Cost Accounting (14th Edition)

APPENDIX 85
Exhibit 3-6
Decision Table for GMAT Success
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
a 1
a 2
a 3
l
A
Selling price =
Package cost =
B
$200
$120
Fixed
C
Percentage
of Fair
Actions
Fee Revenues
: Pay $2,000 fixed fee
$2,000
0%
: Pay $800 fixed fee plus 15% of revenues
$ 800
15%
: Pay 25% of revenues with no fixed fee
$ 0 25%
Operating income = ($200 – $120)(30) – $2,000 = $ 400
m
Operating income = ($200 – $120)(60) – $2,000 = $2,800
n
Operating income = ($200 – $120 – 15% × $200)(30) – $800 = $ 700
p
Operating income = ($200 – $120 – 15% × $200)(60) – $800 = $2,200
q
Operating income = ($200 – $120 – 25% × $200)(30) = $ 900
r
Operating income = ($200 – $120 – 25% × $200)(60) = $1,800
D
E F G
Operating Income
Under Each Possible Event
Event
1 : Units Sold = 30
Event
2 : Units Sold = 60
Probability(
1 ) = 0.60 Probability(
2 ) = 0.40
l
$400
$700
n
q
$900
m
$2,800
$2,200
p
r
$1,800
H
I
Step 5: Identify the set of possible outcomes. Outcomes specify, in terms of the choice criterion, the predicted economic
results of the various possible combinations of actions and events. In the GMAT Success example, the outcomes
are the six possible operating incomes displayed in the decision table in Exhibit 3-6. A decision table is a
summary of the alternative actions, events, outcomes, and probabilities of events.
Distinguish among actions, events, and outcomes. Actions are decision choices available to managers—for example,
the particular rental alternatives that Emma can choose. Events are the set of all relevant occurrences that can
happen—for example, the different quantities of GMAT Success packages that may be sold at the fair. The outcome is
operating income, which depends both on the action the manager selects (rental alternative chosen) and the event that
occurs (the quantity of packages sold).
Exhibit 3-7 presents an overview of relationships among a decision model, the implementation of a chosen action,
its outcome, and a subsequent performance evaluation. Thoughtful managers step back and evaluate what happened
and learn from their experiences. This learning serves as feedback for adapting the decision model for future actions.
Expected Value
An expected value is the weighted average of the outcomes, with the probability of each outcome serving as the
weight. When the outcomes are measured in monetary terms, expected value is often called expected monetary value.
Using information in Exhibit 3-6, the expected monetary value of each booth-rental alternative denoted by E(a 1
),
E(a 2
), and E(a 3
) is as follows:
Pay $2,000 fixed fee: E(a 1
) = (0.60 * $400) + (0.40 * $2,800) = $1,360
Pay $800 fixed fee plus 15% of revenues: E(a 2
) = (0.60 * $700) + (0.40 * $2,200) = $1,300
Pay 25% of revenues with no fixed fee: E(a 3
) = (0.60 * $900) + (0.40 * $1,800) = $1,260
Exhibit 3-7
A Decision Model and Its Link to Performance Evaluation
Decision Model
1. Choice criterion
Implementation
2. Set of alternative actions
of
Uncertainty
3. Set of relevant events
Chosen
Resolved *
4. Set of probabilities
Action
5. Set of possible outcomes
Feedback
* Uncertainty resolved means the event becomes known.
Outcome
of
Chosen
Action
Performance
Evaluation