $600,000).

D. $400,000

Question: 118A quantitative technique useful in projecting a firm’s sales and profits is

A. Probability distribution theory.

Answer (A) is correct.
Probability distribution theory can be used to project sales. It is a mathematical method for making
decisions about the likelihood of future events (such as sales) in the face of uncertainty. Various
estimates of sales (generated from the sales force) can be weighted with different probabilities.

B. Gantt charting.

C. Learning curves.

D. Queuing theory.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 119A widely used approach that managers use to recognize uncertainty about individual items and to
obtain an immediate financial estimate of the consequences of possible prediction errors is

A. Expected value analysis.

B. Learning curve analysis.

C. Sensitivity analysis.
Answer (C) is correct.
Sensitivity analysis determines how a result varies with changes in a given variable or parameter in a
mathematical decision model. For example, in a present value analysis, a manager might first
calculate the net present value or internal rate of return assuming that a new asset has a 10-year life.
The NPV or IRR can then be recalculated using a 5-year life to determine how sensitive the result is
to the change in the assumption.

D. Regression analysis.

Question: 120Through the use of decision models, managers thoroughly analyze many alternatives and decide
on the best alternative for the company. Often, the actual results achieved from a particular decision are not
what was expected when the decision was made. In addition, an alternative that was not selected would have
actually been the best decision for the company. The appropriate technique to analyze the alternatives by using
expected inputs and altering them before a decision is made is

A. Expected value analysis.

B. Linear programming.

C. Program Evaluation Review Technique (PERT).

D. Sensitivity analysis.
Answer (D) is correct.
Sensitivity modeling can be used to determine the outcome of a variety of decisions. A trial-and-
error method may be adopted, usually in a computer model, to calculate the sensitivity of the
solution (variability of outcomes) to changes in a variable.

Fact Pattern: 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%. Question: 121The expected payoff for selling
coffee is

A. $1,360
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. $2,200

C. $3,900

D. $1,960
Answer (D) is correct.
The expected payoff calculation for coffee is
Expected payoff = Prob. hot (Payoff hot) + Prob. cold (Payoff cold)

= .4($1,900) + .6($2,000)

= $1,960

Fact Pattern: 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%. Question: 122The expected payoff if the vendor
has perfect information is

A. $3,900

B. $2,200
Answer (B) is correct.
The vendor would like to sell coffee on cold days ($2,000) and soft drinks on hot days ($2,500). Hot
days are expected 40% of the time. Hence, the probability is 40% of making $2,500 by selling soft
drinks. The chance of making $2,000 by selling coffee is 60%. The payoff equation is:
Exp. payoff with perf. info. = Prob. hot (Payoff soft drinks) + Prob. cold (Payoff coffee)

= .4($2,500) + .6($2,000)

= $2,200

C. $1,360

D. $1,960

Question: 123The process of evaluating the effect of changes in variables such as sales price or wage rates on
the optimum solution in a linear programming application is called

A. Iterative analysis.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. Regression analysis.

C. Sensitivity analysis.
Answer (C) is correct.
Sensitivity analysis is a process to determine how sensitive the final result (solution) is to changes in
variables. It is often used in capital budgeting decisions to incorporate various levels of risk.

D. Matrix analysis.

Question: 124An analyst has developed an estimate of the earnings per share for her firm for the next year
using the following parameters.
Sales $20 million

Cost of goods sold 70% of sales

General & administrative expenses $300,000

Selling expense $100,000 plus 10% of sales

Debt outstanding $5 million at 8% interest rate

Effective tax rate 35%

Common shares outstanding 2 million

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. 7.0 cents per share.

B. 10.4 cents per share.

C. 13.0 cents per share.

Answer (C) is correct.
Sensitivity analysis reveals how sensitive expected value calculations are to the accuracy of the
initial estimates. Sensitivity analysis is thus useful in determining whether expending additional
resources to obtain better forecasts is justified.
Original 10%

Projection Increase

Sales $20,000,000 $22,000,000

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Cost of goods sold (14,000,000) (15,400,000)

Gross profit $ 6,000,000 $ 6,600,000

Selling expenses (2,100,000) (2,300,000)

G&A expenses (300,000) (300,000)

Operating income $ 3,600,000 $ 4,000,000

Interest expense (400,000) (400,000)

Earnings before taxes $ 3,200,000 $ 3,600,000

Income taxes (1,120,000) (1,260,000)

Net income $ 2,080,000 $ 2,340,000

Earnings per share $ 1.04 $ 1.17

D. 20.0 cents per share.

Question: 125A company operates several retail stores. To support the company’s long-term goals, operating
income should be at least 10% of sales. The company’s abbreviated pro forma income statement for next year is
shown below.
Revenues $7,500,000

Cost of goods sold 3,750,000

Operating fixed costs 3,125,000

Operating income $ 625,000

The best action for the company to take in order to meet its income goal is to

A. Increase the advertising budget by $25,000, which would increase sales units by 5%.
Answer (A) is correct.
If sales units increased by 5%, sales revenue would increase by $375,000. Cost of goods sold would
also increase by 5% (an increase of $187,500). The net increase in operating income is $162,500
($375,000 increase in revenue – $187,500 increase in cost of goods sold – $25,000 increase in
advertising expense). The new sales amount is $7,875,000 ($7,500,000 + $375,000), and the new
operating income is $787,500 ($625,000 + $162,500). Operating income as a percentage of sales
revenue is 10%, which meets the company’s long-term goal.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. Raise the selling price by 2%, which would reduce sales units by 2% but save $50,000 in operating
costs.

C. Require all managers to reduce their budgeted operating fixed costs by 3%.

D. Wait until the end of next year’s first quarter to re-evaluate its situation.

Question: 126Which of the following steps in the strategic management process should be completed first?

A. Translate objectives into goals.

B. Determine actions to achieve goals.

C. Develop performance measures.

D. Create a mission statement.

Answer (D) is correct.
A mission statement is a formal, written document that defines an organization’s ultimate purposes
in society in general terms. After a situational analysis is performed, the entity develops a group of
strategies for achieving the mission.

Question: 127A firm’s statement of broad objectives or mission statement should accomplish all of the
following except

A. Outlining strategies for technological development, market expansion, and product differentiation.
Answer (A) is correct.
The determination of organizational objectives is the first step in the planning process. A mission
statement is a formal, written document that defines the organization’s purpose in society, for
example, to produce and distribute certain goods of high quality in a manner beneficial to the public,
employees, shareholders, and other constituencies. Thus, a mission statement does not announce
specific operating plans. It does not describe strategies for technological development, market
expansion, or product differentiation because these are tasks for operating management.

B. Defining the purpose of the company.

C. Providing an overall guide to those in high-level, decision-making positions.

D. Stating the moral and ethical principles that guide the actions of the firm.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Question: 128Intensity of rivalry among existing firms in an industry increases when

I. Products are relatively undifferentiated

II. Consumer switching costs are low

A. I only.

B. II only.

C. Both I and II.

Answer (C) is correct.
The degree of product differentiation and the costs of switching from one competitor’s product to
another increase the intensity of rivalry and competition in an industry. Less differentiation tends to
heighten competition based on price, with price cutting leading to lower profits. Low costs of
switching products also increase competition.

D. Neither I nor II.

Question: 129Structural considerations affecting the threat of substitutes include all of the following except

A. Relative prices.

B. Brand identity.
Answer (B) is correct.
Substitutes are types of goods and services that serve the same purpose. All products that can replace
a good or service should be considered substitutes. For example, bicycles and cars are substitutes for
public transportation. Structural considerations determine the effect substitutes have on one another.
However, because substitutes are types (not brands) of goods and services that have the same
purposes, brand identity is not a structural consideration affecting the threat of substitutes.

C. Cost of switching to substitutes.

D. Customers’ inclination to use a substitute.

Question: 130A corporation is performing research to determine the feasibility of entering the truck rental
industry. The decision to enter the market is most likely to be deterred if

A. The fixed costs are high in relation to variable costs in the truck rental industry.

B. Buyers view the product as differentiated.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

C. The market is dominated by a small consortium of buyers.

Answer (C) is correct.
When purchasing power is concentrated in a few buyers or when buyers are well organized, their
bargaining power is greater. This effect is reinforced when sellers are in a capital-intensive industry,
such as trucking.

D. Buying firms enjoy large profit margins on their end products.

Question: 131Which industry factor does not contribute to competitive rivalry?

A. Price-cutting, large advertising budgets, and frequent introduction of new products.

B. A firm’s growth must come from winning other firms’ customers.

C. High costs of customers switching suppliers.

Answer (C) is correct.
If it is expensive to switch suppliers, customers will be less motivated to respond to competitor
advances.

D. High fixed costs relative to variable costs.

Question: 132Which condition does not increase the threat of new competitor entry into the industry?

A. Strong brand identity.

Answer (A) is correct.
Strong brand identity decreases the threat that new competitors will enter an industry. New
competitors have difficulty because potential customers are loyal to established firms in the industry.

B. Existing firms do not enjoy the cost advantages of vertical integration.

C. Few proprietary product differences.

D. Low capital requirements.

Question: 133The concurrent action of basic competitive forces as defined by Porter’s model determines the

A. Long-term profitability and the competitive intensity of the industry.

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Answer (A) is correct.

Porter developed a model of the structure of industries and competition. It includes an analysis of the
five competitive forces that determine long-term profitability measured by long-term return on
investment. This analysis results in an evaluation of the attractiveness of an industry.

B. Entrance barriers that potential players must face to get into the industry.

C. Rivalry inside the industry.

D. Nonvalue-adding activities that should be eliminated.

Question: 134Which factor most likely encourages entry into an existing market?

A. Governmental subsidies for new investors.

Answer (A) is correct.
Subsidies for new firms lower entry barriers. Thus, new firms may enter the industry and intensify
competition. Government policy also may affect competition by means of regulations that encourage
or discourage substitutes or affect costs, that govern competitive behavior, or that limit growth.
Government also may be a buyer or supplier.

B. High product differentiation, principally produced by trademarks.

C. Knowledge of the industry, with high investments in development.

D. Low fixed exit costs.

Question: 135Which of the following is a favorable condition for a firm competing in a profitable, expanding
industry?

A. The firm does not have a strong customer base.

B. A few suppliers who can restrict supply.

C. Competitors find it difficult to acquire the firm’s customers.

Answer (C) is correct.
A firm that has successfully differentiated its products through developing a desirable image, better
services, cost leadership, the features of the product, or other means is in a favorable competitive
position. Competitors find it difficult to acquire the firm’s customers, for example, by price cutting.
The reason is that the firm’s products are perceived to have few substitutes, and brand loyalty is
high. Furthermore, barriers to entry are favorable to the firm. These barriers deter competitors from
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

entering the market. Existing firms can increase market share and emphasize cutting costs and
increasing value.

D. The firm has high costs relative to other firms in the industry.

Question: 136Michael E. Porter’s competitive strategies model includes an analysis of the competitive forces
that determine the attractiveness of an industry. These forces include

I. The stage of the industry life cycle

II. Threats of, and barriers to, entry
III. Threat of substitutes
IV. The threat of suppliers’ bargaining power

A. I and II only.

B. I and III only.

C. II, III, and IV only.

Answer (C) is correct.
Michael E. Porter has developed a model of the structure of industries and competition. It includes
an analysis of the five competitive forces that determine long-term profitability measured by long-
term return on investment. This analysis results in an evaluation of the attractiveness of an industry.
The five forces are (1) the degree of rivalry among existing firms; (2) threats of, and barriers to,
entry; (3) the threat of substitute products or services; (4) the threat of buyers’ bargaining power; and
(5) the threat of suppliers’ bargaining power.

D. I, II, III, and IV.

Question: 137Which factor increases the threat of entry into an industry?

A. Economies of scale are significant.

B. Capital requirements are high.

C. An industry leader may retaliate against a new entrant.

D. Exit barriers are low.

Answer (D) is correct.
The most favorable condition for the attractiveness of an industry is the existence of high entry
barriers and low exit barriers. When the threat of new entrants is minimal and exit is not difficult,
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

returns are high, and risk is reduced in the event of poor performance. Low entry barriers keep long-
term profitability low because new firms can enter the industry, increasing competition and lowering
prices and the market shares of existing firms. Exit barriers are reasons for a firm to remain in an
industry despite poor (or negative) profits.

Question: 138A manufacturing company produces plastic utensils for a particular segment at the lowest
possible cost. The company is pursuing a cost

A. Leadership strategy.

B. Focus strategy.
Answer (B) is correct.
Cost focus is the generic strategy that seeks competitive advantage through lower costs but with a
narrow competitive scope (e.g., a regional market or a specialized product line). The reason for a
cost-focus strategy is that the narrower market can be better served because the firm knows it well.

C. Differentiation strategy.

D. Containment strategy.

Question: 139What operations strategy is most likely to be adopted when the product sold by an organization is
a commodity and the market is very large?

A. Flexibility strategy.

B. Quality strategy.

C. Service strategy.

D. Cost strategy.
Answer (D) is correct.
An operations strategy formulates a long-term plan for using entity resources to reach strategic
objectives. A cost strategy is successful when the entity is the low-cost producer. However, the
product (e.g., a commodity) tends to be undifferentiated in these cases, the market is often very
large, and the competition tends to be intense because of the possibility of high-volume sales.

Question: 140During the growth stage of a product’s life cycle,

A. The quality of products is poor.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. New product models and features are introduced.

Answer (B) is correct.
In the growth stage, sales and profits increase rapidly, cost per customer decreases, customers are
early adopters, new competitors enter an expanding market, new product models and features are
introduced, and promotion spending declines or remains stable.

C. There is little difference between competing products.

D. The quality of the products becomes more variable and products are less differentiated.

Question: 141In a product’s life cycle, the first symptom of the decline stage is a decline in the

A. Firm’s inventory levels.

B. Product’s sales.
Answer (B) is correct.
The first symptom of the decline stage of a product’s life cycle triggers such other effects as price
cutting, narrowing of the product line, and reduction in promotion budgets.

C. Product’s production cost.

D. Product’s prices.

Question: 142A company is trying to decide which competitive strategy it should try to implement. Since the
company has recently started producing Halloween products and selling them in its Halloween stores a few
months prior, it is trying to focus on low costs. The company believes that this will give it a competitive
advantage since much of the competition across the nation is selling more expensive Halloween products.
Which competitive strategy should the company most likely try to implement?

A. Cost leadership.
Answer (A) is correct.
Cost leadership seeks a competitive advantage through lower costs that have a broad competitive
scope. Since the company is selling its products at low costs and it has many competitors across the
nation, it has a broad competitive scope.

B. Differentiation.

C. Cost focus.

D. Focused differentiation.
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Question: 143A bowling alley has identified three revenue streams with the following income statements.
Bowling Equipment Rental Food Sales

Revenues $9,000,000 $300,000 $1,200,000

Variable costs 1,100,000 150,000 1,150,000

Direct employee salaries 250,000 40,000 120,000

Common costs 6,400,000 35,000 365,000

Income (loss) $1,250,000 $ 75,000 $ (435,000)

The most important consideration in determining whether to discontinue its food sales is

A. Employee morale.

B. Its interrelationships with other products.

Answer (B) is correct.
The service line food sales could impact the sales of both bowling and equipment rental.
Discontinuing the food sales line might negatively affect the other two service lines, and the bowling
alley should further investigate the matter.

C. The ability to increase food sales.

D. The ease of implementing activity-based costing to better assign costs.

Question: 144A strategic business unit (SBU) has a high relative market share (RMS) and a low market growth
rate (MGR). According to the growth-share matrix for competitive analysis created by the Boston Consulting
Group, such an SBU is considered a

A. Star.

B. Question mark.

C. Cash cow.
Answer (C) is correct.
The annual MGR reflects the maturity and attractiveness of the market and the relative need for cash
to finance expansion. The RMS reflects an SBU’s competitive position in the market segment. A
high RMS signifies that the SBU has a strong competitive position. Cash cows have high RMS and
low MGR. They are strong competitors and cash generators in low-growth markets.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. Dog.

Question: 145In the Boston Consulting Group (BCG) growth-share matrix, which strategic business units are
strong competitors in high growth markets but usually have modest net cash flow?

A. Cash cows.

B. Question marks.

C. Dogs.

D. Stars.
Answer (D) is correct.
A star is a strong competitor in a high growth industry. It is profitable but needs large amounts of
cash for expansion, R&D, and meeting competitors’ attacks.

Question: 146A strategic business unit (SBU) has a low relative market share (RMS) and a high market growth
rate (MGR). According to the portfolio model for competitive analysis (the growth-share matrix) created by the
Boston Consulting Group, the SBU is considered a

A. Star.

B. Question mark.
Answer (B) is correct.
Question marks (low RMS, high MGR) are weak competitors and poor cash generators in high-
growth markets. They need large amounts of cash not only to finance growth and compete in the
market but also to increase RMS. If RMS increases significantly, a question mark may become a
star. If not, it becomes a dog.

C. Cash cow.

D. Dog.

Question: 147According to the growth-share matrix approach developed by the Boston Consulting Group, a
harvest strategy is most likely to be used for SBUs that are

A. Question marks that may become stars.

B. Strong cash cows.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

C. Weak cash cows.

Answer (C) is correct.
Each SBU should have objectives, a strategy should be formulated to achieve those objectives, and a
budget should be allocated. A harvest strategy maximizes short-term net cash inflow. Harvesting
means zero-budgeting R&D, reducing marketing costs, not replacing facilities, etc. This strategy is
used for weak cash cows and possibly question marks and dogs.

D. Dogs that reduce the firm’s profits.

Question: 148According to the Boston Consulting Group’s portfolio model for competitive analysis, the
strategy for a strong cash cow should be

A. Harvest.

B. Divest.

C. Hold.
Answer (C) is correct.
A hold strategy is used for strong cash cows. It is necessary if the business is to continue to generate
large net cash inflows. Harvesting might impair a strong cash cow’s ability to generate long-term
positive net cash inflows.

D. Build.

Question: 149A typical life cycle progression for a successful firm within the Boston Consulting Group’s
growth-share matrix is

A. Star, question mark, cash cow, dog.

B. Question mark, star, cash cow, dog.

Answer (B) is correct.
The progression is from question mark to star, cash cow, and dog. Accordingly, a firm should
consider a SBU’s current status and its probable progression when formulating a strategy.

C. Star, cash cow, question mark, dog.

D. Question mark, cash cow, star, dog.

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Question: 150A company has developed and implemented a wireless charging feature into one of their
flashlights. No other competitor in the marketplace currently offers this feature. In a marketing research study,
the vast majority of consumers indicated that they would pay a premium for this feature. Which one of the
following is the best strategy to bring this product to the market?

A. Porter’s cost strategy.

B. Porter’s focus strategy.

C. Porter’s differentiation strategy.

Answer (C) is correct.
Differentiation is the generic strategy of entities that seek competitive advantage through providing a
unique product. The company uses the focused differentiation strategy by introducing a wireless
charging feature that no other competitor offers in the marketplace.

D. Porter’s segmentation strategy.

Question: 151Products identified in the BCG growth-share matrix as cash cows possess relatively

A. High market share in a low growth market.

Answer (A) is correct.
The growth-share matrix has four quadrants. A cash cow is a business unit that has a large market
share in a mature, slow-growing industry.

B. Low market share in a high growth market.

C. High market share in a high growth market.

D. Low market share in a low growth market.

Question: 152A company is the leading company in the premium bottled water industry. Its growth is mainly
driven by the negative health publicity on carbonated soft drinks and other sweetened beverages. Extensive
inventory and distribution infrastructure is needed to compete in this industry. Its main packaging materials can
be sourced either locally or easily imported from overseas. With its 60% market share, the company is able to
influence prices and competitive activity. The second biggest competitor holds 20% market share, while the
remaining 20% is shared by many small companies. Supermarkets and other grocery retailers are the largest
customer segment, accounting for approximately 45% of sales. The supermarkets and grocery retailers are
driving volume growth and are undergoing consolidation into larger supermarket conglomerates. Using Porter’s
5 Forces, which one of the following statements best reflects the industry environment?

A. Low profitability but can increase due to increasing power of buyers.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. Low profitability due to low threat of substitutes and new entrants.

C. High profitability but can decrease due to increasing power of buyers.

Answer (C) is correct.
The company is able to achieve high profitability in the growing premium bottled water industry.
However, the supermarkets and grocery retailers are undergoing consolidation into larger
supermarket conglomerates, which will result in stronger buyer bargaining power and puts collective
pressure on the company.

D. High profitability due to high power of buyers and sellers.

Question: 153Analyzing a company’s technological capabilities, employee skills, and sales team performance
will provide

A. External factors that identify the company’s strengths and threats.

B. Internal factors that identify the company’s strengths and opportunities.

C. External factors that identify the company’s strengths and weaknesses.

D. Internal factors that identify the company’s strengths and weaknesses.

Answer (D) is correct.
Strengths and weaknesses are usually identified by considering the entity’s capabilities and resources
(its internal environment).

Question: 154Which one of the following describes what an organization wants to accomplish and leads to the
formulation of long-term business objectives?

A. Values.

B. Strategy.

C. Competency.

D. Mission statement.
Answer (D) is correct.
The mission statement summarizes the entity’s reason for existing and provides the framework for
formulating the company’s strategies.
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Question: 155The balanced scorecard provides an action plan for achieving competitive success by focusing
management attention on critical success factors. Which one of the following is not one of the perspectives on
the business into which critical success factors are commonly grouped in the balanced scorecard?

A. Competitor business strategies.

Answer (A) is correct.
A typical balanced scorecard classifies critical success factors and measures into one of four
perspectives on the business: financial, customer satisfaction, internal business processes, and
learning and growth.

B. Financial performance.

C. Internal business processes.

D. Employee innovation and learning.

Question: 156Using the balanced scorecard approach, an organization evaluates managerial performance based
on

A. A single ultimate measure of operating results, such as residual income.

B. Multiple financial and nonfinancial measures.

Answer (B) is correct.
The trend in managerial performance evaluation is the balanced scorecard approach. Multiple
measures of performance permit a determination as to whether a manager is achieving certain
objectives at the expense of others that may be equally or more important. These measures may be
financial or nonfinancial and usually include items in four categories: profitability; customer
satisfaction; innovation; and efficiency, quality, and time.

C. Multiple nonfinancial measures only.

D. Multiple financial measures only.

Question: 157On a balanced scorecard, which of the following would not be an example of a customer
satisfaction measure?

A. Market share.

B. Economic value added.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Answer (B) is correct.

Customer satisfaction measures include market share, retention, response time, delivery
performance, number of defects, and lead time. Economic value added, or EVA, is a profitability
measure.

C. Response time.

D. Customer retention.

Question: 158On a balanced scorecard, which is more of an internal process measure than an external-based
measure?

A. Cycle time.
Answer (A) is correct.
Cycle time is the manufacturing time to complete an order. Thus, cycle time is strictly related to
internal processes. Profitability is a combination of internal and external considerations. Customer
satisfaction and market share are related to how customers perceive a product and how competitors
react.

B. Profitability.

C. Customer satisfaction.

D. Market share.

Question: 159Consider the following categories of performance measures.

I. Profitability measures.
II. Customer-satisfaction measures.
III. Efficiency, quality, and time measures.
IV. Innovation measures.
A cruise line operates on a national scale in a very competitive marketplace. In view of this information, which
measures should the company use in the evaluation of its managers?

A. I only.

B. I and II.

C. II and III.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. I, II, III, and IV.

Answer (D) is correct.
The four categories of performance measures listed embody the four perspectives on the business
contained in the classic balanced scorecard. Any company can benefit from generating performance
measures in all four perspectives.

Question: 160Which one of the following statements about a balanced scorecard is incorrect?

A. It seeks to address the problems associated with traditional financial measures used to assess
performance.

B. The notion of value chain analysis plays a major role in the drawing up of a balanced scorecard.

C. It relies on the perception of the users with regard to service provided.

D. It is directly derived from the scientific management theories.

Answer (D) is correct.
Subjective measures, such as customer satisfaction, are imprecise. A high level of management
judgment and intuition are required to successfully implement a balanced scorecard.

Question: 161Two examples of the learning and innovation measures of a balanced scorecard are

A. Employee promotion rate and number of environmental incidents.

B. Employee training hours and product defect rates.

C. Number of employee suggestions and finished products per day per employee.

D. Employee turnover rate and number of internal process improvements.

Answer (D) is correct.
Learning and growth (innovation) critical success factors may include the development of new
products, promptness of their introduction, human resource development, morale, and the
competence of the work force. Both employee turnover rates and the number of internal process
improvements are appropriate measures.

Question: 162Which one of the following statements best describes the definition of critical success factors?

A. Financial measures that track a company’s competitive performance.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. Financial and nonfinancial aspects of performance that are essential to have a competitive advantage.
Answer (B) is correct.
Critical success factors are specific, measurable financial and nonfinancial elements of a firm’s
performance that are vital to its competitive advantage.

C. The key nonfinancial performance indicators on a balanced scorecard.

D. The aspects of a business that are focused on measuring key costs.

Question: 163A sign of the successful implementation of a balanced scorecard is the presence of cause-and-
effect relationship. An example of this success for a hotel is meeting the target of

A. Decreasing a customer’s check-in time, which causes an increase in the number of implemented
employee suggestions.

B. Increasing employee training hours, which causes employee compensation to increase.

C. Increasing profit, which causes an increase in employee job satisfaction ratings.

D. Receiving more 5-star ratings from customers, which causes an increase in profit.
Answer (D) is correct.
The balanced scorecard is an accounting report that connects the firm’s critical success factors to
measurements of its performance. Key performance indicators are specific, measurable financial and
nonfinancial elements of a firm’s performance that are vital to its competitive advantage. A typical
balanced scorecard has four perspectives: financial, customer satisfaction, internal business
processes, and learning and growth.

Question: 164An example of an item that would fall under the customer perspective on the balanced scorecard
of an airline is

A. Customer complaints will decrease by 10%.

Answer (A) is correct.
The customer perspective defines the value proposition that the organization will use in order to
satisfy customers and generate more sales to the targeted customer segments. The measures that are
selected for the customer perspective should measure customer satisfaction. A decrease in customer
complaints indicates that customer satisfaction is increasing.

B. Customers will have to wait no longer than 15 minutes to check their bags.

C. 90% of the flights will arrive on time.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. Three new in-flight meals will replace existing offerings that are unpopular with customers.

Question: 165Which of the following statements is false with respect to best practices analysis?

A. The balanced scorecard facilitates best practice analysis.

B. Best practice analysis is a way or method of accomplishing a business function or process that is
considered to be superior to all other known methods.

C. Best practices analysis assumes that a lesson learned from one area of a business can be passed on to
another area of the business or between businesses.

D. The concept of benchmarking is incompatible with best practices analysis.

Answer (D) is correct.
Best practice analysis is a method of accomplishing a business function or process that is considered
to be superior to all other known methods. The balanced scorecard facilitates best practice analysis.
A lesson learned from one area of a business can be passed on to another area of the business or
between businesses. The whole concept of benchmarking is aimed at identifying best practices.

Question: 166Which of the following cycles does not have accounting information recorded into the general
ledger reporting system?

A. Expenditure.

B. Production.

C. Planning.
Answer (C) is correct.
Planning is the determination of what is to be done and of how, when, where, and by whom it is to
be done. Plans serve to direct the activities that all organizational members must undertake and
successfully perform to move the organization from where it is to where it wants to be. No
transactions that require recording in the general ledger take place during the planning cycle.

D. Revenue.

Question: 167What is strategic planning?

A. It establishes the general direction of the organization.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Answer (A) is correct.

Strategic planning establishes the general direction of an organization. It embodies the concerns of
senior management and is based specifically on (1) identifying and specifying organizational
objectives; (2) evaluating the organization’s strengths and weaknesses; (3) assessing risk levels;
(4) identifying and forecasting the effect of external (environmental) factors relevant to the
organization; (5) deriving the best strategy for reaching the objectives, given the organization’s
strengths and weaknesses and the relevant future trends; and (6) analyzing and reviewing the capital
budgeting process and capacity planning.

B. It establishes the resources that the plan will require.

C. It establishes the budget for the organization.

D. It consists of decisions to use parts of the organization’s resources in specified ways.

Question: 168A distinction between forecasting and planning

A. Is not valid because they are synonyms.

B. Arises because forecasting covers the short-term and planning does not.

C. Is that forecasts are used in planning.

Answer (C) is correct.
Planning is the determination of what is to be done, and of how, when, where, and by whom it is to
be done. Plans serve to direct the activities that all organizational members must undertake to move
the organization from where it is to where it wants to be. Forecasting is the basis of planning because
it projects the future. A variety of quantitative methods are used in forecasting.

D. Is that forecasting is a management activity whereas planning is a technical activity.

Question: 169Which of the following is an example of an outcome of strategic planning?

A. A formal statement of the organization’s definition of the fundamental truths that guide its actions.

B. A broad statement of concepts that emphasizes the implementation of organizational objectives over
the long term.
Answer (B) is correct.
The strategic plan states the means by which an entity expects to achieve its stated mission.
Achieving the mission is predicated on implementing long-term objectives.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

C. A set of general guides for action that channel thinking and allow a certain amount of discretion in
execution.

D. A document specifying a sequence of steps detailing the exact manner in which a certain activity must
be accomplished.

Question: 170Which one of the following management considerations is usually addressed first in strategic
planning?

A. Outsourcing.

B. Overall objectives of the firm.

Answer (B) is correct.
Strategic planning is the process of setting overall organizational objectives and drafting strategic
plans. Setting ultimate objectives for the firm is a necessary prelude to developing strategies for
achieving those objectives. Plans and budgets are then needed to implement those strategies.

C. Organizational structure.

D. Recent annual budgets.

Question: 171Strategy is a broad term that usually means the selection of overall objectives. Strategic analysis
ordinarily excludes the

A. Trends that will affect the entity’s markets.

B. Target product mix and production schedule to be maintained during the year.
Answer (B) is correct.
Strategic analysis is the process of long-range planning. Such tasks as setting the target product mix
and production schedule for the current year are short-term activities.

C. Forms of organizational structure that would best serve the entity.

D. Best ways to invest in research, design, production, distribution, marketing, and administrative
activities.

Question: 172All of the following are characteristics of the strategic planning process except the

A. Emphasis on long run.

 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

B. Analysis of external economic factors.

C. Review of the attributes and behavior of the organization’s competition.

D. Analysis and review of departmental budgets.

Answer (D) is correct.
Strategic planning is the process of setting the overall organizational objectives and involves the
drafting of strategic plans. Analysis and review of departmental budgets is an aspect of operational
management.

Question: 173Strategic planning, as practiced by most modern organizations, includes all of the
following except

A. Top-level management participation.

B. A long-term focus.

C. Strategies that will help in achieving long-range goals.

D. Analysis of the current month’s actual variances from budget.

Answer (D) is correct.
Strategic planning is the process of setting overall organizational objectives. It is a long-term process
aimed at determining the future course of the organization. Analysis of the current month’s budget
variances is a short-term activity.

Question: 174An organization’s policies and procedures are part of its overall system of internal controls. The
control function performed by policies and procedures is

A. Feedforward control.
Answer (A) is correct.
Feedforward control anticipates and prevents problems. Policies and procedures serve as
feedforward controls because they provide guidance on how an activity should be performed to best
ensure that an objective is achieved.

B. Implementation control.

C. Feedback control.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

D. Application control.

Question: 175The management of an organization has stated that two members of the same family may not be
employed in the same department. Identify the component of organizational planning that is being demonstrated
by management’s action.

A. A strategy.

B. A policy.
Answer (B) is correct.
Top management establishes policies as guides to middle- and lower-management decision making.
Policies are relatively broad guidelines for making routine decisions consistent with overall
objectives. They channel thinking in a certain direction but allow for some managerial discretion.

C. An objective.

D. A mission statement.

Question: 176Formal written policies are normally recommended. However, the presence of certain conditions
in an organization minimizes the need for written policies. One condition that minimizes the need for written
policies is a

A. High division of labor.

B. Strong organizational culture.

Answer (B) is correct.
If the culture is strong, the organization’s key values are intensely held and widely shared.
Substantial training has been expended to achieve this high degree of acceptance, minimizing the
need for formal, written policies.

C. Large span of control.

D. Strict unity of command.

Question: 177During the strategic planning process, which one of the following is an external factor to be
analyzed?

A. Organizational culture.

B. Societal culture.
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

Answer (B) is correct.

During the strategic planning process, an organization should analyze the external environment, such
as social, cultural, economic, and political factors.

C. Employee morale.

D. Organizational structure.

Question: 178A company has a compensation system for its managers based on a management-by-objectives
(MBO) approach. The essential premise of MBO is that

A. Compensation should be based on qualitative factors.

B. Employees should be concerned with routine matters, and managers should attend to exceptions.

C. Employees should participate in setting objectives.

Answer (C) is correct.
The hallmark of MBO is the mutual setting of objectives by the superior and the subordinate as a
basis for performance evaluation.

D. Managers should establish objectives for their employees.

Question: 179MBO managers are most likely to believe that employees

A. Dislike their work.

B. Avoid responsibility whenever possible.

C. Work best when threatened with punishment.

D. Are self-motivated.
Answer (D) is correct.
MBO managers believe that employees are committed to achieving objectives, working hard to
receive the rewards of achievement, and striving for self-actualization. The MBO view is that
employees enjoy work, need little supervision, seek responsibility, and are imaginative problem
solvers.

Question: 180A company has established a strategic initiative to increase operating income by increasing
 GLEIM ONLINE 2017 QUESTIONS WITH ANSWERS – UNIT 8

market share through being the lower-cost provider. Assuming the total market size remains the same, and
based on the information provided below, has the company achieved the stated objectives?
Current Year Next Year
Revenues $325,000 $325,000
Cost of goods sold 152,000 146,000
Gross margin $173,000 $179,000
Operating costs
Marketing 100,000 100,000
Administrative 50,000 50,000
Operating income $ 23,000 $ 29,000
Units sold 1,000 1,000

A. Yes, because the company was able to lower costs and increase operating income.

B. No, because the company did not reduce marketing and administrative costs.

C. Yes, because the statements show a reduced cost of goods sold.

D. No, because it does not appear that the company has increased market share.
Answer (D) is correct.
The company did not meet its goal of increasing operating income by increasing market share
through being the lower-cost provider. This is apparent by observing that the units sold for the
current year equal the units sold for the next year.