Part 4C (Quantitative Methods For Decision Analysis) 354

PART 4C
Quantitative Methods for

Decision Analysis
354 Questions
[1] Source: CMA 0683 5-14
Dick Rixard is a quality control specialist for the Lasser
Company. Lasser makes ball bearings that require close
tolerances. In a recent production run Rixard found that the
bearings had an average diameter of .755 inches with a
standard deviation of .01 inches for a sample of 100
bearings. In his quality control testing he uses a 95%
confidence interval. If the Z score is 1.96, the lower
boundary of the confidence interval for this production run
is
A. .755 inches.
D. Some amount other than those given.

[6] Source: CMA 0685 5-15
(Refers to Fact Pattern #1)
The median value for daily sales for this period is
A. 300.
B. 100.
C. 160.
D. 175.
[7] Source: CMA 0685 5-8
The use of a decision tree is appropriate for decision
making under conditions of
B. .7354 inches.
A. Uncertainty and risk.
C. .7746 inches.
B. Uncertainty and subjective likelihoods.
C. Certainty.
D. Risk.
[2] Source: CMA 0683 5-16

Two firms share customers in the same market. Firm A
sampled its customers' buying habits and found that about
70% of its customers were repeat customers each week,
while 30% went to Firm B. Firm B found that 80% of its
customers remained loyal each week, while 20% switched
to Firm A. If this retention and loss of customers continues
for a long period, the percentage of customers Firm A will
have is
[8] Source: CMA 1286 5-1

Management accountants help develop and maintain
reporting systems that are aligned with organizational
structures and that provide useful information on an
organization's performance. Management decision
processes fall into three categories:
A. Nonrepetitive, nonprogrammed, and nonstrategic.
A. 70%.
B. Repetitive, nonprogrammed, and strategic.
B. 80%.
C. Repetitive, nonprogrammed, and nonstrategic.
C. 60%.
D. Nonrepetitive, nonprogrammed, and strategic.
D. 40%.
[3] Source: CMA 0683 5-17
CLT Company has three sales departments. Department A
processes about 50% of CLT's sales, Department B about
30%, and Department C about 20%. In the past,
Departments A, B, and C had error rates of about 2%,
5%, and 2.5%, respectively. A random audit of the sales
records yields a recording error of sufficient magnitude to
distort the company's results. The probability that
Department A is responsible for this error is
[Fact Pattern #2]

Mulvey Company derived the following cost relationship
from a regression analysis of its monthly manufacturing
overhead cost:
C = $80,000 + $12M
If C = monthly manufacturing overhead cost
M = machine hours
The standard error of the estimate of the regression is
$6,000.
A. .50.
B. .33.
C. .02.
The standard time required to manufacture one six-unit

case of Mulvey's single product is 4 machine hours. Mulvey
applies manufacturing overhead to production on the basis
of machine hours, and its normal annual production is
50,000 cases.
D. .25.
[5] Source: CMA 0685 5-14

The modal value for daily sales for this period is
[9] Source: CMA 1285 5-17

Mulvey's estimated variable manufacturing overhead cost
for a month in which scheduled production is 5,000 cases
would be
A. $80,000.
A. 300.
B. $320,000.
B. 100.
C. $240,000.
C. 160.
D. $360,000.
choices based on past sales data. The assignments are as

follows.
[10] Source: CMA 1285 5-18
Mulvey's predetermined fixed manufacturing overhead rate
would be
A. $1.60 per machine hour.
Model
--------P104
X104
A104
S104
Random Numbers
----------------0-1
2-6
7-8
9
B. $3.20 per machine hour.

C. $4.00 per machine hour.
[15] Source: CMA 0688 5-25

The probability that a customer will select model P104 is
D. $4.80 per machine hour.

A. 10%.
[11] Source: CMA 1285 5-26
A sales supervisor is concerned with what appear to be
unusually high travel expenses of one salesperson. The
measure by which the sales supervisor can best evaluate
the difference between the expenses of one salesperson
and those of other salespersons is the
A. Mode.
B. Median.
C. Coefficient of correlation.
D. Standard deviation.
B. 20%.
C. 50%.
D. Some percentage other than those given.
[16] Source: CMA 0688 5-26
In 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.
[12] Source: CMA 1286 5-7

A t-test is a statistical test used to compare the
C. Model A104.
D. Model S104.
A. Variances of two distributions.

B. Independence of two variables.
C. Correlation of two variables.
D. Means of two distributions.
[13] Source: CMA 0688 5-19
Under conditions of risk, the rational, economic decision
maker will use which one of the following decision criteria?
[17] Source: CMA 1288 5-5

Which one of the following statements does not apply to
decision tree analysis?
A. The sum of the probabilities of the events is less
than one.
B. All of the events are mutually exclusive.
C. All of the events are included in the decision.
A. Maximax.
B. Minimax.
D. The branches emanate from a node from left to

right.
C. Minimum regret.
D. Expected monetary value.
[14] Source: CMA 0688 5-18
A decision maker is operating in an environment in which
all the facts surrounding a decision are known exactly, and
each alternative is associated with only one possible
outcome. The environment is known as
A. Certainty.
[18] Source: CMA 1288 5-14

Ron Bagley is contemplating whether to investigate a labor
efficiency variance in the Assembly Department. It will cost
$6,000 to undertake the investigation and another $18,000
to correct operations if the department is found to be
operating improperly. If the department is operating
improperly and Bagley failed to make the investigation,
operating costs from the various inefficiencies are expected
to amount to $33,000. Bagley would be indifferent
between investigating and not investigating the variance if
the probability of improper operation is
B. Risk.
A. 0.29.
C. Uncertainty.
B. 0.40.
D. Conflict.
C. 0.60.
D. 0.71.
[Fact Pattern #3]

A computer store sells four computer models designated as
P104, X104, A104, and S104. The store manager has
made random number assignments to represent customer
[Fact Pattern #4]

The management at Altron Corporation is evaluating two
new products to undertake during the next 1-year period,

digital clocks and calculators. For each product, the
Marketing Department has estimated the possible net cash
flows and the probability of each cash flow.
Digital Clocks
Calculators
------------------------ ----------------------Probability Cash Flow Probability Cash Flow
----------- --------- ----------- ---------25%
$4,000
10%
$ 0
50
5,000
50
3,000
25
8,000
40
10,000
Since both products have equal expected values of $5,500,
management is still undecided. John Wills, a financial
analyst, has suggested that the calculation of the standard
deviation for each product's cash flows may aid in the
decision. He used the following data.
1/2
n
_
S = X - X) P
e
e
e =1
X = individual cash flows.
e
_
X = expected value of all cash flows.
P = probabilities assigned to each cash flow.
e
[19] Source: CMA 1288 5-25
John Wills is using the standard deviation to assist in the
decision process because he is
A. Measuring the size of the constraints.
B. Determining the frequency of an event.
C. Measuring the dispersion of the probability for
each event.
D. Measuring the range of each event.
product has the lesser risk.

[22] Source: CMA 0689 5-17
A quantitative technique useful in projecting a firm's sales
and profits is
A. Probability distribution theory.
B. Gantt charting.
C. Learning curves.
D. Queuing theory.
[Fact Pattern #5]
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
-----------200,000
300,000
400,000
500,000
Probability
-----------0.4
0.3
0.2
0.1
[23] Source: CMA 0689 5-26

Ignoring the time value of money, the expected cost of
using the semiautomatic machine is
A. $170,000.
B. $130,000.
C. $210,000.
[20] Source: CMA 1288 5-26

The standard deviation of the cash flows of the digital
clocks is
A. $2,250,000.00.
B. $1,500.00.
C. $750.00.
D. $353.55.
[21] Source: CMA 1288 5-27
If the standard deviation for the cash flows of the
calculators is $3,775, the management at Altron would
A. Choose to introduce digital clocks because this
product has the lesser risk.
B. Choose to introduce calculators because this
product has a 40% probability for the highest cash
flow.
D. $250,000.
[24] Source: CMA 0689 5-27
Using 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.
D. The automatic machine has the lowest expected
cost.
[Fact Pattern #6]
Refer to the profit payoff table below.
C. Not choose either product.

D. Choose to introduce calculators because the
Supply
in Units
Demand in Units
--------------------------------------0
2
4
6
Probability of Demand
--------------------------------------0.1
0.3
0.4
0.2
-------0
2
4
6
----$0
(80)
(160)
(240)
--------$0
$0
40
40
(40)
80
(120)
0
----$0
40
80
120
[25] Source: CMA 0689 5-28

The expected profit when supply equals 4 units, is
A. $(40).
operations.
[Fact Pattern #7]
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.
B. $80.
C. $20.
D. $(10).
[26] Source: CMA 0689 5-29
The expected profit with perfect information is
A. $28.
Unit Sales Volume

Probability
-----------------------------2,000 pretzels
.10
3,000 pretzels
.15
4,000 pretzels
.20
5,000 pretzels
.35
6,000 pretzels
.20
[30] Source: CMA 1289 5-20
The estimated demand for pretzels at the next home
football game using an expected value approach is
B. $20.
A. 4,000 pretzels.
C. $(36).
B. 4,400 pretzels.
D. $68.
C. 5,000 pretzels.
[27] Source: CMA 0689 5-30
The price one is willing to pay for perfect information is
A. $68.
B. $40.

[31] Source: CMA 1289 5-21
The estimated demand for pretzels at the next home
football game using a deterministic approach based on the
most likely outcome is
C. $48.
A. 4,000 pretzels.
D. $104.
B. 4,400 pretzels.
[28] Source: CMA 1289 5-13
Simple regression analysis may be used to approximate the
relationship between two variables, e.g., direct labor hours
and total product cost. This technique is
A. Most appropriate when the relationship between
the two variables is expressed by an exponential
(non-linear) graph.
C. 5,000 pretzels.
D. 6,000 pretzels.
[32] Source: CMA 1289 5-22
The conditional profit per game of having 4,000 pretzels
available but only selling 3,000 pretzels is
B. Based on a two-dimensional model and the

A. $1,800.
formula, y = a + bx.
B. $2,100.
C. Useful in determining variable costs per unit
produced, but is not related to fixed costs.
C. $2,800.
D. Quantitative, but is not expressed graphically.
[29] Source: CMA 1289 5-15

Statistical quality control often involves the use of control
charts whose basic purpose is to
[33] Source: CMA 1289 5-23

The conditional profit per game of having 4,000 pretzels
available and selling all 4,000 pretzels is
A. Determine when accounting control procedures

are not working.
A. $1,200.
B. Control labor costs in production operations.
B. $2,100.
C. Detect performance trends away from normal

operations.
C. $2,800.
D. $800.
D. Monitor internal control applications in EDP
C. Expected value analysis.

[34] Source: CMA 1289 5-24
The conditional profit (loss) per game of having 4,000
pretzels available but being able to sell 5,000 pretzels if
they had been available is
A. $2,800.
D. Monte Carlo simulation.

[38] Source: CMA 0690 5-25
In decision making under conditions of uncertainty,
expected value refers to the
B. $(1,225).
A. Likely outcome of a proposed action.
C. $4,025.
B. Present value of alternative actions.
D. $3,500.
C. Probability of a given outcome from a proposed

action.
[Fact Pattern #8]

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.
Action (Bags to Stock)
---------------------Demand Probability
(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
Expected value
of action
$20.00 $27.60 $30.40 $29.60
[35] Source: CMA 0690 5-17
The optimum number of bags of peanuts to stock is
A. 20.
D. Weighted average of probable outcomes of an

action.
[39] Source: CMA 0692 4-4
The expected monetary value of an event
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.
C. Is the profit forgone by not choosing the best
alternative.
D. Is the absolute profit from a particular event.
[Fact Pattern #9]
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%.
B. 30.
C. 40.
[40] Source: CMA 1292 4-21

The expected payoff for selling coffee is
D. 50.
A. $1,360.
[36] Source: CMA 0690 5-18
The maximum that Stan Berry should pay for perfect
information so that he could always stock the correct
number of bags of peanuts is
B. $2,200.
C. $3,900.
D. $1,960.
A. $.80.
B. $2.60.
C. $10.40.
D. $30.00.
[41] Source: CMA 1292 4-22

The expected payoff if the vendor has perfect information is
A. $3,900.
B. $2,200.
[37] Source: CMA 0690 5-19

Alsen 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 Alsen to determine sales for budgeting
purposes?
A. Linear programming.
B. Minimax regret criteria.
C. $1,360.
D. $1,960.
[42] Source: CMA 1292 4-23
If 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.
C. $1,000.
D. $500.
[47] Source: CMA 1293 4-29

The modeling technique to be employed in a situation
involving a sequence of events with several possible
outcomes associated with each event is
A. Network analysis.
B. Decision tree analysis.
[43] Source: CMA 1292 4-24

Ryerson Company has three sales departments, each
contributing the following percentages of total sales:
clothing, 50%; hardware, 30%; and household sundries,
20%. Each department has had the following average
annual damaged goods rates: clothing, 2%; hardware, 5%;
and household sundries, 2.5%. A random corporate audit
has found a weekly damaged goods rate of sufficient
magnitude to alarm Ryerson's management. The probability
(rounded) that this rate occurred in the clothing department
is
C. Monte Carlo simulation.

D. Linear programming.
[48] Source: CMA 1286 5-2
Decisions are frequently classified as those made under
certainty and those made under uncertainty. Certainty exists
when
A. The probability of the event is less than 1.0.
A. 50%.
B. 1%.
C. 25%.
B. There is absolutely no doubt that an event will

occur.
C. There is more than one outcome for each possible
action.
D. 33 1/3%.
D. The standard deviation of an event is greater than
zero.
[44] Source: CMA 1293 4-23
The Madison Company has decided to introduce a new
product. The company estimates that there is a 30%
probability that the product will contribute $700,000 to
profits, a 30% probability that it will contribute $200,000,
and a 40% probability that the contribution will be a
negative $400,000. The expected contribution of the new
product is
[49] Source: CMA 1286 5-3

Expected value in decision analysis is
A. A standard deviation using the probabilities as
weights.
A. $500,000.
B. An arithmetic mean using the probabilities as

weights.
B. $110,000.
C. The square root of the squared deviations.
C. $270,000.
D. A measure of the difference between the best

possible outcome and the outcome of the original
decision.
D. $430,000.
[45] Source: CMA 1293 4-26
The expected value of perfect information is the
A. Same as the expected profit under certainty.
[50] Source: CMA 1286 5-5

The average amount of change in a dependent variable that
is associated with a change in an independent variable is
determined through
B. Sum of the conditional profit (loss) for the best

event of each act times the probability of each event
occurring.
A. Factor analysis.
C. Difference between the expected profit under

certainty and the expected opportunity loss.
C. Correlation analysis.
B. Normal analysis.
D. Regression analysis.
D. Difference between the expected profit under
certainty and the expected monetary value of the best
act under uncertainty.
[46] Source: CMA 1293 4-28
Regression analysis
A. Estimates the independent cost variable.
[51] Source: CMA 0688 5-2

Thompson Company is in the process of preparing its
budget for the next fiscal year. The company has had
problems controlling costs in prior years and has decided
to adopt a flexible budgeting system this year. Many of its
costs contain both fixed and variable cost components. A
method that can be used to separate costs into fixed and
variable components is
B. Uses probability assumptions to determine total

project costs.
A. Monte Carlo simulation.
C. Estimates the dependent cost variable.
B. Dynamic programming.
D. Ignores the coefficient of determination.
C. Regression analysis.
D. Expected value analysis.
The expected value of perfect information is the

A. Same as the expected profit under certainty.
[52] Source: CMA 0688 5-20

The following table contains the profit outcomes for each
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
Probabilities
0.10
0.50 0.40
The expected value of perfect information for this firm in
this case is
A. $6.40.
B. $8.40.
B. Sum of the conditional profit (loss) for the best

event of each act times the probability of each event's
occurring.
C. Difference between the expected profit under
uncertainty and conditional profit for the best act
under certainty.
D. Difference between the expected profit under
certainty and the expected monetary value of the best
act under uncertainty.
[57] Source: CMA 1291 4-19
The modeling technique to be employed in a situation
involving a sequence of events with several possible
outcomes associated with each event would be
C. $9.00.
A. Network analysis.
D. $8.60.

[53] Source: CMA 1288 5-1

A modeling technique that incorporates the uncertainty
inherent in most decisions is a(n)
A. CPM model.
B. Linear programming model.
C. Decision tree analysis.
D. EOQ model.
[Fact Pattern #10]
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.
D. Queuing theory.
[58] Source: Publisher
Simple linear regression is a method applied when the
underlying relationship between two variables is believed to
be linear. The least squares process estimates this
hypothesized true relationship by minimizing the sum of
squared errors of the observations in a sample about a
fitted line. Which equation properly represents the
underlying true relationship between variables?
A. y = a + x.
B. y = a + bx.
C. y = a + bx + e.
D. y = a + bx + e.
[54] Source: CMA 0691 4-1

The expected monetary value of an act is the
[Fact Pattern #11]

The formula for the regression equation is y = a + bx + e.
A. Sum of the conditional profit (loss) for each event.

B. Sum of the conditional profit (loss) for each event
times the probability of each event's occurrence.
C. Conditional profit (loss) for the best event times
the probability of each event's occurrence.

The dependent variable is
A. a.
B. y.
D. Revenue minus the costs for the act.

C. b.
[55] Source: CMA 0691 4-2
The Booster Club should select the demand level that
A. Is closest to the expected demand.
D. x.
The y-axis intercept is
B. Has the greatest probability of occurring.

A. a.
C. Has the greatest expected opportunity cost.
B. b.
D. Has the greatest expected monetary value.
C. x.
[56] Source: CMA 0691 4-3
D. e.
If the error term is normally distributed about zero, then

The slope of the line is
A. y.
A. The parameter estimates of the y-intercept and

slope also have a normal distribution.
B. The estimate of the slope can be tested using a
t-test.
B. b.
C. x.
C. The probability that the error term is greater than

zero is equal to the probability that it is less than zero
for any observation.
D. e.
D. All of the answers are correct.
The independent variable is
A. a.
[67] Source: CIA 0589 III-21

When a decision maker is faced with a decision and the
probabilities of various outcomes are known, the situation
is said to be decision making
B. y.
A. Under risk.
C. b.
B. Under uncertainty.
D. x.
C. Under certainty.
D. Through satisficing.

The error term is
A. a.
B. y.
C. b.
D. e.
The confidence interval for the value of y in the simple
linear regression equation represents
A. A range of values constructed from the regression
equation results for a specified level of probability.

A company uses two major material inputs in its
production. To prepare its manufacturing operations
budget, the company has to project the cost changes of
these material inputs. The cost changes are independent of
one another. The purchasing department provides the
following probabilities associated with projected cost
changes:
Cost Change
Material 1 Material 2
--------------------- ---------3% increase
.3
.5
5% increase
.5
.4
10% increase
.2
.1
The probability of a 3% increase in the cost of both
Material 1 and Material 2 is
A. 15%
B. A variability about the least squares line that is

uniform for all values of the independent variable in
the sample.
B. 40%
C. The proportion of the variance explained by the

independent variable.
D. 20%
D. A measure of the strength of the linear

relationship.
In a simple linear regression, constant variance means
A. A range of values constructed from the regression
equation results for a specified level of probability.
the sample.
C. 80%

Which of the following is not an attribute of a probability
distribution?
A. The total probability associated with all possible
occurrences equals 1.
B. It can be modeled by means of a formula or graph
that provides the probability for every possible
outcome.
C. Only one outcome is possible.
D. It concerns a random variable.
C. The underlying assumptions of the regression

equation that are not met.
D. That errors in successive observations are not
independent.

Flowcharts and decision trees both show flow or
sequencing. Unlike the flowchart, however, a decision tree
shows
A. Processing.
B. Decision rules.
B. Under conditions of uncertainty, the first task is to

determine the expected value of each of the multiple
outcomes.
C. Input.
D. Outcome probabilities.
[71] Source: CIA 1195 II-14
In a large computer manufacturer, there has been much
concern about the consistency across departments in
adhering to new and unpopular purchasing guidelines. An
auditor has a list that rank-orders all departments according
to the percentage of purchases that are consistent with the
guidelines and indicates which division the department is
from. The auditor performs a t-test for differences in means
on the average rank of departments in divisions A and B to
see if there is any difference in compliance with the policy
and finds that division A (which has more departments) has
a significantly higher (i.e., better) average rank than division
B. Which one of the following conclusions should be drawn
from this analysis?
A. Division A is complying better with the new
policy.
B. A random sample of departments should be
drawn and the analysis recalculated.
C. Under conditions of risk, decisions are solely

based on the decision maker's experience and
intuition.
D. Under conditions of uncertainty, the first task is to
establish subjective probabilities of occurrence for the
multiple outcomes.
The least exact method for separating fixed and variable
costs is
A. The least squares method.
B. Computer simulation.
C. The high-low method.
D. Matrix algebra.
In forecasting purchases of inventory for a firm, all of the
following are useful except
C. A t-test is not valid when the tested groups differ

in size.
A. Knowledge of the behavior of business cycles.
D. A t-test is inappropriate for this data, and another

type of analysis should be used.
B. Internal allocations of costs to different segments

of the firm.
C. Information on the seasonal variations in demand.

In decision theory, those uncontrollable future events that
can affect the outcome of a decision are
A. Payoffs.
B. States of nature.
C. Probabilities.
D. Econometric modeling.
[Fact Pattern #12]
Total production costs of prior periods for a company are
listed. Assume that the same cost behavior patterns can be
extended linearly over the range of 3,000 to 35,000 units
and that the cost driver for each cost is the number of units
produced.
D. Nodes.
[73] Source: CMA 1294 4-30
Sweivel 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
Sweivel use?
Production
in units
per month 3,000
9,000 16,000 35,000
Cost X
$23,700 $ 52,680 $ 86,490 $178,260
Cost Y
47,280 141,840 252,160 551,600
What is the average cost per unit at a production level of
8,000 units for cost X?
A. Expected value analysis.
A. $5.98
B. Continuous probability simulation.
B. $5.85
C. Exponential distribution analysis.
C. $7.90
D. Sensitivity analysis.
D. $4.83

Decision makers are normally confronted with a choice
among feasible choices. Their decisions often have to be
made under conditions of risk or uncertainty, that is, with
less than complete and accurate knowledge of the outcome
for each alternative. Which of the following is correct?
A. Under conditions of risk, there is only one
potential outcome for each alternative.
[Fact Pattern #13]

A simple two-state cost investigation model calls for a
decision to investigate if the following inequality holds:
L(1 - P) > I + C(1 - P)
If: L = excess operating cost if out of control
P = probability that the process is in control
I = cost of investigation
C = cost of correction if out of control
B. .0612
[78] Source: CMA 1287 5-21
The value (1 - P) must be
C. .0316
D. .00375
A. The probability that the process is out of control.

B. A measure of the seriousness of the
consequences.
C. The inverse of the probability matrix.

Let denote the true mean calories of all diet sodas
produced by ABC Company. What hypothesis should be
tested to determine whether ABC's claim is valid?
D. The transpose of the probability matrix.

A.
[79] Source: CMA 1287 5-22
The critical probability that the process is in control is
Ho: = 1
Ha: is not equal to 1
B.
A. I/(L - C) - 1.
Ho: 1
Ha: > 1
B. (I + C)/L.
C.
C. 1 - I/(L - C).
Ho: = 1
Ha: > 1
D. Greater than I/C.

D.
The statistical quality control department prepares a control
chart showing the percentages of defective production.
Simple statistical calculations provide control limits that
indicate whether assignable causes of variation are
explainable on chance grounds. The chart is particularly
valuable in determining whether the quality of materials
received from outside vendors is consistent from month to
month. What is the best term for this chart?
Ho: = 0
Ha: < 1
The appropriate means for testing this hypothesis is
A. A z-statistic.
A. C chart.
B. A t-statistic.
B. P chart.
C. An F-statistic.
C. R chart.
D. A Q-statistic.
D. X-bar chart.
Many firms are beginning to use the statistical processing
control techniques as part of their total quality management
approach. Which of the following would not constitute a
part of statistical processing control techniques?

The value of the t-statistic is
A. -2.45
B. -.05
A. Acceptance sampling.
C. 2.45
B. Dollar-unit sampling.
D. 4.65
C. Quality control charts.
D. Continuous monitoring and feedback.
[Fact Pattern #14]
The ABC Company has specified that the mean number of
calories in a can of its diet soda is 1 or less. A consumer
testing service examined nine cans with the following
amounts of calories: .9, .95, 1.0, 1.05, .85, 1.0, .95, .95,
and .9. The mean of these observations is .95. The sum of
the squared deviations from the mean is .03. Assume the
underlying population is approximately normal.
What is the sample standard deviation?
A. .0577

The appropriate number of degrees of freedom for this
t-statistic is
A. 8
B. 9
C. 0
D. 1
The following data are from a table of critical values of t:
d.f. t.10 t.05 t.025

---- ----- ----- ----5 1.476 2.015 2.571
6 1.440 1.943 2.447
7 1.415 1.895 2.365
8 1.397 1.860 2.306
9 1.383 1.833 2.262
The value of t defining the rejection region for testing the
hypothesis that ABC's soda has 1 calorie or less per can,
assuming a 95% confidence level, is
frost has an expected market value of $80,000. If Flesher

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 Flesher to be indifferent to
spending $20,000 for tents to provide frost protection?
A. .167
B. .200
C. .250
A. 2.306
D. .333
B. 1.86
C. 1.833
D. 2.262
What conclusion can be drawn with 95% confidence?
A. The manufacturer's claim can be rejected.
B. The manufacturer's claim cannot be rejected.
C. No decision is possible based on current
information.
D. All sodas have at most 1 calorie.
[89] Source: CMA 0697 4-22
Philip Enterprises, distributor of compact disks (CDs), is
developing its budgeted cost of goods sold for 1998. Philip
has developed the following range of sales estimates and
associated probabilities for the year:

During the past few years, Wilder Company has
experienced the following average number of power
outages:
Number per month
Number of Months
------------------------------0
3
1
2
2
4
3
3
-12
==
Each power outage results in out-of-pocket costs of $800.
For $1,000 per month, Wilder can lease a generator to
provide power during outages. If Wilder 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
Sales Estimate Probability

-------------- ------------$ 60,000
25%
85,000
40
100,000
35
Philip's cost of goods sold averages 80% of sales. What is
the expected value of Philip's 1998 budgeted cost of goods
sold?
A. $85,000
B. $84,000
C. $68,000
D. $67,200
[90] Source: CMA 0697 4-24
The modeling technique to be used for situations involving a
sequence of events with several possible outcomes
associated with each event is
D. $7,200
[Fact Pattern #15]
The probabilities shown in the table below represent the
estimate of sales for a new product.
Sales (Units)
-----------0-200
201-400
401-600
601-800
Probability
----------15%
45%
25%
15%

What is the probability of selling between 201 and 600
units of the product?
A. 0%
B. 11.25%
A. Queuing theory.
C. 70%
D. 25%
C. The critical path method.
D. Decision tree analysis.
Under favorable weather conditions, the management of
Flesher Farms expects its raspberry crop to have a
$120,000 market value. An unprotected crop subject to

What is the best estimate of the expected sales of the new
product?
A. 480
B. 380
D. Fail to prove the error rate is above 0.5%.
C. 400
D. 800
[Fact Pattern #16]
The table below shows the estimated probabilities of the
proportions of defective units resulting from a production
run. Each defective unit costs the company $100, and each
production run consists of 100 units.
Percentage Defective Probability
-------------------- ----------1%
20%
2%
20%
3%
30%
4%
20%
5%
10%
The expected percentage of defective units is
A. 2.80%
B. 3.00%
C. 0.90%
D. 3.45%
The variance of the percentage of defective units is
[Fact Pattern #17]

Brown Maintenance Services has been performing
technical maintenance service on a wide variety of business
machines for small businesses in a large metropolitan area
for many years. Brown has been considering a change in its
fee structure. The analysis requires a probability distribution
for each week for the number of anticipated service calls
related to each of several different types of equipment.
Phil Brown suggested establishing the distribution using the
relative frequency of various numbers of weekly service
calls over the last 4 years. The following tabulation was
prepared:
Number of Calls
Number of Occurrences
----------------------------------801-850
4
851-900
10
901-950
80
951-1,000
40
1,001-1,050
20
1,051-1,100
12
1,101-1,150
12
1,151-1,200
10
1,201-1,250
8
1,251-1,300
4
Based on this probability distribution, the probability of
more than 1,150 calls for service during a given week is
A. .06
B. .89
A. 0.00%
C. .17
B. 3.16%
D. .11
C. 10.20%
D. 1.56%
The company hires a worker to oversee the machinery and
assure that no defective units are produced. What is the
breakeven amount per production run to be paid to the
worker?
A. $100

Billy Brown disagreed with his brother, arguing that the
number and size of the companies with which they held
maintenance contracts had changed recently. He concluded
that this past experience was not relevant, and the firm
would be better off recognizing their ignorance of the future
in the rate restructuring. Billy proposed the assumption of a
uniform distribution with every possible number of calls
from 801 to 1,300 being equally likely. Based on this
uniform distribution, the probability of more than 1,150
calls during a week is
B. $200
A. .40
C. $280
B. .30
D. $295
C. .70
D. .20

An audit of accounts payable was made to determine if the
error rate was within the stated policy of 0.5%. One
hundred of the 10,000 accounts payable transactions were
randomly selected using a 95% confidence level. No errors
were found. With 95% certainty, one can conclude that the
sample results

Two projects are going to be implemented. The probability
for positive cash flows in each one is 1/2, and the
probability for negative cash flows in each one is 1/2. What
is the probability that at least one of the projects will have
positive cash flows?
A. Indicate another sample is needed.

A. 0.5
B. Prove there are no errors in accounts payable.
B. 0.67
C. Indicate the null hypothesis is false.
C. 0.75
D. $366.67
D. 0.95
Pongo Company's managers are attempting to value a
piece of land that they own. One potential occurrence is
that the old road that borders 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
C. $225,000
D. $283,333
[Fact Pattern #18]

Stock A has the following possibilities for earnings in the
2000 year:
Earnings Probability
---------- ----------$1,000,000
18%
$1,200,000
15%
$1,700,000
24%
$2,600,000
22%
$3,300,000
21%
What are the expected earnings for Stock A in 2001?
A. $843,000
B. $1,333,333
C. $1,960,000
D. $2,033,000
What is the variance of potential earnings of Stock A?
A. $854,758
B. $223,111,000,000

Bobby, a market analyst for Investing Magazine, is
analyzing the stock of Vandelay Industries. Bobby decides
to use the market data for the year to date to approximate
the standard deviation on monthly returns for Vandelay.
Given the following, what should Bobby estimate the
standard deviation to be?
Month
Return
-------- --------January
10%
February
2%
March
19%
April
25%
May
13%
June
9%
A. 4.79
B. 8.07
C. 14.53
D. 22.91
SuperTrucks Corporation is undertaking a new division of
transport truck production for the upcoming calendar year.
In the division's first year, management for SuperTrucks
has predicted that there is a 20% chance that cash inflows
from the new division will be $8,000, a 30% chance that
cash inflows will be $12,000, and a 50% chance that cash
inflows will be $10,000. What is the standard deviation of
the expected cash flows for SuperTrucks Corporation's
new division?
C. $576,272,000,000
D. $730,611,000,000
[107] Source: CMA Samp Q1-3
A U.S. company currently has domestic operations only. It
is considering an equal-size investment in either Canada or
Britain. The data on expected rate of return and the risk
associated with each of these proposed investments are
given below.
Mean
Standard
Proposed Investment Return Deviation
------------------- ------ --------British Investment
22%
10%
Canadian Investment
28%
15%
The mean return on the company's current (domestic only)
business is 20%, with a standard deviation of 15%. Using
the above data and the correlation coefficients, the
company calculated the following portfolio risk and return
(based on a ratio of 50% U.S. domestic operations and
50% international operations).
Mean
Standard
Investments
Return Deviation
---------------- ------ --------U.S. and Britain
21%
3%
U.S. and Canada
24%
15%
The company plans to select the optimal combination of
countries based on risk and return for the domestic and
international investments taken together. Based on the
above data, which one of the following alternatives
provides the best risk adjusted return to the firm?
A. $2,720.00
A. Undertake the British investment.
B. $1,400.00
B. Undertake the Canadian investment.
C. $767.00
C. Do not undertake either investment.
D. Unable to determine based on data given.

An enterprise intends to insure its building against 100% of
any fire loss, that is, for an amount equal to the full fair
value of $2,000,000. The following is the probability
distribution of potential property losses from fire for the
year that the insurance policy will be effective:
Amount of Loss With
Probability (Without) an Alarm System
----------- ------------------------90%
$
0
5%
100,000(50,000)
3%
1,000,000(500,000)
.2%
2,000,000(1,000,000)
The enterprise estimates that an alarm system will reduce
the amount of fire loss by 50%. Furthermore, the
installation of an alarm system will reduce the annual fire
insurance premium by 24%. The annual premium without
an alarm system is $50,000, and the annual cost of such a
system is $2,000. Which course of action should the
enterprise adopt to minimize its costs?
Insure the Building Install the Alarm System
------------------- -----------------------A.
Yes
Yes
Yes
No
B.
C.
[111] Source: CMA 1280 5-15

A car rental agency has a policy of replacing the tires on its
car fleet as the tires wear out. Management wonders if
there would be any cost savings if the tires are periodically
replaced at one time on its fleet of 500 cars. The technique
the car rental agency would find most useful is
A. Statistical sampling.
B. Probability analysis.
C. Linear programming.
D. Learning curve techniques.
[Fact Pattern #19]
Redler Company manufactures and sells an industrial
strength cleaning fluid. The equations presented as follows
represent the revenue (R) and cost (C) functions for the
company where x is equal to 1,000 gallons of fluid.
2
R(x) = - $100 + $26x - $0.05x
2
C(x) = $50 + $8x + $0.01x
[112] Source: CMA 0681 5-10
The function that represents the marginal cost to
manufacture 1 gallon of cleaning fluid is
A. $8x + $0.01x .
No
Yes
No
No
B. $8 + $0.01x.
D.
C. $8 + $0.02x.
D. $8 $0.02x.
(Refer to Figure 6.) A health insurance company uses a
computer application to monitor physician bill amounts for
various surgical procedures. This program allows the
company to better control reimbursement rates. The X-bar
chart is an example of the output from this application.
Select the interpretation that best explains the data plotted
on the chart.
[113] Source: CMA 0681 5-11

The quantity of cleaning fluid that should be produced to
maximize revenue is
A. 520,000 gallons.
B. 260,000 gallons.
A. Random variation.
C. 160,000 gallons.
B. Abnormal variation.
D. 150,000 gallons.
C. Normal variation.
D. Cyclic variation.
[110] Source: CMA 1280 5-13
A manufacturing company allocates the cost of its service
departments to the producing departments. The service
departments provide services to each other as well as to
the producing departments. The allocation technique that
will charge each service department with the cost of the
service received from other service departments as well as
charge the producing departments for the total incurred
costs of all service departments is
[114] Source: CMA 0681 5-12

The quantity of cleaning fluid that should be produced to
maximize profit is
A. 520,000 gallons.
B. 260,000 gallons.
C. 160,000 gallons.
D. 150,000 gallons.
A. Matrix algebra.
B. Boolean algebra.
C. Simulation techniques.
D. Dynamic programming.
[115] Source: CMA 0681 5-13

What would the profit (loss) be if the company
manufactured and sold 300,000 gallons of cleaning fluid?
A. $3,200,000.
B. $(50,000).
C. $(3,350,000).
D. $(150,000).
[116] Source: CMA 0683 5-5
The personnel manager has just completed a survey on
employee attitudes, working conditions, and productivity.
He would like to analyze data subject to the constraints of
his company (i.e., salary structure, capital equipment, etc.).
The stated objectives of this company are to (1) maximize
profits, (2) maximize safety, and (3) promote positive
employee attitudes. The decision analysis technique that
could accomplish this analysis is
t
b
t
R
m
t
= financial investments held at time period t.

= interest rate.
= stock of money held at time period t.
[120] Source: CMA 1287 5-23

If
Pc - Py > b
t t t-1
(R), then
A. Saving would occur.

B. Earned income would exceed interest income.
C.
B. Statistical analysis.
C. Goal programming.
m would be negative.
t
D. Investments and/or stock of money would decline.
[117] Source: CMA 1283 5-20
One limitation of the linear programming technique is that it
is effective only for
A. Two-product situations.
[121] Source: CMA 1287 5-24

If b > b (1 + R), then
t t-1
A. Earned income must exceed consumption
spending.
B. Manufacturing resource constraint situations.

B. Interest rates must be very high.
C. Straight-line relationship situations.
C. Net investment took place.
D. Income maximization situations.
D. Net disinvestment took place.
[118] Source: CMA 1286 5-27
In order to solve a linear programming problem, slack,
surplus, and artificial variables must be employed. A slack
variable represents
A. Opportunity costs.
[122] Source: CMA 1287 5-25

If a household's need to hold money declines, then
A.
B. Unused capacity.
b >b
t t-1
C. Outside variables with high cost.

B.
D. The variable with the most negative value.
m < m
t t-1
[119] Source: CMA 1286 5-28
The procedure employed to solve linear programming
problems is
A. Differential calculus.
B. Integral calculus.
C.
Pc < Py
t t
D. Negative saving occurs.
C. Simulation.
D. Matrix algebra.
[Fact Pattern #20]
The equality between a household's total sources and uses
of funds can be represented in the form of the budget
constraint model presented as follows.
Py + b (1 + R) + m = Pc + b + m
t t-1
t-1
t t t
If
Py = earned income during time period t.
t
Pc = consumption spending during time period t.
[Fact Pattern #21]

Merlin Company has excess capacity on two machines, 24
hours on Machine 105 and 16 hours on Machine 107. To
utilize this excess capacity, the company has two products,
known as Product D and Product F, that must use both
machines in manufacturing. Both have excess product
demand, and the company can sell as many units as it can
manufacture. The company's objective is to maximize
profits.
Product D has an incremental profit of $6 per unit, and
each unit utilizes 2 hours of time on Machine 105 and then
2 hours of time on Machine 107. Product F has an
incremental profit of $7 per unit, and each unit utilizes 3
hours of time on Machine 105 and then 1 hour of time on
Machine 107. Let D be the number of units for Product D,

F be the number of units for Product F, and P be the
company's profit.
[123] Source: CMA 1288 5-8
The objective function for Merlin Company is
A. P = $6(4D) + $7(4F).
C. Develop the technological matrix.

D. Determine how the optimal solution would react to
changes in parameters.
[Fact Pattern #22]
Harrington Corporation produces three products: anchor
bolts, bearings, and casters.
B. P = (2D + 3F 24) + (2D + F 16).

C. P = $6(2D + 3F 24) + $7(2D + F 16).
D. P = $6D + $7F.
[124] Source: CMA 1288 5-9
The optimum number of units for Product D can be solved
by calculating
A. 2D + F 16.
B. 2D + 3(16 - 2D) 24.
C. 2(16 - F) + 3F 24.
D. 2D + 3(16 + 2D) 24.
[125] Source: CMA 1288 5-10
The equations 2D + 3F 24, D 0, and F 0 are
There are 150 direct labor hours available. Machine hour

capacity allows 100 anchor bolts, only; 50 bearings, only;
40 casters, only; or any combination of the three that does
not exceed the capacity.
Selling Variable Cost Fixed Cost DL Hours
Price per Unit
per Unit per Unit
------- ------------- ---------- --------Anchor bolts
$4.00
$1.00
$2.00
2
Bearings
3.50
.50
2.00
2
Casters
6.00
2.00
3.00
3
For planning purposes, Harrington uses the following
notation.
A = anchor bolts
B = bearings
C = casters
[129] Source: CMA 0689 5-18
The objective function for a linear program to maximize
contribution from Harrington's three products is
A. Max Z = $3A + $3B + $4C.
A. Objective functions.
B. Max Z = $3A + $2.50B + $5C.
B. Inequalities.
C. Max Z = $4A + $3.50B + $6C.
C. Deterministic functions.
D. Max Z = A + B + C.
D. Constraints.
[126] Source: CMA 1288 5-11
A feasible solution for Merlin Company is
[130] Source: CMA 0689 5-19

The direct labor constraint for Harrington's linear program
is
A. A + B + C 150.
A. D = 2 and F = 8.
B. Min Z = 2A + 2B + 3C.
B. D = 6 and F = 4.
C. Max Z = 2A + 2B + 3C - 150.
C. D = 12 and F = 0.
D. 2A + 2B + 3C 150.
D. D = 8 and F = 3.
[127] Source: CMA 1288 5-4
Variables that are important to the decision-making
process but are out of the control of the decision maker,
e.g., economic conditions, are considered to be
[131] Source: CMA 0689 5-20

The machine hour constraint for Harrington's linear
program is
A. The same as the direct labor constraint.
A. Exogenous variables.
B. A + 2B + 2.5C 100.
B. Decision variables.
C. Indeterminable from the data given.
C. Performance criteria.
D. A + B + C 190.
D. Constraints.
[128] Source: CMA 0689 5-13
Sensitivity analysis in linear programming is used to
[132] Source: CMA 0690 5-29

The best way to allocate scarce resources to attain a
chosen objective such as maximization of operating income
or minimization of operating costs is
A. Determine the degree that the constraints vary.

A. Relevant costing.
B. Test the accuracy of the parameters.
B. Responsibility accounting.
C. Simple regression analysis.
[Fact Pattern #23]
Keego Enterprises manufactures two products, boat wax
and car wax, in two departments, the Mixing Department
and the Packaging Department. The Mixing Department
has 800 hours per month available, and the Packaging
Department has 1,200 hours per month available.
Production of the two products cannot exceed 36,000
pounds. Data on the two products follow:
[136] Source: CMA 1291 4-25

Southern Company packages and sells nuts in cans.
Pecans, cashews, Brazil nuts, hazelnuts, and peanuts are
packaged individually as well as in combinations and
mixtures. Southern wants to package the nuts so that it can
maximize its profits while considering market demand. In
addition, there are limited supplies for some types of nuts.
The technique Southern should employ is
A. Correlation and regression analysis.
B. Discounted cash flow techniques.
C. Transportation algorithms.
Hours per 100 Pounds

Contribution -------------------Margin
Mixing Packaging
(per 100 pounds) (M)
(P)
---------------- ------ --------Boat wax (B)
$200
5.0
3.6
Car wax (C)
150
2.4
6.0
[133] Source: CMA 1290 4-25
The objective function for the linear program Keego would
use to determine the optimal monthly production of each
wax would be
[137] Source: CMA 0692 4-8

The Multi Resource Company manufactures two lines of
washing machines, Regular and Deluxe. The contribution
margin of a Regular model is $110 and a Deluxe model
$175. The company has two departments, assembly and
testing. The Regular model requires 3 hours to assemble,
while a Deluxe model requires 4 hours. The total time
available in assembly is 12,000 hours. In the testing
department, it requires 2.5 hours to test a Regular model
and 1.5 hours to test a Deluxe model. A total of 6,000
hours of testing time is available. To maximize profit, Multi
Resource should manufacture
A. Z = 150B + 200C.
A. 2,400 Regular models.
B. 2B + 1.5C 36,000.
B. 3,000 Deluxe models.
C. 2B + 1.5C 36,000.
C. 1,091 Regular models and 2,182 Deluxe models.
D. Z = 200B + 150C.
D. 4,000 Deluxe models.
[134] Source: CMA 1290 4-26
The mixing constraint for the Keego linear program would
be
A. 2.4M + 6P 36,000.
[138] Source: CMA 1293 4-2

United Industries manufactures three products at its highly
automated factory. The products are all popular with
demand far exceeding the company's ability to supply the
marketplace. To maximize profit, management should focus
on each product's
B. 5B + 2.4C 800.
A. Gross margin.
C. 5B + 2.4C 800.
B. Segment margin.
D. 5B + 2.4C = 800.
C. Contribution margin.
[135] Source: CMA 1291 4-24
A small company makes only two products with the
following production constraints representing two machines
and their maximum availability:
2X + 3Y 18
2X + Y 10
X 0; Y 0
If
D. Contribution margin per machine hour.

[139] Source: CMA 1293 4-30
A transportation model is a special case of the
A. Economic order quantity model.
B. Markov model.
X = the units of the first product.

Y = the units of the second product.
If the profit equation is Z = $4X + $2Y, the maximum
possible profit is
A. $20.
B. $21.
C. $18.
C. Linear programming model.

D. Dynamic programming model.
[140] Source: CMA 1280 5-5
A regional construction company must move materials and
supplies from three warehouses located in three separate
cities to various construction sites. In order to minimize the
cost of transferring the materials and supplies, the method
the company would find most useful is
D. $24.
A. Cost-volume-profit analysis.
B. Transportation algorithms.
C. MAX Z = 12S + 24G.
C. Discounted cash flow techniques.
D. MAX Z = 7S + 15G.
D. PERT/CPM analysis.
[142] Source: CMA 1283 5-17

The constraint function for the direct labor is
[146] Source: CMA 1285 5-10

The algebraic formulation of Belmont's monthly direct labor
constraints is
A. 10S + 15S + 6G + 30G 2,880.
A. 1A + 1.5B 200,000.
B. 1/6S + 1/4S + 1/10G + 1/2G 2,880.
B. 8A + 12B 600,000.
C. 1/6S - 1/10G 960; 1/4S - 1/2G 1,920.
C. 8A + 12B 200,000.
D. 1/6S + 1/10G 960; 1/4S + 1/2G 1,920.
D. 1A + 1.5B 600,000.
[143] Source: CMA 1283 5-18
The constraint function for the machine capacity is
[147] Source: CMA 1285 5-11

The algebraic formulation of the monthly nonnegativity
constraints is
A. S, G > 0.
A. 6A + 24B 200,000.
B. S, G < 0.
B. 1/.5A + 1.5/2.0B 800,000.
C. S, G 0.
C. .5A + 2B 200,000.
D. S, G 0.
D. (.5 + .5)A + (2 + 2)B 200,000.
The product of a matrix and its inverse matrix is
A. The matrix.
[148] Source: CMA 1285 5-21

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

D. Queuing theory.
[Fact Pattern #25]

Belmont Company manufactures and sells shirts and gloves
in its two-department plant. Belmont employs linear
programming to determine its optimum product mix.
Economic data pertaining to the two products are
presented as follows.
Shirt(S) Gloves, Pair (G)
-------- ---------------$22
$40
Selling price per unit

Cost data per unit
Variable manufacturing cost
8
12
Variable selling expense
2
4
Fixed manufacturing cost
5
9
Fixed selling expense
1
2
Direct Labor Data
---------------------------Cutting
Finishing
-------------------Shirt(S)
10 minutes
15 minutes
Gloves, pair(G)
6 minutes
30 minutes
Monthly capacity
960 hours
1,920 hours
[145] Source: CMA 1285 5-9
The algebraic formulation of Belmont's objective function is
[Fact Pattern #26]

The terminology and techniques used in linear programming
are as follows. Linear programming is a mathematical
technique that is designed to assist an organization in
allocating its resources. A linear programming problem
takes the form of
f = A X + A X + ... + A X
11 22
nn
subject to
B X + B X + ... + B X C1
11 22
nn
[149] Source: CMA 1286 5-25
The following function is the
f = A X + A X + ... + A X
11 22
nn
A. Revenue function.
B. Constraint function.
A. MAX Z = 10S + 16G.

C. Linear function.
B. MAX Z = 14S + 28G.
D. Objective function.
C. Conditions.
D. Shadow prices.
[150] Source: CMA 1286 5-26

The following function is the
B X + B X + ... + B X C1
11 22
nn
[154] Source: CMA 1287 5-20

The point where N = 2 and S = 3 would
A. Be the optimal solution point.
A. Variable function.
B. Be a feasible point.
B. Constraint function.
C. Lie in a corner.
C. Linear function.
D. Minimize cost.
D. Objective function.
[Fact Pattern #27]
Pleasant Valley Company makes two products, ceramic
vases (V) and ceramic bowls (B). Each vase requires 2
pounds of material and 3 hours of labor. Each bowl
requires 2 pounds of material and 1 hour of labor. During
the next production week, there will be 100 pounds of
material and 60 hours of labor available to make vases and
bowls. Each pound of material costs $4 and each hour of
labor costs $10. All factory overhead is fixed and is
estimated to be $200 for this production process for a
week. Pleasant Valley sells vases for $50 each and bowls
for $35 each.
[151] Source: CMA 0687 5-19
One of the constraints on Pleasant Valley's objective
function would be
[155] Source: CMA 1288 5-2

Dynamic decision models that incorporate a sequence of
decisions over different periods of time include all of the
following except the
A. PERT model.
C. Queuing model.
D. Markov process.
[156] Source: CMA 1288 5-7
In linear programming, the increase in profit if one more unit
of a limited resource is made available is indicated by
A. The feasible solution.
A. 2V + 2B 60.
B. Constraints.
B. 3V + B 60.
C. Shadow prices.
C. V + 3B 100.
D. The objective function.
D. $8V + $8B $600.
Max Z = $30N + $70S

subject to:
3N + 2S 15
2N + 4S 18
[157] Source: CMA 1288 5-11

Merlin company has excess capacity on two machines, 24
hours on machine 105 and 16 hours on machine 107. To
utilize this excess capacity, the company has two products,
known as Product D and Product F, that must use both
machines in manufacturing. Both have excess product
demand, and the company can sell as many units as it can
manufacture. The company's objective is to maximize
profits.
[152] Source: CMA 1287 5-18

These mathematical functions are an example of a(n)
Product D has an incremental profit of $6 per unit, and

each unit utilizes 2 hours of time on Machine 105 and then
2 hours of time on Machine 107. Product F has an
incremental profit of $7 per unit, and each unit utilizes 3
[Fact Pattern #28]

ReMetal, Inc. uses the following model to determine blends
of new (n) metal and scrap (s) metal.
A. Parametric model.
B. Present value model.
C. Economic order quantity model.
D. Linear programming model.
hours of time on Machine 105 and then 1 hour of time on

Machine 107. Let D be the number of units for Product D,
F be the number of units for Product F, and P be the
company's profit. A feasible solution for Merlin Company
is where
A. D = 2 and F = 8.
B. D = 6 and F = 4.
[153] Source: CMA 1287 5-19

The two inequality functions are
C. D = 12 and F = 0.
D. D = 8 and F = 3.
A. Constraints.
B. Objectives.
[158] Source: CMA 1288 5-18

Lynch Corporation manufactures and sells three products.
Top management would like to change the present sales

mix to increase overall operating income. Each of the
company's products has various manufacturing and sales
restrictions, including maximum demand levels and raw
material availability. In order to achieve the most profitable
sales mix, Lynch should employ
[163] Source: CMA 1294 4-2

United Industries manufactures three products at its highly
automated factory. The products are very popular, with
demand far exceeding the company's ability to supply the
marketplace. To maximize profit, management should focus
on each product's
A. Multiple regression.
A. Gross margin.
B. Linear programming.
B. Segment margin.
C. Mix variance analysis.
C. Contribution margin ratio.
D. Expected value techniques.
D. Contribution margin per machine hour.
[159] Source: CMA 1291 4-20

A transportation model is a special case of the
A. Markov model.
C. Dynamic programming model.
D. Critical path method.
[Fact Pattern #29]
Manders Manufacturing Corporation uses the following
model to determine its product mix for metal (M) and scrap
metal (S).
Max Z = $30M + $70S
If 3M + 2S 15
2M + 4S 18
[164] Source: CMA 0695 4-10

The Mix and Match Company has two products, Product
X and Product Y, that it manufactures through its
production facilities. The contribution margin for Product X
is $15 per unit, whereas Product Y's contribution is $25.
Each product uses Materials A and B. Product X uses 3
pounds of Material A, and Product Y uses 6 pounds.
Product X requires 6 feet of Material B and Product Y
uses 4 feet. The company can only purchase 600 pounds
of Material A and 880 feet of Material B. The optimal mix
of products to manufacture is
Product X
---------
Product Y
----------
A.
146 units and
B.
0 units.
0 units and 100 units.

C.
[160] Source: CMA 0694 4-10
These mathematical functions are an example of a(n)
A. Simulation model.
120 units and

D.
40 units.
40 units and 120 units.

C. Economic order quantity model.
D. Present value model.
[161] Source: CMA 0694 4-11
The two inequality functions are
A. Contributions.
B. Shadow points.
[165] Source: CMA 0695 4-11

In linear programming, the shadow price refers to the
A. Measurement of the value of relaxing a constraint
in a problem with dual variables.
B. Marginal change in profit associated with a change
in the contribution margin of one of the variables.
C. Unused capacity available once the optimal
solution is obtained.
D. Variables that are included in the final solution of
the linear programming model.
C. Conditions.
D. Constraints.
[162] Source: CMA 0694 4-12
The point at which M = 2 and S = 3 would
[166] Source: CMA 0697 4-23

A transportation model is a specialized example of
A. The critical path method.
A. Minimize cost.
C. Queuing theory.
B. Lie in a corner.
C. Be a feasible point.
D. Be an infeasible point.
[Fact Pattern #30]

A financial analyst has been asked to forecast net income
over the next 3 years using the computer spreadsheet
below. The actual results for year 1 are shown in column B.
Net sales and cost of goods sold are projected to increase

at the rate of 20% each year. Selling and administrative
expenses are projected to increase at an annual rate of
10%. However, several mistakes have been made in the
spreadsheet below.
A
B
C
D
E
--------------------------------------------------------1
Year 1 Year 2 Year 3 Year 4
-------- -------- -------- -------2 Net sales
$400,000 $480,000 $480,000 $576,000
3 Cost of goods sold 310,000 372,000 372,000
446,400
4 Gross profit
90,000 108,000 108,000 129,600
5 Selling expenses 30,000 33,000 36,300 39,930
6 Administrative
expenses
40,000 44,000 48,400 58,080
7 Income before taxes 20,000 31,000 23,300 31,590
8 Income taxes at 40% 8,000 12,400 9,320 12,636
9 Net income
12,000 18,600 13,980 18,954
[167] Source: CMA 0696 4-8
A correct formula for cell D2 is
A. +C2 x 1.2

A company has two production and two service
departments. Each service department provides service to
the two production departments and to the other service
department. In allocating service department costs, the
company would like to account for the service provided by
each service department to the other. To do so, it could
use
A. Matrix algebra.
B. Regression analysis.
C. Game theory.
A set of simultaneous equations reads:
6X + 3X = 49
1 2
12X + 2X = 17
1 2
If the equations were placed in a matrix format it would be
B. +B2 x 1.2
A.
C. +C2 + (.2 x B2)
D. +B2 + (.2 x B2)
[168] Source: CMA 0696 4-9
Which one of the cells listed below contains an incorrect
formula?
A. D4
B. D8
C. E6
D. C1
[169] Source: CMA 0696 4-10
If all of the errors in the formulas in the spreadsheet were
corrected, the correct projected net income for year 4
would be
A. $21,858
B. $37,410
C. $90,978
D. $88,074
[170] Source: CMA 1296 4-10
A large retail chain has 10 warehouses and 50 retail
locations. The quantitative technique it would likely use to
determine the minimum cost of moving its goods from the
warehouses to the retail stores is
A. A transportation model.
B. Markov analysis.
C. Calculus-based optimization.
D. A queuing model.
x 6 3 49
1
x 12 2 17
2
B.

6 3 x 49
1
12 2 x 17
2

C.

6 3 49 x
1
12 2 17 x
2

D.

x 6 3 49
1
x 12 2 17
2

[173] Source: CIA 0581 IV-25
The Apex Fertilizer Company is planning a new formulation
to appeal to the increasing market of herb growers. Each
unit of the product will require 3 pounds of chemical A, 1
pound of chemical B, and 4 pounds of chemical C. The
per-pound costs of chemical A are $7.95; chemical B,
$3.28; and chemical C, $6.14. Which of the following
matrix algebra formulations will lead to the cost of one unit
of the new fertilizer?
A.
7.95, 3.28, 6.14 3 0 0
0 1 0
0 0 4

B.

7.95 3, 1, 4
3.28
6.14

The unit contribution margins for Products X and Y are

$30 and $50, respectively. Each product uses Materials A
and B. Product X uses 6 pounds of Material A and 12
pounds of Material B. Product Y uses 12 pounds of
Material A and 8 pounds of Material B. The company can
purchase only 1,200 pounds of Material A and 1,760
pounds of Material B. The optimal mix of products to
manufacture is
A. 146 units of X and 0 units of Y.
B. 0 units of X and 100 units of Y.
C.

7.95 3
3.28 1
6.14 4

D.

3 1 4 7.95
3.29
6.14

C. 120 units of X and 40 units of Y.

D. 40 units of X and 120 units of Y.
An internal auditing department developed the formula,
Total audit cost (TC) = a + bX + cX , with X equaling
internal audit resources. The director wanted to minimize
TC with respect to X. The appropriate technique to use is
B. Least squares.
C. Differential calculus.

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

Quality control programs employ many tools for problem
definition and analysis. A scatter diagram is one of these
tools. The objective of a scatter diagram is to
A. Display a population of items for analysis.
B. Show frequency distribution in graphic form.
C. Divide a universe of data into homogeneous
groups.
D. Show the vital trend and separate trivial items.
Heniser Pet Foods manufactures two products, X and Y.
C. Alternative costs.
D. Opportunity costs.
[Fact Pattern #31]
Polar Bear Inc. has three service departments. The
relationship between the three departments, maintenance,
cleaning, and food prep, and the total costs incurred by
each are expressed below:
Maintenance = $40,000 + .25C
Cleaning = $60,000 + .2M
Food Service = $50,000 + .1M + .45C
In addition, there are two production departments:
Assembly and Finishing. Maintenance workers spend
about 35% of their time in each of the two production

departments. Cleaning employees spend about 15% of
their time in each production department. Food service
devotes 90% of its efforts to Assembly and 10% to
Finishing.
(Refer to Figure 7.) Using the information collected, the

organization should focus on

Using the direct method, how much maintenance cost
would be allocated to Assembly?
B. The number of computer complaints associated

with diskette problems and new software usage.
A. The total number of personal computer complaints

that occurred.
A. $14,000
C. The number of computer complaints associated

with the lack of user knowledge and hardware
problems.
B. $20,000
D. The cost to alleviate all computer complaints.
C. $20,264
D. $28,948
Using the reciprocal method, what is the total cleaning
department cost to be allocated to all other departments?

(Refer to Figure 7.) The chart displays
A. The arithmetic mean of each computer complaint.
B. The relative frequency of each computer
complaint.
A. $57,895
C. The median of each computer complaint.
B. $71,579
D. The absolute frequency of each computer

complaint.
C. $68,000
D. $60,000
Using the reciprocal method, what is the total food service
department cost to be allocated to all other departments?
[Fact Pattern #33]

A company produces two products, X and Y, which use
material and labor as inputs. Fixed amounts of labor and
material are available for production each month. In
addition, the demand for product Y each month is limited;
product X has no constraint on the number of units that can
be sold. A graphical depiction of these production and
demand constraints is presented in Figure 8.
A. $88,001
B. $55,790
C. $82,211
D. $83,211

(Refer to Figure 8.) The feasible solution region is bounded
by the lines connecting points
A. 3, 4, 6, and 7.
B. 1, 5, 6, and 8.

Yummy-for-Your-Tummy, Inc. is introducing a new line of
diet specialty dog food composed of genetically altered
corn and wheat. There will be two types of dog food,
"Puppy" and "Inactive Dog," with expected unit profits of
$10 and $15, respectively. The number of pounds of corn
and wheat needed per unit of Puppy food is 2 and 3,
respectively. The number of pounds of corn and wheat
needed per unit of Inactive Dog food is 4 and 2,
respectively. A local mill delivers 100 pounds of corn and
80 pounds of wheat weekly. What is the optimal weekly
production schedule?
C. 2, 4, 5, 6, and 8.
D. 3, 5, 6, and 7.
(Refer to Figure 8.) If a series of profit lines for X and Y
are drawn on the graph, the mix of X and Y that will result
in the maximum profit can be determined from
A. The last point in the feasible solution region
A. 0 Puppy; 25 Inactive Dog

touched by a profit line.
B. 20 Puppy; 10 Inactive Dog
C. 10 Puppy; 20 Inactive Dog
D. 15 Puppy; 17.5 Inactive Dog
[Fact Pattern #32]
An organization has collected data on the complaints made
by personal computer users and has categorized the
complaints.
B. Any point on the boundary of the feasible solution

region touched by a profit line.
C. The first point on the feasible solution region
boundary that intersects a profit line.
D. Any point on the demand constraint that intersects
a profit line.
Yummy-for-Your-Tummy, Inc. is introducing a new line of
diet specialty dog food composed of genetically altered
corn and wheat. There will be two types of dog food,

"Puppy" and "Inactive Dog," with expected unit profits of
$10 and $15, respectively. The number of pounds of corn
and wheat needed per unit of Puppy food is 2 and 3,
respectively. The number of pounds of corn and wheat
needed per unit of Inactive Dog food is 4 and 2,
respectively. A local mill delivers 100 pounds of corn and
80 pounds of wheat weekly. What is the optimal weekly
production schedule?
A. 0 Puppy; 25 Inactive Dog
B. 20 Puppy; 10 Inactive Dog
C. 10 Puppy; 20 Inactive Dog
D. 15 Puppy; 17.5 Inactive Dog
[Fact Pattern #34]
The following four companies manufacture and sell an
industrial strength cleaning fluid. The equations presented
below represent the revenue (R) and cost (C) functions for
B. Funz-N-Oonz Inc.
C. Moonsammy and Associates.
D. Step-N-Wolf Intl.
[193] Source: CPA 0591 I-44
On January 1, 2001, Hooks Oil Co. sold equipment with a
carrying amount of $100,000 and a remaining useful life of
10 years to Maco Drilling for $150,000. Hooks
immediately leased the equipment back under a 10-year
capital lease with a present value of $150,000. It will
depreciate the equipment using the straight-line method.
Hooks made the first annual lease payment of $24,412 in
December 2001. In Hooks's December 31, 2001 balance
sheet, the unearned gain on the equipment sale should be
A. $50,000
B. $45,000
C. $25,588
the companies if X is stated in terms of thousands of gallons

of fluid.
Revenue Function
Cost Function
--------------------------- -------------------------Redler Company R(x) = $100 + $26x $.05x2 C(x) = $50 +
$8x + $.01x2
Funz-N-Oonz
Inc.
R(x) = $90 + $22x $.04x2 C(x) = $65 + $10x +
$.02x2
Moonsammy and
Associates R(x) = $85 + $20x $.08x2 C(x) = $45 +
$12x + $.03x2
Step-N-Wolf
Intl.
R(x) = $110 + $18x $.07x2 C(x) = $70 + $5x +
$.04x2
Which company has the largest quantity of cleaning fluid
that must be produced to maximize revenue?
D. $0
[194] Source: CPA 0588 I-32
On December 31, 2001, Ruhl Corp. sold equipment to
Dorr and simultaneously leased it back for 3 years. The
following data pertain to the transaction at this date:
Sales price
$220,000
Carrying amount
150,000
Present value of lease rentals
($2,000 for 36 months at 12%)
60,800
Estimated remaining useful life
10 years
At December 31, 2001, what amount should Ruhl report
as deferred revenue from the sale of the equipment?
A. $0
B. $9,200
C. $60,800
A. Redler Company.
D. $70,000
B. Funz-N-Oonz Inc.
Which company has the largest quantity of cleaning fluid
that should be produced to maximize profit?
A. Redler Company.
[195] Source: CPA 0590 I-31

On December 31, 2001, Bain Corp. sold a machine to
Ryan and simultaneously leased it back for 1 year.
Pertinent information at this date follows:
Sales price
$360,000
Carrying amount
330,000
Present value of reasonable lease rentals
($3,000 for 12 months at 12%)
34,100
Estimated remaining useful life
12 years
In Bain's December 31, 2001 balance sheet, the deferred
revenue from the sale of this machine should be
B. Funz-N-Oonz Inc.
A. $34,100
B. $30,000
C. $4,100
D. $0

If each of the four companies manufactured and sold
100,000 gallons of cleaning fluid, which firm would have
the largest profits?
A. Redler Company.
[196] Source: CPA 0593 I-31

On December 31, 2001, Dirk Corp. sold Smith Co. two
airplanes and simultaneously leased them back. Additional
information pertaining to the sale-leasebacks follows:
Plane #1 Plane #2
-------- ---------Sales price
$600,000 $1,000,000
Carrying amount, 12/31/01 $100,000 $550,000
Remaining useful life,
12/31/01
10 years 35 years
Lease term
8 years 3 years
Annual lease payments
$100,000 $200,000
In its December 31, 2001 balance sheet, what amount
should Dirk report as deferred gain on these transactions?
A. $950,000
B. $500,000
C. $450,000
PRODUCT
------A B C
-- -- -Selling price per unit $7 $6 $5
Variable cost per unit 5 3 1
Fixed cost per unit
1 1 2
Management used linear programming to generate the
following solution:
PRODUCT VALUE REDUCED VALUE
------- ----- ------------A
100
8
B
?
2
C
150
0
CONSTRAINT VALUE SHADOW PRICE
---------- ----- ------------
D. $0
[197] Source: CPA 0592 T-32
Rig Co. sold its factory at a gain, and simultaneously leased
it back for 10 years. The factory's remaining economic life
is 20 years. The lease was reported as an operating lease.
At the time of sale, Rig should report the gain as a(n)
A. Extraordinary item, net of income tax.
Machine X
Machine Y
Machine Z
Demand A
Demand C
0
400
500
100
150
?
0
0
0
0

How many available machine hours for the production of B
does machine X have?
B. Asset valuation allowance.

A. 600 hours.
C. Separate component of stockholders' equity.
B. 800 hours.
D. Deferred credit.
C. 1,150 hours.
[198] Source: CPA 1192 I-35
On June 30, 2001, Lang Co. sold equipment with an
estimated useful life of 11 years and immediately leased it
back for 10 years. The equipment's carrying amount was
$450,000; the sales price was $430,000; and the present
value of the lease payments, which is equal to the fair value
of the equipment, was $465,000. In its June 30, 2001
balance sheet, what amount should Lang report as deferred
loss?
D. 1,400 hours.
What is the maximum number of units of B that can be
produced by machine Y?
A. 1,400 units.
A. $35,000
B. 800 units.
B. $20,000
C. 700 units.
C. $15,000
D. 400 units.
D. $0
[Fact Pattern #35]
A company produces three products, A, B, and C, using
three different machines, X, Y, and Z. Management has
decided that at least 100 units of product A must be
manufactured. Marketing research indicates that the
company's maximum market share for product C is 150
units.
Each product uses different amounts of machine time
(hours per unit), and each machine has different capacities
(hours per year), as summarized below.
MACHINE TIME (HOURS)
-------------------PRODUCT
X
Y
Z
------- ----- ----- ----A
2
4
3
B
3
2
5
C
4
3
2
CAPACITY 1,400 1,650 2,100
Each product also has a different selling price per unit and
different costs per unit.

If management has decided to maximize the number of units
of B, what is the combined total contribution margin of
products A, B, and C produced by machine Z?
A. $550
B. $1,000
C. $1,700
D. $3,250
[202] Source: CMA 1291 4-18
A company experiences both variable usage rates and
variable lead times for its inventory items. The probability
distributions for both usage and lead times are known. A
technique the company could use for determining the
optimal safety stock levels for an inventory item is
A. Queuing theory.

[203] Source: CMA 1280 5-11
Quiterite Baking Company is a large regional bakery that
competes with two other large bakeries. All three bakeries
supply grocery stores, convenience stores, and restaurants.
Data regarding the market share of each bakery and the
percentage of customers gained and lost from each bakery
have been developed. Quiterite wants to learn more about
the behavior of its customers and their loyalty to Quiterite.
A technique that would be most helpful to Quiterite is
$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.
[206] Source: CMA 0688 5-7
LCB's rate of learning on the 3-year engine contract is
A. 75.5%.
B. 79.0%
C. 80.0%.
D. 62.6%.

B. Markov analysis.
C. Learning curve techniques.
[207] Source: CMA 0688 5-8

The maximum bid price that LCB, Inc. could submit to the
Department of the Navy for the 40 units is
D. Correlation and regression analysis.

A. $760,800.
[204] Source: CMA 1287 5-26
The Program Evaluation and Review Technique (PERT) is
widely used to plan and measure progress toward
scheduled events. PERT is combined with cost data to
produce a PERT-Cost analysis in order to
A. Calculate the total project cost inclusive of the
additional slack time.
B. Evaluate and optimize trade-offs between time of
an event's completion and its cost to complete.
B. $608,640.
C. $885,800.
D. $708,640.
[208] Source: CMA 0688 5-9
In order to ensure that the company would not lose money
on the project, LCB's minimum bid for the 40 units would
be
C. Implement computer-integrated manufacturing

concepts.
A. $760,800.
D. Avoid the problem of time variance analysis.
B. $608,640.
C. $885,800.
[205] Source: CMA 0688 5-1

Jay Vee Enterprises is evaluating whether to introduce a
new product in its sports equipment product line. The
company has had significant experience in marketing new
sports products and has obtained a number of sales
estimates from its sales force. An appropriate method to
analyze the anticipated sales level for the new product
would be
D. $708,640.
[209] Source: CMA 0688 5-14
When using PERT, the expected time for an activity, given
an optimistic time (A), a pessimistic time (B), and a most
likely time (m), is calculated by which of the following
formulas?
A. Queuing theory.
A. (4a + m + 4b)/6.
B. Expected value analysis.
B. (a + 4m + b)/6.
C. The Markov process.
C. (a + b)/2.
D. Contribution margin analysis.
D. (b - a)/2.
[Fact Pattern #36]
LCB, Inc. is preparing a bid to the Department of the Navy
to produce engines for rescue boats. The company has
manufactured these engines for the Navy for the past 3
years, on an exclusive contract, and 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
[210] Source: CMA 0688 5-15

In a PERT or CPM network, the critical path is the
A. Longest path through the network with the least
amount of slack.
B. Shortest path through the network with the least
amount of slack.
C. Shortest path through the network.
D. Most costly path through the network.
[211] Source: CMA 0688 5-16
When making a cost/time trade-off in PERT analysis, the

first activity that should be crashed is the activity
A. With the least amount of slack.
B. On the critical path with the lowest unit crash cost.
C. On the critical path with the maximum possible
time reduction.
D. With the lowest unit crash cost.
[216] Source: CMA 1291 4-22

Huron 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 Huron's total
cost for the project is
A. Learning curve techniques.
[212] Source: CMA 0689 5-13

Sensitivity analysis in linear programming is used to
B. Differential calculus.
A. Determine the degree that the constraints vary.
C. Discounted cash flow techniques.
B. Test the accuracy of the parameters.
C. Develop the technological matrix.

D. Determine how the optimal solution would react to
changes in parameters.
[213] Source: CMA 0689 5-15
A statistical technique used to evaluate possible rates of
return for a capital budgeting project is
[217] Source: CMA 1293 4-27

Royal Manufacturing Company is using a Program
Evaluation and Review Technique (PERT) in the planning
of the installation of a new computerized manufacturing
system. The critical path determined by PERT
A. Is the shortest path through the PERT network.
B. Is the longest path through the PERT network.
C. Is based on the most likely times for each activity.
B. Simulation analysis.
C. Markov chain analysis.
D. Is based on the most pessimistic times for each

activity.
D. Gantt charting.
[214] Source: CMA 0690 5-20
Pallis Enterprises has a warehouse with a loading dock that
is used to unload railroad freight cars. Pallis maintains
records of daily incoming cars that are delivered to the
warehouse during the night. On any given night, zero to six
freight cars could be delivered. It takes the dock workers 4
hours to unload each car. The company would like to
analyze the wait time (delay) involved when more than two
freight cars are delivered. The appropriate technique to
analyze the arrival of the freight cars is
[218] Source: CMA 1280 5-6

A university has several small construction and repair
projects for the maintenance crew to perform. There are a
limited number of painters, woodworkers, and electricians.
The method that will help provide the fastest completion of
all jobs is
A. Queuing theory.
B. Time series analysis.
C. PERT/CPM analysis.

C. Minimax regret criteria.
D. Program Evaluation Review Technique (PERT).
[219] Source: CMA 1283 5-19

The 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.
[215] Source: CMA 1291 4-17

A company is planning a multi-phase construction project.
The time estimates for a particular phase of the project are
C. Sensitivity analysis.
Optimistic
2 months
Most likely 4 months
Pessimistic 9 months
Using the Program Evaluation Review Technique (PERT),
the expected completion time for this particular phase
would be
A. 4 months.
B. 4 months.
D. Matrix analysis.
[220] Source: CMA 1284 5-9
Which one of the following statements best describes a
difference between basic PERT and the Critical Path
Method (CPM) of network analysis?
A. PERT considers only activity cost while CPM
considers only activity time.
C. 5 months.
D. 7 months.
B. PERT considers both activity cost and activity

time while CPM considers only activity cost.
C. PERT does not allow for slack times on the

activities while CPM does.
selling prices will occur. The best method for determining

the expected outcome of the various alternatives is
D. PERT uses probability distributions on the activity

times while CPM uses point estimates for the activity
times.

C. Multiple regression analysis.
[221] Source: CMA 0685 5-11

Simulation, a widely used technique in decision modeling, is
A. A process of modeling whereby real activities are
represented in mathematical or other form.
B. A technique used to pinpoint random deviations in
industrial processes and other repetitive operations.
C. A technique used to separate costs into fixed and
variable portions.
D. Contribution margin analysis.

[226] Source: CMA 0688 5-6
Value Supply Ltd. is implementing a new integrated
computerized accounting system. The systems development
department has analyzed the various steps involved in
implementing the system and has assigned time and cost
estimates to complete the project. The method used to
monitor the installation process is
A. Queuing theory.
D. An inventory management model that is used to

calculate the optimum order quantity.
C. Program Evaluation Review Technique (PERT).
[222] Source: CMA 1285 5-22

Parker Company is concerned about customer loyalty and
has accumulated data on the extent that customers switch
among brands. Parker can best analyze the data on brand
switching by using
B. Queuing theory.
C. Differential calculus.
D. Markov analysis.
D. Learning curve analysis.

[227] Source: CMA 1289 5-12
Baker Company has problems servicing its foundry
department with overhead cranes. The workers are idle
during much of the time that the cranes are servicing other
departments, and management wants to determine whether
to add another crane to provide better service. To solve
this problem, Baker Company should employ
A. A critical path network.
B. Queuing models.
[223] Source: CMA 1285 5-23

ZorbaCo has developed a comprehensive budget using a
microcomputer spreadsheet. ZorbaCo's sales manager
wishes to study the effects of: (1) decreasing selling price in
order to increase sales volume, and (2) putting
salespersons on commission instead of fixed salaries.
These
options can best be studied on the microcomputer by using
C. Simulation.
D. Markov analysis.
C. Internal rate of return.

D. An expected value table.
[228] Source: CMA 0690 5-22
High Tech Industries, Inc. is in the process of preparing a
competitive bid for the sale of a customized product. High
Tech is currently manufacturing a comparable specialized
component that is labor intensive with a long production
run. The method that High Tech should use to project the
cost of manufacturing the proposed new customized
product is
[224] Source: CMA 1286 5-9

The technique used to obtain a probabilistic estimate of the
completion time for a project is
C. Learning curve analysis.

A. A GANTT chart.
B. The critical path method (CPM).
[229] Source: CMA 1291 4-16

The critical path through a network is
C. The performance evaluation and review technique

(PERT).
A. The shortest path through the network.
D. The Markov chain.
B. The longest path through the network.
[225] Source: CMA 0688 5-3

LeVar, Inc. has obtained probability estimates from its
production and sales departments regarding the costs and
selling prices it can anticipate for a new product line. The
company is uncertain as to which combination of costs and
C. The path with the most variability in estimated

times.
D. The least cost path.
[230] Source: CIA 1182 IV-20

Computer simulation has been advocated as an important
tool to assist management in decision making. Which of the
following is not a correct assessment of computer
simulation?
appropriate scheduling technique for this training program is

A. PERT/CPM.
A. It can only be used on large computers.
C. Queuing theory.
B. The relationships of variables in the computer

model can be changed over time.
C. The models can be refined as more evidence from

results becomes available.
D. The simulation can solve for the desired levels of
several key variables given the model criteria.
Management would like to project the company's ending
cash balance. Because of the large number of variables that
could affect the ending cash balance, the wide ranges of
values that these variables may take, and the probabilities
associated with these values, it is not feasible to use analytic
models to estimate the cash balance. The company plans to
develop a computerized model for projecting cash flows.
By varying the inputs to the model, various possible ending
cash balances can be estimated. This method of estimating
the distribution of the ending cash balance is
A. Simulation.

Activity scheduling information for the installation of a new
computer system is given below.
Activity
Immediate
Duration
Predecessor
(Days)
------------------------A
4
B
3
C
A
9
D
A
6
E
B, D
5
For this project, the critical path is
A. A-C.
B. B-E.
C. A-D-E.
D. B-D-C.
B. Simple regression analysis.

C. Capital budgeting.

In a critical path analysis, if slack time in an activity exists,
the activity
A. Is not essential to the overall project.
[232] Source: CMA 1287 5-26
PERT is widely used to plan and measure progress toward
scheduled events. PERT is combined with cost data to
produce a PERT-Cost analysis to
A. Calculate the total project cost inclusive of the
additional slack time.
B. Evaluate and optimize trade-offs between time of
an event's completion and its cost to complete.
C. Implement computer-integrated manufacturing
concepts.
D. Calculate expected activity times.
Which of the following terms is not used in project
management?
A. Dummy activity.
B. Latest finish.
B. Is a backup activity to replace a main activity

should it fail.
C. Could be delayed without delaying the overall
project.
D. Involves essentially no time to complete.
Management 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?
C. Optimistic time.
A. 7.29 minutes.
D. Lumpy demand.
B. 8.1 minutes.
A bank is designing an on-the-job training program for its
branch managers. The bank would like to design the
program so that participants can complete it as quickly as
possible. The training program requires that certain
activities be completed before others. For example, a
participant cannot make credit loan decisions without first
having obtained experience in the loan department. An
C. 6.56 minutes.
D. 5.90 minutes.
[238] Source: CMA 0688 5-16
When making a cost/time trade-off in PERT analysis, the
first activity that should be crashed is the activity
A. On the critical path with the lowest unit crash cost.

B. With the lowest unit crash cost.
C. With the largest amount of slack.
D. With the lowest error rate.
[239] Source: CMA 1288 5-24
California Building Corporation uses the critical path
method to monitor construction jobs. The company is
currently 2 weeks behind schedule on Job #181, which is
subject to a $10,500-per-week completion penalty. Path
A-B- C-F-G-H-I has a normal completion time of 20
weeks, and critical path A-D-E-F-G-H-I has a normal
completion time of 22 weeks. The following activities can
be crashed.
Cost to Crash
Cost to Crash
Activities
1 Week
2 Weeks
---------- ------------------------BC
$ 8,000
$15,000
DE
10,000
19,600
EF
8,800
19,500
California Building desires to reduce the normal completion
time of Job #181 and, at the same time, report the highest
possible income for the year. California Building should
crash
Lake Corporation manufactures specialty components for

the electronics industry in a highly labor intensive
environment. Arc Electronics has asked Lake to bid on a
component that Lake made for Arc last month. The
previous order was for 80 units and required 120 hours of
direct labor to manufacture. Arc would now like 240
additional components. Lake experiences an 80% learning
curve on all of its jobs. The number of direct labor hours
needed for Lake to complete the 240 additional
components is
A. 360.0.
B. 187.2.
C. 307.2.
D. 256.0.
[243] Source: CMA 1294 4-28
Seacraft Inc. received a request for a competitive bid for
the sale of one of its unique boating products with a desired
modification. Seacraft 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 Seacraft use to
estimate the cost of the new competitive bid?
A. Activity BC 1 week and activity EF 1 week.
B. Learning curve analysis.
B. Activity EF 2 weeks.
C. Activity DE 1 week and activity EF 1 week.
D. Continuous probability simulation.
D. Activity DE 2 weeks.
[240] Source: CMA 1291 4-17
A company is planning a multi-phase construction project.
The time estimates for a particular phase of the project are
Optimistic
2 months
Most likely 4 months
Pessimistic 9 months
Using the Program Evaluation Review Technique (PERT),
the expected completion time for this particular phase is
[244] Source: CMA 0683 5-8

A 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.
A. 2 months.
C. 61-100.
B. 4 months.
D. 11-60.
C. 4 months.
D. 5 months.
[241] Source: CMA 1284 5-3
An assumption often made with queuing models is that
A. Arrival time follows a Poisson distribution and
service times are exponentially distributed.
[245] Source: CMA 0688 5-13

In a PERT network, the optimistic time for a particular
activity is 9 weeks, and the pessimistic time is 21 weeks.
Which one of the following is the best estimate of the
standard deviation for the activity?
A. 2.
B. 6.
B. Both arrival times and service times follow normal

distributions as a result of the Central Limit Theorem.
C. Arrival times follow a Poisson distribution and
service times follow a normal distribution.
D. The rate of arrival is greater than the rate of
service.
[242] Source: CMA 0692 4-5
C. 9.
D. 12.
[246] Source: CMA 0688 5-17
A PERT network has only two activities on its critical path.
These activities have standard deviations of 6 and 8,
respectively. The standard deviation of the project
completion time is
A. 7.
time of Job #181 and, at the same time, report the highest
possible income for the year. California Building should
crash
B. 10.
A. Activity BC 1 week and activity EF 1 week.
C. 14.
B. Activity BC 2 weeks.
D. 48.
C. Activity EF 2 weeks.
[Fact Pattern #37]
Moss Point Manufacturing recently completed and sold an
order of 50 units that had costs as follows.
The company has now been requested to prepare a bid for
150 units of the same product.
D. Activity DE 1 week and activity EF 1 week.

[250] Source: CMA 0689 5-23
PERT and the critical path method (CPM) are used for
A. Determining the optimal product mix.
Direct materials
$ 1,500
Direct labor (1,000 hours x $8.50)
8,500
Variable overhead (1,000 hours x $4.00)*
4,000
Fixed overhead**
1,400
------$15,400
=======
*Applied on the basis of direct labor hours.
**Applied at the rate of 10% of variable cost.
[247] Source: CMA 1288 5-19
If an 80% learning curve is applicable, Moss Point's total
cost on this order would be estimated at
B. Project planning and control.

C. Determining product costs.
D. Determining the number of servers needed in a
fast food restaurant.
[251] Source: CMA 0689 5-24
The primary difference between PERT and CPM is that
A. CPM uses probabilities on the activity times and
PERT does not.
B. PERT considers activity costs and CPM does not.
A. $26,400.
B. $32,000.
C. PERT can assign probabilities to activity times and

CPM does not.
C. $38,000.
D. CPM considers activity costs and PERT does not.
D. $41,800.
[252] Source: CMA 0689 5-25
A Gantt chart
[248] Source: CMA 1288 5-20
If Moss Point had experienced a 70% learning curve, the
bid for the 150 units would
A. Shows the critical path for a project.

B. Is used for determining an optimal product mix.
A. Show a 30% reduction in the total direct labor

hours required with no learning curve.
C. Shows only the activities along the critical path of

a network.
B. Include increased fixed overhead costs.
D. Does not necessarily show the critical path

through a network.
C. Be 10% lower than the total bid at an 80%

learning curve.
D. Include 6.40 direct labor hours per unit at $8.50
per hour.
[249] Source: CMA 1288 5-24
California Building Corporation uses the critical path
method to monitor construction jobs. The company is
currently 2 weeks behind schedule on Job #181, which is
subject to a $10,500-per-week completion penalty. Path
A-B- C-F-G-H-I has a normal completion time of 20
weeks, and critical path A-D-E-F-G-H-I has a normal
completion time of 22 weeks. The following activities can
be crashed:
Cost to Crash
Cost to Crash
Activities
1 Week
2 Weeks
---------------------------------BC
$ 8,000
$15,000
DE
10,000
19,600
EF
8,800
19,500
California Building desires to reduce the normal completion
[253] Source: CMA 0690 5-21

Through 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
C. Program Evaluation Review Technique (PERT).
[254] Source: CMA 1291 4-18
A company experiences both variable usage rates and
variable lead times for its inventory items. The probability

distributions for both usage and lead times are known. A
technique the company could use for determining the
optimal safety stock levels for an inventory item is
A. Queuing theory.
D. $17,280.
[259] Source: CMA 0694 4-1
When using PERT (Program Evaluation Review
Technique), the expected time for an activity when given an
optimistic time (A), a pessimistic time (B), and a most likely
time (m), is calculated by which one of the following
formulas?

A. (b - a) 2.
B. (a + b) 2.
[255] Source: CMA 1291 4-21
A company is designing a new regional distribution
warehouse. In order to minimize delays in loading and
unloading trucks, an adequate number of loading docks
must be built. The most relevant technique to assist in
determining the proper number of docks is
A. Correlation and regression analysis.
C. (a + 4m + b) 6.
D. (4abm) 6.
[260] Source: CMA 0694 4-2
In a PERT (Program Evaluation Review Technique) or
CPM (Critical Path Method) network, the critical path is
the
B. Cost-volume-profit analysis.
A. Least costly path through the network.
C. PERT-Cost analysis.
B. Most costly path through the network.
D. Queuing theory.
C. Shortest path through the network.
[256] Source: CMA 1291 4-23
Manning Corporation is preparing a proposal for the
government to produce a steam generator to be used in
nuclear submarines. Manning has three factories that can
initiate and complete the generator; however, completion
times vary due to different technologies and older
equipment within each of the three factories. The decision
tool that would best assist Manning in its factory selection is
D. Longest path through the network with the least

amount of slack.
[261] Source: CMA 0694 4-3
When making a cost/time trade-off in PERT (Program
Evaluation Review Technique) analysis, the first activity that
should be crashed is the activity
A. Queuing theory.
A. With the largest amount of slack.
B. Time series analysis.
B. With the lowest unit crash cost.
C. PERT-Cost analysis.
C. On the critical path with the maximum possible

time reduction.
D. On the critical path with the lowest unit crash cost.
[257] Source: CMA 0692 4-7
The Markov process
A. Assumes that the probabilities of an event depend
only on the current state.
B. Assumes that the probabilities of an event are
dependent on all previous events.
C. Is useful if sequencing of related decisions is
necessary.
D. Is used to assess the implications of decisions in a
competitive environment based on trend analysis.
[258] Source: CMA 1293 4-24
The 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
[262] Source: CMA 1294 4-29

Quick Response Plumbing (QRP), a wholesale distributor,
supplies plumbing contractors and retailers throughout the
Northeast on a next-day delivery basis. QRP has a
centrally located warehouse to accept receipts of plumbing
supplies. The warehouse has a single dock to accept and
unload railroad freight cars during the night. It takes five
hours to unload each freight car. QRP's prior records
indicate that the number of freight cars that arrive in the
course of a night range from zero to five or more, with no
indicated pattern of arrivals. If more than two freight cars
arrive on the same night, then some freight must be held
until the next day for unloading. QRP wants to estimate the
wait time when more than two freight cars arrive in the
same night. The appropriate technique to analyze the arrival
of freight cars is
A. Integer programming.
A. $4,320.
B. $10,368.
C. $2,592.
[263] Source: CMA 0695 4-12

In the Program Evaluation Review Technique (PERT),
slack is the
A. Uncertainty associated with time estimates.
B. Difference between the latest starting time and
earliest finishing time.
C. Path that has the largest amount of time associated
with it.
D. Number of days an activity can be delayed
without forcing a delay for the entire project.
[268] Source: CMA 1289 5-14

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.
[264] Source: CMA 1291 4-26

Automite Company is an automobile replacement parts
dealer in a large metropolitan community. Automite is
preparing its sales forecast for the coming year. Data
regarding both Automite's and industry sales of
replacement parts as well as both the used and new
automobile sales in the community for the last 10 years
have been accumulated. If Automite wants to determine if
there is a historical trend in the growth of its sales as well as
the growth of industry sales of replacement parts, the
company would employ
A. Simulation techniques.
B. Queuing theory.
D. Is a measure of the relative relationship between

two variables.
[269] Source: CMA 1291 4-27
Automite Company is an automobile replacement parts
dealer in a large metropolitan community. Automite is
preparing its sales forecast for the coming year. Data
regarding both Automite's and industry sales of
replacement parts as well as both the used and new
automobile sales in the community for the last 10 years
have been accumulated. If Automite wants to determine if
its sales of replacement parts are patterned after the
industry sales of replacement parts or to the sales of used
and new automobiles, the company would employ
C. Statistical sampling.
A. Simulation techniques.
D. Time series analysis.
B. Correlation and regression analysis.
[265] Source: CMA 1293 4-25
The four components of time series data are secular trend,
cyclical variation, seasonality, and random variation. The
seasonality in the data can be removed by
A. Multiplying the data by a seasonality factor.
B. Ignoring it.
C. Taking the weighted average over four time
periods.
D. Subtracting a seasonality factor from the data.
[266] Source: CMA 0695 4-12
In PERT, slack is the
C. Statistical sampling.
What coefficient of correlation results from the following
data?
X Y
- -1 10
2
8
3
6
4
4
5
2
A. 0
A. Uncertainty associated with time estimates.
B. -1
B. Difference between the latest starting time and

earliest finishing time.
C. +1
D. Cannot be determined from the data given.
C. Path that has the largest amount of time associated

with it.
D. Number of days an activity can be delayed
without forcing a delay for the entire project.
[267] Source: CMA 1285 5-27
The correlation coefficient that indicates the weakest linear
association between two variables is
[271] Source: CIA 1194 II-46

In regression analysis, which of the following correlation
coefficients represents the strongest relationship between
the independent and dependent variables?
A. 1.03
B. -.02
A. -0.73
C. -.89
B. -0.11
D. .75
C. 0.12
D. 0.35
[272] Source: CIA 0595 II-46

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 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 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.
C. Constant coefficient.
D. Variable coefficient.
[274] Source: CMA 1290 4-28
The letter x in the standard regression equation is best
described as a(n)
A. Independent variable.
B. Dependent variable.
C. Constant coefficient.
D. A linear regression analysis would increase the

model's reliability.
[Fact Pattern #38]
In preparing the annual profit plan for the coming year,
Wilkens Company wants to determine the cost behavior
pattern of the maintenance costs. Wilkens has decided to
use linear regression by employing the equation y = a + bx
for maintenance costs. The prior year's data regarding
maintenance hours and costs, and the results of the
regression analysis are as follows.
Average cost per hour
$9.00
a
684.65
b
7.2884
Standard error of a
49.515
Standard error of b
.12126
Standard error of the estimate
34.469
2
r
.99724
Hours of
Maintenance
Activity
Costs
-----------------------January
480
$ 4,200
February
320
3,000
March
400
3,600
April
300
2,820
May
500
4,350
June
310
2,960
July
320
3,030
August
520
4,470
September
490
4,260
October
470
4,050
November
350
3,300
December
340
3,160
-----------Sum
4,800
$43,200
======
=======
Average
400
$3,600
Single Tailed Values of t
--------------------------t
t
t
t
Degree of Freedom .100 .05 .025 .01
----------------- ----- ---- ----- ---8
1.40 1.86 2.31 2.90
9
1.38 1.83 2.26 2.82
10
1.37 1.81 2.23 2.76
11
1.36 1.80 2.20 2.72
12
1.36 1.78 2.18 2.68
13
1.35 1.77 2.16 2.65
14
1.35 1.76 2.15 2.62
[273] Source: CMA 1290 4-27
In the standard regression equation y = a + bx, the letter b
is best described as a(n)
D. Coefficient of determination.
[275] Source: CMA 1290 4-29
Based upon the data derived from the regression analysis,
420 maintenance hours in a month would mean the
maintenance costs (rounded to the nearest dollar) would be
budgeted at
A. $3,780.
B. $3,600.
C. $3,790.
D. $3,746.
[276] Source: CMA 1290 4-30
The percentage of the total variance that can be explained
by the regression equation is
A. 99.724%.
B. 69.613%.
C. 80.982%.
D. 99.862%.
If Wilkens Company uses the high/low method of analysis,
the equation for the relationship between hours of activity
and maintenance cost would be
A. Y = 400 + 9.0X
B. Y = 570 + 7.5X
C. Y = 3,600 + 400X
D. Y = 570 + 9.0X
What is the range of values for the marginal maintenance
cost such that Wilkens can be 95% confident that the true
value of the marginal maintenance cost will be within this
range?
A. $7.02 - $7.56
A. Independent variable.
B. $7.17 - $7.41
B. Dependent variable.
C. $7.07 - $7.51
D. $6.29 - $8.29
C. Is based on objective and constraint functions.

D. Estimates the independent variable.

At 400 hours of activity, Wilkens' management can be
approximately two-thirds confident that the maintenance
costs will be in the range of
A. $3,550.50 - $3,649.53
B. $3,551.37 - $3,648.51
[284] Source: CMA 1296 4-9

The manager of a car rental agency is planning for counter
help during the next 2 weeks. He knows the approximate
number of cars that will be rented, the probability of a car's
being returned to his agency if rented from his agency, and
the probability of its being returned to his agency if rented
from another location. The quantitative method that the
manager would find most helpful is
C. $3,568.18 - $3,613.93
A. A transportation model.
D. $3,565.54 - $3,634.48
B. Markov analysis.
[280] Source: CIA 0595 II-47
An internal auditor for a large automotive parts retailer
wishes to perform a risk analysis and wants to use an
appropriate statistical tool to help identify stores that would
be out of line compared to the majority of stores. The most
appropriate statistical tool to use is
A. Linear time series analysis.
C. Calculus-based optimization.
D. The critical path method.
[285] Source: CMA 0696 4-20
A 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
B. Cross-sectional regression analysis.

C. Cross tabulations with chi-square analysis of
significance.
D. Time series multiple regression analysis to identify
changes in individual stores over time.
B. Learning curve analysis.

[281] Source: CMA 0697 4-21

The critical path through a network is the
A. Shortest path.

Violation of which assumption underlying regression
analysis is prevalent in time series analysis?
B. Path with the most nodes.
A. Variance of error term is constant.
C. Longest path.
B. Error terms are independent.
D. Path with the most slack.
C. Distribution of error terms is normal.

D. Expected value of error term equals zero.
[282] Source: CMA 0697 4-25

Corrigon Industries is preparing a bid for a special project
requiring the production of 35,000 units. The engineering
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 Corrigon's total cost for the project is

The moving-average method of forecasting
A. Is a cross-sectional forecasting method.
B. Regresses the variable of interest on a related
variable to develop a forecast.
C. Derives final forecasts by adjusting the initial
forecast based on the smoothing constant.
D. Includes each new observation in the average as it
becomes available and discards the oldest
observation.
C. Learning curve analysis.

[283] Source: CMA 0697 4-26
A regression equation
A. Estimates the dependent variables.
B. Encompasses factors outside the relevant range.
[288] Source: CIA 0594 II-38

As part of a risk analysis, an auditor wishes to forecast the
percentage growth in next month's sales for a particular
plant using the past 30 months' sales results. Significant
changes in the organization affecting sales volumes were
made within the last 9 months. The most effective analysis
technique to use would be
A. Unweighted moving average.
island.
B. Exponential smoothing.
C. Queuing theory.
D. Linear regression analysis.
A bank has changed from a system in which lines are
formed in front of each teller to a one-line, multiple-server
system. When a teller is free, the person at the head of the
line goes to that teller. Implementing the new system will
A. Decrease the bank's wage expenses because the
new system uses fewer tellers.
B. Decrease time customers spend in the line.
C. Increase accuracy in teller reconciliations at the
end of the day because fewer customers are served
by each teller.
D. Improve on-the-job training for tellers because
each will perform different duties.
Based on a known probability distribution, the bank assigns

random numbers to arrival and service times:
Time
Random between Random
#
Arrivals:
#
Service Time
------- --------- ------- -----------1
1 minute 1, 2
1 minute
2, 3 2 minutes
3
2 minutes
4, 5, 6 3 minutes 4, 5, 6 3 minutes
7, 8 4 minutes 7, 8, 9 4 minutes
The bank then selects random numbers for the next two
cars as Random Numbers Selected:
Arrival Service
------- ------Car 3
#3
#7
Car 4
#7
#8
The arrival time follows which probability distribution?
A. Binomial.

The drive-through service at a fast-food restaurant consists
of driving up to place an order, advancing to a window to
pay for the order, and then advancing to another window
to receive the items ordered. This type of waiting-line
system is
A. Single channel, single phase.
B. Single channel, multiple phase.
B. Chi-square.
C. Poisson.
D. Exponential.
The time that car 3 will have to wait to be serviced (not
including its own service time) is
C. Multiple channel, single phase.

A. 0-2 minutes.
D. Multiple channel, multiple phase.
B. 3 minutes.
[291] Source: CIA 0584 IV-34
A post office serves customers in a single line at one
service window. During peak periods, the rate of arrivals
has a Poisson distribution with an average of 100
customers per hour and service times that are exponentially
distributed with an average of 60 seconds per customer.
From this, one can conclude that the
A. Queue will expand to infinity.
C. 4 minutes.
D. 5+ minutes.
The time that car 4 will have to wait to be serviced (not
including its own service time) is
A. 0-2 minutes.
B. Server will be idle one-sixth of the time.

B. 3 minutes.
C. Average rate is 100 customers per hour.
C. 4 minutes.
D. Average customer waiting time is 2.5 minutes.
D. 5+ minutes.
[Fact Pattern #39]
A bank has two drive-in lanes to serve customers, one
attached to the bank itself, the second on an island. One
teller serves both stations. The bank is interested in
determining the average waiting times of customers and has
developed a model based on random numbers. The two
key factors are the time between successive car arrivals
and the time customers wait in line. Assume that the
analysis begins with cars just arriving at both service
windows, both requiring 3 minutes of service time. Car 1 is
at the attached window and car 2 at the island window. A
car will always go to the window attached to the bank
unless that window has more cars waiting than the island
window. The lone teller will always serve the car that
arrived first. If two cars arrive simultaneously, the one at
the attached window will be served before the one at the
[295] Source: CMA 0688 5-19

Under conditions of uncertainty, the rational, economic
decision maker will use which one of the following decision
criteria?
A. Maximax.
B. Minimum regret.
C. Laplace.
D. Expected monetary value.
[296] Source: CIA 1195 II-30
A division uses a regression in which monthly advertising

expenditures 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. The average monthly advertising expenditure in the
sample is $800,000.
B. When monthly advertising is at its average level,
product sales will be $800,000.
D. 30.0 hours.
What are the four components of a time series?
A. Trend, cyclical, seasonal, and irregular.
B. Alpha, cyclical, seasonal, and irregular.
C. Alpha, cyclical, seasonal, and repetitive.
C. On average, for every additional dollar in

advertising you get $0.80 in additional sales.
D. Advertising is not a good predictor of sales
because the coefficient is so small.
The analysis of decision-making situations in which one
decision maker tries to optimize at the expense of a
competitor is
D. Trend, cyclical, seasonal, and repetitive.

The marketing department of your company is deciding on
the price to charge for a key product. In setting this price,
marketing needs to consider the price that a major
competitor will charge for a similar product because the
competitor's price will affect the demand for your
company's product. Similarly, in setting its price, the
competitor will consider what your company will charge.
A. Game theory.
B. Probability theory.
An appropriate mathematical technique for analyzing such a

decision is
C. Queuing theory.
A. Game theory.
B. Probability theory.
C. Linear programming.

The decision rule that selects the strategy with the highest
utility payoff if the worst state of nature occurs is the
A. Minimize regret rule.
B. Maximize utility rule.
C. Maximin rule.
D. Maximax rule.
A company has several departments that conduct technical
studies and prepare reports for clients. Recently, there have
been long delays in having these reports copied at the
company's centralized copy center because of the dramatic
increase in business. Management is considering
decentralizing copy services to reduce the turnaround and
provide clients with timely reports. An appropriate
technique for minimizing turnaround time and the cost of
providing copy services is
A. Queuing theory.
Only two companies manufacture Product A. The finished
product is identical regardless of which company
manufactures it. The cost to manufacture Product A is $1
and the selling price is $2. One company considers
reducing the price to achieve 100% market share but fears
the other company will respond by further reducing the
price. Such a scenario would involve a
A. No-win strategy.
B. Dual-win strategy.
C. One win-one lose strategy.
D. Neutral strategy.
One of your firm's trucks was involved in an accident with
a car, both parties claiming the other was at fault. A court
ruled that your firm was solely responsible for all damage.
From a game theory perspective, this dispute can be
described as a
A. Prisoner's dilemma.
D. Game theory.
B. Zero-sum game.
[300] Source: CMA 0696 4-7
It 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.
C. Saddle point.
D. Minimax regret.
[Fact Pattern #40]
A bank plans to open a branch in one of five locations
(labeled L1, L2, L3, L4, L5). Demand for bank services
may be high, medium, or low at each of these locations.
Profits for each location-demand combination are
presented in the following payoff matrix.
Payoff Matrix
------------Location L1 L2 L3 L4 L5
-------- -- -- -- -- -Demand:
High 15 21 17 26 29
Medium 12 8 14 10 4
Low
7 -2 4 -3 -6
environment determined that the estimated parameters used

may vary between limits. Subsequent testing of the model
with respect to all possible values of the estimated
parameters is termed
A. A sensitivity analysis.
B. Statistical estimation.
C. Statistical hypothesis testing.

If the bank uses the maximax criterion for selecting the
location of the branch, it will select
A. L1
B. L2
C. L3
D. L5
D. A time-series study.
A firm is attempting to estimate the reserves for doubtful
accounts. The probabilities of these doubtful accounts
follow a transition process over time. They evolve from
their starting value to a changed value. As such, the most
effective technique to analyze the problem is
A. Markov chain analysis.
B. Econometric theory.

If the bank uses the minimax regret criterion for selecting
the location of the branch, it will select
C. Monte Carlo analysis.

A. L2
B. L3
C. L4
[Fact Pattern #41]

The following are the times required for various sequences
of activities (paths through the network) shown in a PERT
diagram:
D. L5
If, in addition to the estimated profits, management of the
bank assesses the probabilities of high, medium, and low
demands to be 0.3, 0.4, and 0.3, respectively, what is the
expected opportunity loss from selecting location L4?
Path
Time in Days
-----------------A-B-C
27
A-D-E-C
33
A-F-C
34
A-F-G-C
36
Which is the critical path?
A. 5.50
A. A-B-C
B. 10.90
B. A-D-E-C
C. 5.67
C. A-F-C
D. 7.00
D. A-F-G-C
[308] Source: CIA 0592 IV-21
Following is a table of probabilities for two separate
product lines, X and Y:
Probability
X profit
Y profit
------------------------.20
$500
$ 50
.70
300
400
.10
600
800
The product line to obtain maximum utility for a risk-averse
decision maker is

How much slack time is there in path A-D-E-C?
A. 1 day.
B. 3 days.
C. 6 days.
D. 33 days.
A. X because it has the highest expected profit.

B. Y because it has the highest expected profit.
C. Y because it has the highest dispersion.
D. X because it has the lowest dispersion.
A cost-volume-profit model developed in a dynamic

Path A-B-C is expected to require 27 days to complete.
This estimate was calculated using the PERT formula based
on a most likely completion time of 25 days and a most
optimistic completion time of 24 days. What estimate was
used for the most pessimistic completion time?
A. 25 days.
B. 27 days.
C. Average waiting time in the queue.
C. 32 days.
D. Utilization rate for the service being rendered.
D. 38 days.
A 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.
[319] Source: CMA 0688 5-28

The operating condition that cannot be identified by using a
queuing model is the
A. Average percentage of time that a service facility
is idle.
B. Probability of a specified number of units in the
queue.
C. Actual amount of time each unit spends in the
queue.
C. 32.0 hours.
D. Average number of units in the system.
D. 40.0 hours.
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?

Jacob Corp. wishes to determine the fixed portion of its
maintenance expense (a semivariable expense), as
measured against direct labor hours, for the first 3 months
of the year. The inspection costs are fixed; the adjustments
necessitated by errors found during inspection account for
the variable portion of the maintenance costs. Information
for the first quarter is as follows:
A. 30.0 hours.
B. 40.0 hours.
C. 45.0 hours.
D. 50.0 hours.
to complete. What is the cumulative average time per unit
after four units are completed?
A. 50.0 hours.
Direct Labor Hours Maintenance Expense

------------------ ------------------January
34,000
$610
February
31,000
$585
March
34,000
$610
What is the fixed portion of Jacob's maintenance expense,
rounded to the nearest dollar?
A. $283
B. $327
C. $258
D. $541
B. 45.0 hours.
C. 40.5 hours.
[321] Source: CMA 0685 5-7

The minimax regret decision rule is applicable to decision
making under conditions of
D. 40.0 hours.
A. Risk.
A shortest-route algorithm is used in network models to
B. Uncertainty.
C. Subjective likelihoods.
A. Identify bottlenecks in a network and hence

identify the longest path.
B. Minimize total travel time from one site to each of
the other sites in a transportation system.
C. Maximize throughput in networks with distinct
entry (source node) and exit (sink node) points.
D. Objective likelihoods.
[322] Source: CMA 1288 5-6
The procedure for choosing the smallest maximum
alternative loss is
A. Deterministic decision making.
D. Identify the set of connecting branches having the

shortest combined length.
B. Queuing theory.
C. Maximax.
[318] Source: CMA 0688 5-27

Queuing models are concerned with balancing the cost of
waiting in the queue with the
A. Cost of providing service.
B. Number of customers in the queue.
D. Minimax.
The least exact method for separating fixed and variable
costs is
A. The least squares method.

B. Computer simulation.
C. The high-low method.
D. Matrix algebra.
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
cost chart for a manufacturing project at Networks, Inc. is

presented below. The numbers in the diagram are the
expected times (in days) to perform each activity in the
project.
Normal Crash
Activity Cost Crash Time Cost
-------- ------ ---------- -----AB
$3,000 3.50 days $4,000
AC
5,000 4.50
5,250
AD
4,000 4.00
4,750
BE
6,000 5.00
7,000
CE
8,000 5.00
9,200
DE
6,000 6.50
6,750
BC
2,500 .50
3,500
BD
2,000 .25
2,500
[328] Source: CMA 1290 4-7
(Refer to Figure 9.) The expected time of the critical path is
B. Game theory.
A. 12.0 days.
B. 13.0 days.
D. Queuing theory.
C. 11.5 days.
In a simple linear regression, the standard error of the
estimate represents
A. A measure of variability of the actual observations
from the least squares line.
the sample.
C. The proportion of the variance explained by
independent variable.
D. 11.0 days.
[329] Source: CMA 1290 4-8
(Refer to Figure 9.) In order to keep costs at a minimum
and decrease the completion time by 1 days, Networks,
Inc. should crash activity(ies)
A. AD and AB.
B. DE.
C. AD.
D. A measure of the strength of the linear

relationship.
Schippi Inc. is developing a new type of watch. The
optimistic time to complete the project is 7 weeks, the most
likely time is 13 weeks, and the pessimistic time is 16
weeks. Using PERT, how long is the expected duration for
this activity?
D. AB and CE.
(Refer to Figure 10.) The network in Figure 10 describes
the interrelationships of several activities necessary to
complete a project. The arrows represent the activities.
The numbers between the arrows indicate the number of
months to complete each activity. The shortest time to
complete the project is
A. 6 weeks.
A. 5 months.
B. 7 weeks.
B. 6 months.
C. 12.5 weeks.
C. 8 months.
D. 13 weeks.
D. 14 months.
When simulating with the Monte Carlo technique, the
average simulated demand over the long run should
approximate the
A. Actual demand.
B. Real demand.
C. Sampled demand.
D. Expected demand.
[Fact Pattern #42]
The PERT network diagram and corresponding activity
[Fact Pattern #43]

Burger Joint is a fast food restaurant that is dependent upon
its quick service. Its manager wants to make sure it is
keeping up with the competition, so she compiles some
information. The average number of customers arriving is 4
per minute, and the cashiers can serve 6 customers per
minute.
What is the average number of customers in line or being
served at any time?
A. 1 customer.
B. 2 customers.
total cost for the month of May using the high-low method?
C. 3 customers.
A. $560
D. 4 customers.
B. $650
C. $720

What is the average number of customers waiting in line,
not being served?
A. .75
B. 1.33
C. 4
D. 8
What is the average waiting time?
D. $760
Rusty, the night manager at a local fast food restaurant, has
had problems with his employees not arriving on time. After
doing some research, he discovered that, if his employees
were on time the night before, the probability that they
would arrive on time again is .7. On the other hand, if they
were late the night before, the probability that they would
arrive on time the following day is .4. What is the
probability that an employee will arrive on time the fourth
day if they arrived on time the first day?
A. .575
B. .583
A. .25 minutes.
C. .61
B. .33 minutes.
D. .7
C. .50 minutes.
D. .67 minutes.
[Fact Pattern #44]
Jackson Co. has the following information for the first
quarter of its year:
Machine Cleaning
Hours Expense
------- -------January
2,100
$ 900
February 2,600
1,200
March
1,600
800
April
2,000
1,000
Using the high-low method, what is Jackson's variable cost
of cleaning per machine hour?
[Fact Pattern #45]

Poppin' Corn Co. has gross profits of $50 for each box of
popcorn it sells. Poppin' Corn also has a $20 holding fee
for each box of popcorn it does not sell, and a $25 loss of
goodwill for every box of popcorn it is unable to provide to
its customers. Managers are expecting to produce 1,000
boxes next month.
What is Poppin' Corn's expected net profit if demand is
predicted to be 950 boxes?
A. $45,000
B. $46,250
C. $46,500
D. $47,500
A. $.40
B. $1.20
C. $2.00

What is Poppin' Corn's expected net profit if demand is
predicted to be 1,100 boxes?
D. $2.50
A. 47,000
Using the high-low method, what is Jackson's fixed cost?
A. $160
B. 47,500
C. 48,000
D. 50,000
B. $320
[Fact Pattern #46]
C. $640
D. $1,040
Jackson's management expects machine hours for the
month of May to be 1,400 hours. What is their expected
In Canada, highway tollbooth operators are given yearly

bonuses for various accomplishments. The following
information was made available: Linus has an average of 5
cars arriving in a minute and can service 7 in a minute.
Schroeder has an average of 4 cars arriving in a minute and
can service 6 in a minute. Snoopy has an average of 5 cars
arriving in a minute and can service 8 in a minute. Pigpen
has an average of 6 cars arriving in a minute and can
service 10 in a minute.
If the yearly bonus is given to the operator with the lowest
average number of cars waiting in line, which operator
would receive the bonus?
A. Linus.
B. Schroeder.
C. Snoopy.
D. Pigpen.
average number of cars in line not being serviced, which
operator would receive the bonus?
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
A. Linus.
B. Schroeder.
C. Snoopy.
D. Pigpen.
average waiting time, which operator would receive the
bonus?
A. Linus.
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.
B. Schroeder.
C. Snoopy.
D. Pigpen.
Red Baron Inc. is a new competitor in the production of
airplane propellers. Red Baron has to train its employees in
the process of making propellers. To increase the speed of
learning, Red Baron will give a bonus to the employee with
the lowest cumulative average time per unit after eight units
are completed. Lucy took 50 hours to complete the first
unit, and she is subject to an 80% learning curve. Sally
took 60 hours to complete the first unit, and she is subject
to a 70% learning curve. Marcy took 40 hours to complete
the first unit, and she is subject to a 90% learning curve.
Patty took 55 hours to complete the first unit, and she is
subject to a 75% learning curve. Which employee will
receive the bonus?

Assuming Donehart manufactures the units in-house, what
is the average labor hours per unit after manufacturing 640
units?
A. 60
B. 30.72
C. 23.63
D. 23.04
Assuming Donehart manufactures the units in-house, how
many total hours will it take to complete 1,000 units?
A. 8,294.4 hours.
A. Lucy.
B. 19,660.8 hours.
B. Sally.
C. 24,330 hours.
C. Marcy.
D. 27,955.2 hours.
D. Patty.
[Fact Pattern #47]
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

Assuming Donehart manufactures the units in-house, how
much will it cost to complete the remaining units in order to
fill the requirement?
A. $416,793.60
B. $463,104
C. $503,193.60
D. $559,104
Assuming Donehart subcontracts the order to Midland,
what is the total labor hours required to produce the 640
units on the learning curve?
A. 15,120 hours.
B. 18,350 hours.
C. 19,530 hours.
overhead cost for the past 24 months have been analyzed

using simple linear regression. The following results were
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
$40,000
Coefficient of independent variable
$2.10
Coefficient of correlation
0.953
Standard error of estimate
$2,840
Standard error of regression coefficient 0.42
Mean value of independent variable
$18,000
Coefficient of determination
0.908
What percentage of the variation in overhead costs is
explained by the independent variable?
D. 35,840 hours.
A. 90.8%
how many hours will it take to complete a unit after the
initial 640 units on the learning curve are finished?
B. 42%
C. 48.8%
D. 95.3%
A. 11.81 hours.
B. 15.75 hours.
C. 21.50 hours.
D. 23.625 hours.
what is the total out-of-pocket cost?

To determine a confidence interval for the parameter
estimated by b in the regression computation, an
appropriate t-value would be selected from a table of
values from student's t-distribution corresponding to the
desired level of confidence and having
A. 0 degrees of freedom.
B. 2 degrees of freedom.
C. 10 degrees of freedom.
A. $302,400
D. 22 degrees of freedom.
B. $330,220.80
C. $390,600
D. $426,535.20
If PERT analysis were used to calculate revenue for
Oxford Industries, what would be the amount of that
revenue?

Assuming that the appropriate t-value is 2.07, a 95%
confidence interval for the b values would be
A. (1.23, 2.97)
B. (0.10, 4.10)
C. (2.1, 2.97)
A. $21,600,000
D. (0.22, 3.97)
B. $22,516,587
C. $23,441,666
D. $42,875,000
[Fact Pattern #48]
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:

The total overhead cost for an estimated activity level of
20,000 direct labor hours would be
A. $42,000
B. $82,000
C. $122,000
D. $222,000
Direct materials $500,000

Direct labor
$40,000 (the labor rate is $4/hour)
Overhead costs have not been established for the new
product, but monthly data on total production and
PART 4C
Quantitative Methods for
Decision Analysis
ANSWERS
[1] Source: CMA 0683 5-14
Answer (A) is incorrect because .755 is the average
diameter.
Answer (B) is incorrect because .7354 inches equals
the mean minus 1.96 times the standard deviation.
Answer (C) is incorrect because .7746 inches equals
the mean plus 1.96 times the standard deviation.
Answer (D) is correct. Because a 95% confidence
interval equals 1.96 standard deviations in either
direction from the mean, the desired lower boundary
is found using the following formula:
_
x - z (s / (n) )
.755 - 1.96(.01 / (100) )

.755 - .00196 = .75304
[2] Source: CMA 0683 5-16
Answer (A) is incorrect because 70% equals Firm
A's percentage of repeat customers.
Answer (B) is incorrect because 80% equals Firm
B's percentage of repeat customers.
Answer (C) is incorrect because 60% is the
percentage of customers Firm B will have in the long
run.
Answer (D) is correct. Each firm's retention and loss
of customers should be defined in equation form, and
the results should be solved simultaneously. Thus,
100% of A's customers minus B's customers equals
70% repeat business of A plus 20% of new business
from B's former customers. In equation form, A's
customers are
.7A + .2B = 100% - B.
Similarly, the equation for Firm B's customers is
.8B + .3A = 100% - A
Simplifying the equations gives
100% - 1.2B
100% - 1.3A
A = ------------ B = -----------.7
.8
Substituting the B equation into the equation for A,
100% - 1.5 (100% - 1.3A)
A = ------------------------.7
100% - 150% + 1.95A = -50% + 1.95A
A = -----------------------------.7
.7
.7A = -50% + 1.95A
1.25A = 50%
A = 40%
[3] Source: CMA 0683 5-17
Answer (A) is incorrect because .50 is the
percentage of sales Department A processes.
Answer (B) is correct. The probability that one
department causes all the errors can be found by

multiplying the probability of each "state of nature,"
i.e., the probability that each department makes
errors, by the percentage of business done by each
department, and adding the partial results together.
A = 50% x 2% = 1.0
B = 30% x 5% = 1.5
C = 20% x 2.5% = .5
----3.0
=====
Since A accounts for 1.0/3.0 of all probable errors,
then the chances are about .33 that A is responsible
for the error in this case.
Answer (C) is incorrect because .02 is the error rate
for Department A, which must be multiplied by the
percentage of sales processed. A = 50% x 2% =
1.0; B = 1.5, C = .5. A accounts for 1.0 (1.0 +
1.5 + .5) of all probable errors, so the chances are
.33 that A is responsible for the error.
Answer (D) is incorrect because the probability that
each department is responsible is determined as
follows:
A = 50% x 2% = 1.0
B = 30% x 5% = 1.5
C = 20% x 2.5% = .5
----3.0
=====
Since A accounts for 1.0/3.0 of all probable errors,
then the chances are about .33 that A is responsible
for the error.
[4] Source: CMA 0685 5-13
Answer (A) is incorrect because 1,925 is the total
sales volume, which must be divided by 11 days.
Answer (B) is incorrect because 100 is the mode of
the set.
Answer (C) is incorrect because 160 is the median
value.
Answer (D) is correct. The mean is a simple average.
It is computed by dividing the total sales of 1,925
units by the 11 days. Thus, the mean is 175 units.
[5] Source: CMA 0685 5-14
Answer (A) is incorrect because 300 is the volume
on the day representing the midpoint of the 11-day
period.
Answer (B) is correct. The mode is the number that
occurs most often in a set. Since 100 units is the only
recurring number, 100 is the mode.
Answer (C) is incorrect because 160 is the median.
Answer (D) is incorrect because 100 is among the
responses given.
[6] Source: CMA 0685 5-15
Answer (A) is incorrect because 300 is the volume
on the day representing the midpoint of the 11-day
period.
Answer (B) is incorrect because 100 is the mode.
[10] Source: CMA 1285 5-18

Answer (C) is correct. When data are arranged in
numerical order, one-half of the values are smaller
than the median and one-half of the values are
greater. Accordingly, this value occurs at the 50th
percentile. With 11 days of sales, the middle value is
the sixth item. The following is the ranking of sales in
order of volume: 100, 100, 100, 135, 150, 160,
180, 190, 200, 300, 310. The middle item (median)
is 160.
Answer (D) is incorrect because 175 is the mean.
[7] Source: CMA 0685 5-8
Answer (A) is incorrect because it includes
uncertainty as part of the answer.
Answer (B) is incorrect because it includes
uncertainty as part of the answer.
Answer (C) is incorrect because under a condition of
certainty, a decision tree would not be needed.
Answer (D) is correct. Decision tree analysis is used
when various options, their consequences, and the
probabilities of those consequences can be
ascertained with a high degree of confidence. Under
conditions of uncertainty, however, probabilities are
unknown.
[8] Source: CMA 1286 5-1
Answer (A) is incorrect because management
decision processes fall into three categories:
repetitive, nonprogrammed, and strategic.
Answer (B) is correct. Decision making can be
classified variously. For example, repetitive decisions
concern routine, programmable, day-to-day matters,
e.g., the automatic reordering of stock when it
reaches a predetermined level. Nonprogrammed
decisions are the shorter-term, tactical
implementation of the strategic decisions. Strategic
decisions are aimed at setting long-term goals and
objectives and making other overall ongoing
decisions for the entity.
Answer (C) is incorrect because management
Answer (D) is incorrect because management
[9] Source: CMA 1285 5-17
Answer (A) is incorrect because $80,000 is the
amount of monthly fixed costs.
Answer (B) is incorrect because $320,000 is the sum
of the fixed and variable costs.
Answer (C) is correct. Each case requires 4 hours of
machine time. Thus, 5,000 cases would require
20,000 hours. At $12 per hour, the variable costs
would total $240,000.
Answer (D) is incorrect because 5,000 cases times 4
machine hours times the $12 variable cost equals
$240,000.
Answer (A) is incorrect because the $4.80 fixed

manufacturing overhead rate equals annual fixed costs
divided by machine time ($960,000 200,000).
Answer (B) is incorrect because the $4.80 fixed
Answer (C) is incorrect because the $4.80 fixed
Answer (D) is correct. According to the regression
equation, the monthly fixed costs are $80,000. On an
annual basis, the total is $960,000. For normal
production of 50,000 cases, 200,000 hours of
machine time are required. Allocating the $960,000
of fixed costs over 200,000 hours of machine time
results in a cost of $4.80 per machine hour.
[11] Source: CMA 1285 5-26
Answer (A) is incorrect because the mode is the
most common variable in a set.
Answer (B) is incorrect because the median is the
middle value in a set.
Answer (C) is incorrect because a coefficient of
correlation indicates the strength of the linear
relationship among two or more variables.
Answer (D) is correct. The standard deviation is a
measure of the degree of compactness of the values
in a population. This measure is used to help
determine appropriate sample sizes. The formula is
1/2
(x - mu)
i
Sigma = ------------
N
The denominator is n - 1 when calculating the

standard deviation of a sample.
[12] Source: CMA 1286 5-7
Answer (A) is incorrect because the t-test compares
means.
Answer (B) is incorrect because correlation analysis
measures the relationship among variables.
Answer (C) is incorrect because correlation analysis
measures the relationship among variables.
Answer (D) is correct. Student's "t" distribution is a
special distribution to be used when only small
samples are available and the population variance is
not given. It is mound-shaped and symmetric like a
normal distribution, only typically flatter with more
variation. A small sample is usually deemed to be less
than 30. For samples larger than 30, the "t"
distribution gives results similar to the standard
normal distribution. It is used to compare the means
of two distributions to determine whether there is any
significant difference between the two groups from
which the means were taken.
[13] Source: CMA 0688 5-19

Answer (A) is incorrect because, in game theory, the
maximax criterion is a decision rule adopted by
risk-seeking, optimistic players who desire the largest
possible payoff and are willing to accept high risk.
The player determines the payoff for each state of
nature expected to arise after each possible decision,
ascertains the maximum payoff for each decision, and
then chooses the decision with the maximum payoff.
Answer (B) is incorrect because a player who uses
the minimax decision criterion determines the
maximum loss for each decision possibility and then
chooses the decision with the minimum loss. This rule
produces the same result as the maximin technique,
which determines the minimum payoff for each
decision and then chooses the decision with the
maximum minimum payoff. Minimax and maximin are
conservative criteria.
Answer (C) is incorrect because the minimum regret
criterion is used by a player who wishes to minimize
the effect of a ba d decision in either direction. It
chooses the decision that has the lowest maximum
opportunity cost (profit foregone).
Answer (D) is correct. A rational economic decision
maker (one completely guided by objective criteria)
will use expected monetary value to maximize his/her
gains under conditions of risk because (s)he is
risk-neutral. For decisions involving variability in
outcomes, the concept of expected value provides a
rational means for selecting the best choice. Expected
value represents the long-term average payoff for
repeated trials. The best choice is the one having the
highest expected value (sum of the products of the
possible outcomes and their respective probabilities).
[14] Source: CMA 0688 5-18
Answer (A) is correct. The less the variability of the
future results of a decision, the smaller the risk
involved. If each choice is associated with only one
possible outcome, no variability exists, and the
probability of the outcome is 1.0. Such a condition is
one of certainty (zero variance).
Answer (B) is incorrect because there would be no
risk or uncertainty if all facts were known and there
was only one possible outcome for each alternative.
Answer (C) is incorrect because there would be no
risk or uncertainty if all facts were known and there
was only one possible outcome for each alternative.
Answer (D) is incorrect because conflict between
alternatives may exist even when all facts are known
and each choice has only one outcome.
[15] Source: CMA 0688 5-25
Answer (D) is incorrect because 20% is among the

given responses.
[16] Source: CMA 0688 5-26
Answer (A) is incorrect because Model P104
corresponds to numbers 0 and 1.
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 six. The numbers two through six correspond
to model X104. Thus, the third customer is expected
to purchase model X104.
Answer (C) is incorrect because Model A104
corresponds to numbers 7 and 8.
Answer (D) is incorrect because Model S104
corresponds to number 9.
[17] Source: CMA 1288 5-5
Answer (A) is correct. In a decision tree, the events
following from a decision are mutually exclusive.
Also, all possible events are included. Thus, the sum
of the probabilities of the events is 1.0.
Answer (B) is incorrect because it is a true statement
with respect to decision trees.
Answer (C) is incorrect because it is a true statement
Answer (D) is incorrect because it is a true statement
[18] Source: CMA 1288 5-14
Answer (A) is incorrect because, if X is less than
0.40, the investigation is not cost beneficial.
Answer (B) is correct. Costs will be either $6,000 or
$24,000 if the variance is investigated and either $0
or $33,000 if not. The probabilities at which the
expected costs of investigation are equal to the
expected costs of not investigating can be determined
from the following equation (X = the probability that
operations are improper):
$24,000X + $6,000 (1 - X) = $33,000X - $0 (1 - X)
$24,000X + $6,000 - 6,000X = $33,000X
X = .4
1 - X = .6
Answer (C) is incorrect because 0.60 is the
probability that the department is operating properly
and the manager is indifferent about investigating the
variance.
Answer (D) is incorrect because the investigation
should be made if X is greater than 0.40.
Answer (A) is incorrect because 10% is the

probability of selecting S104.
[19] Source: CMA 1288 5-25
Answer (B) is correct. A total of ten random
numbers have been assigned. Of these, two (0 and 1)
have been assigned to model P104. Thus, there are
two chances out of ten, or 20%, that a customer will
select that model.
Answer (A) is incorrect because the standard

deviation measures dispersion (range), not the size of
constraints.
Answer (B) is incorrect because frequency is given.
Answer (C) is incorrect because 50% is the

probability of selecting X104.
Answer (C) is incorrect because the standard

deviation measures the dispersion of observations,
not probabilities.
Answer (D) is correct. The standard deviation
measures the range (dispersion) of observations
around the mean. For example, about 95.5% of all
observations fall within two standard deviations of the
mean of a normally distributed variable.
[20] Source: CMA 1288 5-26
Answer (A) is correct. The expected demand is

300,000 units [(.4 x 200,000) + (.3 x 300,000) + (.2
x 400,000) + (.1 x 500,000)]. Total expected cost is
therefore $170,000 [$50,000 fixed cost + ($.40 x
300,000) variable cost].
Answer (B) is incorrect because $130,000 is
calculated by multiplying [($.4 x 200,000) +
$50,000] instead of [($.4 x 300,000) + $50,000].
Answer (A) is incorrect because $2,250,000 is the

variance. Anser (C) is incorrect because $750 is the
square root of $562,500.
Answer (C) is incorrect because $210,000 is

calculated by using 400,000 in the formula $.40X +
$50,000 instead of 300,000.
Answer (B) is correct. Substituting the cash flow

figures into the formula produces the following:
Answer (D) is incorrect because $250,000 is

calculated by using 500,000 in the formula $.40X +
$50,000 instead of 300,000.
_
_
_
X
X
(X - X)
P
(X - X) P
e
e
e
e
e
------ ------ ---------- ---- ----------$4,000 $5,500 $2,250,000 x .25 = $ 562,500
5,000
5,500
250,000 x .50 =
125,000
8,000
5,500
6,250,000 x .25 = 1,562,500
Variance
$2,250,000
The square root of $2,250,000 is $1,500.
Answer (C) is incorrect because $750 is the square
root of $562,500.
Answer (D) is incorrect because $353.55 is the
square root of $125,000.
[21] Source: CMA 1288 5-27
Answer (A) is correct. The standard deviation for
clocks ($1,500) is lower than the standard deviation
for calculators. Thus, the range of outcomes is less
dispersed and producing clocks is less risky.
Answer (B) is incorrect because the greatest
probability is for a lower rate of return.
Answer (C) is incorrect because both products are
profitable.
Answer (D) is incorrect because calculators have the
higher standard deviation and the greater risk.
[24] Source: CMA 0689 5-27

Answer (A) is incorrect because the single purpose
machine is the best choice if expected demand is less
than 150,000.
Answer (B) is incorrect because the automatic
machine is the best choice if expected demand
exceeds 350,000.
Answer (C) is correct. The semiautomatic machine
has an expected cost of $170,000 based on an
expected demand of 300,000 units [(.4 X 200,000)
+ (.3 X 300,000) + (.2 X 400,000) + (.1 X
500,000)]. The single purpose machine has an
expected cost of $200,000 [($.60 x 300,000) +
$20,000]. The automatic machine has an expected
cost of $180,000 [($.20 x 300,000) + $120,000)].
Hence, the semiautomatic machine has the lowest
expected cost at the expected level of demand.
Answer (D) is incorrect because the automatic
machine has the second lowest expected cost.
[25] Source: CMA 0689 5-28
Answer (A) is incorrect because $(40) is the payoff
amount when demand is 2 units.
Answer (B) is incorrect because $80 is the payoff
amount when demand is 4 or 6 units.
[22] Source: CMA 0689 5-17

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.
Answer (B) is incorrect because a Gantt chart is a
bar chart used to measure progress toward a goal.
Answer (C) is incorrect because a learning curve
measures the benefit of experience in the early stages
of a new task.
Answer (D) is incorrect because queuing
(waiting-line) theory is used to determine the optimum
balance between the cost of providing service to
reduce waiting lines and the cost of allowing waiting
lines to exist when items in the queue arrive at
random.
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 Total
------------- ------------ -------------0
$(160)
.1
$(16)
2
(40)
.3
(12)
4
80
.4
32
6
80
.2
16
Expected Profit
$ 20
Answer (D) is incorrect because the expected profit
of $20 equals the sum of the weighted totals when
supply is 4 units.
[27] Source: CMA 0689 5-30

Answer (A) is incorrect because $68 is the amount of
profit with perfect information.
[23] Source: CMA 0689 5-26
Answer (B) is correct. The maximum amount the

seller should pay for perfect information is the
difference between the expected profit with perfect
information ($68) and the expected profit if demand
is not known. Without the 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) = $28.
For a supply of 6 units, the expected loss is
.1($-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).
Answer (C) is incorrect because the price paid for
perfect information equals the difference between
profits expected with perfect information and profits
without perfect information, or $40 ($68 - $28).
Answer (D) is incorrect because the price paid for
perfect information equals the difference between
profits expected with perfect information and profits
without perfect information, or $40 ($68 - $28).
limit and the lower control limit. The processes are

measured periodically, and the values are plotted on
the chart. If the value falls within the control limits, no
action is taken. If the value falls outside the limits, the
process is considered "out of control," and an
investigation is made for possible corrective action.
Another advantage of the chart is that it makes trends
visible.
Answer (D) is incorrect because quality control does
not relate to controls over EDP operations.
[31] Source: CMA 1289 5-21

Answer (A) is incorrect because 4,000 pretzels
assumes each outcome is equally likely.
Answer (B) is incorrect because 4,400 pretzels is the
estimated demand using an expected value approach.
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%).
Answer (D) is incorrect because 6,000 pretzels is
merely the greatest demand.
[32] Source: CMA 1289 5-22
[28] Source: CMA 1289 5-13

Answer (A) is incorrect because simple regression
analysis assumes a linear relationship.
Answer (B) is correct. Simple regression analysis is
used to find an equation for the linear relationship
between two variables. The behavior of the
dependent variable is explained in terms of an
independent variable. Multiple regression is based on
more than one independent variable. Mathematically,
simple regression is depicted by the following
equation:
y = a + bx
If: a = the y-axis intercept and
b = the slope of the regression line
Answer (C) is incorrect because fixed costs can be
described by the regression equation as well as
variable costs. The y-intercept may represent fixed
costs and the slope variable costs.
Answer (D) is incorrect because simple regression
can be expressed on a two-dimensional graph.
[29] Source: CMA 1289 5-15
Answer (A) is incorrect because quality control does
not relate to controls over accounting procedures.
Answer (B) is incorrect because quality control does
not relate to controls over labor costs.
Answer (C) is correct. Statistical control charts are
graphic aids for monitoring the status of any process
subject to random variations. The chart consists of
three horizontal lines plotted on a horizontal time
scale. The vertical scale represents the appropriate
quantitative measure. The center line represents the
average or mean value for the process being
controlled. The other two lines are the upper control
Answer (A) is correct. Each pretzel costs $.30. Thus,

the cost of 4,000 pretzels is $1,200 (4,000 x $.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.
Answer (B) is incorrect because $2,100 would be
the profit from selling 3,000 pretzels with 3,000
available; [($1 x 3,000) - ($.30 x 3,000)].
Answer (C) is incorrect because $2,800 would be
the profit from selling 4,000 pretzels with 4,000
available; [($1 x $4,000) - ($.30 - $4,000)].
Answer (D) is incorrect because $1,800 is among the
responses given.
[33] Source: CMA 1289 5-23
Answer (A) is incorrect because $1,200 equals the
costs for 3,000 pretzels.
Answer (B) is incorrect because $2,100 is the profit
from selling 3,000 units with 3,000 available; [($1 x
3,000) - ($.30 x 3,000)].
Answer (C) is correct. Each pretzel costs $.30. Thus,
the cost of 4,000 pretzels is $1,200 (4,000 x $.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.
Answer (D) is incorrect because $800 assumes
2,000 are sold.
[34] Source: CMA 1289 5-24
Answer (A) is correct. Regardless of demand, only
the 4,000 pretzels in stock can be sold. Thus, the

conditional profit is the $2,800 difference between
the cost of 4,000 pretzels at $.30 each ($1,200) and
the revenue from selling 4,000 pretzels at $1 each
($4,000).
Answer (B) is incorrect because only 4,000 units can
be sold. The profit equals $2,800 [($1 x 4,000) ($.30 x 4,000)].
$30.40).
Answer (D) is incorrect because the most Stan would
pay for perfect information is the difference between
expected profit with perfect information and expected
profit without perfect information, or $2.60 ($33 $30.40).
[37] Source: CMA 0690 5-19
Answer (C) is incorrect because only 4,000 units can

Answer (D) is incorrect because only 4,000 units can
Answer (A) is incorrect because linear programming

is used to optimize a function, such as profits or
costs, given certain constraints.
Answer (B) is incorrect because the minimax regret
criterion is a decision rule developed in game theory.
It chooses the option with the set of outcomes that
includes the lowest maximum opportunity cost.
[35] Source: CMA 0690 5-17

Answer (A) is incorrect because 20 units does not
have the greatest expected value.
Answer (B) is incorrect because 30 units does not
Answer (C) is correct. Expected value analysis is a
means of selecting the best option when decisions
involve risk. The expected value equals the sum of
the products of the various payoffs and their
respective probabilities. Stocking 40 bags for each
game is the action with the greatest expected value
($30.40) according to the payoff table.
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.
Answer (D) is incorrect because Monte Carlo
simulation involves adding random numbers to
otherwise deterministic models to simulate the
uncertainty inherent in real-world situations.
[38] Source: CMA 0690 5-25
Answer (D) is incorrect because 50 units does not

[36] Source: CMA 0690 5-18
Answer (A) is incorrect because the expected value

is a long-range average; it is likely that the expected
value will never be exactly achieved for a particular
event.
Answer (A) is incorrect because the most Stan would

profit without perfect information, or $2.60 ($33 $30.40).
Answer (B) is incorrect because expected value does

not consider present values.
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 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.
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.
20% x $20 = $ 4.00

40% x $30 = 12.00
30% x $40 = 12.00
10% x $50 = 5.00
-----Total
$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).
Answer (C) is incorrect because the most Stan would
profit without perfect information, or $2.60 ($33 -
Answer (C) is incorrect because probability is only

one component of expected value.
[39] Source: CMA 0692 4-4

Answer (A) is incorrect because the conditional value
is the return given a certain condition or state of
nature.
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.
Answer (C) is incorrect because the profit forgone by
not choosing the best alternative is the opportunity
cost.
Answer (D) is incorrect because expected value
represents the long-run average profit from an event.
[40] Source: CMA 1292 4-21

Answer (A) is incorrect because the least the
company can make by selling coffee is $1,900.
Answer (B) is incorrect because the most the
Answer (C) is incorrect because the most the
Answer (D) is correct. The expected payoff
calculation for coffee is:
.4($1,900) + .6($2,000) = $1,960.
[41] Source: CMA 1292 4-22
Answer (A) is incorrect because the most the vendor
can make is $2,500 per day.
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:
.4($2,500) + .6($2,000) = $2,200.
Answer (C) is incorrect because the least the vendor
could make by having perfect information is $2,000
on cold days.
Answer (D) is incorrect because the least the vendor
could make by having perfect information is $2,000
on cold days.
[42] Source: CMA 1292 4-23
Answer (A) is incorrect because the vendor would
pay $600 for perfect information, but the forecasts
are only 50% accurate.
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 (50% x the $600
potential increase in profits) for the sometimes
accurate forecasts.
Answer (C) is incorrect because the most the vendor
could profit from perfect information on hot days
would be $600 ($2,500 - $1,900).
Answer (D) is incorrect because perfect information
is worth $600, but information that is 50% accurate
warrants only a $300 payment.
[43] Source: CMA 1292 4-24
problem occurred in the clothing department.

Answer (C) is incorrect because the clothing
department quality problems make up 1/3 of the
overall company problems.
Answer (D) is correct. Weighting the percentage of
sales by the percentage of quality control problems
for each department determines the annual company
rate of damaged goods as follows:
Department
Sales
Damages
Weighted
---------- ------------------------Clothing
50%
2%
1%
Hardware
30%
5%
1.5%
Household
20%
2.5%
0.5%
-----3%
======
The clothing department accounts for 33-1/3% (1%
3%) of the total company rate. Thus, the
probability that an observed problem is in the clothing
department is 33-1/3%.
[44] Source: CMA 1293 4-23
unweighted sum of the payoffs.
Answer (B) is correct. The expected value of a
decision is found by multiplying the payoff of each
outcome by its probability and summing the products.
It is the long-term average payoff for repeated trials.
Thus, the expected contribution of the new product is
$110,000 [(30% x $700,000) + (30% x $200,000)
+ (40% x a negative $400,000)].
Answer (C) is incorrect because $270,000 does not
consider the negative payoff.
Answer (D) is incorrect because $430,000 adds the
loss from the negative payoff.
[45] Source: CMA 1293 4-26
Answer (A) is incorrect because the expected value
of perfect information is the difference between the
expected profit under certainty and the profit from the
best decision under uncertainty.
Answer (B) is incorrect because the expected value
of perfect information is the excess of the total
conditional profits under certainty over the profit from
the best decision under uncertainty.
Answer (C) is incorrect because there is no expected
opportunity loss under conditions of certainty.
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.
Answer (A) is incorrect because the rate is 50%

(1.5% 3%) for the hardware department.
[46] Source: CMA 1293 4-28
Answer (B) is incorrect because damages in the
clothing department contribute to 1% of the company
rate, but the question asks for the probability that a
Answer (A) is incorrect because the dependent cost

variable is estimated.
prospective measure.
Answer (B) is incorrect because probability
assumptions are not used in regression analysis.
[50] Source: CMA 1286 5-5
Answer (C) is correct. Regression analysis finds an
equation for the linear relationship among variables.
The behavior of the dependent variable is explained
in terms of one or more independent variables.
Simple regression has one independent variable, and
multiple regression has more than one.
Answer (D) is incorrect because the coefficient of
determination may be interpreted as the proportion of
the total variation in the dependent variable that is
explained by the regression equation.
[47] Source: CMA 1293 4-29
Answer (A) is incorrect because network analysis is
a means of scheduling long term projects; PERT and
the critical path method (CPM) are examples.
Answer (B) is correct. Decision trees may be used to
describe complex decision situations. Each branch of
the tree represents a different decision, and each twig
extending from each branch represents several
possible outcomes of the decision.
Answer (C) is incorrect because Monte Carlo
simulation is a technique for experimenting with
mathematical models using a computer, which
generates random values for each variable.
Answer (D) is incorrect because linear programming
is a means of allocating scarce resources given a
specified objective and a variety of constraints.
[48] Source: CMA 1286 5-2
Answer (A) is incorrect because a probability less
than 1.0 would not be certainty.
Answer (B) is correct. An event is certain if there is
no doubt that it will occur. The probability is 1.0 if an
event is certain to occur, and 0 if it is certain not to
occur. Under conditions of certainty, consequences
are therefore deterministic, not probabilistic or
unknown.
Answer (C) is incorrect because certainty implies a
specific outcome.
Answer (D) is incorrect because it is a nonsense
answer.
Answer (A) is incorrect because factor analysis tries

to determine factors leading to a result.
Answer (B) is incorrect because it is not meaningful in
this context.
Answer (C) is incorrect because correlation analysis
determines the degree of the linear relationship
between variables.
Answer (D) is correct. Regression analysis assumes
that a change in the value of a dependent variable is
related to the change in the value of an independent
variable. It attempts to find an equation for the linear
relationship among variables by using the least
squares method, which minimizes the sum of the
squares of the vertical distance between each
observation point and the regression line.
Accordingly, regression analysis determines the
amount of change in a dependent variable based
upon changes in one or more independent variables.
It is an extension of correlation analysis to find a
formula for the relationship among variables.
[51] Source: CMA 0688 5-2
Answer (A) is incorrect because Monte Carlo
simulation involves adding random numbers to
otherwise deterministic models to simulate the
uncertainty inherent in real-world situations.
Answer (B) is incorrect because dynamic
programming is used for problems that involve
probabilistic variables and time-staged decisions, that
is, decisions affected by previous decisions. It
involves an iterative formulation of problems. A
decision tree with probabilities for each branch
illustrates a time-staged decision process that could
be evaluated with dynamic programming.
Answer (C) is correct. Regression analysis can be
used to estimate costs and divide them into their fixed
and variable components. A dependent variable is
estimated based upon the values of one or more
independent variables. The basic regression formula
explains the behavior of a dependent variable (y) in
terms of an independent variable (x). In the formula
for simple linear regression, a is the y-intercept (fixed
cost in a cost function), b is the slope of the
regression line (variable cost), and e is the error term.
The formula is
y = a + bx + e
[49] Source: CMA 1286 5-3

deviation is a measure of dispersion of a population.
Answer (B) is correct. Expected value analysis is an
estimate of future monetary value based on forecasts
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.
deviation is a measure of dispersion of a population.
Answer (D) is incorrect because expected value is a

analysis is a means of selecting the best alternative
when decisions involve risk. The expected value
equals the sum of the products of payoffs and their
respective probabilities.
[52] Source: CMA 0688 5-20
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
x $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.
Decision
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).
Answer (B) is incorrect because $8.40 equals the
payoffs from Decisions 1 and 3 ($2.40 + $6.00).
Answer (C) is incorrect because $9.00 is the best
decision under conditions of uncertainty.
Answer (D) is incorrect because the expected value
of perfect information is $6.40 ($15.40 - $9.00).
[55] Source: CMA 0691 4-2

Answer (A) is incorrect because stocking an amount
equal to expected demand (the sum of the products
of the possible amounts demanded and their
respective probabilities) does not necessarily
maximize expected profits.
Answer (B) is incorrect because the number of bags
to stock is not necessarily the same as the amount
demanded with the highest probability. The inventory
decision should be based on the relation of the
probability distribution to the monetary outcomes.
Answer (C) is incorrect because the greatest
opportunity cost is not factored into the expected
value analysis.
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.
[56] Source: CMA 0691 4-3
[53] Source: CMA 1288 5-1

Answer (A) is incorrect because CPM (critical path
method) is a diagrammatic method of network
analysis used to control complex projects. Unlike
PERT, a related technique, it uses deterministic
(nonprobabilistic) time and cost estimates.
Answer (B) is incorrect because linear programming
is a deterministic technique to find the optimum
allocation of resources subject to constraints.
Answer (C) is correct. A decision tree may be used
to describe decision situations. Each decision is
represented by a branch of the tree. Each event or
state of nature resulting from that decision is a
subbranch presented with its probability and
numerical outcome.
Answer (D) is incorrect because the EOQ (economic
order quantity) model is used to select the optimum
size of each purchase order given a deterministic
demand.
[54] Source: CMA 0691 4-1
Answer (A) is incorrect because the conditional profit
or loss must be weighted by the probability of each
event's occurrence.
Answer (B) is correct. Expected value analysis
estimates future monetary value based on forecasts
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.
Answer (C) is incorrect because the best event will
not occur every time; less desirable events will also
occur and must enter into the calculation.
Answer (D) is incorrect because each event must be
weighted by the probability of its occurrence.
Answer (A) is incorrect because the value of perfect

information is limited to the excess of the profit under
certainty over the best return without perfect
information.
Answer (B) is incorrect because the value of perfect
information is limited to the excess of the profit under
certainty over the best return without perfect
information.
Answer (C) is incorrect because it may not be the
best act under certainty that is considered; the value
of perfect information is based on the event that is
known will happen, whether that event is the best or
the worst.
Answer (D) is correct. 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. Perfect
information is the knowledge that a future state of
nature will occur with certainty. The expected value
of perfect information is the difference between the
expected value under certainty and the expected
value of the optimal decision 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.
[57] Source: CMA 1291 4-19
Answer (A) is incorrect because network analysis is
a project scheduling technique.
Answer (B) is correct. A decision tree diagram is a
quantitative tool for decision making used to obtain
an optimum solution when a series of related
decisions must be made. The tree will consist of
decision choices for each decision point, possible
events that might follow from each choice, probability
estimates for each event, and quantified outcomes. A
decision tree facilitates calculation of the expected
value of a decision.
Answer (C) is incorrect because the Monte Carlo

method adds random behavior to otherwise
deterministic models to simulate the uncertainty
inherent in real-world situations.
Answer (D) is incorrect because queuing theory is
used to minimize the total cost of waiting lines.
Answer (A) is incorrect because it does not have an
error term or a slope term.
Answer (B) is incorrect because it does not have an
error term or a slope term.
Answer (C) is correct. The equation is based upon
application of regression analysis to observations of
the independent variable x and the dependent
variable y. The result equates y (the dependent
variable) with the sum of a (the y-intercept), bx (b is
the slope and x is the independent variable), and e
(an error term). The error term indicates the degree
of uncertainty.
Answer (D) is incorrect because a simple regression
should be a linear, not curvilinear, function.
Answer (B) is correct. The slope of a line is a

constant equal to the proportionate change along the
y axis for each change along the x axis. Thus, in a
regression equation, slope represents the variable
portion of the total cost in the cost function, i.e., the
change in cost that occurs for each one-unit change in
activity.
Answer (C) is incorrect because x is the independent
variable.
Answer (D) is incorrect because e is the error term.
Answer (A) is incorrect because a is the y-axis
intercept.
Answer (B) is incorrect because y is the dependent
variable.
Answer (C) is incorrect because b is the slope of the
line.
Answer (D) is correct. The independent or
explanatory variable is the variable that is permitted
to change. These changes are used to predict values
of the dependent variable.

intercept.
Answer (B) is correct. The dependent variable in the
regression equation is the item to be estimated (or
calculated or predicted), i.e., y. In regression
analysis, the objective is to predict a value of one
variable (dependent) in terms of the values of one or
more other variables (independent).
line.

intercept.
Answer (B) is incorrect because y is the dependent
variable.
line.
Answer (D) is correct. The error term in the equation
is e. The error term is usually assumed to have a
mean of zero in linear regression, thereby permitting
calculations using the formula y = a + bx.
Answer (D) is incorrect because x is the independent

variable.
Answer (A) is correct. The y-axis intercept is equal
to a in the equation. If the relevant range includes
zero volume, a is a fixed cost in the usual cost
function. It is the expected value of y when x is zero,
provided that it lies within the relevant range of the
sample. The relevant range of the regression analysis
is the portion of the least squares line between the
minimum and maximum values of the independent
variable. The predictive ability of regression should
be limited to this region.
Answer (B) is incorrect because b is the slope of the
line.
Answer (C) is incorrect because x is the independent
variable.
Answer (D) is incorrect because e is the error term.
Answer (A) is incorrect because y is the dependent
variable.
Answer (A) is correct. The confidence interval is a

range of values constructed from the regression
results that is expected to contain the true population
value. It equals the estimate of y plus or minus the
number of standard errors of the estimate appropriate
for the desired level of confidence (probability that
the interval contains the true value). This involves
taking the mean, adjusting for the standard deviation
and the appropriate probability distribution, to arrive
at the range.
Answer (B) is incorrect because it describes constant
variance.
Answer (C) is incorrect because it describes the
coefficient of determination.
Answer (D) is incorrect because the strength of the
linear relationship is measured by the coefficient of
correlation.
Answer (A) is incorrect because it describes a
confidence interval.
Answer (B) is correct. Constant variance signifies a

uniform deviation of points from the regression line.
This uniformity is based on the assumption that the
distribution of the observations and errors is not
affected by the values of the independent variable(s).
Answer (C) is incorrect because constant variance is
one of the basic assumptions underlying regression
analysis.
Answer (D) is incorrect because one of the basic
assumptions underlying regression analysis is that
observations are independent.
Answer (A) is incorrect because all of the answers
are correct.
Answer (B) is incorrect because all of the answers
are correct.
Answer (C) is incorrect because all of the answers
are correct.
Answer (D) is correct. All four statements are true.
This ideal situation permits t-tests (i.e., use of the
normal distribution adjusted for degrees of freedom)
to evaluate the significance of the estimates.
Answer (A) is correct. Decision making under risk
entails consideration of multiple possible future states
of nature for each choice. The decision is under risk if
a probability distribution for these states can be
estimated. Thus, the states of nature will be mutually
exclusive, and the sum of their probabilities will equal
1.0. Risk increases as the variability of outcomes
becomes greater. In practice, however, the terms risk
and uncertainty are often treated as synonyms.
Answer (B) is incorrect because, under uncertainty,
the probabilities of the possible states of nature are
unknown.
Answer (C) is incorrect because, under certainty, that
is, with perfect information, the outcome of each
decision choice is known; that is, its probability is
1.0.
Answer (D) is incorrect because satisficing decisions
are satisfactory or sufficient but not optimal.
Answer (A) is correct. The joint probability of
occurrence of two independent events equals the
product of their individual probabilities. The
probability that the cost of Material 1 will increase by
3% is .3. The probability that the cost of Material 2
will increase by 3% is .5. The probability that both
will occur is .15 (.3 x .5).
Answer (B) is incorrect because 40% is the average
of the probabilities of a 3% increase in the costs of
Material 1 and Material 2.
Answer (C) is incorrect because 80% is the sum of
the probabilities of a 3% increase in the costs of
Material 1 and Material 2.
Answer (D) is incorrect because 20% is the
difference between the probabilities of an increase in
the costs of Material 1 and Material 2.

Answer (A) is incorrect because it is an attribute of a
probability distribution.
Answer (B) is incorrect because it is an attribute of a
Answer (C) is correct. In probability distribution, the
probability of any event(s) is bounded by 0 (no
chance) and 1 (certainty). The total probability of all
possible outcomes must sum to 1. Also, a probability
distribution models a random variable through the use
of a formula or graph that provides the probability
associated with the occurrence of certain values of
the random variable. If only one outcome is possible,
the variable is not random but constant and known
with certainty.
Answer (D) is incorrect because it is an attribute of a
Answer (A) is incorrect because a flowchart but not
a decision tree would depict this item.
Answer (B) is incorrect because a flowchart but not a
decision tree would depict this item.
Answer (C) is incorrect because a flowchart but not
a decision tree would depict this item.
Answer (D) is correct. A decision tree is a logic
diagram used to represent sequential decision-making
processes. It is useful when the most beneficial series
of decisions is to be chosen. The possible decisions
for each decision point, the events that might follow
from each decision, the probabilities of these events,
and the quantified outcomes of the events should be
known to develop a decision tree. A flowchart is a
diagram of a repetitive logical process, such as the
steps in a computer program. Thus, it is not designed
to show particular outcomes.
Answer (A) is incorrect because a t-test is not valid
in this case.
Answer (B) is incorrect because the auditor already
has a list of the entire population, and no sampling is
needed.
Answer (C) is incorrect because a t-test can be used
with groups that differ in size.
Answer (D) is correct. The t-distribution is used for
small samples but in the same way as the normal
distribution. A t-test is not valid when used with
ordinal-level data. A t-test by definition is an
application of parametric statistics. Nonparametric
(distribution-free) statistics is applied to problems for
which rank order, but not a specific distribution, is
known.
Answer (A) is incorrect because payoffs are outcome
measures such as profit or loss.
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.
Answer (C) is incorrect because probabilities are the
likelihood of occurrence of the states of nature.
Answer (D) is incorrect because nodes (junction
points) are decision points.
[73] Source: CMA 1294 4-30
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.
Answer (B) is incorrect because simulation is not
necessary. Several estimates are known.
Answer (C) is incorrect because the exponential
distribution is the probability of zero occurrences in a
specified time period.
Answer (D) is incorrect because sensitivity analysis
involves making several estimates of key variables
and recalculating results based on the alternative
estimates; the objective is to determine how sensitive
a solution is to changes in estimates.
Answer (B) is incorrect because a computer

simulation is a more exact method of separating fixed
and variable costs.
Answer (C) is correct. The fixed and variable
portions of mixed costs may be estimated by
identifying the highest and the lowest costs within the
relevant range. The difference in cost divided by the
difference in activity is the variable rate. Once the
variable rate is found, the fixed portion is
determinable. The high-low method is a simple
approximation of the mixed cost formula. The costs
of using more sophisticated methods sometimes
outweigh the incremental accuracy achieved. In these
cases, the high-low method is sufficient.
Answer (D) is incorrect because matrix algebra is a
precise method of separating fixed and variable costs.
Answer (A) is incorrect because knowing the
behavior of business cycles can be valuable when
forecasting the required purchases of inventory.
Answer (B) is correct. Internal accounting allocations
of costs to different segments of the firm are arbitrary
assignments of already incurred costs that are
irrelevant to forecasting its purchases.
Answer (C) is incorrect because understanding
seasonal variations in demand for the product can be
valuable when forecasting the required purchases of
inventory.
Answer (D) is incorrect because the use of
econometric models can be valuable when
forecasting the required purchases of inventory.

Answer (A) is incorrect because, under risk there are
multiple outcomes; certainty exists when only one
outcome is possible.
Answer (B) is incorrect because calculation of
expected values is dependent upon probabilities.
Answer (C) is incorrect because decision makers
may also rely on probabilistic information under
conditions of risk.
Answer (D) is correct. Probability is important to
management decision making because of the
uncertainty of future events. Probability techniques
assist in making the best decisions in the face of
uncertainty. There are two types of probability:
objective and subjective. Objective probabilities are
calculated from either logic or actual experience.
Subjective probabilities are estimates, based on
judgment and past experience, of the likelihood of
future events. In business, subjective probability can
indicate the degree of confidence a person has in
some outcome. Under conditions of uncertainty, a
decision maker must first establish subjective
probabilities; only then can the decision-making
process proceed as it does under conditions of risk.
Answer (A) is incorrect because the least squares
(regression) method is a sophisticated method of
identifying the fixed and variable costs.

Answer (A) is correct. Cost X is a mixed cost (part
variable and part fixed). The hi-low method can be
used to determine the fixed and variable portions.
Dividing the total cost of X at two different
production volumes by the difference in units
produced gives a unit variable cost of $4.83
[($178,260 - $23,700) (35,000 units - 3,000
units)]. Fixed cost must therefore be $9,210
[$178,260 cost of X for 35,000 units - ($4.83 x
35,000 units)]. Total cost of X for 8,000 units is
$47,850 [$9,210 + ($4.83 x 8,000 units)], and the
average cost is $5.98 ($47,850 8,000).
Answer (B) is incorrect because $5.85 equals the
average cost of 9,000 units.
Answer (C) is incorrect because $7.90 equals the
average cost of 3,000 units.
Answer (D) is incorrect because $4.83 is the variable
cost per unit.
[78] Source: CMA 1287 5-21
Answer (A) is correct. The sum of the probabilities
that the process is in or out of control is 1.0. Thus, if
P is the probability that a process is in control, (1 - P)
is its complement, or the probability that the process
is not in control.
Answer (B) is incorrect because it is a nonsense
answer.
Answer (C) is incorrect because it is a nonsense

answer.
Answer (D) is incorrect because it is a nonsense
answer.
[79] Source: CMA 1287 5-22
Answer (A) is incorrect because transforming the
inequality to an equality and solving for P gives the
expression 1 - [I (L - C)].
Answer (B) is incorrect because transforming the
Answer (C) is correct. The critical probability that the
process is in control is defined as P. Transforming the
inequality into an equality and solving for P
determines the value of the critical probability. For
any lesser value of P, given constant values of L, I,
and C, investigation will be justified.
L(1 - P) = I + C(1 - P)
(L - C)(1 - P) = I
1 - P = I (L - C)
P = 1 - I (L - C)
For example, if I equals $18, L equals $100, and C
equals $10, then the lowest (critical) probability at
which the process is considered to be in control is
0.8 [1 - $18 ($100 - $10)]. At this value, the
expected value of the operating cost savings from
investigation equals the sum of the cost of
investigation and the expected value of the cost of
correction.
Answer (D) is incorrect because transforming the

Answer (A) is incorrect because .0577 results from
using n, not n-1, in the denominator.
Answer (B) is correct. The sample mean is the sum
of the observations divided by the sample size. The
sample mean is typically denoted as func x BAR. The
following is
2
_2
the sample variance (s ): x - x) (n - 1). The sample
i
standard deviation (s) is the square root of the
variance. Thus, the sample variance is .00375 [.03
(9 - 1)], and the sample standard deviation is .0612
(square root of .00375).
Answer (C) is incorrect because .0316 equals .03
divided by .95.
Answer (D) is incorrect because .00375 is the
variance.
Answer (A) is incorrect because the null hypothesis is
that the population mean is equal to or less than 1
calorie. The alternate hypothesis is that it is greater
than 1.
Answer (B) is correct. ABC asserts that its diet soda
has, on the average, 1 calorie or less. Thus, a
possible null hypothesis is Ho: 1. The alternative
hypothesis is that the mean is greater than 1, that is,
Ha: > 1. Because the null hypothesis cannot be
rejected if the test statistic falls in the left-hand tail of
the distribution, the test is one-tailed.
Answer (A) is incorrect because a C chart is also an

attribute control chart. It shows defects per item.
Answer (C) is incorrect because the null hypothesis is

than 1.
Answer (B) is correct. A P chart is based on an

attribute (acceptable/not acceptable) rather than a
measure of a variable, specifically, the percentage of
defects in a sample.
Answer (D) is incorrect because the null hypothesis is

than 1.
Answer (C) is incorrect because an R chart displays

the range of dispersion of a variable, such as size or
weight.
Answer (D) is incorrect because an X-bar chart plots
the sample mean for a variable.

Answer (A) is incorrect because the z-statistic is
appropriate when the standard deviation of the
population is known or a large sample (n > 30)
permits a reasonable approximation of the population
standard deviation.

Answer (A) is incorrect because acceptance
sampling is a standard statistical process control
technique.
Answer (B) is correct. Dollar-unit sampling has been
uniquely applied to auditing account balances. It is
not used in statistical processing control.
Answer (C) is incorrect because quality control
charts are an integral part of TQM approaches.
Answer (D) is incorrect because continuous
monitoring and frequent feedback are two of the
important elements of statistical quality control.
Answer (B) is correct. The t-statistic is appropriate

for tests of hypotheses based on small samples. It
measures how the sample mean differs from the
hypothesized true mean in terms of standard
deviations. The formula is
_
x-
t = -------------------s square root of n
_
If: x = sample mean,
= hypothesized true mean
s = sample standard deviation
n = sample size.
Answer (C) is incorrect because the F-statistic tests

differences in variances.
Answer (D) is incorrect because Q-statistic is a
nonsense term.
Answer (D) is incorrect because 2.262 is for 9

degrees of freedom and a confidence level of 97.5%.
Answer (A) is incorrect because the null hypothesis
cannot be rejected.

Answer (A) is correct. Given that func x BAR equals
.95, the hypothesized value of the true mean is 1, the
sample standard deviation equals .0612, and the
sample size is 9, the value of the t-statistic is
.95 - 1
-.05 -.05
t = ------------------------ = --------- = ----- = -2.45
.0612 square root of 9 .0612 3 .0204
Answer (B) is incorrect because -.05 is the difference
between the sample mean and the hypothesized true
mean.
Answer (C) is incorrect because the value is negative.
Answer (D) is incorrect because the value is negative.
Answer (A) is correct. The degrees of freedom
associated with the test statistic equals the sample
size minus the number of parameters being tested.
Measurements of calorie content were made for nine
cans of diet soda; i.e., nine distinct observations were
included in the sample. The only parameter tested is
, the mean calorie content of the diet sodas, so the
number of degrees of freedom is 8 (9 - 1).
Answer (B) is correct. The critical value of t is 1.86,

and the calculated t-statistic is -2.45. Accordingly,
the 5% rejection region includes, and lies to the right
of, the t-value of 1.86. Because the computed value
is less than (to the left of) 1.86 in this one-tailed test,
the null hypothesis cannot be rejected.
Answer (C) is incorrect because the null hypothesis
cannot be rejected.
Answer (D) is incorrect because some sodas have
more than 1 calorie.
[89] Source: CMA 0697 4-22
Answer (A) is incorrect because $85,000 is the sales
estimate with the highest probability.
Answer (B) is incorrect because $84,000 is the
expected value of sales.
Answer (C) is incorrect because $68,000 is 80% of
the sales estimate with the highest probability.
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 x .25) +
($85,000 x .40) + ($100,000 x .35)]. Cost of goods
sold is therefore $67,200 (80% x $84,000).
Answer (B) is incorrect because 9 is the sample size.

[90] Source: CMA 0697 4-24
Answer (C) is incorrect because one parameter is
tested.
Answer (D) is incorrect because one parameter is
tested.
Answer (A) is incorrect because 2.306 is for a
confidence level of 97.5%.
Answer (B) is correct. The rejection region is
determined by the value of t at the appropriate
degrees of freedom and the specific level of
confidence. Choosing a 95% level of confidence
means that the value of t will restrict the probability of
a Type 1 error (rejecting the null hypothesis when the
null hypothesis is true) to 5%. The rejection region is
bounded by this value. Hence, the null hypothesis will
be rejected if the t-statistic calculated from the
formula is equal to or greater than the t-value from a
table of t-values. The t-value correlates the
appropriate degrees of freedom (n - 1) and the
appropriate probability of making a Type 1 error
(.05). In this case, with 8 degrees of freedom, the
appropriate rejection region is defined by a t value of
1.86. Thus, a calculated t-statistic equal to or greater
than 1.86 permits rejection of the null hypothesis Ho:
1.
Answer (C) is incorrect because 1.833 is for 9
degrees of freedom.
Answer (A) is incorrect because queuing

(waiting-line) theory is a group of mathematical
models of systems involving waiting lines.
programming is an approach to solving problems, not
a particular algorithm. It divides a large mathematical
model into smaller, more manageable pieces in such a
way that, once the smaller problems have been
solved, the result is the optimal solution to the overall
model.
Answer (C) is incorrect because the critical path
method is a network model used to help control
large-scale, complex projects.
Answer (D) is correct. Decision tree analysis is useful
when the most beneficial series of decisions is to be
chosen. The possible decisions for each decision
point, the events that might follow from each decision,
the probabilities of these events, and the quantified
outcomes of the events should be known.
Answer (A) is incorrect because, if frost has a
probability of .167, the expected value of not
providing protection exceeds that of providing
protection.
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.
Answer (C) is incorrect because, if the probability of
frost is greater than .200, an expected value analysis
indicates the company should provide protection.
Answer (D) is incorrect because, if the probability of
frost is greater than .200, an expected value analysis
indicates the company should provide protection.
Answer (A) is incorrect because $(15,200) is the
annual amount the company will lose without a
generator.
Answer (B) is incorrect because ($1,267) is the
monthly amount the company will lose without a
generator.
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 x 0
2 12 x 1
4 12 x 2
3 12 x 3
= 0.
= .16667
= .66667
= .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.
Answer (D) is incorrect because $7,200 is the
amount the company will save if two outages occur
per month.
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%.
Answer (D) is incorrect because 25% is the
probability of selling between 401 and 600 units.
Answer (A) is incorrect because 480 is based on the
maximum value in each range.
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 x 15% = 15
300 x 45% = 135
500 x 25% = 125
700 x 15% = 105
--380
===
Answer (C) is incorrect because 400 is the maximum
value in the modal range.
Answer (D) is incorrect because 800 is the highest
estimate.
Answer (A) is correct. To determine the expected
value, each outcome is multiplied by its probability as
follows:
1%
2%
3%
4%
5%
x
x
x
x
x
.20 = .20%
.20 = .40%
.30 = .90%
.20 = .80%
.10 = .50%
----Total 2.80%
=====
The expected rate of defective units is 2.80%.
Answer (B) is incorrect because 3.00% is the
unweighted average of the possible rates of defects.
Answer (C) is incorrect because .90% equals 30%
of 3%.
Answer (D) is incorrect because the expected rate of
defects must be less than 3.00%. The probability of a
rate less than 3.00% is 40%, whereas the probability
of a rate greater than 3.00% is 30%.
Answer (A) is incorrect because a variance occurs
unless all data points are identical.

Answer (A) is incorrect because there is a 70%
Answer (B) is incorrect because there is a 70%
Answer (C) is correct. The probability of selling
Answer (B) is incorrect because this variance is not

possible. None of the data points are more than
2.2% from the mean.
Answer (C) is incorrect because 10.2% is the simple
sum of the squares assuming an unweighted list of
only five data points.
Answer (D) is correct. The variance is the average of

the squared deviations from the mean. It is found by
subtracting the mean from each value, squaring each
difference, adding the squared differences, and
dividing the sum by the number of data points. The
mean, or expected value, of the percentage of
defective units is 2.80%. Moreover, there are
effectively 100 data points in this problem because
the probabilities of possible outcomes are given
instead of a set of actual outcomes. For example, a
20% probability of a 1% rate is the equivalent of 20
occurrences of a 1% rate in a sample of 100
production runs. Accordingly, instead of dividing by
the sum of the data points in the variance formula,
each squared difference can be multiplied by the
related probability as shown below:
(1.0% - 2.80%)2
(2.0% - 2.80%)2
(3.0% - 2.80%)2
(4.0% - 2.80%)2
(5.0% - 2.80%)2
x .20 = .648
x .20 = .128
x .30 = .012
x .20 = .288
x .10 = .484
----Variance 1.56%
=====
in the 1,151-1,200 range, 8 in the 1,201-1,250

range, and 4 in the 1,251-1,300 range. Thus, the
probability of a number of calls greater than 1,150 is
simply (10 + 8 + 4) 200 = .11.
Answer (A) is incorrect because the probability is
determined by dividing the number of outcomes
greater than 1,150 by the total number of outcomes.
Answer (B) is correct. If each of 500 outcomes
(1,300 - 800) is equally likely, the probability of
more than 1,150 calls in a week is 30% [(1,300 1,150) 500].
Answer (C) is incorrect because the probability is
Answer (D) is incorrect because the probability is

Answer (A) is incorrect because $100 is the amount
that a defective unit costs the company.
Answer (B) is incorrect because more than $200 can
be paid and the company's profits will increase.
Answer (C) is correct. The expected rate of
defective units is 2.80% per production run, or 2.8
units per 100. If each defective unit costs the
company $100, avoiding 2.8 defective units saves the
company $280. Thus, any labor cost less than $280
will increase profits.
Answer (D) is incorrect because the company's
profits will decline if $295 is paid to the worker.
Answer (A) is incorrect because the probability of at

least one positive project would be greater.
Answer (B) is incorrect because the probability of at
least one positive project would be greater.
Answer (C) is correct. The probability that either one
or both of two events will occur equals the sum of
their separate probabilities minus their joint
probability. Therefore, the probability that at least
one of the two projects will have positive cash flows
is the probability that project 1 will have positive cash
flows plus the probability that project 2 will have
positive cash flows, minus the probability that both
project 1 and project 2 will have positive cash flows.
Thus, (0.5) + (0.5) - [(0.5)(0.5)] = 0.75.
Answer (D) is incorrect because there is a .25
chance that both projects will have negative cash
flows.
Answer (A) is incorrect because the sample is

adequate.
Answer (B) is incorrect because even an examination
of all 10,000 transactions would not necessarily
prove that there are no errors in accounts payable.
Answer (C) is incorrect because the null hypothesis
has not been disproved.
Answer (D) is correct. The null hypothesis is that the
error rate is equal to or less than 0.5%. Given that no
errors were found, no basis for disproving the null
hypothesis is presented.
Answer (A) is incorrect because $133,333 places

too much weighting on the second option.
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 (0.5)($200,000) +
(0.4)($100,000) + (0.1)($550,000) = $195,000.
Answer (C) is incorrect because $225,000 gives too
much weight to the third option.

Answer (A) is incorrect because .06 is the probability
that over 1,200 calls will be received.
Answer (D) is incorrect because $283,333 uses a

simple unweighted average of the returns from the
three options.
Answer (B) is incorrect because .89 is the probability

that fewer than 1,151 calls will be received.
Answer (C) is incorrect because .17 is the probability
that more than 1,100 calls will be received.
Answer (D) is correct. Of the 200 recorded
occurrences, only 22 were over 1,150 per week: 10

deviation is the square root of the variance.
Answer (B) is correct. The population standard
deviation may be estimated from the sample standard

deviation. This can be found by first determining the
variance of the sample set, which equals the
summation of the values obtained by subtracting each
individual monthly return from the average return for
the 6 months given (13%), squaring this difference,
and then dividing that difference by (n - 1), if n is the
number of elements in the sample. Thus, (n - 1)
equals 5. Accordingly, the sample variance is 65.2.
The standard deviation is the square root of the
variance, or 8.07.
Answer (D) is incorrect because the standard
Answer (B) is correct. Substituting the cash flow
figures into the probability-based formula for the
population variance produces the following:
-2
-2
X
X
(X - X)
P
(X - X) P
e
e
e
e
e
------- ------- ----------------------$ 8,000 $10,200 $4,840,000 x 0.20 = $ 968,000
$12,000 $10,200 $3,240,000 x 0.30 = $ 972,000
$10,000 $10,200 $ 40,000 x 0.50 = $ 20,000
2
(Variance) = $1,960,000
(Standard deviation) = $ 1,400
X = (0.20)($8,000) + (0.30)($12,000) + (0.50)($10,000)
= $1,600 + $3,600 + $5,000
= $10,200
Answer (D) is incorrect because the standard

Answer (A) is incorrect because it is the standard
deviation.
Answer (B) is incorrect because they were not
properly weighted for the probabilities of occurrence.
Answer (C) is incorrect because they were not
properly weighted for the probabilities of occurrence.
Answer (D) is correct. The population variance is the
average of the squared deviations from the mean. It is
found by subtracting the mean from each value,
squaring each difference, adding these squared
differences, and dividing the sum by the number of
data points. The mean, or expected value, was
determined to be $2,033,000 in the previous
question. In this case, probabilities are given, so
instead of dividing by the sum of the data points in the
variance formula, each squared difference can be
multiplied by the appropriately related probability, as
shown below.
($1,000,000 - $2,033,000) x 0.18 = $192,076,020,000
($1,200,000 - $2,033,000) x 0.15 = 104,083,350,000
($1,700,000 - $2,033,000) x 0.24 = 26,613,360,000
($2,600,000 - $2,033,000) x 0.22 = 70,727,580,000
($3,300,000 - $2,033,000) x 0.21 = 337,110,690,000
---------------Variance $730,611,000,000
================
The variance is an intermediate step in the calculation
of the standard deviation. The standard deviation is
the square root of the variance.
Answer (A) is correct. The coefficient of variation is
useful when the rates of return and standard
deviations of two investments differ. It measures the
risk per unit of return because it divides the standard
deviation
/\
( by the expected return (k ).
/\
Coefficient of variation = k

Answer (A) is incorrect because they are lower than
possible given any of the probabilities given.
Answer (B) is incorrect because they are lower than
possible given any of the probabilities given.
Answer (C) is incorrect because it represents the
arithmetic average of the five possibilities, without
regard to probabilities.
Answer (D) is correct. To determine the expected
value, each potential outcome is multiplied by its
probability, and then these values are summed to give
the expected value.
$1,000,000 x .18 = $ 180,000
1,200,000 x .15 = 180,000
1,700,000 x .24 = 408,000
2,600,000 x .22 = 572,000
3,300,000 x .21 = 693,000
---------$2,033,000
==========
The investment in the U.S. and Britain has a

coefficient of variation of .143 (3% 21%), whereas
the investment in the U.S. and Canada has a
coefficient of variation of .625 (15% 24%).
Accordingly, the company should undertake the
British investment because it has substantially less risk
per unit of return.
Answer (B) is incorrect because the Canadian
investment is significantly riskier per unit of return.
Answer (C) is incorrect because the company should
undertake the British investment. As a result, its
return will increase and its risk will decrease.
Answer (D) is incorrect because the company should
undertake the British investment. As a result, its
return will increase and its risk will decrease.
Answer (A) is incorrect because the cost of insurance
and installation of an alarm system is $40,000, which
is greater than the $37,500 expected loss.
Answer (B) is incorrect because the cost of insurance

alone is $50,000.
Answer (C) is correct. If an alarm system is not
installed, the expected fire loss in the next year is
$75,000 [(90% x $0) + (5% x $100,000) + (3% x
$1,000,000) + (2% x $2,000,000)]. If an alarm
system is installed, the expected fire loss in the next
year is $37,500 (50% x $75,000 expected loss
without an alarm system). Accordingly, if the building
is not insured, the enterprise's total cost if it does not
install an alarm system is the expected uninsured loss
of $75,000. If the alarm system is installed, the total
cost is $39,500 ($2,000 installation cost + $37,500
expected uninsured loss). If the building is insured,
and the alarm system is not installed, the expected fire
loss will be reimbursed, but an insurance premium of
$50,000 must be paid. If the alarm system is
installed, the expected fire loss will be reimbursed,
but the sum of the insurance premium and the
installation cost will be $40,000 {[(100% - 24%) x
$50,000] + $2,000}. Thus, the enterprise's best
course of action is not to self-insure, but to install an
alarm system.
Answer (D) is incorrect because the expected
uninsured loss is $75,000 without an alarm system.
Answer (A) is incorrect because random or normal
variations should fall within realistically determined
control limits.
Answer (B) is correct. Statistical quality control
charts are graphic aids for monitoring the status of
any process subject to random variations. For
example, an X-bar chart depicts the sample means
for a variable. If the values fall within the upper and
lower control limits, no action is taken. Accordingly,
values outside these limits are abnormal and should
be investigated for possible corrective action.
Answer (C) is incorrect because random or normal
variations should fall within realistically determined
control limits.
Answer (D) is incorrect because, in time series
analysis, cyclic variation is the fluctuation in the value
of a variable caused by change in the level of general
business activity.
[110] Source: CMA 1280 5-13
Answer (A) is correct. Matrix algebra can be used to
solve the system of simultaneous equations that will
result from the description of the cost for each
department. The equations are simultaneous because
the costs are simultaneously allocated among service
departments and producing departments.
Answer (B) is incorrect because Boolean algebra is a
technique used for the solution of problems in binary
arithmetic.
their probabilistic nature. In other words, a problem

is divided into a number of subproblems and then
worked backward, so each subproblem is solved
until the final solution is obtained. Decision trees are
an example of dynamic programming.
[111] Source: CMA 1280 5-15
Answer (A) is incorrect because statistical sampling is
used to calculate the condition of a population based
on a sample from that population. A sample is not
needed because the life of the tires is already known,
as is the number of miles on each car.
Answer (B) is correct. Probability analysis can be
used to estimate the condition of the tires in the fleet
at any one time and the expected value of replacing
all tires at once versus as they wear out.
Answer (C) is incorrect because linear programming
is used to find the most economic combination of a
large number of scarce resources. An objective
function is minimized, e.g., cost, or maximized, e.g.,
profit, subject to a series of constraints, e.g., available
resources, necessary output, etc.
Answer (D) is incorrect because learning curve
techniques are useful in measuring and estimating the
increased efficiency in increased production quantities
due to increasing expertise on the part of the people
working on production.
[112] Source: CMA 0681 5-10
Answer (A) is incorrect because $8x + $0.01x is the
cost function without the constant.
Answer (B) is incorrect because the first derivative of
$0.01x is $0.02x.
Answer (C) is correct. The marginal cost function is
the derivative of the total cost function. Remember,
the basic formula for the derivative is
n
n-1
f'(Ax ) = nAx
If:
A = the constant, or number of x's
x = the variable being differentiated
n = the exponent of the independent variable
Also recall that the derivative of the entire equation is
the sum of the derivatives of the individual elements.
Thus, the derivative of the cost function is
2
2
f'($50 + $8x + $0.01x ) = f'($50) + f'($8x) + f'($0.01x )
= 0 + $8 + $0.02x
= $8 + $0.02x
Answer (D) is incorrect because the derivative of the
entire equation is the sum of the derivatives of the
individual elements.
[113] Source: CMA 0681 5-11
Answer (C) is incorrect because the simulation

technique model is a process to permit analysis of the
effects of changing one or more variables.
Answer (D) is incorrect because dynamic
programming is a method of solving selected decision
problems, usually involving only a few variables. In
dynamic programming a series of independent but
related problems (decisions) are solved based on
Answer (A) is incorrect because 520,000 gallons

assumes the first derivative of the revenue function is
26 - .05x.
Answer (B) is correct. A maximization problem is
solved by setting the first derivative of the revenue
function equal to zero and solving for x. The first
derivative of the revenue function is 26 - .1x. Thus,
.1x = 26
x = 260
Selling 260,000 gallons of cleaning fluid would
maximize revenues.
Answer (C) is incorrect because 260,000 gallons
maximizes revenue.
Answer (D) is incorrect because 150,000 gallons is
the profit-maximizing amount.
[114] Source: CMA 0681 5-12
Answer (A) is incorrect because 520,000 gallons is
the quantity that maximizes revenue if the first
derivative function is 26 - .05x.
Answer (B) is incorrect because 260,000 is the
quantity of product to be sold to maximize revenue.
Answer (C) is incorrect because 150,000 gallons is
the profit-maximizing production.
Answer (D) is correct. Profit is equal to the revenue
function minus the cost function
2
2
[(-$100 + $26x - $0.05x ) - ($50 + 8x + $0.01x )].
It is not necessary to combine terms. The profit
maximum is the first derivative of this profit function
(26 - .1x) - (8 + .02x), or 18 - .12x. Set this
derivative equal to zero and solve for x, or 150.
Thus, producing 150,000 gallons of cleaning fluid will
maximize profit.
[115] Source: CMA 0681 5-13
Answer (A) is incorrect because $3,200,000 equals
total revenues.
Answer (B) is incorrect because $(50,000) equals
fixed costs.
applied to problems with financial, social, and

environmental objectives. It was first introduced as a
means of solving linear programming problems that
did not have a feasible solution.
programming cannot deal with multiple objectives,
although it can handle changes in constraints.
[117] Source: CMA 1283 5-20
Answer (A) is incorrect because, although a linear
programming problem can only be solved graphically
in two-product situations, it can incorporate
additional alternatives with the aid of a computer.
can be used for product mix, raw material mix, staff
assignment, and a variety of other problems.
Answer (C) is correct. Linear programming assumes
straight-line relationships over a relevant range.
can be used to solve maximization problems.
[118] Source: CMA 1286 5-27
Answer (A) is incorrect because a slack variable
represents unused capacity.
Answer (B) is correct. A slack variable represents
unused capacity. Since linear programming
formulations are often stated as inequalities, there is a
possibility of unused capacity even at the optimum
production level. To convert inequalities to equalities,
slack variables are introduced to account for this
unused capacity.
Answer (C) is incorrect because a slack variable
Answer (D) is incorrect because a slack variable
Answer (C) is incorrect because $(3,350,000)

equals total costs.
[119] Source: CMA 1286 5-28
Answer (D) is correct. This question is easily solved
by substituting 300 for x in the revenue and cost
equations.
Revenue = -$100 + $26(300) - $.05(90,000)
Cost = $50 + $8(300) + $.01(90,000)
Then the cost equation is subtracted from the revenue
equation to determine profit.
[-100 + 7,800 - 4,500 - (50 + 2,400 + 900)]
Profit = $3,200 (revenue) - $3,350 (costs)
= $150 (loss) per x.
Since x represents a thousand gallons, the total loss
would be $150,000.
[116] Source: CMA 0683 5-5
cannot deal with multiple objectives.
Answer (B) is incorrect because statistical analysis is
a mathematical technique.
Answer (C) is correct. Goal programming permits an
ordinal specification and solution to a problem with
multiple goals. With its ability to incorporate multiple
goals, goal programming has the potential to be
Answer (A) is incorrect because differential calculus

is used to identify the maxima and minima of
curvilinear functions.
Answer (B) is incorrect because integral calculus is
used to calculate the area under a curve.
Answer (C) is incorrect because simulation is a
means of experimenting with logical and mathematical
models using a computer.
Answer (D) is correct. Matrix algebra is a method of
manipulating multiple linear equations. It is used to
solve linear programming problems. The use of matrix
algebra to solve such problems is called the simplex
method.
[120] Source: CMA 1287 5-23
Answer (A) is incorrect because, assuming saving is
defined as investment, the effect on saving is
indeterminate. The stock of money may or may not
have been reduced in favor of greater investment. If
saving is defined as money held plus investment,
however, no saving could occur.
Answer (B) is incorrect because the relationship

between earned income and interest income cannot
be determined.
Answer (C) is incorrect because the stock of money
cannot be negative.
Answer (D) is correct. This model recognizes three
sources of funds: current period earned income, prior
period return on investment, and prior period money
held. The three uses of funds in the current period are
consumption, investment, and money held. If the
excess of consumption spending over earned income
in period t is greater than the return on investment in
period (t - 1), investment or the stock of money must
have declined because spending is greater than
income and earnings on investments.
[121] Source: CMA 1287 5-24
Answer (A) is incorrect because the increase in
investment may have come from a decline in the
stock of money held.
margin of $6 plus an unknown number of units of F at

a unit contribution margin of $7 (P = $6D + $7F).
[124] Source: CMA 1288 5-9
Answer (A) is incorrect because 2D + F 16 is the
constraint equation for Machine 107.
Answer (B) is correct. The constraint equations for
machine hours are 2D + 3F 24 hours and 2D + 1F
16 hours. Since these equations involve two
unknowns (D and F), they may be solved
simultaneously. Solving for F in the second equation
produces F 16 - 2D. Substituting this result into the
first equation produces 2D + 3(16 - 2D) 24.
Answer (C) is incorrect because D equals [(16 - F)
2].
Answer (D) is incorrect because the constraint
equations for machine hours are 2D + 3F 24 hours
and 2D + 1F 16 hours. Solving for F in the second
equation produces F 16 - 2D. Substituting this
result into the first equation produces 2D + 3(16 2D) 24.
Answer (B) is incorrect because the level of interest

rates cannot be determined.
[125] Source: CMA 1288 5-10
Answer (C) is correct. If investments have increased
by more than the interest earned, some of the current
period's earnings must have been invested or the
stock of money may have decreased.
Answer (A) is incorrect because objective functions

are those that management is attempting to maximize
(or minimize) in a linear programming problem.
Answer (D) is incorrect because net investment

occurred.
Answer (B) is incorrect because inequalities refer to

equations that do not balance. These can balance.
[122] Source: CMA 1287 5-25

Answer (A) is incorrect because the decline in money
held does not necessarily result in greater investment.
Answer (B) is correct. If a household's need to hold
money declines, the stock of money in the current
period will be less than the stock held in the
preceding period.
Answer (C) is incorrect because consumption may
be more or less than earnings since the additional
funds could have been used for consumption or
investment.
Answer (D) is incorrect because the reduction in the
money stock may have been consumed or invested.
[123] Source: CMA 1288 5-8
Answer (A) is incorrect because the objective
function seeks to maximize the total contribution
margin. It will equal an unknown number of units of D
at a unit contribution margin of $6 plus an unknown
number of units of F at a unit contribution margin of
$7 (P = $6D + $7F).
Answer (B) is incorrect because the constraint
equations are not factors in the objective function.
Answer (C) is incorrect because the constraint
equations are not factors in the objective function.
Answer (D) is correct. The objective function is the
equation that the company is trying to maximize.
Since the objective is to maximize the total
contribution margin, the function will equal an
unknown number of units of D at a unit contribution
Answer (C) is incorrect because deterministic

functions are those with known (determinable)
variables.
Answer (D) is correct. These are constraint
equations. The objective function (P = $6D + $7F) is
to be maximized subject to these constraint functions.
There are four constraints altogether: (1) the 24 hours
limitation for Machine 105, (2) the 16 hours limitation
for Machine 107, (3) the nonnegative production
assumption for product D, and (4) the nonnegative
production assumption for product F.
[126] Source: CMA 1288 5-11
Answer (A) is incorrect because, if F is 8, D must be
0.
Answer (B) is correct. This question does not ask for
the optimum solution, only a feasible solution. Thus,
the only question that is being addressed is whether
the production level violates the constraint functions.
This problem can be solved either graphically or by
means of trial and error. The graphical approach
involves drawing the constraint lines on a graph and
outlining the feasible region. An easier approach is to
solve the problem by trial and error. For each
answer, it can be determined whether the production
levels violate the constraint functions.
2D + 3F 24
2D + 1F 16
Producing 6 units of product D and 4 units of product
F does not violate a constraint.
Answer (C) is incorrect because D cannot be 12.
Answer (D) is incorrect because, if D is 8, F must be
0.
[127] Source: CMA 1288 5-4
Answer (A) is correct. Exogenous or input variables
are outside the control of the decision maker.
Exogenous means "originating externally." These
influence the decision model (system) but are not
influenced by it.
Answer (B) is incorrect because at least one of the
decision variables in a model must be under the
decision maker's control; that is, at least one variable
cannot be exogenous.
Answer (C) is incorrect because performance criteria
are the means of measuring the results of a decision
after the fact.
Answer (D) is incorrect because constraints are
limitations (constants, not variables) that must be
considered as part of the decision process.
[130] Source: CMA 0689 5-19

Answer (A) is incorrect because the direct labor
variables must be multiplied by the hours needed.
Thus, the direct labor constraint is 2A + 2B + 3C
150.
Answer (B) is incorrect because a linear
programming constraint is stated as an inequality.
Answer (C) is incorrect because a linear
programming constraint is stated as an inequality.
Answer (D) is correct. A linear programming
constraint is stated as an inequality. For example,
because only 150 direct labor hours are available,
production is constrained by (limited to) the amount
of that resource. Each anchor bolt requires 2 hours of
labor, each bearing 2 hours, and each caster 3 hours.
Total direct labor hours must be less than or equal to
150 hours, so the constraint is 2A + 2B + 3C 150.
[131] Source: CMA 0689 5-20
[128] Source: CMA 0689 5-13

Answer (A) is incorrect because sensitivity analysis is
not used to determine how constraints vary but rather
how the optimum solution will change if constraints
do vary.
Answer (B) is incorrect because the accuracy of the
parameters cannot be tested as a part of the model.
The intent is simply to measure the impact if the
assumed parameters do vary.
Answer (C) is incorrect because the technological
matrix is developed by production managers or
engineers and is an input into the model.
Answer (D) is correct. Sensitivity analysis in linear
programming determines how the optimal solution will
change if an objective function coefficient, the limiting
value of a resource constraint, or a constraint
coefficient is varied. It also considers the effect of
adding a new variable or constraint.
[129] Source: CMA 0689 5-18
Answer (A) is correct. The purpose of linear
programming is to find the combination of resources
subject to constraints that optimizes the objective
function. Harrington wishes to maximize the total
contribution margin. Thus, the first step is to
determine the contribution margin for each of the
three products. The contribution margin is $3 ($4 $1 variable cost) for anchor bolts, $3 ($3.50 - $.50)
for bearings, and $4 ($6 - $2) for casters. The
objective is therefore to maximize $3A + $3B +
$4C.
Answer (B) is incorrect because the contribution
margin is $3 for B and $4 for C.
Answer (C) is incorrect because the contribution
margins for A, B, and C are $3, $3, and $4,
respectively.
Answer (D) is incorrect because the product
variables for A, B, and C must be multiplied by their
contribution margins, which are $3, $3, and $4,
respectively.
Answer (A) is incorrect because the machine-hour

constraint is in the ratio of 1:2:2.5. It can be stated as
A + 2B + 2.5C 100.
Answer (B) is correct. Machine hours are not given,
but up to 100 anchor bolts can be produced with the
existing capacity. Assuming that 100 units of machine
time are available (one per anchor bolt), the units of
time required to produce a bearing must be 2 (100
50 bearings). The time per caster is 2.5 (100 40
casters). Because the machine-hour constraint is
known to be in the ratio of 1:2:2.5, it can be stated as
A + 2B + 2.5C 100.
Answer (C) is incorrect because the machine-hour
A + 2B + 2.5C 100.
Answer (D) is incorrect because the machine-hour
A + 2B + 2.5C 100.
[132] Source: CMA 0690 5-29
Answer (A) is incorrect because relevant costing
refers to future costs that differ among decision
choices.
Answer (B) is incorrect because responsibility
accounting is the practice of charging costs and
crediting revenues to those managers who have
responsibility for them.
Answer (C) is incorrect because simple regression
analysis is a means of explaining the variation in a
dependent variable based upon an independent
variable.
Answer (D) is correct. Linear programming is a
deterministic mathematical technique used to
maximize linear revenue functions or to minimize
linear cost functions subject to linear constraints.
Linear programming is often used to plan resource
allocations. Managers need to use resources as
profitably or as inexpensively as possible. Solving
linear programming problems requires the use of
independent variables, dependent variables,
constraints, and slack variables. Slack variables are
used to convert equations stated as inequalities into
equalities.
determined by subtracting the second equation from

the first:
[133] Source: CMA 1290 4-25
Answer (A) is incorrect because the objective
function is Z = 200B + 150C.
Answer (B) is incorrect because the objective
Answer (C) is incorrect because the objective
Answer (D) is correct. The objective function is the
equation to maximize the contribution margin. Given
that each 100 pounds of boat wax contributes $200
and each 100 pounds of car wax contributes $150,
the company's goal is to maximize the total of these
amounts. Consequently, if B is the number of
100-pound units of boat wax, C is the number of
100-pound units of car wax, and Z is the total
contribution margin, the objective function is Z =
$200B + $150C.
[134] Source: CMA 1290 4-26
Answer (A) is incorrect because the mixing constraint
is 5B + 2.4C 800.
Answer (B) is incorrect because the mixing constraint
is 5B + 2.4C 800.
Answer (C) is correct. The Mixing Department has
only 800 hours available per month, which is a
limitation (constraint) on production. Thus, the total
mixing time is less than or equal to 800 hours. Every
100-pound batch of boat wax (B) requires 5 hours of
mixing time, and every 100-pound batch of car wax
(C) requires 2.4 hours of mixing time. Accordingly,
the total mixing time available cannot exceed 5B plus
2.4C, and the constraint equation is 5B + 2.4C
800.
Answer (D) is incorrect because the mixing constraint
is 5B + 2.4C 800.
[135] Source: CMA 1291 4-24
Answer (A) is correct. A simple means of solving this
two-equation, two variable linear programming
problem is to graph the equations. The optimal
solution is at one of the corners of the feasible space
defined by the lines representing the equations. This
space is the area that lies under both equations. The
corners of the constraint area can be determined
algebraically. If X equals 0, Y would equal 6 in the
first constraint equation (assuming it is stated as an
equality) and 10 in the second. If Y equals 0, X
would equal 9 in the first equation and 5 in the
second. Thus, the maximum units of X and Y that can
be produced are 5 and 6, respectively. Substituting
these corner solutions into the objective functions
yields these results:
Z = $4(5) + $2(0) = $20, or
Z = $4(0) + $2(6) = $12.
Thus, the better solution is to produce 5 units of
product X, which results in a profit of $20.
A third feasible solution (corner of the feasible space)
is to produce nothing (X = 0, Y = 0). This solution
obviously yields a profit of $0. The fourth corner is
the intersection of the two simultaneous constraint
equations (stated as equalities), which can be
2X + 3Y = 18
-2X + -Y = -10
-------- --2Y = 8
Y = 4 and X = 3
This solution also results in a profit of $20 [($4 x 3) +
($2 x 4)].
Answer (B) is incorrect because the maximum profit
is $20.
Answer (C) is incorrect because the maximum profit
is $20.
Answer (D) is incorrect because the maximum profit
is $20.
[136] Source: CMA 1291 4-25
Answer (A) is incorrect because correlation and
regression analysis is a means of measuring the
relationships among two or more variables.
Answer (B) is incorrect because discounted cash
flow techniques are used to evaluate alternative
capital investment decisions.
Answer (C) is incorrect because transportation
algorithms are used to minimize transportation costs
when goods must be shipped from multiple factories
to multiple customers or warehouses.
technique used to optimize a revenue, profit, or cost
function subject to constraints. LP is often used for
planning resource allocations. Other business
applications include selecting a product mix, blending
chemical products, scheduling flight crews, assigning
jobs to machines, and determining transportation
routes.
[137] Source: CMA 0692 4-8
Answer (A) is incorrect because producing 2,400
Regular models will result in a profit of only
$264,000.
Answer (B) is correct. This linear programming
problem can be solved graphically or algebraically.
The objective function maximizes the contribution
margin: $110R + $175D. The constraint function for
assembly is: 3R + 4D 12,000. The constraint
equation for testing is: 2.5R + 1.5D 6,000.
Accordingly, at most 4,000 units of the Regular
model (12,000 hours 3) or 3,000 of the Deluxe
model (12,000 hours 4) can be assembled.
Moreover, at most, 2,400 units of the Regular model
(6,000 hours 2.5) or 4,000 units of the Deluxe
model (6,000 hours 1.5) can be tested. Hence,
two feasible solutions are to produce either 2,400
units of the Regular model and none of the Deluxe
model or 3,000 units of the Deluxe model and none
of the Regular. A third feasible solution is the
intersection of the constraint functions, adjusted to
state equalities and solved simultaneously.
Answer (C) is incorrect because producing 1,091
Regular models and 2,182 Deluxe models (the
solution at the intersection of the constraint functions)
will result in a profit of only $501,860.
Answer (D) is incorrect because producing 4,000
Deluxe models violates a constraint.

[138] Source: CMA 1293 4-2
Answer (A) is incorrect because focusing on a
product's gross margin may not result in an optimal
decision if that product uses a greater amount of the
scarce resource than does another product with a
lower gross margin. Moreover, gross margin includes
some fixed costs.
Answer (B) is incorrect because focusing on segment
margin may not maximize profit if the segment uses
more than its share of the scarce resource.
Answer (C) is incorrect because product contribution
margin and contribution margin ratio may not result in
an optimal decision if the products use differing
quantities of the limited resource.
Answer (D) is correct. Given a constraining resource,
total profit is maximized by manufacturing the product
that will maximize the profit per unit of scarce
resource. Assuming machine hours are the
constraining resource, products should be
manufactured that will produce the greatest
contribution margin (revenue - variable cost) per
machine hour. This analysis assumes that fixed costs
will be unchanged regardless of which product is
manufactured.
of money and are used to calculate the present value

of a stream of future cash payments.
Answer (D) is incorrect because PERT/CPM
analysis is a project management scheduling
technique.
[141] Source: CMA 1283 5-16
Answer (A) is correct. The total variable cost of
Model A is $17 ($3 material + $8 DL + $6 variable
OH). The contribution margin is $10.50 ($27.50 unit
price - $17 VC). Similarly, the total variable cost of
Model B is $43 ($7 materials + $12 DL + $24
variable OH) and the contribution margin is $32 ($75
unit price - $43 VC). Thus, the objective linear
program function should maximize the total
contribution margin from both products: 10.50A +
32.00B.
Answer (B) is incorrect because selling price is used
instead of contribution margin.
Answer (C) is incorrect because total costs are used
instead of contribution margin.
Answer (D) is incorrect because variable costs are
used instead of contribution margin.
[142] Source: CMA 1283 5-17
[139] Source: CMA 1293 4-30

Answer (A) is incorrect because the EOQ model is
used to determine inventory order quantity and is not
related to the transportation model.
Answer (B) is incorrect because a Markov model is
useful in decision problems in which the probability of
the occurrence of a future state depends only on the
current state of nature.
Answer (C) is correct. The transportation model is a
special type of linear programming model. A
transportation model involves physical movement of
goods from sources of supply to destinations. The
objective function includes the transportation cost of
each item from each source to each destination. The
constraints are the output for each supply point and
the demand by each destination.
programming is a type of model useful for problems
that involve time-staged decisions such as decisions
affected by previous decisions; typically, dynamic
programming is used for much smaller problems than
linear programming.
Answer (A) is incorrect because the constraint

function for direct labor must be equal to or less than
the 600,000 available hours. Because every unit of
Model A requires 1 hour of labor and every unit of
Model B requires 1.5 hours of labor, the constraint
function is 1A + 1.5B 600,000.
Answer (C) is incorrect because the constraint
Answer (D) is correct. Since 600,000 direct labor
hours are available, the function must be equal to or
less than 600,000. Since every unit of Model A
requires 1 hour of labor and every unit of Model B
requires 1.5 hours of labor, the constraint function is
1A + 1.5B 600,000.
[140] Source: CMA 1280 5-5

[143] Source: CMA 1283 5-18
Answer (A) is incorrect because cost-volume-profit
analysis is used to estimate income, given the
relationships between cost, profit, and volume.
Answer (B) is correct. Transportation algorithms are
used to find the combination of supplies from various
warehouses to various construction sites (i.e., various
sources and various destination points) which will
minimize the total costs. Most transportation
algorithms are adaptations of linear programming
problems.
Answer (C) is incorrect because discounted
cash-flow techniques take into account the time value
Answer (A) is incorrect because the constraint

function for machine capacity must be equal to or less
than the 200,000 hours available. Every unit of A
requires .5 hours, and every unit of B requires 2
hours. Thus, the machine hour constraint function is
.5A + 2B 200,000.
.5A + 2B 200,000.
Answer (C) is correct. Since 200,000 hours of

machine time are available, the function must be equal
to or less than 200,000 hours. Every unit of A
requires .5 hours and every unit of B requires 2
.5A + 2B 200,000.
Answer (D) is incorrect because the constraint
.5A + 2B 200,000.
Answer (A) is incorrect because multiplying any
matrix by a different matrix (whether inverse or not)
will not yield the same result as either of the
multiplicands.
Answer (C) is incorrect because the times spent

cutting and finishing gloves are not negative quantities.
Answer (D) is correct. A constraint equation of a
linear programming problem depicts the constraint of
production by limiting total available hours or other
resources, assuming that those hours or other
resources may be used on either or both the
products. The cutting labor time available is 960 per
month. The finishing labor constraint is 1,920 hours.
Since each shirt requires 10 minutes (1/6 hr.) of
cutting time, and each pair of gloves requires six
minutes (1/10 hr.), the cutting constraint is that 1/6S
+ 1/10G must be less than or equal to 960. Since
each shirt requires 15 minutes ( hr.) of finishing
time, and each pair of gloves requires 30 minutes (
hr.), the finishing constraint is that S + G must be
less than or equal to 1,920.
[147] Source: CMA 1285 5-11
Answer (B) is incorrect because multiplying any

multiplicands.
Answer (A) is incorrect because production cannot

be negative, but it can be exactly zero. Thus, the
nonnegativity constraints are that production of S and
G must be greater than or equal to 0.
Answer (C) is correct. In matrix operations, ordinary

division is not possible. In lieu of division, one
multiplies by an inverse matrix. By definition, a matrix
times its inverse will give an identity matrix. This
operation is similar to dividing one number or one
variable by itself and obtaining one. An identity matrix
is a matrix with zeros in all elements except the
principal diagonal, which contains ones.
Answer (B) is incorrect because production cannot

Answer (D) is incorrect because multiplying any

multiplicands.
Answer (C) is incorrect because production cannot

Answer (D) is correct. Production cannot be
negative, but it can be exactly zero. Thus, the
[145] Source: CMA 1285 5-9

[148] Source: CMA 1285 5-21
Answer (A) is incorrect because the variable unit
costs are used instead of the contribution margin.
Answer (B) is incorrect because the variable selling
costs have not been included.
Answer (C) is correct. Linear programming is a
mathematical technique used to maximize revenue
(profit) functions or to minimize cost functions subject
to constraints. The objective function in a linear
programming model symbolically represents the
revenues (profits) or costs being maximized or
minimized, respectively. The contribution margin from
production of the combination of shirts and pairs of
gloves is to be maximized. The contribution margin
from shirts is $12 ($22 - $10 variable unit costs). The
contribution margin from gloves is $24 ($40 - $16
variable unit costs). Thus, the objective is to maximize
12S + 24G.
Answer (D) is incorrect because fixed manufacturing
costs were subtracted.
[146] Source: CMA 1285 5-10
Answer (A) is incorrect because regression analysis

is used to determine the effect on a dependent
variable of changes in independent variables.
Answer (B) is incorrect because Markov analysis
involves a chain of analyses, with each link relying on
the results of the preceding link.
Answer (C) is correct. Expected value analysis is an
estimate of future monetary value based on forecasts
and related probabilities of occurrence. Expected
value is found by multiplying the probability of each
outcome by its payoff and summing the products. The
probabilities used can be developed from experience,
e.g., the results of past cases.
used to determine the optimum length of waiting lines.
[149] Source: CMA 1286 5-25
Answer (A) is incorrect because revenue and cost
functions are specific kinds of objective functions.
Answer (A) is incorrect because the constraints

should not be combined, and all times should be in
hours.

functions are the conditions under which the objective
function is to be maximized or minimized.
Answer (B) is incorrect because the constraints

should not be combined.
Answer (C) is incorrect because it is a nonsense

answer.

mathematical technique used to maximize revenue
(profit) functions or to minimize cost functions subject
to constraints. Here, the function f is the objective
function. The objective function in a linear
programming model symbolically represents the
revenues (profits) or costs being maximized or
minimized, respectively.
[150] Source: CMA 1286 5-26
Answer (A) is incorrect because it is not meaningful
in this context.
Answer (B) is correct. The constraint functions are
the "subject to" functions; i.e., they state the limits on
production imposed by scarce resources.
Answer (C) is incorrect because it is not meaningful
in this context.
Answer (D) is incorrect because the objective
function is to be maximized or minimized subject to
the constraints.
[151] Source: CMA 0687 5-19
Answer (A) is incorrect because the material
constraint requires that 2 pounds per vase plus 2
pounds per bowl be less than or equal to 100.
Answer (B) is correct. Given 100 pounds of material,
the material constraint requires that 2 pounds per
vase plus 2 pounds per bowl be less than or equal to
100. The labor constraint is 3 hours per vase plus 1
hour per bowl, which must be less than or equal to
60 hours.
the objective function is to be optimized, such as

labor or machine hours.
Answer (B) is incorrect because objectives are the
ultimate goals of an operation. This answer is
essentially nonsense as used here.
Answer (C) is incorrect because conditions represent
the present state of the environment. This answer is
essentially nonsense as used here.
Answer (D) is incorrect because a shadow price is
the opportunity cost of not having one additional unit
of one of the constrained resources.
[154] Source: CMA 1287 5-20
Answer (A) is incorrect because there is another
point (N = 3 and S = 3) that will optimize the
objective function.
Answer (B) is correct. The best way to answer this
question is to solve the problem graphically. The
point at which N equals two and S equals three is a
feasible point but not the optimal point. The optimal
point is that point at which Z will be maximized. The
given values do not violate either of the constraints.
However, this procedure does not indicate whether
the point is the optimal point.
Answer (C) is incorrect because the graph shows
that the point does not lie in a corner where two
constraint lines meet.
Answer (D) is incorrect because this is not a
minimization problem; producing zero would minimize
costs but would not maximize revenue or profits.
[155] Source: CMA 1288 5-2
Answer (C) is incorrect because the labor constraint

requires that 3 hours per vase plus 1 hour per bowl
be less than or equal to 60 hours.
Answer (D) is incorrect because material costs and
labor costs should not be combined.
[152] Source: CMA 1287 5-18
Answer (A) is incorrect because a parametric model
is concerned with population parameters and is based
on strict assumptions about distributions.
Answer (B) is incorrect because a present value
model is used to determine the present equivalent of
money to be received in the future.
Answer (C) is incorrect because an EOQ model is
used to determine the proper order size for inventory
purchases based on costs and annual demand.
technique used to optimize a revenue, profit, or cost
function subject to constraints. LP is often used for
planning resource allocations. Other business
applications include selecting a product mix, blending
chemical products, scheduling flight crews, assigning
jobs to machines, and determining transportation
routes.
Answer (A) is incorrect because PERT and CPM

are network diagrams designed to coordinate large,
complicated projects that are carried out over a long
period of time.
Answer (B) is correct. The linear programming model
is designed to maximize income or minimize costs
given resource constraints. It is a static model
because it does not allow for a sequence of
decisions.
Answer (C) is incorrect because queuing models are
designed to minimize the total cost of a system that
involves a waiting line. Queuing models are dynamic
in that they assume random applications for service.
Answer (D) is incorrect because Markov processes
are used in sequential decision problems in which the
probability of the occurrence of a future state of
nature depends only on the current state. The initial
state matters less and less as time goes by.
[156] Source: CMA 1288 5-7
Answer (A) is incorrect because the feasible solution
is within the area of possible production. A feasible
solution is one that does not violate any constraint.
Answer (B) is incorrect because constraints are the
given limitations on resources or market limitations.
[153] Source: CMA 1287 5-19

Answer (A) is correct. The inequality functions state
the constraints. They are the limitations within which
Answer (C) is correct. The shadow price in a linear

programming problem is the return (increase in the
objective function) that would accrue if one more unit
of a limited resource (a constraint in the problem)

were available. The shadow price is the maximum
amount that one should be willing to pay for
additional units of the resource.
Answer (D) is incorrect because the objective
function is the equation that is to be maximized or
minimized in a linear programming problem. For
example, a typical objective function is to maximize
contribution margin by selling products A and B,
which have known contribution margins per unit.
[157] Source: CMA 1288 5-11
Answer (A) is incorrect because, if D is 2 and F is 8,
the first constraint is violated.
Answer (B) is correct. This question does not ask for
the optimum solution, only a feasible solution. Thus,
the only question that is being addressed is whether
the production level violates the constraint functions.
This problem can be solved either graphically or by
means of trial and error. The graphical approach
involves drawing the constraint lines on a graph and
outlining the feasible region. An easier approach is to
solve the problem by trial and error. For each
answer, it can be determined whether the production
levels violate the constraint functions.
2D + 3F 24
2D + 1F 16
Substituting the production levels in the answer
choices shows that only D=6 and F=4 does not
violate a constraint.
Answer (C) is incorrect because, if D is 12 and F is
0, the second constraint is violated.
Answer (D) is incorrect because, if D is 8 and E is 3,
both constraints are violated.
[158] Source: CMA 1288 5-18
Answer (A) is incorrect because regression explains
the behavior of a dependent variable (such as total
costs) in terms of one or more independent variables
(such as units produced).
Answer (B) is correct. Linear programming is used to
maximize an objective function, such as contribution
margin, given a number of constraints. The constraints
represent limits on sales (product demand) and
limitations on the supply of resources, such as raw
materials, labor, and machine hours.
Answer (C) is incorrect because mix variance
analysis is the analysis of the variance between actual
and planned contribution margin that is caused by a
difference between actual and planned product mix.
techniques are used to solve for the long-run
expected value given the probabilities of the events
arising from a decision and their outcomes.
Answer (B) is correct. The transportation model is a

special type of linear programming problem. It
involves the analysis of the physical movement of
objective is to minimize the total transportation cost
subject to such constraints as warehouse capabilities
and customer locations.
Answer (C) is incorrect because dynamic
programming is a variant of mathematical
programming that applies to sequential
decision-making situations.
Answer (D) is incorrect because the critical path
method is a project scheduling technique.
[160] Source: CMA 0694 4-10
Answer (A) is incorrect because a simulation model
is a technique for experimenting with models using a
computer. It does not necessarily use maximization
and constraint functions.
Answer (B) is correct. When making a cost-time
trade-off, the first activity to be crashed (have its
completion time accelerated) is one on the critical
path. To select an activity on another path would not
reduce the total time of completion. The initial activity
chosen should be the one with the completion time
that can be accelerated at the lowest cost per unit of
time saved.
Answer (C) is incorrect because the EOQ is based
on a single equation that includes a square root.
Answer (D) is incorrect because the present value
model is based on a single equation that incorporates
a rate of return.
[161] Source: CMA 0694 4-11
Answer (A) is incorrect because contributions to
revenue are included in the objective (maximization)
equation.
Answer (B) is incorrect because a shadow point, or
shadow price, is the amount by which the value of the
optimal solution of the objective function will change
if a one-unit change is made in a binding constraint.
Answer (C) is incorrect because conditions are
usually not shown through inequalities.
Answer (D) is correct. The restrictions on the optimal
value of the objective function in a linear
programming problem are known as constraints.
They are depicted by means of inequalities.
[162] Source: CMA 0694 4-12
Answer (A) is incorrect because nothing can be said
with respect to costs. Costs are not mentioned in any
of the equations.
[159] Source: CMA 1291 4-20

Answer (A) is incorrect because Markov analysis
applies to sequential processes in which the
probability of an event is conditioned upon the
previous event, and the most emphasis is placed on
the most recent evidence rather than on an average of
all evidence.
Answer (B) is incorrect because the point does not

lie in a corner.
Answer (C) is correct. The point at which M= 2 and
S = 3 is a feasible point because it does not violate
either of the constraint functions. A graphic depiction
of the constraints will show whether the point lies in a
corner, which is not the case. Because it does not lie

in a corner, it could not be the optimal solution point.
In a linear programming problem, the optimal solution
lies at a corner in the feasible area. Thus, all that can
be said for certain about the point is that it lies within
the feasible area.
Answer (D) is incorrect because the point does lie
within the feasible area.
[163] Source: CMA 1294 4-2
Answer (A) is incorrect because the company can
sell as much of each product as it can produce. Thus,
sales are limited by production constraints, e.g.,
machine hours. The company should therefore seek
to maximize its return per unit of the constraint.
Answer (B) is incorrect because the company can
sell as much of each product as it can produce. Thus,
sales are limited by production constraints, e.g.,
machine hours. The company should therefore seek
to maximize its return per unit of the constraint.
Answer (C) is incorrect because the contribution
margin ratio is only important as it translates to
dollars. A high margin on a low sales volume will not
be profitable.
Answer (D) is correct. When demand far exceeds a
company's ability to supply the marketplace,
management will want to maximize its profits per unit
of scarce resource. If the scarce resource is raw
materials, the products that provide the greatest
contribution margin per unit of raw materials are the
products to emphasize. If machine hours are the
constraint, profits are maximized by emphasizing the
contribution margin per machine hour.
[164] Source: CMA 0695 4-10
Answer (A) is incorrect because 146 units of X and
0 units of Y yield a contribution margin of $2,190.
Answer (B) is incorrect because 0 units of X and 100
units of Y yield a contribution margin of $2,500.
Answer (C) is correct. Linear programming is used to
maximize a contribution margin function, or minimize
a cost function, subject to constraints, such as scarce
resources or minimum/maximum levels of production.
In this problem, the equation to be maximized (the
objective function, or 15X + 25Y) is to be maximized
subject to the two constraint functions (Material A:
3X + 6Y < 600 and Material B: 6X + 4Y < 880).
One way to solve this problem is to graph the
constraint lines and determine the feasible area. The
optimal production level is at an extreme point within
the feasible area. However, a simple alternative is to
calculate the contribution margin for each feasible
answer choice. Thus, a production level of 120 units
of X and 40 units of Y is the feasible level that yields
the maximum contribution margin of $2,800 [(120 x
$15) + (40 x $25)]. This mix is feasible because it
requires 600 pounds of A[(3 lbs. x 120) + (4 lbs. x
40)] and 880 feet of B[(6 ft. x 120) + (4ft. x 40)].
Answer (D) is incorrect because producing 120 units
of Y violates the constraint for Material A.
[165] Source: CMA 0695 4-11
Answer (A) is correct. A shadow price is the amount
by which the value of the optimal solution of the
objective function will change if a one-unit change is

made in a binding constraint. The calculation of
shadow prices is an example of sensitivity analysis,
which is any procedure that tests the responsiveness
of a solution to changes in variables.
Answer (B) is incorrect because the change is in the
limited resource, not in the contribution margin of one
of the variables.
Answer (C) is incorrect because shadow prices are
concerned with binding constraints, not nonbinding
constraints; the shadow price of unused capacity, a
nonbinding constraint, is zero.
Answer (D) is incorrect because shadow prices are
not used in the final solution of a linear programming
model.
[166] Source: CMA 0697 4-23
Answer (A) is incorrect because the critical path
method is a network model used to plan large
projects.
Answer (B) is correct. The transportation model is a
special type of linear programming model. A
transportation model involves physical movement of
constraints are the output for each supply point and
the demand by each destination.
Answer (C) is incorrect because queuing theory
attempts to minimize the total costs, including service
and waiting costs, of systems involving waiting lines.
simulation is a means of simulating real-world
situations using random numbers.
[167] Source: CMA 0696 4-8
Answer (A) is correct. Cell D2 is sales for year 3.
Given that sales are expected to increase 20% each
year, the amount in that cell should be 120% of the
preceding year's sales. The formula is C2 x 1.2.
Answer (B) is incorrect because +B2 x 1.2 is the
formula for cell C2.
Answer (C) is incorrect because +C2 + (.2 x B2)
bases the increase in sales on 20% of the year 1
amount instead of the year 2 amount.
Answer (D) is incorrect because +B2 + (.2 x B2) is
an alternative formula for cell C2.
[168] Source: CMA 0696 4-9
Answer (A) is incorrect because cell D4 (D2 - D3)
reflects proper applications of formulas, although the
amount is incorrect as a result of errors in other cells.
Answer (B) is incorrect because cell D8 (40% x D7)
reflects proper applications of formulas, although the
amount is incorrect as a result of errors in other cells.
Answer (C) is correct. Cell E6 contains the amount
of administrative expenses for year 4. These
expenses are expected to increase at the rate of 10%
annually. This rate of increase is reflected in cells C6
and D6. However, the amount in cell E6 is 120% of
the amount in cell D6 (1.2 x $48,400 = $58,080).

The proper amount is $53,240 (1.1 x $48,400).
Answer (D) is incorrect because C1 is the date.
[169] Source: CMA 0696 4-10
Answer (A) is incorrect because $21,858 results
from not considering the changes in sales and cost of
goods sold in year 3 and the impact those changes
had in year 4.
Answer (B) is correct. If the error in cell D2 is
corrected, the sales for year 3 become $576,000
(1.2 x $480,000). Cell E2 should therefore be
$691,200 (1.2 x $576,000). Cell C3 is correct, but
cell D3 is not. Thus, cell E3 should be $535,680 (1.2
x 1.2 x $372,000), and the gross profit in cell E4
should be $155,520 ($691, 200 - $535,680). Selling
expenses in cell E5 are correct at $39,930.
Administrative expenses in cell E6 should be $53,240
(1.1 x $48,400). Hence, gross profit in cell E7 is
$62,350 ($155,520 - $39,930 - $53,240). Income
taxes (cell E8) become $24,940 (.4 x $62,350).
Finally, net income in cell E9 is $37,410 ($62,350 $24,940).
Answer (C) is incorrect because $90,978 results
from not considering the change in cost of goods sold
in year 3 and the impact it had on year 4.
Answer (D) is incorrect because $88,074 results
from not considering the change in cost of goods sold
in year 3 or the change in administrative expenses in
year 4.
Answer (C) is incorrect because game theory is a

mathematical approach to decision making in which
each decision maker takes into account the actions of
competitors.
Answer (D) is incorrect because sensitivity analysis is
a method of studying the effects of changes in one or
more variables on the results of a decision model.
Answer (A) is incorrect because 49 and 17 are
constants, not coefficients.
Answer (B) is correct. Systems of linear equations
can often be more conveniently manipulated by using
matrix notation and matrix algebra techniques. In this
format, the ordered numerical coefficients of the
unknowns are presented in a matrix (in this case, two
rows by two columns). The variables are described
by a row or, in this problem, a column vector. Finally,
the right side of the system is described by a vector
(here, a column) of constants.
Answer (C) is incorrect because the variables vector
and the constants vector are misplaced.
Answer (D) is incorrect because the coefficients
matrix and the variables vector are misplaced.
[173] Source: CIA 0581 IV-25
Answer (A) is incorrect because a 1-by-3 matrix
times a 3-by-3 matrix results in a 1-by-3 matrix, i.e.,
3 separate numbers.
[170] Source: CMA 1296 4-10

Answer (A) is correct. The transportation model is a
special application of linear programming to a type of
network flow problem. It determines the minimum
cost of, or maximum profit or revenue derived from,
physically moving goods or delivering services from
sources of supply (warehouses) to other destinations
(retail stores).
Answer (B) is incorrect because Markov analysis is
useful in decision problems in which the probability of
the occurrence of a future state depends only on the
current state of a model.
Answer (C) is incorrect because calculus-based
optimization does not incorporate the constraints of a
transportation problem.
Answer (D) is incorrect because a queuing model is a
group of mathematical functions for systems involving
waiting lines.
Answer (B) is incorrect because a 3-by-1 matrix

9 numbers.
Answer (C) is incorrect because a 3-by-1 matrix
3 numbers.
Answer (D) is correct. The objective is to multiply
the number of pounds of each material times the cost
of each material and sum the answers. This matrix
appears in answer (D).
(3 x 7.95) + (1 x 3.28) + (4 x 6.14)
When multiplying two matrices together, multiply the
items in each row (horizontal) of the first matrix times
each item in the second matrix's column (vertical),
and then add the products. Here, a 1-by-3 matrix is
multiplied by a 3-by-1 matrix, resulting in a 1-by-1
matrix representing the cost. Thus, the dimensions of
the matrix resulting from multiplying 2 matrices
together are equal to the number of rows in the first
and the number of columns in the second.

Answer (A) is correct. Matrix algebra is a
mathematical technique for solving a set of
simultaneous equations. Matrices consisting of the
coefficients of the variables of the equations may be
manipulated by addition, subtraction, multiplication,
and inversion. Because the two service departments
simultaneously provide services to each other,
recognition of these reciprocal services requires
solution of a set of simultaneous equations.
Answer (B) is incorrect because regression analysis is
a statistical procedure for estimation of the relation
between variables.

Answer (A) is incorrect because integral calculus is
used to compute the area under a curve. It finds
antiderivatives; that is, the first derivative of the
integral is the function that was integrated.
Answer (B) is correct. Differential calculus is used to
identify the maxima or minima of nonlinear functions.
The derivative of a function measures the slope or
rate of change of that function. Maxima or minima
occur where the slope is equal to zero. A maximum
exists when the derivative of the first derivative of the
function is negative. A minimum exists when the

second derivative is positive.
Answer (C) is incorrect because operations research
is a broad term for the application of scientific and
quantitative methods to the understanding of systems,
especially human-machine systems used in business.
Answer (D) is incorrect because regression analysis
creates an equation to explain the variation in a
dependent variable caused by changes in one or
more independent variables.
Answer (A) is correct. Marginal cost is the
incremental cost incurred to produce one additional
unit of output. The derivative of the total cost function
is the change in total cost per unit change in output
quantity. Accordingly, it is the same as marginal cost.
Marginal cost increases or decreases as the
derivative (slope) of the total cost function increases
or decreases.
Answer (B) is incorrect because marginal cost may
increase or decrease as total cost increases. Whether
it increases or decreases depends on whether the
derivative of the total cost function increases or
decreases.
Answer (C) is incorrect because marginal cost may
increase or decrease as total cost increases.
Answer (D) is incorrect because marginal cost may
increase or decrease as total cost increases.
allocations. In this problem, the equation to be

maximized, called the objective function, is: $30X +
$50Y. This equation is to be maximized subject to
the constraints on materials. The two constraint
functions are:
Material A: 6X + 12Y 1,200
Material B: 12X + 8Y 1,760
One way to solve this problem is to graph the
constraint lines and determine the feasible area. The
optimal production level is at an extreme point within
the feasible area. The graph shows that a production
level of 120 units of X and 40 units of Y is a feasible
production level that maximizes the contribution
margin.
Answer (D) is incorrect because 40 units of X and
120 units of Y is not within the feasible production
area. It violates the constraint on Material A.
Answer (A) is incorrect because the formula is
nonlinear and there are no stated constraints.
Answer (B) is incorrect because least squares is
related to regression analysis.
Answer (C) is correct. Only differential calculus can
be used to derive the normal equations for regression
(least squares) analysis. This form of calculus
identifies the maxima or minima of curvilinear
functions. Hence, it is applicable to the problem of
finding the function that minimizes the squared
deviations of the observed values from the regression
line.

Answer (A) is correct. The objective of a scatter
diagram is to demonstrate correlations. Each
observation is represented by a dot on a graph
corresponding to a particular value of X (the
independent variable) and Y (the dependent
variable).
Answer (B) is incorrect because the objective of a
histogram is to show frequency distribution in graphic
form.
Answer (C) is incorrect because the objective of
stratification is to divide a universe of data into
homogeneous groups.
is used to find trend lines.
Answer (A) is incorrect because the $4,380 of
contribution margin yielded by 146 units of X and 0
units of Y is less than the $5,600 yielded by 120 units
of X and 40 units of Y.
Answer (B) is incorrect because the $5,000 of
contribution margin yielded by 0 units of X and 100
units of Y is less than the $5,600 yielded by 120 units
of X and 40 units of Y.
Answer (C) is correct. Linear programming is a
technique used to maximize a contribution margin
function or to minimize a cost function, subject to
constraints such as scarce resources or
minimum/maximum levels of production. Thus, linear
programming is often used for planning resource
Answer (D) is incorrect because integral calculus

concerns areas and volume.
Answer (A) is correct. Linear programming is a
mathematical technique for planning resource
allocation that optimizes a given objective function
that is subject to certain constraints. In this case, the
maximum investment is constrained by a 70% limit on
either investment choice.
Answer (B) is incorrect because capital budgeting is
used to analyze and evaluate long-term capital
investments.
Answer (C) is incorrect because differential analysis
is used for decision making when differences in costs
(revenues) for two or more options are compared.
used to minimize the sum of the costs of waiting lines
and servicing waiting lines when items arrive
randomly at a service point and are serviced
sequentially.
[180] Source: CIA 0593 IV-21
Answer (A) is incorrect because relevant costs are
expected future costs that will vary with the decision
taken. They are reflected in the objective function and
constraints of linear programming problems.
Answer (B) is incorrect because a differential cost is
the net relevant cost.
Answer (C) is incorrect because the term alternative

costs is seldom used in either managerial/cost
accounting textbooks or the literature on decision
theory.
Answer (D) is correct. A shadow price is the amount
by which the value of the optimal solution of the
objective function in a linear programming problem
will change if a one-unit change is made in a binding
constraint. The calculation of a shadow price is a
simple example of sensitivity analysis. An opportunity
cost is the maximum benefit forgone by using a scarce
resource for a given purpose. It is the benefit from the
next best use of that resource. Thus, shadow prices
and opportunity costs are related concepts.
Answer (A) is incorrect because it is based on a 35%
allocation rather than a 50% allocation.
Answer (B) is correct. Under the direct method, the
costs incurred in a service department are allocated
directly to production without consideration of
services performed for other service departments.
Thus, $40,000 of maintenance costs would be
allocated to production. Since the same amount of
work is performed for each production department,
they would each be allocated $20,000.
Answer (C) is incorrect because they are not based
on the direct method in that they include some
interdepartmental allocations.
Answer (D) is incorrect because they are not based
on the direct method in that they include some
interdepartmental allocations.
Answer (A) is incorrect because $57,895 is the cost
allocated to the maintenance department.
Answer (B) is correct. The three simultaneous
equations can be solved using substitution. Substitute
the maintenance department into the cleaning
department equation.
C = $60,000 + .2($40,000 + .25C)
C = $60,000 + $8,000 + .05C
.95C = $68,000
C = $71,579
include the 25% of the cleaning department that
maintenance is dependent upon.
Answer (D) is incorrect because $60,000 does not
include the 20% of the maintenance department that
the cleaning department is dependent upon.
include the 45% of the cleaning department that the

food service department is dependent upon.
include the 10% of the maintenance department that
the food service department is dependent upon.
Answer (D) is incorrect because $83,211 reverses
the 10% of maintenance in the equation with the 45%
of cleaning in the equation.
Answer (A) is incorrect because 25 Inactive Dog
units and 0 Puppy units yield a contribution margin of
$375.
Answer (B) is incorrect because 20 Puppy units and
10 Inactive Dog units yield a contribution margin of
$350.
Answer (C) is incorrect because 10 Puppy units and
$400.
Answer (D) is correct. Linear programming is used to
maximize a contribution margin function or minimize a
cost function, subject to constraints, such as scarce
resources or minimum/ maximum levels of
production. In this problem, the equation to be
maximized, 10x + 15y, is to be maximized subject to
two constraint functions; Corn: 2x + 4y 100, and
Wheat: 3x + 2y 80. Solve these two equations:
2x + 4y 100 --------> 2x + 4y 100
3x + 2y 80 --------> 6x + 4y 160
-4x 60
x 15
Substitute into 2x + 4y 100, and get y = 17.5.
Thus, a contribution margin of $412.50.
Answer (A) is incorrect because more detailed
information is not available. The Pareto diagram does
not focus on the total quantity of computer
complaints.
Answer (B) is incorrect because complaints about
diskettes and software are infrequent.
Answer (C) is correct. Complaints based on lack of
user knowledge and hardware problems are by far
the most frequent according to this chart.
Consequently, the company should devote its
resources primarily to these issues.
Answer (D) is incorrect because cost information is
not provided.

Answer (A) is correct. The three simultaneous
equations can be solved using substitution. Plug in the
values previously found for the maintenance and
cleaning departments into the food service equation.
F = $50,000 + .1($57,895) + .45($71,579)
F = $50,000 + $5,790 + $32,211
F = $88,001
Answer (B) is incorrect because $55,790 does not
Answer (A) is incorrect because the chart does not

display the arithmetic means of each type of
complaint.
Answer (B) is incorrect because the chart does not
display the relative frequencies of each type of
complaint.
Answer (C) is incorrect because the chart does not
display the medians of each type of complaint.
Answer (D) is correct. This Pareto diagram depicts

the frequencies of complaints in absolute terms. It
displays the actual number of each type of complaint.
Answer (A) is correct. A model consisting of a
system of functions may be used to optimize an
objective function. If the functions in the model are all
linear, the model is a linear programming model.
Linear programming is a technique to determine
optimal resource allocation. Several solution methods
are available to solve linear programming problems.
The graphical method, the easiest technique, is limited
to simple problems. Here, the graph consists of three
lines, each representing a production constraint. The
lines connecting points 3, 4, 6, and 7 bound the
feasible solution region. Product mixes of X and Y
that lie outside this boundary cannot be produced
and/or sold because the demand constraint (line 3,4),
the labor constraint (line 4,6), and the material
constraint (line 6,7) are binding.
Answer (B) is incorrect because points 1, 5, and 8
are outside the boundary.
Answer (C) is incorrect because points 2, 5, and 8
are outside the boundary.
Answer (D) is incorrect because point 5 is outside
the boundary.
Answer (A) is correct. A profit line has negative
slope because the profit from sales of one product
increases as the profit from sales of the other product
declines. Moving the profit line rightward (while
maintaining its slope) to the last point in the feasible
region determines the solution.
Answer (B) is incorrect because the last point in the
feasible solution region touched by a profit line
determines the solution.
15y, is to be maximized subject to two constraint

functions; Corn: 2x + 4y 100, and Wheat: 3x + 2y
80. Solve these two equations.
2x + 4y 100
3x + 2y 80
2x + 4y 100
6x + 4y 160
4x 60
x 15
Substitute into 2x + 4y 100, and get y = 17.5.

Thus, a contribution margin of $412.50.
Answer (A) is incorrect because Redler's amount of
cleaning fluid to maximize revenue is 260,000 gallons.
Answer (B) is correct. A maximization problem is
solved by setting the first derivative of the revenue
function equal to zero and solving for x. The first
derivative of the Funz-N-Oonz revenue function is 22
- .08x. Thus,
.08x = 22
x = 275
Selling 275,000 gallons of cleaning fluid will maximize
revenues at Funz-N- Oonz.
Answer (C) is incorrect because Moonsammy's
amount of cleaning fluid to maximize revenue is
125,000 gallons.
Answer (D) is incorrect because Step-N-Wolf's
amount of cleaning fluid to maximize revenue is
129,000 gallons.
Answer (A) is correct. Profit is equal to the revenue
function minus the cost function which for Redler is
[(-$100 + $26x $.05x2) ($50 x $8x + $.01x2)]. It is
not necessary to combine terms. The profit maximum
is the first derivative of this profit function (26 .1x) (8 + .02x), or 18 - .12x. Set the derivative equal to
zero and solve for x, or 150. Thus, producing
150,000 gallons of cleaning fluid will maximize profit.
Answer (C) is incorrect because the last point in the

Answer (B) is incorrect because Funz-N-Oonz's

profit will be maximized at a production level of
100,000 gallons.
Answer (D) is incorrect because the last point in the

Answer (C) is incorrect because Moonsammy's

36,000 gallons.

Answer (A) is incorrect because 25 Inactive Dog
units and 0 Puppy units yield a contribution margin of
$375.
Answer (D) is incorrect because Step-N-Wolf's

59,000 gallons.
Answer (B) is incorrect because 20 Puppy units and

$350.
Answer (A) is correct. This question is easily solved

by substituting 100 for x in the two given equations
for each company. For Redler, it is:
Answer (C) is incorrect because 10 Puppy units and

$400.
Revenue = $100 + $26(100) - $.05(10,000)

Cost = $50 + $8(100) - $.01(10,000)
The cost equation is subtracted from the revenue
equation to determine profit or loss per gallon of x.
Answer (D) is correct. Linear programming is used to

maximize a contribution margin function or minimize a
cost function, subject to constraints, such as scarce
resources or minimum/maximum levels of production.
In this problem, the equation to be maximized, 10x +
[-$100 + $2,600 - $500 - ($50 + $800 + $100)]

Profit = $2,000 (revenue) - $950 (costs)
= $1,050 (profit)
Because x is stated in thousands of gallons, the total
profit is $1,050,000.
Answer (B) is incorrect because Funz-N-Oonz has a
profit of only $445,000.
Answer (C) is incorrect because Moonsammy has a
total loss of $430,000.
Answer (D) is incorrect because Step-N-Wolf has a
profit of only $20,000.
Minus PV of lease payments

(60,800)
-------Profit recognized
$ 9,200
========
The $60,800 remaining gain on the sale-leaseback
should be amortized in proportion to the gross rentals
expensed over the lease term because the leaseback
is classified as an operating lease (none of the criteria
for a capital lease is met). At 12/31/01, the date of
the inception of the lease, the entire $60,800 should
be reported in the balance sheet as deferred revenue
from the sale of the equipment.
[193] Source: CPA 0591 I-44

Answer (A) is incorrect because $50,000 is the total
deferred gain at the inception of the lease.
Answer (B) is correct. A profit or loss on the sale in
a sale-leaseback transaction is ordinarily deferred
and amortized in proportion to the amortization of the
leased asset if the leaseback is classified as a capital
lease. At 12/31/01, a gain proportionate to the lease
amortization will be recognized [($150,000 $100,000) 10 years = $5,000]. Hence, the
deferred gain will be $45,000 ($50,000 - $5,000).
Answer (C) is incorrect because $25,588 is the
difference between the total deferred gain and the
periodic lease payment.
Answer (D) is incorrect because the seller-lessee has
retained substantially all of the use of the property
and should therefore defer gain.
[194] Source: CPA 0588 I-32
Answer (A) is incorrect because the profit not
recognized should be deferred.
recognized.
Answer (C) is correct. In an ordinary sale and
leaseback, any profit or loss on the sale is amortized
over the life of the lease. But SFAS 28 provides for
exceptions. One exception applies when a
seller-lessee retains more than a minor part but less
than substantially all of the use of the property
through the leaseback. The "excess" profit on the sale
is recognized at the date of the sale if the seller-lessee
in this situation realizes a profit on the sale in excess
of either
Answer (D) is incorrect because $70,000 is the total

profit.
[195] Source: CPA 0590 I-31
present value of reasonable lease rentals.
recognized.
Answer (C) is incorrect because $4,100 is the excess
of the present value of reasonable lease rentals over
the profit recognized.
Answer (D) is correct. The general rule is that profit
or loss on the sale in a sale-leaseback transaction is
deferred and amortized over the life of the lease.
However, SFAS 28 provides for certain exceptions.
One exception applies when the seller-lessee
relinquishes the right to substantially all of the
remaining use of the property sold and retains only a
minor portion of such use. This exception is indicated
if the present value of a reasonable amount of rentals
for the leaseback represents 10% or less of the fair
value of the asset sold. In this case, the seller-lessee
should account for the sale and the leaseback as
separate transactions based upon their respective
terms. Because the $34,100 present value of the
reasonable lease rentals is less than 10% of the
$360,000 sales price (the fair value), Bain should
recognize the entire $30,000 difference between the
$360,000 sales price and the $330,000 carrying
amount as a gain from the sale. The leaseback should
then be accounted for as if it were unrelated to the
sale, because the leaseback is considered to be
minor.
[196] Source: CPA 0593 I-31
1. The present value of the minimum lease payments over

the lease
term if the leaseback is an operating lease, or
2. The recorded amount of the leased asset if the
leaseback is
classified as a capital lease.
"Substantially all" has essentially the same meaning as
the "90% test" used in determining whether a lease is
a capital or operating lease (the present value of the
lease payments is 90% or more of the fair value of
the leased property). "Minor" refers to a transfer of
10% or less of the use of the property in the lease.
For Ruhl Corp., the $60,800 present value of the
lease rentals is greater than 10% and less than 90%
of the fair value of the leased property as measured
by the sales price. Thus, $9,200 in excess profit
should be recognized.
Sales price
Book value
Profit
$220,000
(150,000)
-------$ 70,000
Answer (A) is incorrect because $950,000 includes

the gain on plane #2.
Answer (B) is correct. The lease of plane #1 is a
capital lease because its 8-year term exceeds 75% of
the 10-year estimated remaining economic life of the
plane. In a sale and leaseback transaction, any profit
or loss on the sale is ordinarily required to be
deferred and amortized in proportion to the
amortization of the leased asset if the lease is a capital
lease. The amortization is in proportion to the gross
rental payments expensed over the lease term if the
lease is an operating lease. At the inception of this
lease, the $500,000 gain ($600,000 sales price $100,000 carrying amount) should be reported as
deferred revenue. The lease of plane #2 is an
operating lease that falls under an exception provided
by SFAS 28. When the seller-lessee relinquishes the
right to substantially all of the remaining use of the
property sold and retains only a minor portion of such
use (in this case, less than 10% of the remaining
useful life), the seller-lessee should account for the

sale and the leaseback as separate transactions based
upon their respective terms. Dirk should recognize
the entire $450,000 gain ($1,000,000 sales price $550,000 carrying amount). Thus, only the $500,000
gain from the sale of plane #1 is deferred.
Answer (B) is incorrect because 800 hours is the

amount allocated to products A and C.
Answer (C) is incorrect because $450,000 equals

the gain on plane #2.
Answer (D) is incorrect because 1,400 hours is the

machine hour capacity of machine X.
Answer (D) is incorrect because the gain on plane #1

should be deferred.
[197] Source: CPA 0592 T-32
Answer (A) is incorrect because the gain is ordinarily
deferred.
Answer (B) is incorrect because a contra asset (an
asset valuation allowance) would be reported if the
lease qualified as a capital lease.
Answer (C) is incorrect because the gain is usually
reported as a deferred credit.
Answer (D) is correct. A gain on the sale in a
sale-leaseback normally should be deferred and
amortized. When the seller-lessee classifies the lease
arising from the sale-leaseback as an operating lease,
no asset is shown on the balance sheet, and the
deferral cannot be presented as a contra asset.
Accordingly, the usual practice is to report the gain as
a deferred credit.
[198] Source: CPA 1192 I-35
excess of the fair value over the price.
Answer (B) is correct. Any profit or loss on the sale
in a sale-leaseback transaction is ordinarily deferred
and amortized. Immediate recognition of the loss is
permitted, however, when the fair value at the time of
the transaction is less than the undepreciated cost
(SFAS 28). Given a fair value of $465,000 and a
carrying amount of $450,000, that exception does
not apply. Consequently, the $20,000 ($450,000 $430,000) excess of the carrying amount over the
sales price should be deferred.
Answer (C) is incorrect because 1,150 hours is

found by not multiplying the demand for A and C by
the number of hours required to produce them.

Answer (A) is incorrect because 1,400 units is found
by not multiplying by hours per unit of products A
and C, and by not dividing by hours per unit of
product B.
Answer (B) is incorrect because 800 units is found
by not dividing by hours per unit of product B.
Answer (C) is incorrect because 700 units is found
by not multiplying by hours per unit of products A
and C.
Answer (D) is correct. The maximum number of units
of a product that can be produced is found by
subtracting the product of the demand of the other
products and the hours required to manufacture those
products from the machine capacity. This number is
then divided by the machine hours required for each
unit of the product. In this example:
Machine hour capacity
1,650
Machine hours to produce maximum number of C
(450)
Machine hours to produce minimum number of A
(400)
----Available machine hours for production of B
800
=====
Machine hours required for each unit of B
2
Maximum number of units of B that can be produced
400
=====
Answer (A) is incorrect because 550 is the combined
number of products manufactured.
Answer (C) is incorrect because $15,000 is the

excess of the fair value over the carrying amount.
Answer (B) is incorrect because $1,000 is the net

profit after fixed costs.
Answer (D) is incorrect because full recognition of

the loss ($0 deferred loss) is not appropriate when
the fair value is greater than the carrying amount. In
these circumstances, the loss is essentially a prepaid
rental expense.
Answer (C) is correct. The contribution margin is the

selling price minus the variable cost. The contribution
margin is then multiplied by the number of units sold.
In this example, products A and C are fixed. The
number of units of product B must be found using
linear programming.

Answer (A) is correct. The amount of available
machine hours using linear programming is found by
subtracting the product of the demand of the other
products and the hours required to manufacture those
products from the machine capacity. In this example:
1,400
Machine hours to produce minimum number of A (200)
Machine hours to produce maximum number of C (600)
600
=====

2,100
Machine hours to produce maximum number of C
(300)
Machine hours to produce minimum number of A
(300)
1,500
=====
Machine hours required for each unit of B
5
Maximum number of units of B that can be produced
300
=====
A
B
C
---- ---- ---Selling price
$ 7 $ 6 $ 5
Variable cost
5
3
1
---- ---- ---Contribution margin
$ 2 $ 3 $ 4
Number of units
100 300 150
---- ---- ---Total contribution margin
$200 $900 $600
==== ==== ====
Combined contribution margin $200 + $900 + $600 =
$1,700.
Answer (D) is incorrect because $3,250 is the
combined amount of sales.
[202] Source: CMA 1291 4-18
Answer (A) is incorrect because slack time is an

inherent part of the noncritical paths on PERT
projects.
Answer (B) is correct. Combining PERT with cost
data permits decisions as to whether the benefits of
earlier completion of a project are justified in terms of
the additional costs of completion. For this purpose,
activity times and costs must be estimated for both
normal and crash efforts.
Answer (C) is incorrect because PERT-Cost can be
used without computerization.
Answer (D) is incorrect because costs are not
needed for these calculations.
Answer (A) is incorrect because queuing theory is

used to minimize the costs of waiting lines.
[205] Source: CMA 0688 5-1
is used to minimize a cost function or maximize a
profit function given constraints.
Answer (C) is incorrect because decision trees are
diagrams that analyze sequences of probabilistic
decisions, the events that may follow each decision,
and their outcomes.
Answer (D) is correct. Simulation is a technique for
experimenting with mathematical models using a
computer. Monte Carlo simulation is a technique to
generate the individual values for a random variable.
A random number generator is used to produce
numbers with a uniform probability distribution. The
second step of the Monte Carlo process then
transforms the random numbers into values consistent
with the desired distribution. The performance of a
model under conditions of uncertainty may be
investigated by randomly selecting values for each of
the variables in the model based on the probability
distribution of each variable and then calculating the
value of the solution. Advantages of Monte Carlo
simulation are that time can be compressed,
alternative policies can be considered, and complex
systems can be analyzed.
[203] Source: CMA 1280 5-11
Answer (A) is incorrect because expected value
analysis is useful when finding the anticipated payoff
from a probability distribution of payoffs and the
probability of each payoff.
Answer (B) is correct. Markov analysis is used when
a decision involves a number of separate states of
nature, and the probability of moving from one state
to another is dependent only upon the current state.
We are presented with consumers who are loyal to
one bakery, and given a probability of their moving
away from that bakery or becoming new customers
of another bakery.
Answer (C) is incorrect because learning curve
techniques are used to analyze the increases in
volume efficiency due to the augmented experience of
employees.
Answer (D) is incorrect because correlation and
regression analyses are used to describe the strength
and direction, i.e., positive or negative, of
relationships between variables.

and of servicing them.
Answer (B) is correct. Expected value analysis can
be used to analyze anticipated sales. The estimates of
anticipated sales can be assigned probabilities. The
expected value will be the sum of the products of the
outcomes (sales) and the probabilities.
Answer (C) is incorrect because Markov analysis is
used when the probability of a future state depends
only upon the current state. This would probably not
be true for sales of a new product.
Answer (D) is incorrect because contribution margin
analysis concerns the relationship of sales and
variable costs.
[206] Source: CMA 0688 5-7
Answer (A) is incorrect because the rate of learning
is determined as follows: The cumulative average unit
labor cost for 10 units was $12,000 ($120,000
10). The cumulative cost for 20 units was $9,600.
The cost for 40 units was $7,680. Because $9,600 is
80% of $12,000 and $7,680 is 80% of $9,600, an
80% rate of learning occurred.
Answer (B) is incorrect because the rate of learning is
determined as follows: The cumulative average unit
80% of $12,000 and $7,680 is 80% of $9,600, an
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
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 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.
[204] Source: CMA 1287 5-26

Answer (D) is incorrect because the rate of learning
is determined as follows: The cumulative average unit

80% of $12,000 and $7,680 is 80% of $9,600, an
Answer (C) is incorrect because the formula includes

4 times the most likely time in the numerator, with a
denominator of 6.
Answer (D) is incorrect because the numerator
equals the optimistic time, plus 4 times the most likely
time, plus the pessimistic time. The denominator is 6.
[207] Source: CMA 0688 5-8

Answer (A) is incorrect because $760,800 equals
125% times $608,640, which is full cost without
including $100,000 fixed overhead.
Answer (B) is incorrect because $608,640 is full cost
without including $100,000 fixed overhead.
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
(80% x $7,680). Estimated total labor cost for 80
units is $491,520 (80 units x $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 (125% x $708,640 full cost).
Answer (D) is incorrect because $708,640 equals full
cost. The maximum bid price equals full cost times
125%.
[210] Source: CMA 0688 5-15

Answer (A) is correct. PERT and CPM emphasize
time. The critical path is thus the path that requires the
longest time through the network. It is the path with
the least amount of slack because any delay on the
critical path increases project length. Hence, slack
time on the critical path is zero. Slack time is found
on all other paths. It is the time by which the path is
shorter than the critical path. For example, if a critical
path requires 14 weeks and another path 13 weeks,
the alternative has 1 week of slack time. The work on
the noncritical path can be delayed by 1 week and
the completion time of the total project will not be
lengthened.
Answer (B) is incorrect because the critical path is
the longest but not necessarily the most costly.
Answer (C) is incorrect because the critical path is
Answer (D) is incorrect because the critical path is
[211] Source: CMA 0688 5-16
Answer (A) is incorrect because the activity must be
on the path with the least slack (the critical path).
[208] Source: CMA 0688 5-9

Answer (A) is incorrect because $760,800 equals
125% times $608,640, which is the full cost without
including the fixed cost.
Answer (B) is correct. The full cost of the incremental
production is $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.
Answer (C) is incorrect because $885,800 equals
the maximum bid.
Answer (D) is incorrect because $708,640 includes
$100,000 of fixed costs.
Answer (B) is correct. When making a cost/time

reduce the total time of completion. The activity
chosen should be that whose completion time can be
accelerated at the lowest possible cost per unit of
time saved.
Answer (C) is incorrect because the time reduction
should be related to its cost.
Answer (D) is incorrect because the activity with the
lowest unit crash cost may not be on the critical path.
The activity selected must be on the critical path.
[212] Source: CMA 0689 5-13
Answer (A) is incorrect because sensitivity analysis is
not used to determine how constraints vary but rather
how the optimum solution will change if constraints
do vary.
[209] Source: CMA 0688 5-14

Answer (A) is incorrect because the most likely time
is multiplied by 4, not the optimistic or pessimistic
times.
Answer (B) is correct. The expected times used in a
PERT analysis are determined by applying a 1-4-1
ratio. The optimistic time is multiplied by one, the
most likely time by four, and the pessimistic time by
one. The products are added and the sum is divided
by six. Thus, the three time estimates are weighted
1/6, 4/6, and 1/6.
Answer (B) is incorrect because the accuracy of the

parameters cannot be tested as a part of the model.
The intent is simply to measure the impact if the
assumed parameters do vary.
Answer (C) is incorrect because the technological
matrix is developed by production managers or
engineers and is an input into the model.
Answer (D) is correct. Sensitivity analysis in linear
programming determines how the optimal solution will
change if an objective function coefficient, the limiting
value of a resource constraint, or a constraint

coefficient is varied. It also considers the effect of
adding a new variable or constraint.
[213] Source: CMA 0689 5-15
is based on past data and is often used to determine
trends or divide costs into their fixed and variable
components.
Answer (B) is correct. The term "rates of return"
suggests the net present value and internal rate of
return methods in this context, but simulation analysis
can also be used. Simulation is a mathematical
modeling technique for performing a what-if analysis
of estimated data. For instance, it may determine how
profitable a company will be if Machine A is
purchased rather than Machine B.
Answer (C) is incorrect because Markov chain
analysis is used in decision problems in which the
probability of the occurrence of a future state
depends only on the current state. A characteristic of
the Markov process is that the initial state matters
less and less as times goes on, because the process
will eventually reach its steady state.
Answer (D) is incorrect because Gantt charting
involves drawing a bar chart showing the progress of
a project.
[214] Source: CMA 0690 5-20
Answer (A) is correct. Simulation is a technique for
experimenting with mathematical models using a
computer. Monte Carlo simulation is a technique to
generate the individual values for a random variable
(such as arrivals of freight cars). The performance of
a model under conditions of uncertainty may be
investigated by randomly selecting values for each of
the variables in the model based on the probability
distribution of each variable and then calculating the
value of the solution. Advantages of Monte Carlo
simulation are that time can be compressed,
alternative policies can be considered, and complex
systems can be analyzed.
Answer (B) is incorrect because expected value
analysis is used to determine an anticipated return or
cost based upon probabilities of events and their
related outcomes.
Answer (C) is incorrect because the minimax regret
criterion is a decision rule developed in game theory.
It chooses the action with lowest maximum
opportunity cost.
Answer (D) is incorrect because PERT is a type of
network analysis used to plan and control large
projects.
Answer (C) is incorrect because the PERT estimate

is 4.5 months.
Answer (D) is incorrect because the PERT estimate
is 4.5 months.
[216] Source: CMA 1291 4-22
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.
Answer (B) is incorrect because differential calculus
is used primarily to identify the maxima or minima of
curvilinear functions.
Answer (C) is incorrect because discounted cash
flow techniques are used to evaluate capital
investment decisions.
is a tool for optimizing a cost or profit function given
scarce resources and specified restraints.
[217] Source: CMA 1293 4-27
Answer (A) is incorrect because the critical path is
the longest path, not the shortest path.
Answer (B) is correct. Under either PERT or the
critical path method, the critical path is the longest
path of sequential activities through a network. It is
critical because, if any activity on the critical path
takes longer than expected, the entire project will be
delayed. PERT analysis includes probabilistic
estimates of activity completion times. Three time
estimates are made: optimistic, most likely, and
pessimistic. PERT approximates the mean of the
likely time distributions by dividing the sum of the
optimistic time, the pessimistic time, and four times
the most likely time by six.
Answer (C) is incorrect because PERT is based on
the most likely time, the optimistic time, and the
pessimistic time.
Answer (D) is incorrect because PERT is also based
on most likely and optimistic times.
[218] Source: CMA 1280 5-6
[215] Source: CMA 1291 4-17

Answer (A) is incorrect because the PERT estimate
is 4.5 months.
Answer (B) is correct. The PERT method weights
expected completion times using a 1-4-1 ratio. The
most optimistic and pessimistic estimates are
weighted equally, but the most likely completion time
is weighted four times more heavily than the others.
Thus, the PERT estimate is 4.5 months {[(1 x 2) + (4
x 4) + (1 x 9)] 6}.

used to decide how many service facilities to have
when their work arrives randomly. An example is the
arrival of cars at a toll collection facility on a highway.
Queuing theory helps calculate the number of toll
collection facilities required to minimize the total costs
of waiting for service and of providing additional
service facilities.
Answer (B) is incorrect because time series analysis
is used to describe the variation of a certain quantity
over time, e.g., GNP.

Answer (C) is correct. PERT/CPM analysis is a
project management and scheduling technique which
identifies the longest path from the starting point to
the completion point, and allows the project manager
to put most of his effort on this longest path, thereby
minimizing the total time for the completion of the
project. Remember, PERT stands for Program
Evaluation and Review Technique and CPM stands
for Critical Path Method. They are closely related.
used to pinpoint random variations in industrial

processes or for short-run allocation models.
Answer (C) is incorrect because regression analysis
(or some other method) is used to separate costs into
fixed and variable portions.
Answer (D) is incorrect because simulation is not an
EOQ model.
[222] Source: CMA 1285 5-22

is used to minimize the total cost or maximize profits
subject to a series of linear constraints, e.g., scarce
resources.
[219] Source: CMA 1283 5-19

is used to maximize (or minimize) an objective
function given a variety of limitations.
Answer (B) is incorrect because queuing theory is
used to optimize waiting line situations.
Answer (A) is incorrect because both the simplex

method and iterative analysis are ways of working a
linear programming problem by hand.
Answer (C) is incorrect because differential calculus

is used to find derivatives of functions and to
determine the points of maximization or minimization.
Answer (B) is incorrect because regression analysis is

a means of finding the relationship between two or
more variables.
Answer (D) is correct. In a Markov chain, the

probability of an event is conditioned upon the
previous event. Many card games reflect the Markov
process because the probabilities are altered by the
cards already played. Markov analysis is thus an
appropriate technique for forecasting consumer
buying habits because it relies on recent evidence
rather than on an average of all evidence.
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.
Answer (D) is incorrect because matrix analysis is
another mathematical tool used to solve a variety of
problem types.
[223] Source: CMA 1285 5-23

is used to maximize or minimize an objective function
given a number of limiting factors.
[220] Source: CMA 1284 5-9

Answer (A) is incorrect because basic PERT does
not consider cost.
Answer (B) is incorrect because basic PERT does
not consider cost.
Answer (C) is incorrect because slack times occur
under both methods of analysis.
Answer (D) is correct. Both PERT (program
evaluation and review technique) and CPM (critical
path method) are useful in the planning and control of
a large system or process. PERT and CPM both
construct a network of time relationships between
each subunit or subproject to identify the subprojects
that have a direct effect on the completion date of the
project. PERT uses probabilistic time estimates
(usually based on the most likely, the optimistic, and
the pessimistic times for an activity). CPM uses
deterministic time and cost estimates. It also uses time
and cost estimates for normal and "crash" efforts.
Answer (B) is incorrect because decision tree

analysis is used to study the results of various
decisions that have a number of outcomes, all with
different risks.
Answer (C) is correct. Simulation involves
developing a computer model in logical and
mathematical form. The model is a representation of a
system that relates the relevant variables, their
behavior, and their interactions. Varying the
assumptions in the model permits sensitivity analysis,
for example, of the effects of changing prices.
Answer (D) is incorrect because Markov analysis is
useful when a problem involves a variety of states of
nature and the probability of moving from one to
another depends only upon the current state.
[224] Source: CMA 1286 5-9
Answer (A) is incorrect because a GANTT chart is a
bar chart used to keep a record of the steps in a
project that have already been completed.
[221] Source: CMA 0685 5-11

Answer (A) is correct. Computer simulation is used
when an optimization model cannot be developed,
e.g., because the variables exceed the equations
describing them. Simulation involves constructing a
mathematical/logical model incorporating most of the
features of the problem. This model is tested in a
variety of hypothetical situations, and the modeled
responses can then be measured.
Answer (B) is incorrect because simulation is not
Answer (B) is incorrect because CPM is similar to

PERT, but uses deterministic estimates of time.
Answer (C) is correct. PERT is used to obtain a
probabilistic estimate of the completion time for a
project. The PERT method is sometimes known as
the 1-4-1 three-estimate method because the most
optimistic and pessimistic estimates are each
weighted by one and the most likely estimate is
weighted by four. The sum of these three weighted
estimates is then divided by six to arrive at the
probable completion time.

Answer (D) is incorrect because Markov analysis is
useful when a problem involves a variety of states of
nature and the probability of moving from one to
another depends only upon the current state.
[225] Source: CMA 0688 5-3
Answer (A) is correct. Monte Carlo simulation is
used to generate the individual values for a random
variable. The performance of a model under
conditions of uncertainty may be investigated by
randomly selecting values for each of the variables in
the model based on the probability distribution of
each variable and then calculating the value of the
solution. Advantages of Monte Carlo simulation are
that time can be compressed, alternative policies can
be considered, and complex systems can be
analyzed.
through a complex project by emphasizing the

longest, or critical, path.
Answer (B) is correct. Queuing theory is a group of
mathematical models for systems involving waiting
lines. In general, a queuing system consists of a
waiting line and a service facility (a crane in this case).
The objective of queuing theory is to minimize the
total cost of the system, including both service and
waiting costs, for a given rate of arrivals.
Answer (C) is incorrect because the IRR is a
discounted cash flow technique used to evaluate
investment projects.
Answer (D) is incorrect because the expected value
of a decision is found by multiplying the probability of
each outcome by its payoff and summing the
products.
[228] Source: CMA 0690 5-22

analysis is used when specific outcomes can be
associated with particular events and probabilities can
be assigned to those events.
Answer (C) is incorrect because multiple regression
analysis explains the behavior of a dependent variable
based on the value of one or several independent
variables.

explains the behavior of a dependent variable (such
as total cost) in terms of one or more independent
variables (such as units produced).
related outcomes.
Answer (D) is incorrect because contribution margin

analysis is used to explore changes in sales and
variable costs.
[226] Source: CMA 0688 5-6
Answer (A) is incorrect because queuing
(waiting-line) theory is used for systems involving
waiting lines (such as cash registers in a store or teller
windows in a bank). Its objective is to minimize the
total cost of the system (service and waiting costs).
Answer (B) is incorrect because regression analysis
explains the value of a dependent variable in terms of
one or more independent variables.
Answer (C) is correct. PERT is a network analysis
technique that uses probabilistic time and cost
estimates to aid managers in planning and controlling
large-scale, complex projects having many
interrelated activities. PERT diagrams are free-form
networks showing each activity as a line between
events. A sequence of lines shows interrelationships
among activities. The critical path is the longest path
in time through the network. It is critical in that if any
activity on the critical path takes longer than
expected, the entire project will be delayed. Paths
that are not critical have slack time. One advantage of
PERT is that it identifies this slack time, which
represents unused resources that can be diverted to
the critical path.
Answer (D) is incorrect because learning curve
analysis is based on the observation that people
perform tasks more rapidly as they gain experience.
[227] Source: CMA 1289 5-12
Answer (A) is incorrect because a critical path
network is used to plan and measure the progress
Answer (C) 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.
simulation is used to generate values for random
variables in computer models.
[229] Source: CMA 1291 4-16
the longest path.
Answer (B) is correct. The critical path is the longest
path through a network. It is critical because any
increase in time for an activity on this path will delay
the entire project. Moreover, any decrease in time for
an activity not on the critical path will not shorten the
project.
Answer (C) is incorrect because variability of
estimated times is not the distinguishing characteristic
of the critical path. Indeed, CPM does not assign
probabilities to activity times.
Answer (D) is incorrect because time, not cost,
determines whether a path is critical.
[230] Source: CIA 1182 IV-20
Answer (A) is correct. Computer simulations are
used to examine what-if questions. Variables may be
changed, assumptions modified, and models refined.
Computer simulations may be used in various types
of problems, including production and financial
models. Simulation techniques can be used on
microcomputers as well as larger installations.
Answer (B) is incorrect because time-based

simulations are a common simulation technique.
Answer (C) is incorrect because the refinement of
models leads to more informed management decision
making.
Answer (D) is incorrect because goal-seeking
analyses solve for the desired level of several key
variables given the model criteria. This analysis is a
common simulation technique.
Answer (A) is correct. Simulation is a technique for
experimenting with logical-mathematical models using
a computer. Despite the power of mathematics, many
problems cannot be solved by known analytical
methods because of the behavior of the variables and
the complexity of their interactions. However, the
performance of a quantitative model under
uncertainty may be investigated by randomly selecting
values for each of the variables in the model (based
on the probability distribution of each variable) and
then calculating the value of the solution. If this
process is performed a large number of times, the
distribution of results from the model will be obtained.
Answer (D) is correct. Project management concerns

managing teams assigned to special projects. Lumpy
demand refers to periodic demand for a product or
service that increases in large, lumpy increments.
Answer (A) is correct. PERT/CPM is a network
technique for scheduling interrelated time series
activities and identifying any critical paths in the series
of activities. The critical path is the longest path
through the network.
is a mathematical technique for maximizing or
minimizing a given objective subject to certain
constraints.
Answer (C) is incorrect because queuing theory is
used to minimize the costs of waiting lines when items
arrive randomly at a service point and are serviced
sequentially.
a method for studying the effects of changes in one or

finds an equation for the relationship among variables.
Answer (C) is incorrect because capital budgeting is
a methodology to maximize the returns on long-term
investment decisions.
is a technique used to maximize a revenue or profit
function or minimize a cost function subject to
constraints.
Answer (A) is incorrect because the path length of

A-C is 13.
Answer (B) is incorrect because the path length of
B-E is 8.
Answer (C) is correct. The critical path is the longest
path because it defines the minimum duration of the
project. A-D-E (4 + 6 + 5 = 15) is the critical path.
Answer (D) is incorrect because B-D-C is not a
path. The predecessor of C is A.
[232] Source: CMA 1287 5-26

Answer (A) is incorrect because slack time is an
inherent part of the noncritical paths on PERT
projects.
Answer (B) is correct. Combining PERT with cost
data permits decisions as to whether the benefits of
earlier completion of a project are justified in terms of
the additional costs of completion. For this purpose,
activity times and costs must be estimated for both
normal and crash efforts.
Answer (C) is incorrect because PERT-Cost can be
used without computerization.
Answer (D) is incorrect because costs are not
needed for these calculations.

Answer (A) is incorrect because an activity with
slack may nevertheless be essential to the overall
project.
Answer (B) is incorrect because it is not a backup
activity.
Answer (C) is correct. Slack is the free time
associated with each activity. In other words, paths
that are not critical have slack time. Slack represents
unused resources that can be diverted to the critical
path.
Answer (D) is incorrect because time is involved in a
slack activity.

Answer (A) is incorrect because a dummy activity is
one that consumes no time but establishes
precedence among activities. It is used specifically in
project management.
Answer (B) is incorrect because the latest finish is the
latest that an activity can finish without causing delay
in the completion of the project.
Answer (C) is incorrect because optimistic time is the
time for completing a project if all goes well.

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% x 10 minutes = 9
minutes, and 90% x 9 minutes = 8.1 minutes).
Accordingly, the cumulative average time to perform

eight tasks is 7.29 minutes (90% x 8.1 minutes).
Answer (B) is incorrect because 8.1 minutes is the
cumulative time for four tasks.
Answer (C) is incorrect because 6.56 minutes is the
cumulative average time for 16 tasks.
Answer (D) is incorrect because 5.90 minutes is the
cumulative average time for 32 tasks.
expected completion times using a 1-4-1 ratio. The

most optimistic and pessimistic estimates are
weighted equally, but the most likely completion time
is weighted four times more heavily than the others.
Thus, the PERT estimate is 4.5 months {[(1 x 2) + (4
x 4) + (1 x 9)] 6}.
Answer (D) is incorrect because 5 months is the
difference between the most likely estimate and the
pessimistic estimate.
[241] Source: CMA 1284 5-3
[238] Source: CMA 0688 5-16

Answer (A) is correct. When making a cost/time
reduce the total time of completion. The activity
chosen should be that whose completion time can be
time saved.
Answer (B) is incorrect because the activity with the
lowest unit crash cost may not be on the critical path.
The activity selected must be on the critical path.
Answer (C) is incorrect because the activity must be
on the path with the least slack (the critical path).
Answer (D) is incorrect because the activity chosen
should be that whose completion time can be
time saved.
[239] Source: CMA 1288 5-24
Answer (A) is incorrect because the activity to be
crashed must be on the critical path. Activity BC is
not on the critical path.
Answer (B) is incorrect because the cost to crash
activity EF for 2 weeks is $700 higher than the cost
to crash activities DE and EF for one week ($19,500
- $18,800).
Answer (C) is correct. Activities that are to be
crashed in a CPM problem should be ones that are
on the critical (longest) path. Thus, activity BC should
not be selected because it is not on the critical path.
To finish activity BC 2 weeks early would not reduce
the total time to complete the project. Thus, the only
feasible choices are DE and EF on the critical path.
The total cost to crash DE and EF for 1 week each is
$18,800 ($10,000 + $8,800), which is less than the
cost to crash either activity for 2 weeks. Thus, DE
and EF should be crashed for 1 week each because
the total cost is less than the $21,000 ($10,500 x 2)
2-week delay penalty.
Answer (D) is incorrect because the cost to crash
activity DE for 2 weeks is $800 higher than the cost
to crash activities DE and EF for one week ($19,600
- $18,800).
[240] Source: CMA 1291 4-17
Answer (A) is incorrect because 2 months is the most
optimistic estimate.
Answer (A) is correct. Queuing theory assumes that

arrivals are completely random and follow a Poisson
distribution. This discrete distribution indicates the
probability that a specified number of occurrences of
a random event will occur within an interval of time. It
applies when the occurrences of the event are
independent; the number of the occurrences of the
event in the interval is theoretically unlimited; the
probability of a single occurrence of the event is
proportional to the length of the interval; and in any
extremely small portion of the interval the likelihood
of more than one occurrence is very small. Queuing
theory also assumes that departures are completely
random. Departures occur at the end of service and
thus are a function of service time. A continuous
distribution (the exponential distribution, which is
related to the Poisson) is needed to decide service
times.
Answer (B) is incorrect because arrival times are
based on a Poisson distribution and service times are
exponentially distributed.
Answer (C) is incorrect because arrival times are
based on a Poisson distribution and service times are
exponentially distributed.
Answer (D) is incorrect because if the arrival rate
were greater than the rate of service, the line would
be infinitely long.
[242] Source: CMA 0692 4-5
Answer (A) is incorrect because 360 hours assumes
no learning curve effect.
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 (.8 x 1.5)
320
.96 hours (.8 x 1.2)
Thus, to produce 320 units, total production time will
be 307.2 hours (.96 x 320). The total time for the last
240 units will be 187.2 hours (307.2 - 120).
Answer (C) is incorrect because 307.2 hours is the
total time for completing 320 units.
Answer (D) is incorrect because 256 hours is a
nonsense answer.
Answer (B) is incorrect because 4 months is the most

likely estimate.
[243] Source: CMA 1294 4-28
Answer (C) is correct. The PERT method weights

analysis selects the best alternative for decisions
involving risk by multiplying the probability of each
outcome by its payoff, and summing the products.
Answer (B) is correct. Learning curves reflect the
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.
is used to find an equation for the linear relationships
among variables.
Answer (D) is incorrect because simulation would not
be appropriate when a single project is being bid
upon.
Answer (D) is incorrect because 12 weeks is the

difference between the optimistic and pessimistic
estimates.
[246] Source: CMA 0688 5-17
Answer (A) is incorrect because 7 is the average of
the two standard deviations.
Answer (B) is correct. The mean time for the critical
path is simply the sum of the means of the activity
times. However, the standard deviation equals the
square root of the sum of the variances (squares of
the standard deviations) of the times for activities on
the critical path. The standard deviation of the project
completion time (time for the critical path) is therefore
the square root of 100 (6 squared + 8 squared), or
10.
Answer (C) is incorrect because 14 is the sum of the
two standard deviations.
Answer (D) is incorrect because 48 is the product of
the standard deviations.
[244] Source: CMA 0683 5-8

Answer (A) is incorrect because 1-40 is an
appropriate assignment of random numbers for the
notification category.
Answer (B) is incorrect because 40-90 includes 51
numbers.
Answer (C) is incorrect because 61-100 is an
appropriate assignment of random numbers for the
notification category.
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.
[245] Source: CMA 0688 5-13
Answer (A) is correct. PERT analysis includes
probabilistic estimates of activity completion times.
Three time estimates are made: optimistic, most
likely, and pessimistic. The time estimates for an
activity are assumed to approximate a beta
probability distribution. In contrast to the normal
distribution, this distribution has finite endpoints (the
optimistic and pessimistic estimates) and is unimodal;
that is, it has only one mode (the most likely time).
PERT approximates the mean of the beta distribution
by dividing the sum of the optimistic time, the
pessimistic time, and four times the most likely time
(the mode) by six. The standard deviation is
approximated by dividing the difference between the
pessimistic and optimistic times by six. The basis for
the latter approximation is that various probability
distributions have tails that lie about plus or minus
three standard deviations from the mean. For
example, 99.9% of observations in the normal
distribution are expected to lie within this range.
Accordingly, if the pessimistic and optimistic times
are 21 and 9 weeks, respectively, the standard
deviation is 2 weeks (12 6).
[247] Source: CMA 1288 5-19

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 (80% x $12,500). 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
(80% x $10,000). 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).
Answer (B) is incorrect because $32,000 is the total
cost for labor and variable overhead for 200 units.
Answer (C) is incorrect because $38,000 is the total
variable cost for 200 units.
Answer (D) is incorrect because $41,800 is the total
cost for 200 units.
[248] Source: CMA 1288 5-20
Answer (B) is incorrect because 6 is the approximate

number of standard deviations between the tails of
the normal distribution.
Answer (A) is incorrect because with no learning

curve effect, estimated total hours would be 4,000
instead of 1,960, a change of more than 50%.
Answer (C) is incorrect because 9 weeks is the

pessimistic estimate.
Answer (B) is incorrect because fixed costs applied

per lot would decline because they are based on
labor hours, which are declining.

Answer (C) is incorrect because with no learning
curve effect, estimated total hours would be 4,000
instead of 1,960, a change of more than 50%.
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% x 1,000). A doubling to four lots
would reduce the cumulative hours per lot to 490
(70% x 700). Thus, for an output of 200 units, the
total hours worked would be 1,960 (4 x 490).
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.
[249] Source: CMA 1288 5-24
Answer (A) is incorrect because activity BC is not on
the critical path.
Answer (B) is incorrect because activity BC is not on
the critical path.
Answer (C) is incorrect because the cost of crashing
EF 2 weeks is $19,500, which is greater than the
total cost to crash DE and EF for 1 week each.
Answer (D) is correct. Activities that are to be
crashed in a critical path problem should be ones that
are on the critical (longest) path. Thus, activity BC
should not be selected because it is not on the critical
path. To finish activity BC 2 weeks early would not
reduce the total time to complete the project.
Therefore, the only feasible choices are DE and EF
on the critical path. The total cost to crash DE and
EF for 1 week each is $18,800 ($10,000 + $8,800),
which is less than the cost to crash either activity for 2
weeks. Thus, DE and EF should be crashed for 1
week each since the total cost is less than the
$21,000 ($10,500 x 2) 2-week delay penalty.
[250] Source: CMA 0689 5-23
Answer (A) is incorrect because determining product
mix can be accomplished by using linear
programming.
Answer (B) is correct. The Program Evaluation and
Review Technique and critical path method are useful
in the planning and control of a complex system or
process. PERT and CPM both construct a network
of time relationships between each event or
subproject to identify the subprojects that have a
direct effect on the completion date of the project as
a whole. The critical path is the longest path through
the network. If any activity on this path takes longer
than expected, the entire project will be delayed
(slack time is zero). Every project has at least one
critical path. Some have more than one.
Answer (C) is incorrect because product costs are
determined by cost accounting.
Answer (D) is incorrect because queuing theory
determines the number of servers needed in a
restaurant.
[251] Source: CMA 0689 5-24
Answer (A) is incorrect because CPM specifies the
activity times (uses deterministic estimates).
Answer (B) is incorrect because CPM but not PERT

uses activity costs and considers crash times.
Answer (C) is incorrect because a less significant
difference between PERT and CPM is that PERT
uses probabilistic estimates of completion times.
CPM times are deterministic. The 1:4:1 method is
typically used in PERT. Under this method, the most
optimistic and pessimistic estimates are weighted
equally, but the most likely estimate is weighted four
times more heavily than the others.
Answer (D) is correct. Both PERT and CPM are
network analysis techniques. But CPM was
developed independently of PERT and is widely used
in the construction industry. CPM may be thought of
as a subset of PERT. Like PERT, it is a network
technique, but, unlike PERT, it uses deterministic time
and cost estimates. Its advantages include cost
estimates plus the concept of "crash" efforts and
costs. Activity times are estimated for normal effort
and crash effort. Crash time is the time to complete
an activity assuming that all available resources were
devoted to the task (overtime, extra crew, etc.).
Activity costs are also estimated for normal and crash
efforts. These estimates allow the project manager to
estimate the costs of completing the project if some
of the activities are completed on a crash basis. The
network diagram is constructed in the same manner
as PERT diagrams. Once the diagram is constructed,
the critical paths are found for normal and crash
times. More than one critical path may exist for each
diagram.
[252] Source: CMA 0689 5-25
not shown.
is used to determine an optimal product mix.
Answer (C) is incorrect because a Gantt chart shows
the activities to be completed but does not reflect
their relationships (sequencing) or define a critical
path.
Answer (D) is correct. A Gantt or bar chart is
sometimes used in conjunction with PERT or CPM
to show the progress of a special project. Time is
shown on the horizontal axis, the length of a bar
equals the length of an activity, and shading indicates
the degree of completion. However, the Gantt chart
is not as sophisticated as PERT or CPM in that it
does not reflect the relationships among the activities
or define a critical path.
[253] Source: CMA 0690 5-21
related outcomes.
optimizes a function given certain constraints.
Answer (C) is incorrect because PERT is a network
technique used to plan and control large projects.
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.
network analysis.
is a tool for optimizing a cost or profit function given
specified constraints.
[254] Source: CMA 1291 4-18

[257] Source: CMA 0692 4-7
used to minimize the costs of waiting lines.
is used to minimize a cost function or maximize a
profit function given constraints.
Answer (C) is incorrect because decision trees are
diagrams that analyze sequences of probabilistic
decisions, the events that may follow each decision,
and their outcomes.
Answer (D) is correct. Monte Carlo simulation is
often used to generate the individual values for
random variables, such as lead times and usage rates.
Performance under uncertainty can be investigated by
randomly selecting values for each of the variables in
the model (based on the probability distribution of
each variable) and then calculating the value of the
solution. If this process is performed a large number
of times, the distribution of results can be obtained.
[255] Source: CMA 1291 4-21
Answer (A) is correct. Markov processes are useful

in decision problems in which the probability of the
occurrence of a future state depends only on the
current state. A characteristic of the Markov process
is that the initial state matters less and less as time
goes on because the process will eventually reach its
steady state.
Answer (B) is incorrect because Markov processes
eventually reach a steady state; earlier probabilities
are less important.
Answer (C) is incorrect because sequencing is not
important in a Markov process.
Answer (D) is incorrect because earlier trends are
weighted less than later trends.
[258] Source: CMA 1293 4-24
Answer (A) is incorrect because $4,320 equals the
cost of the items in the fourth batch.
Answer (A) is incorrect because correlation and

regression analysis is a means of determining the
degree of the relationship among two or more
variables.
Answer (B) is incorrect because $10,368 is based on

the assumption that the cumulative average unit labor
cost is reduced by the learning curve percentage with
each batch, not each doubling of output.
Answer (B) is incorrect because CVP analysis is

used to analyze the relationship among fixed costs,
variable costs, sales volume, and profit or loss.
Answer (C) is incorrect because $2,592 represents

the labor cost of 100 units at the unit rate expected
after another doubling of production to eight batches.
Answer (C) is incorrect because PERT-Cost is a

means of network analysis that assigns costs to all
activities so that the effect of any change in a given
task on cost as well as on time may be estimated.
Answer (D) is correct. The learning curve reflects the

task becomes progressively shorter. Ordinarily, the
curve is expressed in a percentage of reduced time to
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 (60% x $72). Hence, total labor
cost for 400 units is estimated to be $17,280 (400 x
$43.20).
Answer (D) is correct. Queuing theory is a group of

waiting line and a service facility (loading docks in this
case). The objective of queuing theory is to minimize
the total cost of the system, including both service
and waiting costs, for a given rate of arrivals.
[256] Source: CMA 1291 4-23
used to minimize the cost of waiting lines.
Answer (B) is incorrect because time series analysis
is based on past experience. In time series analysis, a
dependent variable is regressed on time (the
independent variable).
Answer (C) is correct. PERT is a network analysis
technique that uses probabilistic time estimates to aid
managers in planning and controlling large-scale,
complex projects having many interrelated activities.
PERT diagrams are free-form networks showing
each activity as a line between events. A sequence of
lines shows interrelationships among activities.
PERT-Cost is a modification that permits the effect of
any change in a given task to be determined in terms
of cost as well as time. Basically, PERT-Cost is
simply an application of cost figures to traditional
[259] Source: CMA 0694 4-1

Answer (A) is incorrect because the most likely time
estimate should be included in the formula.
Answer (B) is incorrect because the most likely time
estimate should be included in the formula.
Answer (C) is correct. PERT was developed to aid
managers in controlling large, complex projects.
PERT analysis includes probabilistic estimates of
activity completion times. Three time estimates are
made: optimistic, most likely, and pessimistic. The
time estimates for an activity are assumed to
approximate a beta probability distribution. PERT
approximates the mean of the beta distribution by

dividing the sum of the optimistic time, the pessimistic
time, and four times the most likely time by six.
Answer (D) is incorrect because all time estimates
are not weighted equally.
[260] Source: CMA 0694 4-2
relates to time, not cost.
Answer (B) is incorrect because the critical path
relates to time, not cost.
Answer (C) is incorrect because the shortest path has
the most slack and is therefore not critical.
Answer (D) is correct. In a PERT or critical path
network, the critical path is the longest path in time
through the network. The longest path is critical in
that if any activity on the critical path takes longer
than expected, the entire project will be delayed.
Every network has at least one critical path. Paths
that are not critical have slack time.

is used to find an equation for the linear relationships
among variables.
[263] Source: CMA 0695 4-12
Answer (A) is incorrect because uncertainty is
reflected in the use of probabilistic estimates of
completion times.
Answer (B) is incorrect because the difference
between the latest starting time and earliest finishing
time is irrelevant.
Answer (C) is incorrect because the path with the
largest amount of time associated with it is the critical
path.
Answer (D) is correct. PERT diagrams are free-form
networks showing each activity in a large project as a
line between events. The critical path is the longest
path in time through the network. That path is critical
in that if any activity on the critical path takes longer
Paths that are not critical have slack time. Slack is the
number of days an activity can be delayed without
forcing a delay for the entire project.
[261] Source: CMA 0694 4-3

Answer (A) is incorrect because eliminating an
activity with slack will not reduce the total time of the
project.
Answer (B) is incorrect because the lowest unit crash
cost may not result in a major time savings.
Answer (C) is incorrect because the time reduction
should be related to its cost. The maximum time
reduction may not be cost effective.
Answer (D) is correct. When making a cost-time
reduce the total time of completion. The initial activity
chosen should be the one with the completion time
that can be accelerated at the lowest possible cost
per unit of time saved.
[264] Source: CMA 1291 4-26

Answer (A) is incorrect because simulation is a
means of experimenting with logical or mathematical
Answer (C) is incorrect because statistical sampling is
a means of estimating the characteristics of a
population by examining a few of its units.
Answer (D) is correct. Time series analysis would be
appropriate because it relies on past experience.
Changes in the value of a variable (such as sales) may
have several possible components, e.g., a change in
demand for the product or a change in market share.
These changes are regressed on time (the
[262] Source: CMA 1294 4-29

[265] Source: CMA 1293 4-25
Answer (A) is incorrect because integer programming
is a variation of linear programming that concerns
problems in which some variables are not continuous.
Integer programming problems are also known as
discrete models because the variables take on
discrete, noncontinuous values.
is a technique used to maximize a revenue or profit
function, or minimize a cost function, subject to
constraints such as limited resources or minimum (or
maximum) levels of production time.
Answer (C) is correct. The Monte Carlo simulation
method is often used to generate the individual values
for a random variable. The performance of a
quantitative model under uncertainty may be
investigated by randomly selecting values for each
variable in the model (based on the probability
distribution of each variable) and then calculating the
value of the solution. If this process is performed
many times, the distribution of results from the model
will be obtained.
Answer (A) is incorrect because adding a seasonality

factor to, or subtracting it from, a forecast based on
trend analysis is a means of adjusting for seasonality.
Answer (B) is incorrect because seasonality factors
cannot be ignored; they are reflected in the data and
must be considered for a model to be accurate.
Answer (C) is correct. Time series analysis relies on
past experience. Changes in the value of a variable
may have several possible components including
secular trends, cyclical variation, seasonality, and
random variation. Seasonal variations are common in
many businesses. A variety of methods exist for
including seasonal variations in a forecasting model,
but most methods use a seasonal index. Alternatively,
seasonal variations can be removed from data by
using a weighted average of several time periods
instead of data from individual periods.
Answer (D) is incorrect because the seasonality
adjustment for a single season's data may be an
increase or a decrease.

[266] Source: CMA 0695 4-12
Answer (A) is incorrect because uncertainty is
reflected in the use of probabilistic estimates of
completion times.
Answer (B) is incorrect because the difference
between the latest starting time and earliest finishing
time is irrelevant.
Answer (C) is incorrect because the path with the
largest amount of time associated with it is the critical
path.
Answer (D) is correct. PERT diagrams are free-form
in that, if any activity on the critical path takes longer
Paths that are not critical have slack time. Slack is the
number of days an activity can be delayed without
forcing a delay for the entire project.
[267] Source: CMA 1285 5-27
Answer (A) is incorrect because -0.73 signifies a
strong negative correlation.
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 would indicate no association
between the variables. Therefore, the correlation
coefficient that is nearest to zero would indicate the
weakest linear association. Of the options given in the
question, the correlation coefficient that is nearest to
zero is -0.11.
Answer (C) is incorrect because 0.12 is a slightly
stronger correlation.
Answer (D) is incorrect because 0.35 is a
considerably stronger correlation.
Answer (B) is correct. Correlation and regression

analysis can be used to determine if 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) would
determine the extent of the dependence.
Answer (C) is incorrect because statistical sampling is
a means of choosing and analyzing a sample to
estimate population characteristics.
Answer (D) is incorrect because time series or trend
analysis regresses the dependent variable on time (the
Answer (A) is incorrect because a perfect negative
correlation exists.
Answer (B) is correct. The coefficient of correlation
(in standard notation, 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.
Answer (C) is incorrect because an inverse, not a
direct, relationship exists.
Answer (D) is incorrect because a linear relationship
exists between X and Y.
[271] Source: CIA 1194 II-46
Answer (A) is incorrect because 1.03 is an
impossible value.
[268] Source: CMA 1289 5-14

Answer (A) is incorrect because the coefficient is
negative if the relationship between the variables is
inverse.
Answer (B) is incorrect because the coefficient
relates the two variables to each other.
Answer (C) is incorrect because the size of the
coefficient varies between -1.0 and +1.0.
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.
[269] Source: CMA 1291 4-27
Answer (A) is incorrect because simulation is a
means of experimenting with logical or mathematical
Answer (B) is incorrect because -.02 is a very weak

correlation coefficient.
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.
Answer (D) is incorrect because .75 is .25 from the
maximum value, whereas - .89 is .11 from the
minimum value.
[272] Source: CIA 0595 II-46
Answer (A) is incorrect because cross-sectional
regression analysis is inappropriate. The auditor is
trying to estimate changes in a single account balance
over time.
may still be the most appropriate methodology to
estimate interest income, but the auditor should first
understand the factors that may be causing r to
decrease. The reason may be a systematic error in

the account balance.
Answer (C) is correct. The coefficient of
determination (r ) 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.
Answer (D) is incorrect because linear regression
models are simpler models, but the auditor should be
searching for a systematic error in the account
balance or applying a more complex model.
[273] Source: CMA 1290 4-27
Answer (A) is incorrect because x is the independent
variable.
Answer (B) is incorrect because the dependent
variable is y.
Answer (C) is incorrect because the constant
coefficient is a.
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.
[274] Source: CMA 1290 4-28
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.
Answer (B) is incorrect because the dependent
variable is y.
Answer (C) is incorrect because the constant
coefficient is a.
total variance in cost that can be explained by the

regression equation. If the coefficient of determination
is .99724, 99.724% of the variance is explained by
the regression equation. Thus, the values in the
regression equation explain virtually the entire amount
of total cost.
Answer (B) is incorrect because the percentage of
the total variance explained by the regression
equation is 99.724% which corresponds to the
coefficient of determination (r ), or .99724.
Answer (C) is incorrect because the percentage of
Answer (D) is incorrect because the percentage of
Answer (A) is incorrect because the fixed cost and
variable cost are wrong.
Answer (B) is correct. First, determine the months
with the highest (520 hours in August) and lowest
(300 hours in April) levels of activity.
August
520 hours $4,470
April
300 hours $2,820
------------- -----Difference 220 hours $1,650
As the hours increased by 220, cost increased by
$1,650, which is $7.50 per hour. Thus, at 300 hours
of activity, the total variable costs are $2,250 ($7.50
x 300 hours). Since the total cost was $2,820, the
$570 above the variable costs must be fixed costs.
Substituting into the standard regression equation of y
= a + bx gives Y = $570 + $7.50X.
Answer (C) is incorrect because both fixed and
variable costs are wrong.
Answer (D) is incorrect because the variable cost is
wrong.
Answer (D) is incorrect because r is the coefficient

of determination.
[275] Source: CMA 1290 4-29
Answer (A) is incorrect because the budgeted
maintenance costs are $3,746.
Answer (B) is incorrect because the budgeted
Answer (C) is incorrect because the budgeted
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).
Answer (A) is correct. Given so few observations

(fewer than 30), t-values must be used. The company
wants 95% confidence, which means 47.5% at the
top of the range and 47.5% at the bottom. Thus, the
appropriate column of the t-table to use is .025 (half
of the 5% error allowance is at the top 50% and half
at the bottom). Given 12 observations and two
variables, and thus only 10 degrees of freedom (12 2), the appropriate t-value from the table is 2.23. The
standard error of the b coefficient (0.12126)
multiplied by the t-value (2.23) equals the range
above and below the mean. The variable coefficient
7.2884 plus the range of .2704 (2.23 x .12126)
equals 7.558. 7.2884 - 0.2704 equals 7.0180. The
range is thus $7.02 to $7.56 (to the nearest cent).
y = a + bx
y = 684.65 + 7.2884(420)
y = $3,746
Answer (B) is incorrect because it does not cover

two standard deviations of the range.
[276] Source: CMA 1290 4-30
Answer (C) is incorrect because it does not cover

Answer (A) is correct. The coefficient of

determination (r ) measures the percentage of the
Answer (D) is incorrect because it does not cover


Answer (A) is incorrect because it includes more than
one standard deviation from the mean.
Answer (B) is incorrect because it includes more than
Answer (C) is incorrect because it includes less than
Answer (D) is correct. Based on the regression
equation, the total cost at 400 hours would be
$684.65 of fixed costs (the constant coefficient) plus
$2,915.36 (400 x 7.2884) of variable costs, for a
total of $3,600.01. The standard error of the estimate
is given as $34.469, or $34.47. Thus, one standard
deviation either way would be $3,600.01 - $34.47 =
$3,565.54 and $3,600.01 + $34.47 = $3,634.48. A
two-thirds confidence level falls within one standard
deviation (approximately from the mean).
[280] Source: CIA 0595 II-47
Answer (A) is incorrect because linear time series
analysis is inapplicable. It is a simple model that
compares data for an individual store over time.
Answer (B) is correct. Time series data pertain to a
given entity over a number of prior time periods.
Cross-sectional data, however, pertain to different
entities for a given time period or at a given time.
Thus, cross-sectional regression analysis is the most
appropriate statistical tool because it compares
attributes of all stores' operating statistics at one
moment in time.
Answer (C) is incorrect because cross tabulations
have to be built on a model of expectations. Unless
the model is built, the analysis is not useful.
Answer (D) is incorrect because the objective is to
compare stores at one moment in time. Multiple
regression time series analysis compares the
performance of an individual store over a period of
time.
[281] Source: CMA 0697 4-21
the longest path.
Answer (B) is incorrect because whether a path is
critical is a function of its completion time, not the
number of nodes.

programming is an approach to solving problems, not
a particular algorithm. It divides a large mathematical
model into smaller, more manageable pieces in such a
way that, once the smaller problems have been
solved, the result is the optimal solution to the overall
model.
Answer (C) is correct. Learning curves reflect the
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.
Answer (D) is incorrect because time series analysis
applies to data gathered at successive moments in
time. It is a forecasting technique in which the
dependent variable is regressed on time.
[283] Source: CMA 0697 4-26
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).
Answer (B) is incorrect because regression results
are limited to observations within the relevant range.
does not use constraint functions.
Answer (D) is incorrect because the dependent
variable is estimated using regression analysis.
[284] Source: CMA 1296 4-9
Answer (A) is incorrect because a transportation
model is a form of linear programming used to
allocate shipments most economically. Transition
probabilities are not used in a transportation model.
Answer (B) is correct. Markov analysis is useful in
decision problems in which the transition probability
of the occurrence of a future state depends only on
the current state. Thus, it is employed to analyze how
certain systems evolve over repeated trials, with the
initial state mattering less and less as time passes. The
objective is to estimate the probability that the system
will be in a given state at a moment in the future. This
problem could probably also have been solved using
queuing theory, but that was not one of the answer
choices.
Answer (C) is correct. The critical path is the longest

path through the network. If any activity on this path
takes longer than expected, the entire project will be
delayed (slack time is zero). Every project has at
least one critical path. Some have more than one.
Answer (C) is incorrect because calculus is used to

optimize a nonlinear model, for example, a cost
function.
Answer (D) is incorrect because a critical path has no

slack.
Answer (D) is incorrect because the critical path

method is used to plan and control large projects.
The longest path through the network of activities is
the critical path.
[282] Source: CMA 0697 4-25

[285] Source: CMA 0696 4-20
is an optimizing model used to determine a minimum
or maximum, e.g., of a cost or revenue function, given
certain constraints on resources.
Answer (A) is incorrect because expected value is

the probabilistically weighted average of the
outcomes of an action.
Answer (B) is incorrect because learning curve

analysis quantifies how labor costs decline as
employees learn their jobs through repetition.
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.
Answer (D) is incorrect because regression, or least
squares, analysis determines the average change in
the dependent variable given a unit change in one or
more independent variables.
Answer (A) is incorrect because, in time series
analysis, variance of the error term is usually constant.
Answer (B) is correct. Time series analysis is a
regression model in which the independent variable is
time. In time series analysis, the value of the next time
period is frequently dependent on the value of the
time period before that. Hence, the error terms are
usually correlated or dependent on the prior period;
i.e., they are characterized by autocorrelation (serial
correlation).
Answer (C) is incorrect because, in time series
analysis, distribution of the error terms is normal.
Answer (D) is incorrect because, in time series
analysis, the expected value of the error term usually
equals zero.
Answer (A) is incorrect because cross-sectional
regression analysis examines relationships among
large amounts of data (e.g., many or different
production methods or locations) at a particular
moment in time.
relates the forecast to changes in particular variables.
Answer (C) is incorrect because, under exponential
smoothing, each forecast equals the sum of the last
observation times the smoothing constant, plus the
last forecast times one minus the constant.
Answer (D) is correct. The simple moving-average
method is a smoothing technique that uses the
experience of the past N periods (through time
period t) to forecast a value for the next period. Thus,
the average includes each new observation and
discards the oldest observation. The forecast formula
for the next period (for time period t+1) is the sum of
the last N observations divided by N.
[288] Source: CIA 0594 II-38
times one minus the constant. Thus, exponential

means that greater weight is placed on the most
recent data, with the weights of all data falling off
exponentially as the data age. This feature is
important because of the organizational changes that
affected sales volume.
Answer (C) is incorrect because queuing theory is
Answer (D) is incorrect because linear regression
analysis determines the equation for the relationship
among variables. It does not give more importance to
more recent data.
Answer (A) is incorrect because the number of
employees is unlikely to change due to the new
system.
Answer (B) is correct. When all customers must wait
in a single queue, a decrease in waiting time is
possible given multiple servers. An added effect is to
increase customer satisfaction.
Answer (C) is incorrect because, assuming a Poisson
process, the number of customers per teller will not
change.
Answer (D) is incorrect because tellers' duties will
not change, so on-the-job training will not improve.
Answer (A) is incorrect because service by one
ticket-seller at a movie theater is an example of a
single-channel, single-phase system.
Answer (B) is correct. The drive-through represents
a single queue (channel). Because this waiting line has
three services in series, it may be said to be multiple
phase. Another example is the typical factory
assembly line. This terminology (channel, phase),
however, is not used by all writers on queuing theory.
Answer (C) is incorrect because supermarket
checkout lines are a common example of multiple
single-phase servers servicing multiple lines.
Answer (D) is incorrect because an example of a
multiple-channel, multiple-phase system is a set of
supermarket checkout lines each of which is served in
sequence by a cashier and a person who packs
grocery bags.
[291] Source: CIA 0584 IV-34
Answer (A) is correct. One hundred customers arrive
in line per hour and only 60 are serviced per hour.
Accordingly, the queue will expand to infinity during
peak periods.
Answer (B) is incorrect because insufficient
information is given to determine overall idle time.
The question gives only peak period data.
Answer (A) is incorrect because an unweighted

average will not give more importance to more recent
data.
Answer (C) is incorrect because peak customer

service is only 60 per hour.
Answer (B) is correct. Under exponential smoothing,

each forecast equals the sum of the last observation
times the smoothing constant, plus the last forecast
Answer (D) is incorrect because insufficient

information is given to determine average customer
waiting time. The question gives only peak period
data.
Answer (A) is incorrect because the binomial
distribution is a discrete distribution in which each trial
has just two outcomes.
Answer (B) is incorrect because the chi-square
distribution is a continuous distribution used to
measure the fit between actual data and the
theoretical distribution.
Answer (C) is correct. Queuing models assume that
arrivals follow a Poisson process: the events (arrivals)
are independent, any number of events must be
possible in the interval of time, the probability of an
event is proportional to the length of the interval, and
the probability of more than one event is negligible if
the interval is sufficiently small. If Y is the average
number of events in a given interval, k is the number
of events, and e is the natural logarithm (2.71828...),
the probability of k is
k -Y
Y e
f(k) = -----k!
Answer (D) is incorrect because service time has an
exponential distribution. This distribution gives the
probability of zero events in a given interval, i.e., the
probability of a specified time between arrivals.
maximax criterion is a decision rule adopted by

risk-seeking, optimistic players who desire the largest
possible payoff and are willing to accept high risk.
The player determines the payoff for each state of
nature expected to arise after each possible decision,
ascertains the maximum payoff for each decision, and
then chooses the decision with the maximum payoff.
Answer (B) is incorrect because the minimum regret
criterion is used by a player who wishes to minimize
the effect of a bad decision in either direction. It
chooses the decision that has the lowest maximum
opportunity cost (benefit forgone).
Answer (C) is incorrect because the insufficient
reason (Laplace) criterion applies when the decision
maker cannot assign probabilities to the states of
nature arising after a decision. The reasoning is that, if
no probability distribution can be assigned, the
probabilities must be equal, and the expected value is
calculated accordingly. This criterion is risk-neutral.
Answer (D) is correct. A rational economic decision
maker (one completely guided by objective criteria)
will use expected monetary value to maximize gains
under conditions of uncertainty because (s)he is
risk-neutral (the utility of a gain equals the disutility of
a loss of the same absolute amount). For decisions
involving variability in outcomes, the concept of
expected value provides a rational means for
selecting the best choice. Expected value represents
the long-term average payoff for repeated trials. The
best choice is the one having the highest expected
value (sum of the products of the possible outcomes
and their respective probabilities).

[296] Source: CIA 1195 II-30
Answer (A) is incorrect because car 3 must wait for
4 minutes.
Answer (B) is incorrect because car 3 must wait for
4 minutes.
Answer (C) is correct. Car 1 is at the attached
window and will require 3 minutes to service. Car 2
must wait for car 1 to be serviced (3 minutes in the
queue + 3 minutes to be serviced = 6 minutes). Car 3
arrived at the attached window 2 minutes after cars 1
and 2. It must wait 1 minute for car 1 to be serviced
and 3 minutes for car 2 to be serviced, a waiting time
of 4 minutes.
Answer (D) is incorrect because car 3 must wait for
4 minutes.
Answer (A) is incorrect because car 4 must wait 4
minutes.
Answer (B) is incorrect because car 4 must wait 4
minutes.
Answer (C) is correct. Car 4 arrives at the
just-vacated island window 4 minutes after car 3. It
must wait 4 minutes for car 3 to be serviced.
Answer (D) is incorrect because car 4 must wait 4
minutes.
[295] Source: CMA 0688 5-19
Answer (A) is incorrect because, in game theory, the
Answer (A) is incorrect because a regression

coefficient is unrelated to the means of the variables.
Answer (B) is incorrect because, to predict a specific
value of sales, the value of the independent variable is
multiplied by the coefficient. The product is then
added to the y-intercept value.
Answer (C) is correct. The regression coefficient
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.
Answer (D) is incorrect because the absolute size of
the coefficient bears no necessary relationship to the
importance of the variable.
Answer (A) is correct. Game (or decision) theory is a
mathematical approach to decision making when
confronted with an enemy or competitor. Games are
classified according to the number of players and the
algebraic sum of the payoffs. In a two-person game,
if the payoff is given by the loser to the winner, the
algebraic sum is zero and the game is called a
zero-sum game. If it is possible for both players to
profit, however, the game is a positive-sum game.
Mathematical models have been developed to select
optimal strategies for certain simple games.
Answer (B) is incorrect because probability theory
assists in making the best decisions in the face of
uncertainty by providing mathematical methods for
expressing doubt or assurance about the occurrence
of a chance event.
Answer (C) is incorrect because queuing theory is a

mathematical technique for minimizing the total cost of
a queue (cost of providing service + the cost of
allowing idle resources to stand in the queue) when
items arrive randomly at a service point and are
serviced sequentially.
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% x 50 hours) for
two units and 32 hours (80% x 40 hours) for four
units.

a trial-and-error method, usually employed with a
computer, for studying the effects of changes in one
or more variables on the results of a decision model.
Answer (D) is incorrect because 30 hours is the time

necessary to complete the second unit.

Answer (A) is incorrect because the minimize regret
rule selects the action or strategy that minimizes the
sum of the regrets for the strategy.
Answer (B) is incorrect because the maximize utility
rule is not a decision rule.
Answer (C) is correct. According to game theory, a
player who uses the minimax decision criterion
determines the maximum loss for each decision
possibility and then chooses the decision with the
minimum maximum loss. This rule produces the same
result as the maximin technique, which determines the
minimum payoff for each decision and then chooses
the decision with the maximum minimum payoff.
Minimax and maximin are conservative criteria
adopted by risk-averse players, that is, those for
whom the disutility of a loss exceeds the utility of an
equal gain.
Answer (D) is incorrect because the maximax rule
selects the strategy or choice that provides the
greatest payoff if the most favorable state of nature
occurs.
Answer (A) is correct. Queuing theory is a group of
waiting line and a service facility (a copy center in this
case). The objective is to minimize total costs,
including both service and waiting costs (turnaround
time), for a given rate of arrivals.
optimizes a given objective function subject to
constraints.
estimates the relation among variables.
Answer (D) is incorrect because game theory is an
approach to decision making that considers the
actions of competitors.
[300] Source: CMA 0696 4-7
Answer (A) is incorrect because 50 hours is the time
for the first unit.
Answer (B) is incorrect because 40 hours is the
cumulative average completion time for two units.
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
Answer (A) is correct. Time series analysis or trend

analysis relies on past experience. Changes in the
value of a variable (e.g., unit sales of a product) may
have several possible components. In time series
analysis, the dependent variable is regressed on time
(the independent variable). The secular trend is the
long-term change that occurs in a series. It is
represented by a straight line or curve on a graph.
Seasonal variations are common in many businesses.
A variety of methods include seasonal variations in a
forecasting model, but most methods adjust data by a
seasonal index. Cyclical fluctuations are variations in
the level of activity in business periods. Whereas
some of these fluctuations are beyond the control of
the firm, they need to be considered in forecasting.
They are usually incorporated as index numbers.
Irregular or random variations are any variations not
included in the three categories above. Business can
be affected by random happenings, e.g., weather,
strikes, or fires.
Answer (B) is incorrect because alpha is not a
meaningful term in this context.
Answer (C) is incorrect because alpha and repetitive
are not meaningful terms in this context.
Answer (D) is incorrect because repetitive is not a
meaningful term in this context.
Answer (A) is correct. Game (or decision) theory is a
confronted with an enemy or competitor. Games are
classified according to the number of players and the
algebraic sum of the payoffs. In a two-person game,
if the payoff is given by the loser to the winner, the
algebraic sum is zero and the game is called a
profit, however, the game is a positive-sum game.
Mathematical models have been developed to select
optimal strategies for certain simple games.
Answer (B) is incorrect because probability theory is
a mathematical technique used to express
quantitatively the likelihood of occurrence of an
event.
Answer (C) is incorrect because linear programming
is a mathematical technique for optimizing a given
objective subject to certain constraints.
Answer (A) is correct. If both firms reduce the selling
price of Product A, neither will gain sales and the
resultant price war will cause both firms to earn lower
profits. This is inevitable when reduced profit margins

do not result in a significant increase in sales. The
effect is a no-win strategy.
Answer (B) is incorrect because both firms will
experience lower profits.
------------------------------------------Maximum Regret 14 9 12 10 13
------------------------------------------The location with the minimum regret is L2. If
demand is low, L2 has a payoff of -2, whereas L1
has a payoff of 7.
Answer (C) is incorrect because both firms will

Answer (B) is incorrect because the location with the

minimum regret is L2.
Answer (D) is incorrect because both firms will

Answer (C) is incorrect because the location with the

Answer (D) is incorrect because the location with the

Answer (A) is incorrect because the prisoner's
dilemma is a special outcome of a partly competitive
game. In these games, each player has a strategy that
dominates all others, and the outcome from each
player's choice of his/her dominant strategy is less
favorable to both players than some other outcome.
Answer (B) is correct. Game (or decision) theory is a
confronted with an "enemy" or competitor. Games
are classified according to the number of players and
the algebraic sum of the payoffs. In a two-person
game, if the payoff is given by the loser to the winner,
the algebraic sum is zero and the game is called a
profit, however, it is called a positive-sum game.
Answer (C) is incorrect because a saddle point is an
optimal strategy point.
Answer (D) is incorrect because the minimax regret
decision criterion chooses the strategy that minimizes
the maximum opportunity cost (profit forgone).

Answer (A) is correct. The opportunity loss matrix is
as follows:
Location L1
L2
L3
L4
L5
-----------------------------------------------------Demand:
High
14 = 8 =
12 = 3 =
0=
29-15 29-21 29-17 29-26 29-29
Medium 2 =
6=
0=
4=
10 =
14-12 14-8 14-14 14-10 14-4
Low
0=
9=
3=
10 = 13 =
7-7
7-(-2) 7-4
7-(-3) 7-(-6)
-----------------------------------------------------The expected opportunity loss from selecting location
L4 is 5.5 [(3 x 0.3) + (4 x 0.4) + (10 x 0.3)].
Answer (B) is incorrect because the expected
opportunity loss from selecting location L4 is 5.5.
Answer (C) is incorrect because the expected
Answer (D) is incorrect because the expected
Answer (A) is incorrect because the location with the

greatest potential profit is L5.
[308] Source: CIA 0592 IV-21
Answer (B) is incorrect because the location with the
Answer (A) is incorrect because the expected values

of X and Y are equal.
Answer (C) is incorrect because the location with the

Answer (B) is incorrect because the expected values

of X and Y are equal.
Answer (D) is correct. Under the maximax criterion,

the decision maker selects the choice that maximizes
the maximum profit. The maximum profits for the five
locations are:
Answer (C) is incorrect because a risk-averse

decision maker would want the least amount of risk
Location
L1 L2 L3 L4 L5
--------------------------------------------Maximum Profit
15 21 17 26 29
--------------------------------------------The location with the greatest potential profit is L5.
Answer (A) is correct. Under the minimax regret
criterion, the decision-maker selects the choice that
minimizes the maximum regret (opportunity loss). The
maximum regret for each location is determined from
the opportunity loss matrix (see Discussion of the
next question). The maximum regret for each location
is the highest number in each column as indicated
below:
Location
L1
L2 L3
L4
L5
for a given expected value of return. Given that the

expected values are the same, the product with the
least risk should be chosen.
Answer (D) is correct. For a risk-averse decision
maker, the utility of a gain is less than the disutility of
an equal loss. A risk-averse decision maker therefore
tends to prefer a stable pattern of returns, in this case,
a lower maximum return and a higher minimum return.
Accordingly, X should be chosen because the
dispersion of values is lower than that of Y.
Answer (A) is correct. After a problem has been
formulated into any mathematical model, it may be
subjected to sensitivity analysis. Sensitivity analysis is
Answer (B) is incorrect because statistical estimation

involves the estimation of parameters.
Answer (C) is incorrect because statistical hypothesis
testing calculates the conditional probability that both
the hypothesis is true and the sample results have
occurred.
Answer (D) is incorrect because a time-series study
involves forecasting data over time.
critical path is 36 days long, the slack is the 3-day

difference. In other words, work along path
A-D-E-C can be delayed by 3 days without affecting
the final completion time.
Answer (C) is incorrect because 6 days is the
difference between A-D-E-C and the shortest path.
Answer (D) is incorrect because 33 days is the time
required to complete path A-D-E-C.

Answer (A) is correct. A Markov chain is a series of
events in which the probability of an event depends
on the immediately preceding event. An example is
the game of blackjack in which the probability of
certain cards being dealt is dependent upon what
cards have already been dealt. In the analysis of bad
debts, preceding events, such as collections, credit
policy changes, and writeoffs, affect the probabilities
of future losses.
Answer (B) is incorrect because econometrics
forecasts the impact of different economic policies
and conditions.
Answer (C) is incorrect because Monte Carlo
analysis is a simulation technique that uses
random-number procedures to create values for
probabilistic components.
programming is a problem-solving approach that
breaks a large mathematical model into a number of
smaller, manageable problems.

Answer (A) is incorrect because 25 days is the most
likely completion time.
Answer (B) is incorrect because 27 days is the
expected completion time.
Answer (C) is incorrect because 32 days is based on
a simple arithmetic average.
Answer (D) is correct. A PERT analysis incorporates
uncertainty by using probabilistic estimates of activity
completion times. The most optimistic, most likely,
and most pessimistic times are weighted on a basis of
1 to 4 to 1, respectively. Given an expected
completion time of 27 days, a most likely completion
time of 25 days, and a most optimistic completion
time of 24 days, the following formula may be solved
for the most pessimistic completion time (X):
(1 x 24) + (4 x 25) + (1 x X) = (6 x 27)
24 + 100 + X = 162
X = 38

Answer (A) is incorrect because A-B-C, A-D-E-C,
and A-F-C require 27, 33, and 34 days,
respectively.
Answer (B) is incorrect because A-B-C, A-D-E-C,
respectively.
Answer (C) is incorrect because A-B-C, A-D-E-C,
respectively.
Answer (D) is correct. The critical path is the longest
path in a network. The reason that path is critical is
that any delays along the critical path will cause
delays in the completion of the overall project. The
longest path in the network is A-F-G-C (36 days).
Answer (A) is incorrect because 1 day is the
difference between A-D-E-C and the next longest
path, not the longest path in the network.
Answer (B) is correct. PERT diagrams are free-form
because, if any activity on the critical path takes
longer than expected, the entire project will be
delayed. Paths that are not critical have slack time.
Slack is the number of days an activity can be
delayed without forcing a delay for the entire project.
Given that path A-D-E-C is 33 days long, and the
Answer (A) is incorrect because 20.0 hours assumes

three successive reductions of 10 hours [50 - (80% x
50)] each.
Answer (B) is correct. The learning curve reflects the
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 (80%
x 50 hours). If production is again doubled (to four
units), the average completion time will be 32 hours
(80% x 40 hours). When production is doubled again
to eight units, the cumulative average completion time
will be 25.6 hours (80% x 32 hours).
Answer (C) is incorrect because 32 is the average
completion time after four units have been produced.
Answer (D) is incorrect because 40 is the average
time after two units have been produced.
Answer (A) is correct. The learning curve reflects the

percentage each time production doubles. Thus, an
x 50 hours). If total production time is 80 hours (2 x
40 cumulative average time), and the first unit
required 50 hours, the time to produce the second
unit must be 30 hours.
Answer (B) is incorrect because 40.0 hours is based
on the assumption that the time to produce the last
unit (the incremental unit-time assumption) is reduced
by 20%.
Answer (C) is incorrect because 45.0 hours is based
on a 90% learning curve and the incremental unit-time
assumption.
Answer (D) is incorrect because 50.0 hours is the
completion time for the first unit.
Answer (A) is incorrect because 50 hours is the
completion time for the first unit.
Answer (B) is incorrect because 45 is the cumulative
average completion time after production of two
units.
Answer (C) is correct. The learning curve reflects the
percentage each time production doubles. Thus, a
x 50 hours). If production is again doubled (to four
units), the cumulative average completion time will be
40.5 hours (90% x 45 hours).
Answer (D) is incorrect because 40.0 hours assumes
two successive reductions of 5 hours [50 - (90% x
50)] each.
method (CPM) is intended to identify bottlenecks in a
network and hence identify the longest path.
Answer (B) is correct. Network models are used to
solve managerial problems pertaining to project
scheduling, information systems design, and
transportation systems design. Networks consisting
of nodes and arcs may be created to represent in
graphic form problems related to transportation,
assignment, and transshipment. The shortest-route,

minimal spanning tree, and maximal flow problems
are other applications of network models. A
shortest-route algorithm minimizes total travel time
from one site to each of the other sites in a
transportation system.
Answer (C) is incorrect because the maximal flow
algorithm maximizes throughput in networks with
distinct entry (source node) and exit (sink node)
points. Examples of applications are highway
transportation systems and oil pipelines. Flows are
limited by capacities of the arcs (e.g., highways or
pipes).
Answer (D) is incorrect because the minimal spanning
tree algorithm identifies the set of connecting
branches having the shortest combined length. A
spanning tree is a group of branches (arcs) that
connects each node in the network to every other
node. An example problem is the determination of the
shortest telecommunications linkage among users at
remote sites and a central computer.
[318] Source: CMA 0688 5-27
Answer (A) is correct. Two basic costs are involved
in queuing (waiting-line) models: (1) the cost of
providing service (including facility costs and
operating costs) and (2) the cost of idle resources
waiting in line. The latter may be a direct cost if paid
employees are waiting or an opportunity cost in the
case of waiting customers. The objective of the
queuing theory is to minimize the total cost of the
system, including both service and waiting costs, for a
given rate of arrivals. This minimization occurs at the
point where the cost of waiting is balanced by the
cost of providing service.
Answer (B) is incorrect because queuing theory is a
cost minimization technique.
Answer (C) is incorrect because queuing theory is a
Answer (D) is incorrect because queuing theory is a
[319] Source: CMA 0688 5-28

Answer (A) is incorrect because each can be
calculated using the queuing model.
Answer (B) is incorrect because each can be
calculated using the queuing model.
Answer (C) is correct. The objective of a queuing
model is to minimize the total cost of a system,
including both service and waiting costs, for a given
rate of arrivals. The arrivals and services in a queuing
model occur in accordance with a Poisson process;
i.e., the probability of occurrence of an event is
constant, and the occurrence is independent of what
has happened immediately preceding the current
observation. The Poisson probability distribution is
used to predict the probability of the occurrence of a
given number of events in a given time, given the
expected number of events per unit of time and the
length of time. The formula assumes a specified
number of service facilities and random arrivals. Also,
the formula calculates the average number in line or
being serviced, the average waiting time, and the
average percent of time that a service facility is idle.
The actual waiting time cannot be determined from
use of the model.

Answer (D) is incorrect because the average number
of units in the system (in line or being serviced) can
be calculated.
which chooses the strategy with the maximum

minimum payoff, gives the same results as the
minimax procedure.

Answer (A) is incorrect because $283 equals
variable cost for January or March.
Answer (B) is correct. The high-low method can be
used to determine the fixed and variable cost
components of a mixed cost. The variable cost is
found by dividing the change in total cost (TC) by the
change in activity, e.g., DLH. The fixed cost is found
by substituting the variable cost into either of the
activity/cost functions. Alternatively, the fixed cost is
the cost given a zero level of activity.
Change in TC
$25
----- = $.00833
Change in DLH 3,000
FC = TC - VC
FC = $585 - (31,000 x $.00833) = $327
FC = $610 - (34,000 x $.00833) = $327
Answer (C) is incorrect because $258 equals
variable cost for February.
Answer (D) is incorrect because $541 equals
variable cost for February and March.
[321] Source: CMA 0685 5-7
Answer (A) is incorrect because, in decision making
under risk, the probabilities of the consequences of
possible actions are known with a higher degree of
confidence.
Answer (B) is correct. The minimax regret decision
rule is applicable under conditions of uncertainty, that
is, when the probabilities of future consequences are
not known. Using this criterion, management
constructs a decision table based on opportunity
costs for each possible action and state of nature that
may exist and then selects the act that minimizes the
maximum possible opportunity cost.
Answer (C) is incorrect because probabilities can
also be determined objectively.
Answer (D) is incorrect because probabilities can
also be determined subjectively.
[322] Source: CMA 1288 5-6
Answer (A) is incorrect because deterministic
decision making is based upon fixed
(nonprobabilistic) inputs into the decision process.
Answer (A) is incorrect because the least squares

method is a sophisticated method of identifying the
fixed and variable costs.
Answer (B) is incorrect because a computer
simulation is a more exact method of separating fixed
and variable costs.
Answer (C) is correct. The fixed and variable
portions of mixed costs may be estimated by
identifying the highest and the lowest costs within the
relevant range. The difference in cost divided by the
difference in activity is the variable rate. Once the
variable rate is found, the fixed portion is
determinable. The high-low method is a simple
approximation of the mixed cost formula. The costs
of using more sophisticated methods sometimes
outweigh the incremental accuracy achieved. In these
cases, the high-low method is sufficient.
Answer (D) is incorrect because matrix algebra is a
precise method of separating fixed and variable costs.
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.
Answer (B) is incorrect because game theory is a
mathematical approach to decision making in which
the actions of competitors are considered.
Answer (C) is incorrect because sensitivity analysis
studies how changes in one or more variables affect
the optimal solution in a linear programming model.
and servicing waiting lines when items arrive
randomly at a service point and are serviced
sequentially.
Answer (A) is correct. The standard error of the
estimate represents the deviation of the actual
observations from the regression line. It is calculated
based upon the sample drawn from the population.
Answer (B) is incorrect because it describes constant
variance.

used to minimize the sum of waiting and service costs
for a waiting line.
Answer (C) is incorrect because it describes the

coefficient of determination.
Answer (C) is incorrect because maximax is a

criterion chosen by a risk-seeking player who prefers
the strategy that maximizes the maximum possible
profit.
Answer (D) is incorrect because the coefficient of

correlation measures the strength of the linear
relationship.
Answer (D) is correct. In game theory, the minimax

decision criterion selects the strategy that will
minimize the maximum possible loss. It is a technique
used by a risk-averse player. The maximin criterion,

Answer (A) is incorrect because 6 weeks is the result
of failing to multiply the most likely time by 4.

Answer (B) is incorrect because 7 weeks is the
optimistic time.
Answer (C) is correct. The expected duration of an
activity in a PERT network can be found by taking
the sum of the optimistic time, the pessimistic time,
and four times the most likely time and dividing it by
6. Hence, the expected duration is 12.5 weeks.
{[7 + (4 x 13) + 16] 6} = 12.5 weeks
Answer (D) is incorrect because 13 weeks is the
most likely time.
Crashing DE results in a 1.0-day saving (7.5 - 6.5)

only. Crashing AB is the efficient way to reduce both
A-B-C-E and A-B-D-E by the desired amount of
time because it is part of both paths. The incremental
cost of crashing AB is $1,000 ($4,000 crash cost $3,000 normal cost) to shorten the completion time
by 1.0 day (4.5 - 3.5). The alternatives for
decreasing both A-B-C-E and A-B-D-E are more
costly.
Answer (B) is incorrect because crashing activity DE
saves only 1.0 day (7.5 - 6.5) on the critical path and
does not reduce the time needed for A-B-C-E.
Answer (C) is incorrect because crashing AD does
not reduce the time necessary to complete A-B-C-E
or A-B-D-E.

Answer (A) is incorrect because actual (real) demand
is not known until it has occurred. Simulation is a
forecasting tool.
Answer (D) is incorrect because AB and CE are not

on the critical path.
Answer (B) is incorrect because actual (real) demand

is not known until it has occurred. Simulation is a
forecasting tool.
Answer (C) is incorrect because sampling actual
demand for prior periods does not necessarily yield
the expected demand given changes in future
circumstances.
Answer (D) is correct. The Monte Carlo simulation
method is often used to generate the individual values
for a random variable. The performance of a
quantitative model under uncertainty may be
investigated by randomly selecting values for each
variable in the model (based on the probability
distribution of each variable), and then calculating the
value of the solution. If this process is performed
many times, the distribution of results from the model
will be obtained. Thus, random numbers are assigned
so that the probability of an outcome in the model is
the same as that in the actual circumstances. Average
simulated long-term demand must therefore equal
expected demand.
[328] Source: CMA 1290 4-7
Answer (A) is incorrect because the expected time of
the critical path is 13.0 days.
Answer (B) is correct. The critical path is the longest
path. The longest path in the diagram is A-D-E,
which requires 13 days (5.5 + 7.5) based on
expected times.
Answer (A) is incorrect because the project cannot

be completed in less than 8 months.
Answer (B) is incorrect because the project cannot
be completed in less than 8 months.
Answer (C) is correct. The longest, or critical, path in
the network from node (A) to node (F) is path
A-C-D-F. All other paths are shorter than path
A-C-D-F, so the activities along those paths can be
completed before the activities along path A-C-D-F.
Thus, the shortest time to complete the project is 8
months (3 + 3 + 2).
Answer (D) is incorrect because no path through the
network requires 14 months.
Answer (A) is incorrect because the average number
of customers in line or being served at any time is 2.
Answer (B) is correct. The average number of work
units waiting in line can be found by taking the
average number of customers arriving, and dividing
that by the difference between the number of
customers a cashier can service and the average
number of customers. Therefore, the equation is
4
4
------ = - = 2 customers in line at any time
(6 - 4) 2
Answer (C) is incorrect because the expected time of

Answer (C) is incorrect because the average number

Answer (D) is incorrect because the expected time of


[329] Source: CMA 1290 4-8

Answer (A) is correct. The critical (longest) path is
A-D-E, which has an expected time of 13 days.
However, to decrease the project's completion time
by 1.5 days, paths A-B-C-E (4.5 + 1.0 + 6.5 = 12
days) and A-B-D-E (4.5 + .5 + 7.5 = 12.5 days) as
well as A-D-E must also be shortened. Hence,
A-D-E must be reduced by 1.5 days, A-B-C-E by
.5 day, and A-B-D-E by 1.0 day. The only way to
decrease A-D-E by 1.5 days is to crash activity AD
(5.5 expective time - 4.0 crash time = 1.5 days).

Answer (A) is incorrect because the average number
of customers waiting in line, not being served, is 1.33.
Answer (B) is correct. The average number of
customers waiting in line can be found by squaring the
average number of customers arriving, and dividing
that by the number of customers able to be served
times the difference between the number of
customers a cashier can serve and the average
number of customers. Therefore, the equation is
16
16
16
-------- = ---- = -- = 1.33 customers waiting in line, not
6(6 - 4) 6(2) 12
being served
Answer (C) is incorrect because the average number
subtracted from the total cost of that respective

month. Therefore, using the month of February, it
would be:
$.40 x 2,600 hours = $1,040 $1,200 Total Cost
1,040 Variable Cost
-----$ 160 Fixed Cost
======
Answer (B) is incorrect because $160 is the fixed
cost for Jackson Co.

Answer (A) is incorrect because the average waiting
time is .33 minutes.
Answer (B) is correct. The average waiting time can
be found by taking the average number of customers
waiting in line and dividing that by the average
number of customers arriving per minute. The
average number of customers waiting in line can be
found by squaring the average number of customers
arriving, and dividing that by the number of customers
able to be served times the difference between the
number of customers a cashier can serve and the
average number of customers. Therefore, the
equation is
16
16
16
-------- = ---- = -- = 1.33 customers waiting in line, not
6(6 - 4) 6(2) 12
line, not being served
Therefore, using the 1.33 people waiting in line, not
being served, the equation is
Answer (C) is incorrect because $160 is the fixed

Answer (D) is incorrect because $160 is the fixed
Answer (A) is incorrect because $560 is the variable
cost, not the total cost.
Answer (B) is incorrect because $720 is the
expected total cost for the month of May.
Answer (C) is correct. The expected total cost, using
the high-low method, can be found by taking the
number of expected machine hours and multiplying it
by the variable cost per machine hour. This number is
then added to the fixed cost.
1,400 hours x $.40 per hour = $560 + $160 = $720
1.33
---- = .33
4
Answer (C) is incorrect because the average waiting
Answer (D) is incorrect because the average waiting
Answer (A) is correct. The high-low method is used
to generate a regression line by basing the equation
on only the highest and lowest of a series of
observations. In this problem, March was the lowest
and February the highest.
Answer (D) is incorrect because $720 is the

expected total cost for the month of May.
Answer (A) is incorrect because .575 is the
probability of an employee arriving on time the 5th
day.
Answer (B) is correct. Markov processes are useful
in decision problems in which the probability of the
occurrence of a future state depends only on the
current state. For this problem, the process should be
set up as follows:
Answer (B) is incorrect because the variable cost of

cleaning is $.40 per machine hour.
To
----------------From
On Time
Late
---------------On time
.7
.3
Late
.4
.6
In Out
Pr
-------------------------------------------------------------Day 2 (1.0) x (.7)
= .7 (1-.7) = .3
Day 3 (.7) x (.7) + (.3) x (.4) = .61 (1-.61) = .39
Day 4 (.61) x (.7) + (.39) x (.4) = .583 (1-.58) = .417
Answer (C) is incorrect because the variable cost of

Answer (C) is incorrect because .61 is the probability

of an employee arriving on time the 3rd day.
Answer (D) is incorrect because the variable cost of

Answer (D) is incorrect because .7 is the probability

of an employee arriving on time the 2nd day.
February $1,200 for 2,600 hours

March
800 for 1,600 hours
---------Increase $ 400 for 1,000 hours
Thus, it costs $400 for 1,000 hours, or $.40 for an
hour.

Answer (A) is correct. The fixed cost using the
high-low method can be found by multiplying the
variable cost per machine hour, $.40, by the number
of machine hours of either month. This number is then

Answer (A) is incorrect because it results from
deducting too much for holding fees.
Answer (B) is incorrect because it results from
deducting too much for holding fees.

Answer (C) is correct. If Q D in an inventory
simulation, then holding cost per unit times the
difference between Q and D is subtracted from gross
profit times D to get net profit.
Net profit
Net profit
Net profit
Net profit
=
=
=
=
$50D - $20(Q - D)
$50(950) - $20(1,000 - 950)
$47,500 - $1,000
$46,500
units serviced in a unit of time (T). This number is

then multiplied by T. The product of this calculation is
then divided into B squared. In this example, for
Pigpen, the calculation is
2
B
36
36
N = -------- or N = ---------- = -- = .9 cars
q T(T - B) q 10(10 - 6) 40
Answer (D) is incorrect because it results from a

failure to deduct holding fees.
Answer (A) is incorrect because it results from
deducting the wrong amount for goodwill loss.
Answer (B) is correct. If Q < D in an inventory
simulation, then shortage cost per unit times the
difference between Q and D is subtracted from gross
profit times Q to get net profit.
Net profit
Net profit
Net profit
Net profit
=
=
=
=
$50Q - $25(D - Q)
$50(1,000) - $25(1,100 - 1,000)
$50,000 - $2,500
$47,500
Answer (A) is incorrect because Linus has an

average waiting time of .357 minutes.
Answer (B) is incorrect because Schroeder has an
Answer (C) is incorrect because Snoopy has an
Answer (D) is correct. The average waiting time is
found by dividing the average number waiting in line,
not being serviced, by the average number of work
units arriving in a unit of time. In this example,
Pigpen's customers have the shortest wait.
N
q
.9
W = -- or W = -- = .15 minutes
B
6
Answer (C) is incorrect because it results from

deducting the wrong amount for goodwill loss.
Answer (D) is incorrect because it results from a
failure to make a deduction for goodwill loss.
average of 2.5 cars in line at any time.
average of 2 cars in line at any time.
average of 1.67 cars in line at any time.
Answer (D) is correct. The average number of cars
waiting in line is found by initially subtracting the
average number of work units arriving in a unit of time
from the average number of work units serviced in a
unit of time. This number is then divided into the
average number of work units serviced in a unit of
time. In this example, for Pigpen, the calculation is
B
6
6
N = ----- or N = -------- = - = 1.5 cars
T-B
(10 - 6) 4
Answer (A) is incorrect because Lucy has a

cumulative average time per unit of 25.6 hours.
Answer (B) is correct. The learning curve reflects the
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 Sally, if the first unit required 60 hours
to complete, her average completion time after two
units will be 42 hours (70% x 60 hours). If
production is doubled to 4 units, her average
completion time will be 29.4 hours (70% x 42 hours).
When production is then doubled to 8 units, her
average completion time will be 20.6 hours (70% x
29.4 hours). This is the best among the four workers.
Answer (C) is incorrect because Marcy has a
Answer (D) is incorrect because Patty has a

average of 1.79 cars in his line, not being serviced.
Answer (D) is correct. The first step in finding the
average number of cars waiting in line, not being
serviced, is to subtract the average number of work
Answer (A) is incorrect because 60 hours is the

average labor hours per unit on the first production
run.
Answer (B) is correct. Learning curves reflect the
gain experience. For this example, the learning curve
has the following affect:
Average Labor
Average
Run Number Units Hours per Unit Labor Hours
---------- ----- -------------- ----------1
80
60
4,800
2
160
48
7,680
3
320
38.40
12,288
4
640
30.72
19,660.80
Therefore, the average labor hours per unit is 30.72
hours.
average labor hours per unit for Midland Inc.
Answer (D) is incorrect because 23.04 hours is
incremental hours per unit after 320 units have been
produced.
Answer (A) is incorrect because 8,294.4 hours is the
time required to complete the remaining 360 units
after the learning curve.
Answer (B) is incorrect because 19,660.8 hours is
the time required to complete the 640 units on the
learning curve.
Answer (C) is incorrect because 24,330 hours is the
time required to complete 1,000 units if
subcontracted to Midland Inc.
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:
Units in Run Hours in Run Hours per Unit
------------ ------------ -------------80
4,800
60
80
2,880
36
160
4,608
28.80
320
7,372.8
23.04
Therefore, 23.04 hours per unit times 360 remaining
units gives 8,294.40 hours. This number added to the
19,660.8 hours required to complete the 640 hours
on the learning curve equals 27,955.2 hours.

gain experience. For this example, the learning curve
has the following effect:
Average Labor
Total
Run Number Units Hours per Unit Labor Hours
---------- ----- -------------- ----------1
80
56
4,400
2
160
42
6,720
3
320
31.5
10,080
4
640
23.625
15,120
Therefore, the total hours required to produce the
640 units is 15,120.
Answer (B) is incorrect because 18,350 hours is
found by using an 80% learning curve.
Answer (C) is incorrect because 19,530 hours is the
total hours required to complete the project.
Answer (D) is incorrect because 35,840 hours is the
amount of time necessary assuming no learning curve.
Answer (A) is incorrect because 11.81 hours is the
time needed to finish additional units after 1,280 units,
assuming the learning curve did not end at 640 units.
Answer (B) is correct. 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. For example,
15,120 hours (amount needed to finish 640 units)
-10,080 hours (amount needed to finish 320 units)
-----------5,040 hours
5,040 hours 320 units = 15.75 hours
time needed to finish additional assuming an 80%
learning curve.

Answer (A) is correct. The best method to determine
the total out-of-pocket costs to complete a project is
to first multiply the total hours required by the cost
per hour. After this, subtract the initial costs of
producing the first batch. This will result in the total
out-of-pocket costs to complete a project.
27,955.2 hours x $18 per hour =
$503,193.60
80 units x 60 hours x $18 per hour = - 86,400.00
----------$416,793.60
===========
Answer (B) is incorrect because $463,104 is found
by using the direct labor cost related to outsourcing
to Midland.
Answer (C) is incorrect because $503,193.60 is
found by not subtracting the cost of the initial 80
units.
Answer (D) is incorrect because $559,104 is found
by using the direct labor cost related to outsourcing
to Midland.
Answer (D) is incorrect because 23.625 hours is the

average labor hours per unit to finish 640 units.
Answer (A) is incorrect because $302,400 ignores
the hours required for the additional units and it
ignores the increases in the direct labor rate.
Answer (B) is incorrect because $330,220.80
ignores the hours required for the additional units.
Answer (C) is incorrect because $390,600 ignores
the increases in the direct labor rate.
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. In this example:
15,120 hours + (280 units x 15.75 hours per unit)
19,530
Direct labor rate [$20.00 x (1 + .04 labor increase)
x (1 + .05 cost margin)]
$ 21.84
-----------
$426,535.20
===========
freedom.

Answer (A) is incorrect because $21,600,000 is
based on the expected column.
Answer (B) is correct. The first step is to determine
market size, market share, and unit price under the
1-4-1 ratio of PERT. Market size would be:
60,000 x 1 = 60,000
90,000 x 4 = 360,000
140,000 x 1 = 140,000
------560,000 6 = 93,333
Market share would be:
25% x 1 = 25
30% x 4 = 120
35% x 1 = 35
---180 6 = 30%
Price would be:
750 x 1 = 750
800 x 4 = 3,200
875 x 1 = 875
---------4,825 6 = $804.1667
Total revenue would be:
93,333 x 30% x $804.1667 = $22,516,587
Answer (C) is incorrect because $23,441,666 is
based on an unweighted average of the three
possibilities.
Answer (D) is incorrect because $42,875,000 is
based on the optimistic column.
Answer (A) is correct. The coefficient of
determination (r ) is the square of the coefficient of
correlation (r). The coefficient of determination, r ,
may be interpreted as the percent of variation in the
dependent variable "explained" by the variation in the
independent variable. The coefficient of correlation is
an index of the amount of association between the
two variables, and is also known as the covariance.
Here, r = 0.953, and r = 0.908.
Answer (B) is incorrect because 42% is the standard
error of the regression coefficient.
Answer (C) is incorrect because 48.8% is a
nonsense response.
Answer (D) is incorrect because 95.3% is the square
root of the correct answer.
Answer (A) is incorrect because the degrees of
freedom necessary are (n - 2).
Answer (B) is incorrect because the degrees of
Answer (C) is incorrect because the degrees of
Answer (D) is correct. The formula for the
confidence interval of a regression using the student's
t-distribution is calculated as (n - 2) or 22 degrees of
Answer (A) is correct. The confidence interval is b

t (standard error of b). Thus, $2.10 2.07(0.42), or
$2.10 0.87, which is $1.23 to $2.97.
Answer (B) is incorrect because they do not
represent a 95% confidence interval.
Answer (C) is incorrect because they do not
Answer (D) is incorrect because they do not
Answer (A) is incorrect because $42,000 represents
only variable costs.
Answer (B) is correct. The overhead may be
calculated from the regression equation as: y = a + bx.
OH = $40,000 + [($2.10)(20,000)]
OH = $82,000
Note that the fixed costs are $40,000 and the
variable costs are $2.10 per direct labor hour.
Answer (C) is incorrect because they overstate the
variable cost portion of the total.
Answer (D) is incorrect because they overstate the
variable cost portion of the total.

Part 4C (Quantitative Methods For Decision Analysis) 354

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Part 4C (Quantitative Methods For Decision Analysis) 354

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PART 4C

Quantitative Methods for

D. Some amount other than those given.

A. Uncertainty and risk.

B. Uncertainty and subjective likelihoods.

D. Some amount other than those given.

[2] Source: CMA 0683 5-16

[8] Source: CMA 1286 5-1

[Fact Pattern #2]

The standard time required to manufacture one six-unit

[5] Source: CMA 0685 5-14

[9] Source: CMA 1285 5-17

choices based on past sales data. The assignments are as

B. $3.20 per machine hour.

[15] Source: CMA 0688 5-25

D. $4.80 per machine hour.

[12] Source: CMA 1286 5-7

A. Variances of two distributions.

[17] Source: CMA 1288 5-5

D. The branches emanate from a node from left to

[18] Source: CMA 1288 5-14

[Fact Pattern #3]

[Fact Pattern #4]

new products to undertake during the next 1-year period,

product has the lesser risk.

[23] Source: CMA 0689 5-26

[20] Source: CMA 1288 5-26

C. Not choose either product.

[25] Source: CMA 0689 5-28

Unit Sales Volume

D. Some amount other than those given.

B. Based on a two-dimensional model and the

D. Quantitative, but is not expressed graphically.

D. Some amount other than those given.

[29] Source: CMA 1289 5-15

[33] Source: CMA 1289 5-23

A. Determine when accounting control procedures

B. Control labor costs in production operations.

C. Detect performance trends away from normal

D. Monitor internal control applications in EDP

C. Expected value analysis.

D. Monte Carlo simulation.

A. Likely outcome of a proposed action.

B. Present value of alternative actions.

C. Probability of a given outcome from a proposed

[Fact Pattern #8]

D. Weighted average of probable outcomes of an

[40] Source: CMA 1292 4-21

[41] Source: CMA 1292 4-22

[37] Source: CMA 0690 5-19

[47] Source: CMA 1293 4-29

[43] Source: CMA 1292 4-24

C. Monte Carlo simulation.

B. There is absolutely no doubt that an event will

[49] Source: CMA 1286 5-3

B. An arithmetic mean using the probabilities as

C. The square root of the squared deviations.

D. A measure of the difference between the best

[50] Source: CMA 1286 5-5

B. Sum of the conditional profit (loss) for the best

C. Difference between the expected profit under

[51] Source: CMA 0688 5-2

B. Uses probability assumptions to determine total

A. Monte Carlo simulation.

C. Estimates the dependent cost variable.

D. Ignores the coefficient of determination.

D. Expected value analysis.

The expected value of perfect information is the

[52] Source: CMA 0688 5-20

B. Sum of the conditional profit (loss) for the best

B. Decision tree analysis.

[53] Source: CMA 1288 5-1

[54] Source: CMA 0691 4-1

[Fact Pattern #11]

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

[59] Source: Publisher