Fundamentals of Management, 8e (Robbins et al.

)
Quantitative Module
1) An optimistic manager will typically follow a maximax choice.
Answer: TRUE
Explanation: When optimistic, a manager will look to maximize the maximum possible payoff that is
given by a maximax choice.
Diff: 1 Page Ref: 94
AACSB: Analytic skills
2) A pessimistic manager will typically follow a minimin choice.
Answer: FALSE
Explanation: When pessimistic, a manager will look to maximize the minimum possible payoff that is
given by a maximin choice.
Diff: 2 Page Ref: 94
AACSB: Analytic skills
3) With choice S1, a manager sees gains of $10 million and $6 million. With choice S2, a manager sees
gains of $12 million and $3 million. The manager chooses S2, so she must be optimistic.
Answer: TRUE
Explanation: The manager chose the greatest possible gain, so she used a maximax strategy that is
typical of an optimist.
Diff: 2 Page Ref: 94
AACSB: Analytic skills
4) With choice S1, a manager sees gains of $10 million and $6 million. With choice S2, a manager sees
gains of $12 million and $8 million. S2 might be the choice of a pessimistic manager.
Answer: TRUE
Explanation: S2 has the greatest possible minimum payoff, so it could be the strategy of an optimist. It
could also be the strategy of a pessimist since S2 also has the greatest possible maximum.
Diff: 3 Page Ref: 94
AACSB: Analytic skills
5) With choice S1, a manager sees gains of $10 million and $6 million. With choice S2, a manager sees
gains of $12 million and $8 million. Only a pessimistic manager would choose S1.
Answer: FALSE
Explanation: S1 is not a good choice for an optimist or a pessimist. It has a low possible maximum and
minimum.
Diff: 3 Page Ref: 94
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6) Regret is computed by subtracting the value of a possible strategy from the greatest value in the entire
matrix.
Answer: FALSE
Explanation: Regret is computed by subtracting the value of a possible strategy from the greatest value
in the same column in a matrix.
Diff: 2 Page Ref: 94
AACSB: Analytic skills
7) This payoff matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive
strategies CA1, CA2, and CA3 for the Large Company. From Bigg's point of view, the S1 maximum
regret for CA1 is 8.
CA1 CA2 CA3
S1
8
5 12
S2
9
14
3
S3
16
13
20
Answer: TRUE
Explanation: The difference between the S1 value of 8 and the maximum CA1 value of 16 is 8.
Diff: 1 Page Ref: 94
AACSB: Analytic skills
8) This payoff matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive
strategies CA1, CA2, and CA3 for the Large Company. From Bigg's point of view, the S1 maximum
regret for CA2 is 8.
CA1 CA2
CA3
S1
8
5
12
S2
9
14
3
S3
16
13
20
Answer: FALSE
Explanation: The difference between the S1 value of 5 and the maximum CA2 value of 14 is 9.
Diff: 1 Page Ref: 94
AACSB: Analytic skills
9) This payoff matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive
strategies CA1, CA2, and CA3 for the Large Company. From Bigg's point of view, the S2 maximum
regret is 9.
CA1 CA2
CA3
S1
8
5
12
S2
9
14
3
S3
16
13
20
Answer: FALSE
Explanation: The difference between the S2 value of 3 and the maximum CA3 value of 20 is 17.
Diff: 1 Page Ref: 94
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10) This payoff matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive
strategies CA1, CA2, and CA3 for the Large Company. From Bigg's point of view, the S3 maximum
regret is 1.
CA1
CA2
CA3
S1
8
5
12
S2
9
14
3
S3
16
13
20
Answer: TRUE
Explanation: The S3 value for CA2 is 13, which is 1 less than the maximum CA2 value of 14.
Diff: 1 Page Ref: 94
AACSB: Analytic skills
11) This regret matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive
strategies CA1, CA2, and CA3 for the Large Company. A minimax Bigg manager would choose S2
because it has the smallest maximum regret of 1.
CA1
CA2
CA3
S1
5
5
3
S2
9
6
1
S3
10
2
5
Answer: FALSE
Explanation: A minimax manager would choose S1, the strategy with the smallest maximum regret of 5.
Diff: 1 Page Ref: 95
AACSB: Analytic skills
12) This regret matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive
strategies CA1, CA2, and CA3 for the Large Company. The maximum regrets for this table are S1 = 5,
S2 = 9, S3 = 12.
CA1
CA2
CA3
S1
5
5
3
S2
9
6
1
S3
10
12
5
Answer: TRUE
Explanation: The maximum regret is the greatest value in each row.
Diff: 1 Page Ref: 95
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13) This regret matrix gives values for strategies S1, S2, and S3 for the Bigg Company and competitive
strategies CA1, CA2, and CA3 for the Large Company. A minimax Bigg manager choosing S3 would
have a greatest possible regret of 2.
CA1
CA2
CA3
S1
5
5
3
S2
9
6
1
S3
10
2
5
Answer: TRUE
Explanation: The greatest possible regret would be 10.
Diff: 1 Page Ref: 95
AACSB: Analytic skills
14) Decision trees are unreliable for making pricing decisions.
Answer: FALSE
Explanation: Decision trees are useful for making hiring, marketing, investment, equipment,
purchasing, and pricing decisions.
Diff: 1 Page Ref: 95
AACSB: Analytic skills
15) The decision tree shows the profit outcomes for a sandwich shop in a strong and a weak economy. If
the economy is strong, the shop is likely to make an $80,000 profit.

Answer: TRUE
Explanation: The profit from a strong economy is the full $80,000 as shown in the figure.
Diff: 2 Page Ref: 95-96
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16) The decision tree shows the profit outcomes for a sandwich shop in a strong and a weak economy. If
the economy is weak, the shop is likely to make 60 percent of a $25,000 profit, or $15,000.

Answer: FALSE
Explanation: The profit from a weak economy is the full $25,000 as shown in the figure.
Diff: 2 Page Ref: 95-96
AACSB: Analytic skills
17) The decision tree shows the profit outcomes for a sandwich shop in a strong and a weak economy.
Overall, the shop is expected to make $32,000.

Answer: FALSE
Explanation: Overall, the shop will make the sum of the probability products, or (0.40 $80,000) +
(0.60 $25,000) = $32,000 + $15,000 = $47,000.
Diff: 2 Page Ref: 95-96
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18) The decision tree shows the profit outcomes for a sandwich shop in a strong and a weak economy.
The shop is likely to make $105,000, the sum of both projections.

Answer: FALSE
Explanation: Overall, the shop will make the sum of the probability products, or (0.40 $80,000) +
(0.60 $25,000) = $32,000 + $15,000 = $47,000.
Diff: 2 Page Ref: 95-96
AACSB: Analytic skills
19) A manager uses break-even analysis to find out how many units of a product he needs to sell to make
a profit of zero.
Answer: TRUE
Explanation: The break-even point is located for a profit of zerothat is, it is the point at which the
product begins to return a profit.
Diff: 2 Page Ref: 96
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20) The break-even point is computed by the formula BE = TFC/(P VC)].
Answer: TRUE
Explanation: TFC stands for total fixed costs, P stands for the price of the product per unit, and VC
stands for variable costs for each unit.
Diff: 1 Page Ref: 97
AACSB: Analytic skills
21) The greater the ratio of TFC to (P VC) is means that the business needs to sell fewer units to make
a profit.
Answer: FALSE
Explanation: The reverse is true. When the ratio of TFC to (P VC) is high, the business needs to sell
more units to turn a profit.
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22) Reducing the value of VC in a break-even analysis means that the business needs to sell fewer units
to turn a profit.
Answer: TRUE
Explanation: A smaller VC results in a smaller TFC to (P VC) ratio, which translates into fewer units
sold to turn a profit.
Diff: 2 Page Ref: 97
AACSB: Analytic skills
23) Liquidity is a measure of an organization's ability to access cash to meet its debt obligations.
Answer: TRUE
Explanation: The organization may meet debt obligations by selling its assets or by using the cash it has
on hand.
Diff: 2 Page Ref: 97
AACSB: Analytic skills
24) A current ratio of 1.5 to 1 for an organization suggests that the organization will not be able to meet
its short-term debt obligations.
Answer: FALSE
Explanation: An organization is not in danger of not meeting its debts until the ratio gets to 1:1 or lower.
Diff: 1 Page Ref: 98
AACSB: Analytic skills
25) An organization with a high leverage ratio has usually been overly cautious and conservative in its
borrowing.
Answer: FALSE
Explanation: High leverage indicates a company that has borrowed too much, not too little.
Diff: 2 Page Ref: 98
AACSB: Analytic skills
26) Return on investment measures the ratio of total profits to total assets.
Answer: FALSE
Explanation: Return on investment measures the ratio of net profits to total assets.
Diff: 2 Page Ref: 98
AACSB: Analytic skills
27) A company is worried about meeting its interest expenses, so it should pay close attention to its
times interest earned.
Answer: TRUE
Explanation: Times interest earned compares profit before interest and taxes to total interest charges,
showing how readily a company can pay its interest expenses.
Diff: 1 Page Ref: 98
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28) Production data is shown for the number of hours required per unit for the Running and Soccer
versions of Streaks, custom made athletic shoes. Using linear programming, if running shoes are
represented by R and soccer shoes by S, the expression $16R + $20S is equal to the maximum profit that
can be made.
Monthly Product

Answer: FALSE
Explanation: The maximum profit expression should be $20R + $16S.
Diff: 2 Page Ref: 99
AACSB: Analytic skills
29) Production data for Streaks is shown. Using linear programming, if running shoes are represented by
R and soccer shoes by S, 5R + 3S < 750 is the correct constraint equation for design.
Monthly Product

Answer: TRUE
Explanation: The expression 5R + 3S < 750 is the correct constraint equation for design because it
correctly places each variable. The company has 750 hours of capacity that can be split up in different
ways. The constraint shows that the design process takes longer for running shoes than soccer shoes.
Diff: 2 Page Ref: 100
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30) Production data for Streaks is shown. Using linear programming, the maximum number of soccer
shoes that the plant can make is 250.
Monthly Product

Answer: TRUE
Explanation: The maximum number of soccer shoes that can be made is found by dividing the
maximum number of hours that can be spent in design by the number of design hours that it takes for
each design, or 750 3 = 250.
Diff: 1 Page Ref: 100
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31) Production data for Streaks is shown. Using linear programming, the maximum number of running
shoes that the plant can make is 250.
Monthly Product

Answer: FALSE
Explanation: The maximum number of running shoes that can be made is found by dividing the
maximum number of hours that can be spent in design by the number of design hours that it takes for
each design, or 750 5 = 150.
Diff: 2 Page Ref: 100
AACSB: Analytic skills
32) Production data for Streaks is shown. Using linear programming, if the plant makes 100 pairs of
running shoes and 100 pairs of soccer shoes, it ends up with $3600 in profit.
Monthly Product

Answer: TRUE
Explanation: The plant will make (100 $20) + (100 $16), or $3600 in profit.
Diff: 2 Page Ref: 100
AACSB: Analytic skills
33) Another term for queuing theory is "waiting line" theory.
Answer: TRUE
Explanation: Queuing theory is concerned with the costs and benefits of using a facility, such as a bank
teller station or a gas station.
Diff: 1 Page Ref: 101
AACSB: Analytic skills
34) A queuing theory analysis for bank teller windows comes up with a value of 0.10 for P, indicating
that customers are likely to wait about 10 minutes for each transaction.
Answer: FALSE
Explanation: A value of 0.10 for P indicates that the limit that has been set will be exceeded 10 percent
of the time.
Diff: 2 Page Ref: 101
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35) Using a fixed-point reordering system, a business might order new inventory when it is down to
about one-third of its maximum stock.
Answer: TRUE
Explanation: Fixed-point reordering typically identifies the reordering point at some fixed time along
the way, such as when inventory is reduced to one-third of its maximum.
Diff: 2 Page Ref: 101
AACSB: Analytic skills
36) In the economic order quantity (EOQ) model, one of the costs that gets considered for analysis is the
carrying costs of tying up money with inventory.
Answer: TRUE
Explanation: Storage, insurance, taxes, and other costs are also categorized under the heading of
carrying costs.
Diff: 2 Page Ref: 101
AACSB: Analytic skills
37) The goal of the economic order quantity (EOQ) model is to maximize the total costs that are
categorized as carrying costs and ordering costs.
Answer: FALSE
Explanation: The goal of economic order quantity (EOQ) is to minimize, not maximize, the total costs
that are categorized as carrying costs and ordering costs.
Diff: 2 Page Ref: 102
AACSB: Analytic skills
38) In the economic order quantity (EOQ) model, the optimum order quantity is obtained by identifying
where the total cost curve and the ordering costs curve intersect.
Answer: FALSE
Explanation: The optimum order quantity is obtained by identifying where the carrying costs curve and
the ordering costs curve intersect.
Diff: 2 Page Ref: 102
AACSB: Analytic skills
39) In the economic order quantity (EOQ) model, increasing the order size will decrease ordering costs.
Answer: TRUE
Explanation: Ordering costs will go down since fewer orders will need to be made over the course of
the year.
Diff: 2 Page Ref: 102
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40) In the economic order quantity (EOQ) model, decreasing the order size will increase carrying costs.
Answer: FALSE
Explanation: Smaller orders will result in lower carrying costs as the need for such things as storage and
extra inventory will be reduced.
Diff: 2 Page Ref: 102
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41) The purchase price of a product has no influence on calculating EOQ.

Answer: FALSE
Explanation: The variable V for the value or purchase price of the product is part of the formula for
computing EOQ.
Diff: 2 Page Ref: 94
AACSB: Analytic skills
42) Which role does uncertainty typically play in how managers function?
A) Uncertainty limits the amount of information that is available.
B) Uncertainty increases the amount of information that is available.
C) Uncertainty improves the quality of information that is available.
D) Uncertainty enhances the information that is available.
Answer: A
Explanation: A) Uncertainty causes managers to reduce their ambitions and scale back their goals
because the information they have is not reliable or is inaccurate.
Diff: 2 Page Ref: 94
AACSB: Analytic skills
43) Which psychological orientation would be typical of a manager who is optimistic about her business
environment?
A) a maximin orientation
B) a minimin orientation
C) a maximax orientation
D) a minimax orientation
Answer: C
Explanation: C) An optimistic manager wants to maximize her payoff. She is certain that she will be
successful, so she strives to make her success as great as possible. This maximum possible payoff
corresponds to a maximax orientation.
Diff: 2 Page Ref: 94
AACSB: Analytic skills
44) A manager is worried that if he chooses the wrong investment strategy, his company could lose out
on a great deal of money. Which strategy should he follow?
A) a maximax orientation
B) a minimin orientation
C) a maximin orientation
D) a minimax orientation
Answer: D
Explanation: D) The manager is worried about regretthe amount of money that could have been made
had he chosen a different strategy. To minimize regret, the manager should choose a minimax strategy
that minimizes the maximum amount of regret he can experience.
Diff: 2 Page Ref: 94
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45) Which psychological orientation would be typical of a manager who is pessimistic about her
business environment?
A) a maximin orientation
B) a minimin orientation
C) a maximax orientation
D) a minimax orientation
Answer: A
Explanation: A) A pessimistic manager wants to minimize her payoff. She is uncertain about the
outcome of her effort, so she strives to maximize the minimum return she can get for her investment.
This maximum possible minimum payoff corresponds to a maximin orientation.
Diff: 2 Page Ref: 94
AACSB: Analytic skills
46) This payoff matrix gives potential dollar gain values in millions for strategies S1, S2, S3, and S4 for
the Bent Fork National Bank and competitive strategies CA1, CA2, and CA3 for the Straight Spoon
Bank. If Bent Fork is optimistic, which strategy will it choose?
CA1
CA2
CA3
S1
3
24
17
S2
15
16
14
S3
8
19
10
S4
20
2
11
A) S1
B) S2
C) S3
D) S4
Answer: A
Explanation: A) The S1 strategy gives the greatest possible gain, 24, a chance for Bent Fork to
maximize its success. For an optimist, this is the best choice because it allows Bent Fork to capitalize on
its feeling that it will be successful.
Diff: 2 Page Ref: 94
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47) This payoff matrix gives potential dollar gain values in millions for strategies S1, S2, S3, and S4 for
the Bent Fork National Bank and competitive strategies CA1, CA2, and CA3 for the Straight Spoon
Bank. If Bent Fork is pessimistic, which strategy will it choose?
CA1
CA2
CA3
S1
3
24
17
S2
15
16
14
S3
8
19
10
S4
20
2
11
A) S1
B) S2
C) S3
D) S4
Answer: B
Explanation: B) The S2 strategy gives the greatest possible minimum gain, 14, a chance for Bent Fork
to maximize its worst possible outcome. For a pessimist, this is the best choice because it allows Bent
Fork to get the best possible "worst" outcome.
Diff: 2 Page Ref: 94
AACSB: Analytic skills
48) This payoff matrix gives potential dollar gain values in thousands for strategies S1, S2, S3, and S4
for Sam's Pizza and competitive strategies CA1, CA2, and CA3 for Pam's Pizza. If Sam chooses S4,
how is he feeling about the business climate?
CA1
CA2
CA3
S1
13
14
7
S2
7
17
12
S3
31
29
4
S4
20
12
21
A) Sam is feeling optimistic because he has chosen a maximax strategy.
B) Sam is feeling pessimistic because he has chosen a maximin strategy.
C) Sam is feeling optimistic because he has chosen a maximin strategy.
D) Sam is feeling pessimistic because he has chosen a maximax strategy.
Answer: B
Explanation: B) Sam has chosen the strategy with the greatest minimum, 12, indicating that he is
expecting bad times ahead, so he wants to get the greatest possible low result rather than the greatest
possible high result. This reflects a pessimistic outlook on the future.
Diff: 2 Page Ref: 94
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49) This payoff matrix gives potential dollar gain values in thousands for strategies S1, S2, S3, and S4
for Sam's Pizza and competitive strategies CA1, CA2, and CA3 for Pam's Pizza. If Sam chooses S3,
how is he feeling about the business climate?
CA1
CA2
CA3
S1
13
14
7
S2
7
17
12
S3
31
29
4
S4
20
12
21
A) Sam is feeling pessimistic because he has chosen a maximax strategy.
B) Sam is feeling pessimistic because he has chosen a minimax strategy.
C) Sam is feeling optimistic because he has chosen a maximax strategy.
D) Sam is feeling optimistic because he has chosen a maximin strategy.
Answer: C
Explanation: C) Sam has chosen the strategy with greatest maximum, 31, indicating that he is expecting
good times ahead, so he wants to get the greatest possible low result rather than the greatest possible
high result. This reflects an optimistic outlook on the future.
Diff: 2 Page Ref: 94
AACSB: Analytic skills
50) Which of the following best defines regret in a payoff matrix?
A) Regret refers to the difference of the sum of the values in a chosen strategy and the sum of the best
strategy.
B) Regret refers to the difference of the sum of the values in a chosen strategy and the sum of the worst
strategy.
C) Regret refers to the sum total of the sum of the values in a chosen strategy and the sum of the best
strategy.
D) Regret refers to the extra amount of money that could have been made had the person chosen a
different strategy.
Answer: D
Explanation: D) Regret measures the amount of extra money that could have been gained had the
person chosen the "right" strategy. Thus, the greatest difference between a high score from another
strategy and a score from the given strategy identifies the regret value.
Diff: 2 Page Ref: 95
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51) This payoff matrix gives potential dollar gain values in thousands for strategies S1, S2, S3, and S4
for Sam's Pizza and competitive strategies CA1, CA2, and CA3 for Pam's Pizza. If Sam chooses S1,
how is he feeling about the business climate?
CA1
CA2
CA3
S1
13
14
7
S2
7
17
12
S3
31
29
4
S4
20
12
21
A) Sam is feeling pessimistic because he has chosen a maximax strategy.
B) Sam is feeling optimistic because he has chosen a maximin strategy.
C) Sam is feeling neither pessimistic nor optimistic because he has chosen neither a maximin nor a
maximax strategy.
D) Sam is feeling both pessimistic and optimistic because he has chosen both a maximin and a maximax
strategy.
Answer: C
Explanation: C) Sam has chosen S1, which has neither the greatest maximum, which would indicate
that he has the maximax strategy of an optimist, nor the greatest minimum, which would correlate to the
greatest minimum value for a pessimist. Sam is also not focusing on getting the smallest possible regret
because S3 has a smaller maximum regret value than S1.
Diff: 2 Page Ref: 94
AACSB: Analytic skills
52) This payoff matrix gives potential dollar gain values in thousands for strategies S1, S2, S3, and S4
for Sam's Pizza and competitive strategies CA1, CA2, and CA3 for Pam's Pizza. What is the maximum
regret value for S1?
CA1
CA2
CA3
S1
13
14
7
S2
7
17
12
S3
31
29
4
S4
20
12
21
A) 18
B) 15
C) 14
D) 12
Answer: A
Explanation: A) The regret value shows the maximum amount that Sam can lose by making the wrong
choice. In this case, the difference between the CA1 value of 13 and the CA1 value of 31 gives the
maximum regret of 18 for S1, meaning the most that could have been lost had Sam not chosen S1 would
have been 18 thousand dollars.
Diff: 2 Page Ref: 95
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53) This payoff matrix gives potential dollar gain values in thousands for strategies S1, S2, S3, and S4
for Sam's Pizza and competitive strategies CA1, CA2, and CA3 for Pam's Pizza. What is the maximum
regret value for S4?
CA1
CA2
CA3
S1
13
14
7
S2
7
17
12
S3
31
29
4
S4
20
12
21
A) 13
B) 7
C) 2
D) 17
Answer: D
Explanation: D) The regret value shows the maximum amount that Sam can lose by making the wrong
choice. In this case, the difference between the CA3 value of 21 and the CA3 value of 4 gives the
maximum regret of 17 for S4, meaning the most that could have been lost had Sam not chosen S4 would
have been 17 thousand dollars.
Diff: 2 Page Ref: 95
AACSB: Analytic skills
54) This payoff matrix gives potential dollar gain values in thousands for strategies S1, S2, S3, and S4
for Sam's Pizza and competitive strategies CA1, CA2, and CA3 for Pam's Pizza. What is the maximum
regret value for S2?
CA1
CA2
CA3
S1
13
14
7
S2
7
17
12
S3
31
29
4
S4
20
12
21
A) 24
B) 15
C) 5
D) 0
Answer: A
Explanation: A) The regret value shows the maximum amount that Sam can lose by making the wrong
choice. In this case, the difference between the CA1 value of 7 and the CA3 value of 31 gives the
maximum regret of 24 for S2, meaning the most that could have been lost had Sam not chosen S2 would
have been 24 thousand dollars.
Diff: 2 Page Ref: 95
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55) Which of the following would a manager choose who wants to minimize her maximum regret?
A) the smallest maximum regret value
B) the smallest minimum regret value
C) the smallest difference maximum regret value and the minimum regret value
D) the greatest difference maximum regret value and the minimum regret value
Answer: A
Explanation: A) A minimax strategy minimizes the maximum regret. So the manager should compare
the maximum regret values for each strategy and choose the smallest value among them.
Diff: 2 Page Ref: 95
AACSB: Analytic skills
56) This regret matrix gives potential dollar values in thousands for strategies S1, S2, S3, and S4 for Al's
Fish Fry and competitive strategies CA1, CA2, and CA3 for Sal's Fish Bake. If Al wants to minimize his
maximum regret, which strategy should he choose?
CA1 CA2
CA3
S1
3
15
9
S2
12
10
12
S3
8
9
17
S4
13
16
3
A) S4
B) S3
C) S2
D) S1
Answer: C
Explanation: C) Al's maximum regrets are 15 for S1, 12 for S2, 17 for S3, and 16 for S4. The lowest of
the four maximum values is 12, so S2 identifies the smallest possible maximum regret.
Diff: 2 Page Ref: 95
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57) This regret matrix gives potential dollar values in thousands for strategies S1, S2, S3, and S4 for Al's
Fish Fry and competitive strategies CA1, CA2, and CA3 for Sal's Fish Bake. If Al chooses S3, what
kind of strategy is he using?
CA1
CA2
CA3
S1
3
15
9
S2
12
10
12
S3
8
9
17
S4
13
16
3
A) minimax
B) maximin
C) maximax
D) minimin
Answer: C
Explanation: C) Al has chosen the strategy that has the highest maximum regret value. Therefore, he has
maximized the maximum regret value, or gone for the maximax strategy. This strategy does not make
sense for most serious-minded managers.
Diff: 2 Page Ref: 95
AACSB: Analytic skills
58) In a decision tree, each possible outcome ________.
A) gets assigned a probability value between 0 and 1.0
B) gets assigned a probability value of 50 percent
C) gets assigned a probability value between 0 and 50 percent
D) gets assigned a probability value between 0.5 and 1.0
Answer: A
Explanation: A) In a decision tree, each possible outcome gets assigned a probability value. Thus, if
there are two outcomes and it is 25 percent likely that outcome A will occur, it is therefore 100 percent 25 percent, or 75 percent, likely that outcome B will occur. Outcome A will therefore be assigned a
probability value of 0.25, and outcome B will have a 0.75 probability value.
Diff: 2 Page Ref: 95
AACSB: Analytic skills
59) In a decision tree, which of the following is true?
A) The probabilities of all of the outcomes must be equal.
B) The sum of the probabilities of all of the outcomes must equal 1.0.
C) No outcome can have a probability that is less to 1.0.
D) The sum of the probabilities of all of the outcomes must be greater than 1.0.
Answer: B
Explanation: B) In a decision tree, the probabilities must have a sum that equals 1.0, thereby indicating
that there is a 100 percent probability that at least one of the outcomes will occur. Note that probabilities
can be equal but certainly do not need to be equal to one another. Note also that if the sum of
probabilities were greater than 1.0, it would indicate that the outcomes have more than a 100 percent
chance of occurring, which does not make logical sense.
Diff: 2 Page Ref: 95
AACSB: Analytic skills

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60) The decision tree shows the profit outcomes for a coffee shop in a strong and a weak economy for
next year. What is the probability that the economy will be weak in the coming year?

A) 0.73
B) 27 percent
C) 50 percent
D) 7.3
Answer: A
Explanation: A) There are only two outcomes in this decision tree. Since the sum of all outcomes must
equal 100 percent, or 1.0, the probability of a weak economy is 1.0 - 0.27, or 0.73.
Diff: 2 Page Ref: 95-96
AACSB: Analytic skills
61) The decision tree shows the profit outcomes for a coffee shop in a strong and a weak economy for
next year. Suppose a third outcome is considered in which a moderate economy is 33 percent likely to
occur. With this added outcome, how does the probability of a weak economy change?

A) A weak economy is now 73 percent likely.

B) A weak economy is also 33 percent likely.
C) A weak economy is now 40 percent likely.
D) A weak economy is now 0 percent likely.
Answer: C
Explanation: C) The addition of a third option of a moderate economy that is 33 percent likely to occur
reduces the likelihood of a weak economy. Since the sum of all outcomes must equal 100 percent, or 1.0,
the probability of a weak economy is 1.0 - 0.27 - 0.33, or 0.40.
Diff: 3 Page Ref: 95-96
AACSB: Analytic skills
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62) The decision tree shows the profit outcomes for a toy store in a strong and a weak economy for next
year. What is the expected value of the store's profit in a strong economy?

A) $10,500
B) $15,000
C) $16,000
D) $30,000
Answer: D
Explanation: D) The expected value for the store is not affected by the probabilities themselves. All of
the $30,000 profit expected in a strong economy will be realized if the economy is actually strong,
which according to the data has only a 35 percent chance of occurring.
Diff: 2 Page Ref: 96
AACSB: Analytic skills
63) The decision tree shows the profit outcomes for a toy store in a strong and a weak economy for next
year. If the economy turns out to be weak, how much profit is the store likely to lose out?

A) $14,000
B) $16,000
C) $30,000
D) $15,000
Answer: A
Explanation: A) The amount of money that the owner will lose out on can be calculated by finding the
difference between the two estimates corresponding to a strong and a weak economy: $30,000 (strong) $16,000 (weak) = $14,000 lost.
Diff: 2 Page Ref: 96
AACSB: Analytic skills
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64) The decision tree shows the profit outcomes for a toy store in a strong and a weak economy for next
year. What is the expected value of profit for the store for the year?

A) $10,500
B) $20,900
C) $29,000
D) $10,400
Answer: B
Explanation: B) The expected value is found by multiplying the probability of each outcome by its
profit value. This is expressed by (0.35 $30,000) + (0.65 $16,000) = $20,900.
Diff: 2 Page Ref: 96
AACSB: Analytic skills

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65) Decision trees show the profit outcomes for the plans for two doughnut stores in a strong and a weak
economy for the future. Which store is expected to have the greater expected profit?

A) Store 1 has a $27,900 greater profit.

B) Store 1 has a $1200 greater profit.
C) Store 2 has a $26,700 greater profit.
D) Store 2 has a $1200 greater profit.
Answer: B
Explanation: B) The expected value is found by multiplying the probability of each outcome by its
profit value. This is expressed by (0.45 $40,000) + (0.55 $18,000) = $27,900 (store 1) and (0.45
$30,000) + (0.55 $24,000) = $26,700 (store 2). The difference between the stores is $27,900 - 26,700
= $1200.
Diff: 2 Page Ref: 96
AACSB: Analytic skills

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66) Decision trees show the profit outcomes for the plans for two doughnut stores in two different
locations in a strong and a weak economy for the future. If the investor interested in building a store is
optimistic, in which location should she build?

A) She should build Store 1, because it has a lower minimum profit.

B) She should build Store 2, because it has a greater maximum profit.
C) She should build Store 1, because it has a greater maximum profit.
D) She should build Store 2, because it has a greater minimum profit.
Answer: C
Explanation: C) An optimistic investor looks to use a maximax strategy. In this case, the store with
greater upside corresponds to a maximax strategy. Store 1 has the greatest possible profit of $40,000, so
it is the choice for an optimistic investor.
Diff: 2 Page Ref: 96
AACSB: Analytic skills

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67) Decision trees show the profit outcomes for the plans for two doughnut stores in two different
locations in a strong and a weak economy for the future. If the investor interested in building a store is
pessimistic, in which location should she build?

A) She should build Store 2, because it has a greater minimum profit.

B) She should build Store 2, because it has a greater maximum profit.
C) She should build Store 1, because it has a greater maximum profit.
D) She should build Store 1, because it has a greater minimum profit.
Answer: A
Explanation: A) A pessimistic investor looks to use a maximin strategy that maximizes the minimum
gain. In this case, the store with the greatest minimum gain is store 2, since its low estimate is $24,000.
Diff: 2 Page Ref: 96
AACSB: Analytic skills
68) For break-even analysis, which of the following is a fixed cost for a doughnut shop?
A) costs for purchasing flour and sugar
B) energy costs for ovens and heating
C) interest payments on loans
D) advertising costs
Answer: C
Explanation: C) Though almost any cost can be stable for a period of time, the costs of purchasing raw
materials, advertising, and energy are more variable than those of paying interest. Interest payments are
regular and predictable throughout the life of a loan unless the terms of the loan are changed.
Diff: 2 Page Ref: 96-97
AACSB: Analytic skills

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69) A manager does a break-even analysis and finds that his value for BE, the break-even point, has
decreased over time. Which of the following could be responsible for this event?
A) TFC has increased.
B) P has increased.
C) VC has decreased.
D) P has decreased.
Answer: D
Explanation: D) The value of the expression [TFC/(P - VC)] would increase if TFC were to increase in
value, VC were to decrease, or P were to increase. All of these events would increase the value of the
numerator of the fraction relative to the denominator, thereby causing the value of fraction BE to
increase. If P were to decrease, however, the denominator of the fraction would increase, causing the
overall value of the fraction to decrease. Therefore, the value of BE, the break-even point, would
decrease.
Diff: 2 Page Ref: 96-97
AACSB: Analytic skills
70) Fixed costs for a product are $50,000. The product itself sells for $5.00 and it costs $3.00 to make
each product. What is the break-even point for the product?
A) 100,000
B) 10,000
C) 50,000
D) 25,000
Answer: D
Explanation: D) Plugging in the variables for the equation BE = [TFC/(P - VC)], you get BE = $50,000/
(5 - 3), or 25,000 for BE. This means that the company must make 25,000 units of the product to begin
making a profit.
Diff: 2 Page Ref: 96-97
AACSB: Analytic skills
71) Fixed costs for a product are $60,000. The product itself sells for $4.00 and it costs $1.00 to make
each product. How will the break-even point for the product change if the variable cost per unit goes up
to $1.50?
A) The break-even point will increase by 4000.
B) The break-even point will increase by 24,000.
C) The break-even point will decrease by 4000.
D) The break-even point will increase by 20,000.
Answer: A
Explanation: A) Plugging in the variables for the original break-even point, BE = [TFC/(P - VC)], you
get BE = $60,000/(4 - 1), or 20,000 for BE. Changing the value of VC gives BE = $60,000/(4 - 1.50), or
24,000 for BE. Therefore, the value of BE increases from 20,000 to 24,000, or 4000.
Diff: 2 Page Ref: 96-97
AACSB: Analytic skills

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72) Fixed costs for a product are $30,000. The product itself sells for $3.00 and it costs $1.50 to make
each product. How can the plant decrease the break-even point by 5000 units?
A) Increase P, the price of the item, by $0.50.
B) Increase TFC, the fixed costs for item, by $5000.
C) Decrease P, the price of the item, by $0.50.
D) Decrease TFC, the fixed costs for item, by $5000.
Answer: A
Explanation: A) Plugging in the variables for the original break-even point, BE = [TFC/(P - VC)], you
get BE = $30,000/(3 - 1.50), or 20,000 for BE. Changing the value of P by 50 cents gives BE = $30,000/
(3.50 - 1.50), or 15,000 for BE, giving a break-even point that is 5000 lower than the original break-even
point.
Diff: 2 Page Ref: 96-97
AACSB: Analytic skills
73) A company has a current ratio of of 2.75 to 1. What should a manager in the company conclude?
A) The company is getting the best possible return on its assets.
B) The company has too many liabilities.
C) The company is not getting the best possible return on its assets.
D) The company is not getting the best possible return on its liabilities.
Answer: C
Explanation: C) A current ratio of 2 to 1 is considered healthy for a typical company. Any value much
lower than 2 to 1 may indicate that the company cannot meet its debts. A ratio nearing 3 to 1 suggests
that the company is not using its assets efficiently, which is the situation for this company.
Diff: 2 Page Ref: 98
AACSB: Analytic skills
74) A company has a current ratio of of 0.85 to 1. What should a manager in the company worry about?
A) The company has too many assets and is not using them efficiently.
B) The company has too much inventory.
C) The company may start to have trouble paying salaries.
D) The company is paying salaries that are too high.
Answer: C
Explanation: C) A current ratio that is significantly less than 1.0 means that the company has too many
liabilities relative to its assets. With this kind of liquidity problem, the company may experience
difficulty in having enough cash to pay off its short-term obligationsthings such as taxes, accounts
payable, and salaries.
Diff: 2 Page Ref: 98
AACSB: Analytic skills

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75) When is the acid test an especially important test for a company's liquidity?
A) when the economy is slow and inventory is not selling
B) when the economy is robust and inventory is selling fast
C) with companies that exclusively sell services and therefore do not have any inventory
D) with companies that exclusively sell services to the wealthy and therefore are not subject to economic
downturns
Answer: A
Explanation: A) The acid test becomes especially important when the economy slows down and
companies are stuck with inventory that can't be moved with the same speed that it was when the
economy was healthy. By subtracting inventories from assets and comparing that difference to current
liabilities, a manager gets a good picture of how much liquidity a company has.
Diff: 2 Page Ref: 98
AACSB: Analytic skills
76) Which of the following characterizes a highly leveraged company?
A) high total assets relative to total debt
B) high total debt relative to total assets
C) high total debt relative to inventories
D) high total interest payments relative to total debt
Answer: B
Explanation: B) A leveraged company takes on too much debt relative to the amount of assets it has.
Leverage has nothing to do with inventories and it is not a measure of interest to the amount of money a
company borrows.
Diff: 2 Page Ref: 98
AACSB: Analytic skills
77) Which of the following would cause a well-run company to become highly leveraged?
A) when the money that the company can earn investing the money that it borrows is equal to the cost of
borrowing
B) when the money that the company can earn investing the money that it borrows is significantly less
than the cost of borrowing
C) when the money that the company can earn investing the money that it borrows is significantly
greater than the cost of borrowing
D) when the money that the company can earn investing the money that it borrows is equal to more than
half of the cost of borrowing
Answer: C
Explanation: C) Borrowing heavily and becoming heavily leveraged makes sense for a company only
when it can turn around and use the money it borrows to deliver a return that is significantly greater than
its interest payments, percentage-wise. Thus, if a company can borrow at 5 percent and make 8 percent
on the money it borrowsa 60 percent gainit is well worth it for the company to borrow heavily.
Diff: 2 Page Ref: 98
AACSB: Analytic skills

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78) Production data for the number of hours required per unit for making the Droid and iPhone versions
of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. What is the
maximum number of units that the factory can make of either type of phone component?
Monthly Product

A) 2500
B) 2000
C) 500
D) 1000
Answer: D
Explanation: D) Both designs require 2.5 hours to manufacture. So whether the factory chooses to make
Droid phones or iPhones, it can only make 2500 2.5, or 1000 components each month.
Diff: 2 Page Ref: 99
AACSB: Analytic skills
79) Production data for the number of hours required per unit for making the Droid and iPhone versions
of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. What is the
maximum number of iPhone units that the factory can make?
Monthly Product

A) 625
B) 1000
C) 5000
D) 800
Answer: A
Explanation: A) The plant can make a maximum of 1000 units, but since each iPhone unit takes 8 hours
to design, the plant can make only 5000 8 = 625 iPhone units.
Diff: 2 Page Ref: 99
AACSB: Analytic skills

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80) Production data for the number of hours required per unit for making the Droid and iPhone versions
of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. What is the
maximum number of Droid units that the factory can make?
Monthly Product

A) 625
B) 1000
C) 5000
D) 800
Answer: B
Explanation: B) The plant can make a maximum of 1000 units. Since each Droid unit takes 5 hours to
design, the plant can work to full manufacturing capacity: 5000 5 = 1000 Droid units.
Diff: 2 Page Ref: 99-100
AACSB: Analytic skills
81) Production data for the number of hours required per unit for making the Droid and iPhone versions
of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. Suppose the plant
decides to make the maximum number of iPhone components possible and reach the rest of its capacity
by making Droid phones. How many of each type of phone will it make?
Monthly Product

A) 375 iPhone units and 625 Droid units

B) 500 iPhone units and 500 Droid units
C) 1000 iPhone units and 1000 Droid units
D) 625 iPhone units and 375 Droid units
Answer: D
Explanation: D) The plant can manufacture a maximum of 1000 units. Since each iPhone unit takes 8
hours to design, the plant can make 5000 8 = 625 iPhone units. The plant fills out the rest of its
capacity with Droid phones: 1000 total units - 625 iPhone units = 375 Droid units.
Diff: 2 Page Ref: 99-100
AACSB: Analytic skills

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82) Production data for the number of hours required per unit for making the Droid and iPhone versions
of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. Suppose the plant
decides to make the maximum number of iPhone components possible and reach the rest of its capacity
by making Droid phones. How much profit will it make?
Monthly Product

A) $3750
B) $1500
C) $5250
D) $4000
Answer: C
Explanation: C) The plant can make a maximum of 1000 units total. At maximum capacity for iPhones,
it can make 625 iPhone units and 375 Droid units. At $4 profit for Droid units and $6 profit for iPhone
units, the total profit is $4(375) + $6(625) = $5250.
Diff: 2 Page Ref: 99-100
AACSB: Analytic skills
83) Production data for the number of hours required per unit for making the Droid and iPhone versions
of cell phone components by Bizzer, a high-tech manufacturing firm, is given below. Suppose the plant
decides exclusively to make either the maximum number of iPhone components or the maximum
number of Droid phones. Which choice will result in the greater profit?
Monthly Product

A) Making Droid units will result in $4000 more profit.

B) Making iPhone units will result in $250 more profit.
C) Making Droid units will result in $250 more profit.
D) Making iPhone units will result in $3750 more profit.
Answer: C
Explanation: C) The plant can make a maximum of 1000 units total. At capacity for iPhones, it can
make a maximum of either 625 iPhone units or 1000 Droid units. At $4 profit for Droid units, the plant
makes $4(1000), or $4000, for Droid units or $6(625), or $3750, for iPhone units. Therefore, the plant
makes $250 more profit making Droid units.
Diff: 2 Page Ref: 99-100
AACSB: Analytic skills

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84) A queuing theory analysis for the Department of Motor Vehicles determines that customers typically
wait for 8 minutes and that the agency should strive never to exceed more than 5 customers in a single
line. What is the maximum amount of time that customers should be expected to wait?
A) 8 minutes
B) 40 minutes
C) 20 minutes
D) 24 minutes
Answer: B
Explanation: B) The situation is simpleif the typical customer wait time is 8 minutes and customers
are expected to wait for no more than 5 customers ahead of them, the maximum wait time would be 8
minutes 5 customers = 40 minutes.
Diff: 2 Page Ref: 101
AACSB: Analytic skills
85) A queuing theory analysis for the Department of Motor Vehicles determines that customers typically
wait for 8 minutes and that the agency should strive never to exceed more than 5 customers in a single
line. An analysis comes up with a value for P of 0.125. What does this P value mean?
A) that customers will wait an average of 12.5 minutes
B) that the chances that a customer will need to wait for more than 5 people in line are 1 in 8
C) that customers will wait an average of 0.125 minutes
D) that the chances that a customer will need to wait for more than 5 people in line are 1 in 12.5
Answer: B
Explanation: B) The P value of 0.125 indicates that the limit of waiting for 5 customers will be
exceeded about 12.5 percent of the time. As a ratio, 0.125 is equal to 1/12, or 1 in 12. A P value has
nothing to do with actual wait time, so those choices that have to do with wait time in minutes are
incorrect.
Diff: 2 Page Ref: 101
AACSB: Analytic skills
86) How does a fixed-point reordering system work?
A) When inventory level reaches 50 percent of maximum, the system orders new inventory.
B) When inventory level reaches 33 percent of maximum, the system orders new inventory.
C) At some preestablished inventory level, the system automatically orders new inventory.
D) At some random inventory level, the system automatically orders new inventory.
Answer: C
Explanation: C) A fixed-point reordering system uses cash register receipts to monitor inventory. When
inventory reaches a certain predetermined level, new inventory is ordered to make sure that stocks do
not get too low.
Diff: 2 Page Ref: 101
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87) Jeff, a manager at the Flux Soap Store, notices that the store regularly runs out of Jasmine-Berry
soap. Currently, the reorder point is fixed when inventory reaches 40 percent of maximum. Which
adjustment should Jeff make in a fixed-point reordering system?
A) Jeff should lower the reorder level to a point where inventory of Jasmine-Berry soap is at 30 percent
of maximum.
B) Jeff should lower the reorder level to a point where inventory of Jasmine-Berry soap is at 10 percent
of maximum.
C) Jeff should raise the reorder level to a point where inventory of Jasmine-Berry soap is at 50 percent
of maximum.
D) Jeff should lower the reorder level to a point where inventory of Jasmine-Berry soap is at half of the
previous level.
Answer: C
Explanation: C) If the store keeps running out of Jasmine-Berry soap, it means that it is waiting too long
to reorder and running out of stock. To avoid running out of stock, Jeff should schedule the reorder point
earlier in the process.
Diff: 2 Page Ref: 101
AACSB: Analytic skills
88) Jeff, a manager at the Flux Soap Store, lowered the reorder point for Butterscotch-Lemon soap from
33 percent of maximum to 20 percent of maximum. What is Jeff likely to observe?
A) The level of Butterscotch-Lemon soap in stock should increase.
B) Sales of Butterscotch-Lemon soap should decrease.
C) Sales of Butterscotch-Lemon soap should increase.
D) The level of Butterscotch-Lemon soap in stock should drop.
Answer: D
Explanation: D) Changing the reorder point should not have any effect on sales. It should, however,
result in a smaller inventory on the amount of Butterscotch-Lemon soap that is kept on the shelves
because the store will wait longer before more soap is delivered.
Diff: 2 Page Ref: 101
AACSB: Analytic skills
89) Which of the following identifies the goal of managers who use the economic order quantity (EOQ)
model?
A) minimizing carrying costs and ordering costs
B) maximizing carrying costs and ordering costs
C) maximizing carrying costs and minimizing ordering costs
D) maximizing carrying costs and total costs
Answer: A
Explanation: A) Managers who use the economic order quantity (EOQ) model are looking primarily to
make both carrying costs, such as money tied up in inventory, taxes, and storage, and ordering costs,
which include processing and paperwork costs, to a minimum.
Diff: 1 Page Ref: 102
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90) Mia, a manager at Best Buy, increases the order size for a product that the company sells, which will
________.
A) increase both ordering costs carrying costs
B) increase ordering costs and decrease carrying costs
C) decrease both ordering costs carrying costs
D) decrease ordering costs and increase carrying costs
Answer: D
Explanation: D) A larger order size reduces ordering costs because over an extended period of time Mia
will end up making fewer orders and thereby save individual costs associated with each order. However,
at the same time, a larger order will increase carrying costs because it may result in needing to hold onto
larger inventories and all the costs, such as storage, that go along with them.
Diff: 2 Page Ref: 102
AACSB: Analytic skills
91) Mia, a manager at Best Buy, should be able to find Q, the most economic order size for a product, by
________.
A) locating where the carrying costs curve and the total costs curve intersect
B) locating where the carrying costs curve and the ordering costs curve intersect
C) locating where the carrying costs curve and the ordering costs curve are parallel
D) locating where the total costs curve and the ordering costs curve are parallel
Answer: B
Explanation: B) Since carrying costs tend to increase as order size goes up and ordering costs decrease,
the optimum order size can be found where the curves for each variable intersect.
Diff: 2 Page Ref: 102
AACSB: Analytic skills
92) A new upgrade for a product is expected to increase demand by a factor of 4. If all other factors
remain equal, how is EOQ likely to change?
A) EOQ will double.
B) EOQ will increase by 50 percent.
C) EOQ will decrease by 50 percent.
D) EOQ will not change.
Answer: A
Explanation: A) EOQ is computed by finding the square root of the term [2 D OC]/V CC, where
D is demand, OC is the cost of placing each order, V is the purchase price of the item, and CC is the
carrying cost. If D goes up by a factor of 4, EOQ will increase by the square root of 4, giving a factor of
2 by which EOQ will increase.
Diff: 2 Page Ref: 94
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93) In a short essay, explain the type of strategy that an optimistic manager would take for her company.
Answer: An optimistic manager sees strong sales and a healthy business climate. In essence, she sees
the "sky as the limit" for the upcoming year, so she wants to maximize her return for this prosperous
period. In order to do this, the manager chooses a maximax strategy in which she is looking to find the
path that will give her the greatest possible return for her investment of time and energy. Theoretically,
this strategy may have a greater downside, but in an optimistic situation, a manager will tend to accept
this greater risk to maximize the possible upside of the situation.
Diff: 3 Page Ref: 94
AACSB: Analytic skills
94) In a short essay, explain the type of strategy that a pessimistic manager would take for his company.
Answer: A pessimistic manager sees an uncertain business climate at best. Rather than look for the "big
score," he is looking to find a strategy in which he can either minimize regret or maximize his minimal
possible payoff. To minimize regret, the manager chooses a minimax strategy in which the maximum
regret he can suffer is kept to a minimum. To maximize his minimum possible payoff, the manager
chooses a maximin strategy in which he finds the situation in which he can at least keep his minimum
possible payoff at the greatest possible level.
Diff: 3 Page Ref: 94
AACSB: Analytic skills
95) A payoff matrix features strategies S1, S2, S3, and S4 and competitive strategies CA1, CA2, and
CA3. In a short essay, explain how maximum regret can be calculated for an S1 strategy.
Answer: For the S1 strategy, values for CA1, CA2, and CA3 must be compared to the CA1, CA2, and
CA3 values for S2, S3, and S4. To compute regret, find the difference between the S1 value in a column
and the greatest value in that same column. Find the regret value for each column, then compare the
three regret values for CA1, CA2, and CA3. The greatest value identifies the maximum regret.
Diff: 3 Page Ref: 95
AACSB: Analytic skills
96) In a short essay, explain how the break-even point (BE) changes with variables TFC (total fixed
costs), P (unit price), and VC (variable cost per unit).
Answer: According to the equation BE = [TFC/(P - VC)], when TFC increases, BE, the break-even
point, also increases, requiring more units to be sold for the product to make a profit. Increasing P
increases the value of the denominator in the equation, which results in the value of BE dropping.
Finally, increasing VC decreases the value of the denominator in the equation, which results in the value
of BE increasing.
Diff: 3 Page Ref: 96-97
AACSB: Analytic skills
97) In a short essay, explain how managers can use current value for making organizational decisions.
Answer: Current value is calculated by finding the ratio of a company's current assets to its current
liabilities. A current ratio that is significantly greater than 2:1 suggests that the company is asset-heavy
and is not receiving the best return possible on the assets it has. A current ratio of less than 1:1 suggests
that the company has too many liabilities and may soon have trouble meeting its short-term obligations,
such as payroll, and paying taxes.
Diff: 3 Page Ref: 98
AACSB: Analytic skills
98) In a short essay, explain what the value of P in queuing theory provides for a manager.
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Answer: In queuing theory, the manager sets a limit with respect to how long a line in a grocery store
(for example) she is willing to tolerate. Computing P tells the manager what percentage of the time she
can expect the limit to be exceeded. For example, suppose the manager determines that she does not
wish to have lines that have more than three people in them. With a P value of 0.20, the manager can
expect to have lines with more than three people in them 20 percent of the time.
Diff: 3 Page Ref: 101
AACSB: Analytic skills
99) In a short essay, explain how carrying costs and ordering costs change with order size in EOQ
(economic order quantity) analysis.
Answer: Carrying costs, such as money tied up in inventory, taxes, and storage, tend to increase when
order size increases. Larger orders means that more inventory is on-site at any given time, and more
inventory results in higher costs associated with keeping that inventory aroundcarrying costs. At the
same time, larger orders drive ordering costs (paperwork, processing costs) down because needing to
order less frequently means that the activities associated with ordering are kept to a minimum. The two
types of costs, carrying costs and ordering costs, therefore, tend to go in opposite directions as order size
changes. Finding Q, the optimum order size, is typically accomplished by graphically locating the point
at which the carrying costs curve and the ordering costs curve intersect.
Diff: 3 Page Ref: 101-102
AACSB: Analytic skills

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