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Free CMA Exam Braindumps (page: 166)

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View Related Case Study

A company is deciding whether to purchase an automated machine to manufacture one of its products. Cash flows from this decision depend on several factors, interactions among those factors, and the probabilities associated with different levels of those factors. The method that the company should use to evaluate the distribution of net cash flows from this decision and changes in net cash flows resulting from changes in levels of various factors is

  1. Simulation and sensitivity analysis.
  2. Linear programming.
  3. Correlation analysis.
  4. Differential analysis.

Answer(s): A

Explanation:

Simulation is a technique used to describe the behavior of real-world system overtime. This technique usually employs a computer program to perform the simulation computations. Sensitivity analysis examines how outcomes change as the model parameters change.



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Managers must make decisions in many different situations. A manager must make a subjective decision when the environment is one in which

  1. Uncertainty exists.
  2. Risk exists.
  3. Certainty may be achieved.
  4. Probabilities can be calculated.

Answer(s): A

Explanation:

Uncertainly exists when the results of possible outcomes cannot even be estimated using the tools of statistical probability'. This environment is the most difficult for decision making because objective mathematical analyses cannot be made. Hence, creativity' is required in the decision-making process, and reliance on the educated guess rather than the probabilistically calculated estimate is necessary.



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Behavioral scientists have identified human tendencies that can erode the quality of decision making. Which of the following best describes a behavioral decision error referred to as "framing error"?

  1. Evaluating positive information favorably and negative information unfavorably.
  2. Getting locked into losing courses of action because of personal commitment.
  3. Evaluating the probabilities of outcomes as point estimates instead of ranges.
  4. Becoming overconfident because of past successes.

Answer(s): A

Explanation:

How information is presented influences both its interpretation and the resulting behavior. Framing error is the tendency to evaluate positively presented information favorably and negatively presented information unfavorably.



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The term "escalation of commitment" refers to

  1. The process of continuing to fund old projects because of inadequate information or time to formally anal we the costs and benefits associated with continued investment.
  2. The decision maker increasing the resources to a new course of action if the employee can recommend alternatives such that the decision the new course of action as his/her own initiative.
  3. Committing to projects that have been shown to be successful and limiting the additional commitment of resources to projects that have been unsuccessful.
  4. The decision maker increasing the resources to the previous course of action in an effort to demonstrate that the previous course of action was appropriate.

Answer(s): D

Explanation:

Consistency may be dysfunctional because it may result in inflexibility. The desire to avoid the inner conflict resulting from inconsistency may have adverse effects on decision making. For example, when a decision maker feels responsible for the failure of a course of action, (s) he may want to prove that the original decision was sound despite increasing evidence to the contrary. Thus, his/her commitment to a failed policy may escalate, and additional resources may be squandered.






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