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Unformatted text preview: CHAPTER 24 DISCUSSION QUESTIONS 241 Q241. Before making a decision under conditions of uncertainty, a manager should try to assess the probabilities associated with alternative possible outcomes in order to determine the probable result of each alternative action. Unless the probabilities associated with possible outcomes are determined, the effect of uncertainty cannot be accounted for adequately, which may result in inconsistent and unreliable decisions. Q242. Expected value is the weighted average value of the events for a probability distribution, i.e., it is the average value of the events that are expected to occur. Q243. The standard deviation of the expected value is a measure of the variability of events within a probability distribution and, as such, is viewed as a measure of risk. The larger the standard deviation, the greater the risk that the actual result will differ from the expected value. Q244. The coefficient of variation relates the standard deviation for a probability distribution to its expected value, thus allowing for differences in the relative size of different probability distributions. The coefficient of variation provides a comparative measure of risk for alternatives with different expected values. Q245. A joint probability is the probability of the simultaneous occurrence of two or more events (e.g., the probability of the occurrence of both event A and event B, denoted as P(AB)), whereas a conditional probability is the probability of the occurrence of one event given that another event has occurred (e.g., the probability of the occurrence of event A given that event B has already occurred, denoted as P(AIB)). A conditional probability implies that some relationship exists between the events. Q246. Management should be interested in revising probabilities as new information becomes available, because new information may alter the expected outcomes (i.e., probabilities) enough to warrant making a different decision. As a consequence, the revision of probabilities may be necessary in order to provide a basis for making the best decision. Q247. Decision trees graphically portray alternatives and their expected values and include a sequential decision dimension in the analysis. They highlight decision points, alternatives, estimated results, related probabilities, and expected values.They are especially useful in evaluating alternatives requiring sequential decisions that depend upon uncertain outcomes. Q248. In a discrete probability distribution, the possible outcomes are limited to certain finite values (e.g., 10, 11, 12, etc.). The number of shipments, orders, units of product, etc. are events that could be described adequately by a discrete probability distribution. For convenience, the outcomes that occur in a discrete probability distribution are often limited to a fairly small number, but this need not necessarily be the case. In contrast, the possible outcomes that may occur in a continuous...
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This note was uploaded on 03/15/2012 for the course ACCOUNTING 620 taught by Professor Smith during the Spring '11 term at Alabama A&M University.
 Spring '11
 Smith

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