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What is the difference between projection and forecasting techniques?
- Projection techniques use primarily hypothetical scenarios and are suitable only for internal use.
- Forecasting techniques use hx data and are suitable for internal and external use. It includes both qualitative and quantitative methods.
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What is a sensitivity analysis? Is this a [projection / forecasting] technique?
- A projection technique.
- If [this one variable] is changed which variables are most sensitive to this change (thus the biggest impact on profits).
- Unfortunately, it usually only involves one variable at a time.
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WHITE BOARD: Using scenario analysis, what is the projected sales for next year given the following.
Last year's sales = $40M
Optimistic scenario (30% probability) = 5% increase in sales
Pessimistic scenario (20% probability) = 5% decrease in sales
Most Likely (50% probability) = no change
- (0.3*0.05)+(0.2*(-.05))+(0.5*0)=0.5% growth
- $40M x 1.005 = $40.2M est. sales next yr
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What is Scenario Analysis and how is it calculated? Is this a [projection / forecasting] technique?
- A projection technique
- A probability is assigned to several different potential outcomes.
- The probability of each outcome is multiplied by its effect. All scenarios are then added together to determine an overall effect.
- The overall effect is used as a multiplier on historic info to determine outcome.
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When forecasting revenues, which of the following are potential independant variables and which is the dependent variable: economy, product competition, sales, growth of the industry, personal income
- Sales is the dependent variable
- All others are potential independent variables
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When forecasting expenses, which of the following are potential independent variables and which is the dependent variable: total costs, fixed costs, variable costs.
- Total costs is the dependent variable.
- The others are independent variables.
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Is Regression Analysis a [projection / forecasting] technique? What is the purpose of a regression analysis?
- Forecasting (based on hx data)
- To predict future outcomes, such as total cost.
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Regression analysis is also known as a...
best fit line
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What is the coefficient of correlation and what do the outcomes mean?
- (r)=the strength of the linear relationship
- r=+1.00 is a perfect positive correlation (upward sloping line)
- r=-1.00 is a perfect negative correlation (downward sloping line)
- r=0.00 means there's no correlation (straight horizontal line)
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What is the coefficient of determination?
- R^2: the proportion of the total variation in the dependent variable explained by the independent variable.
- Indicates the goodness of fit
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If the coefficient of determination is 81%, what does this mean with regard to total cost?
81% of the change in total cost during a period can be attributed to changes in volume.
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What is the High-Low method used for?
To estimate the fixed and variable portion of production costs.
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How is High-Low calculated?
- Determine the high and low production volumes, and their respective costs. (Ignore outliers)
- Use (high-low) for both units and costs
- Determine cost/unit
- Using either the high volume or low volume numbers (the end result is the same) determine total variable costs by multiplying cost/unit x volume of that set
- Subtract this amount (total variable costs) from the costs of that set to determine the fixed costs.
- Total costs = fixed costs + (variable costs/unit x number of units)
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Why is the Learning Curve method used?
- As workers perform repetitive tasks, the workers become skilled (learn) and time to complete the tasks decreases over time until a steady state is achieved.
- This steady state amount can be used as a measure of employee skill & to determine an incentive pay.
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What are the requirements before one can use the Learning Curve technique?
- The activity must be repetitive in nature
- The activity must involve intense labor
- There must be little or no employee turnover
- There cannot be breaks in production
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How is the Learning Curve technique calculated?
- Obtain the number of hours required to complete the very 1st run of a product
- Obtain the number of hours required to complete runs at each point when the cumulative product units doubles (1 unit, 2 units, 4 units, 8 units, etc, not 2 more units - just after the 2nd unit, or not 4 more units - just after unit #4).
- Calculate the learning curve rate based on equivalent number of units produced and then the percentage change to achieve that amount of hrs / unit.
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WHITE BOARD: It takes the Jones Co 50 hours to produce the first unit of its only product. Assuming a 70% learning curve, what is the avg time and total to produce 2, 4, and 8 units? How much time was actually spent creating unit 2?
- 1 unit: 50 hrs
- 2 units: Avg time = 35 hrs, total time = 70 hrs
- 4 units: Avg time = 24.5 hrs, total time = 98 hrs
- 8 units: Avg time = 17.15 hrs, total time = 137.2 hrs
- Unit #2 actually required 20 hours to produce (70 hrs for unit #2 - 50 hrs for unit #1)
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WHITE BOARD: It takes Jones Co 50 hours to produce the first unit and 70 hours to produce the first 2 units, what is the learning curve rate?
(70 hours) / (50x2) = 70%
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When using the simple linear regression line, which of the following variables is: fixed cost, variable cost, number of units, and total cost.
- a = fixed cost
- b = variable cost
- x = # of units
- y = total cost
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Using a simple linear regression line, the term y-bx provides what information?
Contribution Margin
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What is the Delphi Method, and what are its benefits?
- A series of questionnaires sent to experts.
- After each round, the responses are also delivered to the experts who then modify their answers based on the response.
- The result (and purpose) is to obtain a correct response through consensus.
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What is the flexible budget formula? How is this used?
- y = a + bx (the same formula for regression)
- Use this formula to determine a range of total costs that change based on number of units, but fixed cost (a) remains the same.
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A learning curve calculation was performed with the following results: 1 unit=5 hrs, 2 units=3.25 hrs, 4 units=2.11 hrs, 8 units=1.37 hrs. What is the avg time per unit and total time to produce 4 units?
- Avg time per unit = 2.11 hrs
- Total time = 8.45 hrs
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