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# Decision Making

### Theme 3

Question | Answer |
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What is Sales Forecasting? | The process of predicting future sales levels by volume or value and future trends |

What is Sales Forecasting used for? | Inform resource management about inventory levels, production output and logistics Inform cash flows and budgets Aid workforce planning |

What is Time Series Analysis? | Shows past sales figures in date order |

Explain what Time Series Analysis data is used for | Marketers use this historical data, after fluctuations have been smoothed out, to identify trends /Trends are then used to predict future sales |

How are moving averages used? | Shows whether a trend is significant by smoothing out fluctuations in data Allows for better identification of an overall trend Identifies influencing factors on future sales e.g. seasonal, cyclical or random fluctuations |

What are scatter graphs? | They plot the relationship between 2 variables to identify correlation |

What is a correlation? | Correlation is the identifying of a relationship between 2 variables |

What is a positive correlation? | The 2 variables move in the same direction e.g. as temperature goes up ice cream sales go up |

What is a negative correlation? | The 2 variables move in opposite directions e.g. as road tax prices go up the sales of new 4 x 4s goes down |

What is Zero correlation? | There is no relationship between the factors e.g. average rain fall and sales of text books |

How can the strength of a correlation be measured? | The strength of correlation can be expressed on a spectrum from -1 to +1 |

What is Extrapolation? | The action of estimating or concluding something by assuming that existing trends will continue or a current method will remain applicable. |

When is extrapolation useful? | A useful technique when trends can clearly be identified and the market is relatively stable |

State three limitations of quantitative sales forecasting techniques | 1.The further into the future the greater the uncertainty 2.Sales will be influenced by external influences which are difficult to accurately predict 3.May be manipulated or biased 4.Inadequate market research 5.Unexpected events |

What is Investment Appraisal? | Investment appraisal is the use of numerical techniques to predict the financial outcomes of potential capital investments |

Why is investment appraisal useful? | Investment appraisal may be used to compare different options e.g. location A or location B and/or against predetermined criteria/Weighs up the cash outflows i.e. initial investment plus continued costs against the future cash inflows |

What is payback used for? | Calculates how long it will take to pay back the cost of the initial investment |

What are the limitations of Payback? | The longer the payback period the greater the degree of risk and uncertainty Does not take into account what happens after payback Assumes that in the year of payback that the cash inflow is equal each month |

What is ARR used for? | Calculates average profit as a percentage of the cost of the initial investment |

What are the drawbacks of ARR? | it does not take into account the effects of time on the value of money The timing of the return is ignored |

What are the benefits of ARR? | it shows clearly the profitability of an investment project Can be compared to other uses for investment funds e.g. can compare what a bank has to offer Simple to calculate |

What are the benefits of NPV? | All cash flows are included Takes timing into account Can consider different scenarios Takes the opportunity cost of money into account |

What are the drawbacks of NPV? | Complex to calculate The meaning of the result is often misunderstood Only comparable between projects if the initial investment is the same The cost of capital is often difficult to ascertain Is based on expectation |

What is NPV used for? | Calculates the total return on an investment taking into account the time value of money |

What is Investment Criteria? | A predetermined set of guidelines against which an investment can be judged/Minimum targets expected from investments |

Investment appraisal is trying to minimise risk/uncertainty .But, what needs to be considered in assessing degree and risk? | Gearing Stability Opportunity cost Competitor reactions Time frame |

What is a decision tree? | A simple and visual way of presenting the alternative course of action available when making a decision |

What do decision trees identify? | When a decision has to be made The choices available The cost associated with each option The possible outcomes related to each choice The likelihood (probability) of each outcome occurring The estimated financial result of each outcome |

What are the benefits of decision trees? | Clearly show the options available Encourages logical thinking Allows structured discussions and comparisons Takes into account risk May raise alternative options Quantifies the outcome of each decision |

What are the drawbacks of decision trees? | Relies heavily on estimates i.e. probabilities Estimates may be biased May not consider external influences e.g. if the cost of one option will be affected by interest rates Non dynamic – may be out of date before decision is reached |

State four things that can influence the decisions a business makes? | Mission/objectives/ethics/external environment e.g. competition/resource constraints |

How can the mission and objectives influence the decision a business makes? | Mission – does the decision fit in with the business’ overall purpose? Objectives – will the decision help the business achieve its goals within the specified time period? |

How can the external environment influence the decision a business makes? | How will changes in the external environment e.g. fluctuations in the economy or competitors ’actions influence the financial outcomes and the probabilities? Will this have a major impact on uncertainty in decision making? |

Why should resources need to be considered when a business makes decisions? | Because even if a decision looks like the right one is it achievable with the resources available, including:Time/Human resources/Expertise/Finance |

What is Critical Path Analysis? | A technique used to identify the order in which all activities need to be completed when planning a complex project. |

What use is a Critical Path Analysis diagram? | Critical path diagrams organise the activities in an order to show which activities can be done simultaneously and which are dependent upon earlier activities. |

Explain what is meant by the Critical Path? | The critical path is the set of activities that will lengthen the duration of the project if delayed. |

On a Critical Path diagram how many parts does a node have? | Three parts - Earliest start time/latest finish time and the node number |

What are non-critical activities? | Those which are not on the critical path/There is some leeway (spare time) to complete the activities/These activities are said to have float time |

What is the Total Float formula? | LFT - Duration -EST |

Why do managers use Critical Path Analysis? | So time and resources are not wasted Improve efficiency So materials are not delivered before they are needed So people and machines are not sitting around idle |

What are the benefits of Critical Path Analysis? | Encourages planning reduces risk of delays Resources needed for each task can be made available at suitable times Time can be saved by operating activities simultaneously If delays occur CPA can be used to work out solution |

What are the drawbacks of Critical Path Analysis? | Complex activities may be impossible to draw CPA simply shows the quickest way to complete, doesn’t guarantee that it is the right project It relies on estimates – if incorrect wrong CPA could be identified |