mgs3100cheatsheettest1

# mgs3100cheatsheettest1 - 1 A model is a an abstraction b an...

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1. A model is a. an abstraction b. an approximation c. a selective representation of reality d. all of the above 2. Which of the following is a mathematical model? a. An influence diagram b. An aerodynamic model of aircraft c. A flow chart that shows the sequence of operations for making products d. An equation that shows the relationship between future cash inflows and their present values 3. Breakeven occurs when a. revenue = 0 b. profit = total variable cost c. total revenue = total cost d. profit = total cost 4. A crossover point is the demand volume at which a. Two alternatives yield the same profit. b. Two alternatives have the same total cost. c. We would neither suffer a loss nor enjoy a profit. d. One alternative has higher profit than the other. ////The Bigwig Company must decide which of three options to choose for providing a product to customers. Bigwig will sell the product for \$12/unit; production costs for the options vary as follows: Option Fixed Cost Unit Variable Cost A: Purchase for resale 0 \$10 B: Labor-intensive process \$20,000 \$8 C: Capital-intensive process \$64,000 \$4 If Bigwig chooses option C, at least how many units it should produce in order to be profitable? Solve the above algebraically. b) What are the crossover points between options A and B, and between options B and C? Show the crossover points graphically. You do not have to solve using algebra. c) If Bigwig expects sales of 10,000 units, which option should it choose? Why? Solve using any method of your choice. d) Why would the fixed cost be lower and the variable cost higher for B compared to C? What might be some of the costs? 1. a) For option C, Price = \$12/unit, Fixed Cost = \$64,000 Variable Cost = \$4/unit Let X = number of units produced/sold Profit = Revenue - cost = 12X - 4X - 64000 = 8X - 64000. At breakeven, Profit = 0 = 8X - 64000 8X = 64000 X = 8000 units. Hence, breakeven point for option C is 8000 units. b) To do the graph on paper, you only need the profit function for each alternative, and plot two points for each and join them for the lines. The profit funcitons are shown below.

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