ACCA Applied Knowledge · Management Accounting · Analytical techniques in budgeting and forecasting
Zeta Co estimates demand for a new product as follows: 2,000 units with probability 0.30, 3,000 units with probability 0.50 and 4,000 units with probability 0.20. What is the expected value of demand?
The expected value is 2,900 units. Each demand level is multiplied by its probability (600 + 1,500 + 800) and the results are summed. Using the simple average of 3,000 units would ignore the different likelihoods attached to each outcome.
- A2,900 unitsCorrect
- B3,000 units
- C3,100 units
- D3,500 units
Explanation
EV = (2,000 x 0.30) + (3,000 x 0.50) + (4,000 x 0.20) = 600 + 1,500 + 800 = 2,900 units. The simple average of the outcomes, 3,000, ignores the probabilities and is wrong.
Did you get it right without looking?
One question tells you little. A timed set on Analytical techniques in budgeting and forecasting shows your real accuracy, how long you take and where you lose marks.
More Analytical techniques in budgeting and forecasting questions
- The first unit of a product takes 125 labour hours. An 80% learning curve applies (cumulative average time model) and labour costs $15 per h…
- The first unit of a product takes 250 labour hours and an 80% learning curve applies. What is the total time expected for the first 4 units?
- A business buys two materials. Base-year prices: X $4, Y $10. Current prices: X $5, Y $12. Base-year quantities: X 100 units, Y 50 units. Wh…
- A business finds r = 0.5 between staff training hours and units processed per hour. Which conclusion is most appropriate?
- A company's raw material price index was 120 in Year 1 (base Year 0 = 100) and 150 in Year 2. Material cost in Year 1 was $48,000. Assuming …
- A company finds that the correlation coefficient between advertising spend and sales revenue is +0.9. Which statement is the most appropriat…