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Unformatted text preview: CHAPTER 24 DISCUSSION QUESTIONS 24-1 Q24-1. Before making a decision under conditions of uncertainty, a manager should try to assess the probabilities associated with alternative possi-ble outcomes in order to determine the proba-ble 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. Q24-2. 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. Q24-3. 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. Q24-4. The coefficient of variation relates the stan-dard deviation for a probability distribution to its expected value, thus allowing for differ-ences in the relative size of different probabil-ity distributions. The coefficient of variation provides a comparative measure of risk for alternatives with different expected values. Q24-5. A joint probability is the probability of the simul-taneous 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 proba-bility of the occurrence of one event given that another event has occurred (e.g., the probabili-ty of the occurrence of event A given that event B has already occurred, denoted as P(AIB)). A conditional probability implies that some rela-tionship exists between the events. Q24-6. 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 deci-sion. As a consequence, the revision of prob-abilities may be necessary in order to provide a basis for making the best decision. Q24-7. 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 out-comes. Q24-8. In a discrete probability distribution, the possi-ble outcomes are limited to certain finite val-ues (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 conven-ience, the outcomes that occur in a discrete probability distribution are often limited to a fairly small number, but this need not neces-sarily 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.

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