Business 2: Forecasting and Projection

Question 1

What is sensitivity analysis?

Answer 1

• Process of experimenting with different parameters and assumptions regarding a model and cataloging the range of results to view the possible consequences of a decision

Question 2

What is a sensitivity analysis also referred to as?

Answer 2

What-if analysis

Question 3

What is the biggest drawback of sensitivity analysis?

Answer 3

Implicit assumption that variables are independent

Question 4

In preparing models for future periods, managers may prepare multiple different scenarios which represent what?

Answer 4

Alternative possible outcomes

Question 5

Forecasting (probability/risk) analysis is an extension of what type of analysis?

Answer 5

Sensitivity analysis

Question 6

What is the purpose of forecasting?

Answer 6

Predict future values of a dependent variable using info from previous time periods

Question 7

Total costs = ?

Answer 7

= FC + (VC per unit * Units produced)

Question 8

Linear regression is a method for studying the relationship b/w what?

Answer 8

Two or more variables

Question 9

In a simple linear regression model, what is the basic assumption?

Answer 9

Increase in # of units produced will increase total costs

Question 10

The simple linear regression model takes what basic form?

Answer 10

y = a + Bx

y  = dependent variable (total cost)
x = independent variable (# units produced)
a = y-axis intercept (fixed cost)
B = slope (VC per unit)

Question 11

What two statistical measures can be used to evaluate regression analysis?

Answer 11

1) r = coefficient of correlation

2) R^2 = coefficient of determination

Question 12

What does the coefficient of correlation (r) measure?

Answer 12

Strength of the linear relationship between x and y

Question 13

What is the range of the coefficient of correlation (r)?

Answer 13

-1 to 1

Question 14

What does r = 1 mean?

Answer 14

Perfect positive correlation

Question 15

What does r = -1 mean?

Answer 15

Perfect inverse correlation

Question 16

What does r = 0 mean?

Answer 16

No correlation

Question 17

What does the coefficient of determination (R^2) measure?

Answer 17

Proportion of the total variation in y explained by x

Question 18

The value of the coefficient of determination (R^2) lies within what range?

Answer 18

0 and 1

Question 19

What does a higher R^2 indicate?

Answer 19

• The higher the R^2, the greater the proportion of the total variation in y that is explained by the variation in x
• Regression line fits better

Question 20

Learning curve analysis is based on what premise?

Answer 20

That as workers become more familiar with a specific task, the per-unit labor hours will decline as experience is gained and production becomes more efficient

Question 21

True or False.

The high-low method is a simple technique that is used to estimate the fixed and variable portions of cost, usually production costs.

Answer 21

True

Question 22

The Delphi method for forecasting relies mostly on what?

Answer 22

Judgment

Question 23

The Delphi model of forecasting involves the use of what?

Answer 23

• Multiple teams in geographically remote locations

- Info is shared and gathered in a central point and compiled and then redistributed for comment

Question 24

What is sensitivity analysis?

Answer 24

• Process of experimenting with different parameters and assumptions regarding a model and cataloging the range of results to view the possible consequences of a decision

Question 25

True or false.

Forecasting is an extension of sensitivity analysis that involves an examination of historical relationships to formulate predictions regarding independent variables in order to predict future values of dependent variables.

Answer 25

True

Question 26

What is linear regression?

Answer 26

• Method for studying the relationships b/w two or more variables
• Used to predict the value of y (total cost) corresponding to given values of independent variables (fixed cost (A) , VC per unit (B), and production expressed in units (x))

Question 27

The high-low method is a simple technique that is used to do what?

Answer 27

Estimate the fixed and variable portions of costs, usually production costs