Decision-making techniques

**Section A** GlobalRelief, an NGO, distributes two types of emergency kits: Standard and Medical. The limiting factor is the specialized labor hours required to pack them. The shadow price of one specialized labor hour has been calculated as $15. What does this shadow price of $15 represent?

**Section A** VoltMotors manufactures electric vehicles. They currently make a specialized battery component in-house. The variable cost of production is $45 per unit. Fixed overheads absorbed are $15 per unit. An external supplier has offered to supply the component for $50 per unit. If outsourced, 40% of the fixed overheads currently absorbed by the component would be saved. Should VoltMotors make or buy the component, and what is the relevant cost saving/loss per unit?

**Section A** SkyHigh Aerospace has developed a revolutionary new lightweight drone. They have a patent on the technology and there are currently no direct competitors. The company needs to recover high research and development costs quickly before competitors reverse-engineer the product. Which pricing strategy is most appropriate for SkyHigh Aerospace?

**Section A** A manager is deciding between three mutually exclusive projects (A, B, and C). The outcomes depend on the state of the economy. The manager decides to use the 'minimax regret' rule. What is the underlying attitude to risk of a manager who uses the minimax regret rule?

**Section B - Case 1: AquaHarvest** AquaHarvest operates a sustainable offshore kelp farm. The company is evaluating a special one-off contract to supply a cosmetics company with a specific kelp extract. The contract requires 500 kg of 'Type A' kelp. AquaHarvest currently has 300 kg of Type A in inventory, which was bought for $4 per kg. Type A is in regular use by AquaHarvest, and the current replacement cost is $5 per kg. The remaining 200 kg will need to be purchased at the current replacement cost. What is the total relevant cost of the 'Type A' kelp for this special contract? (Enter your answer as a whole number).

**Section B - Case 1: AquaHarvest** AquaHarvest operates a sustainable offshore kelp farm. For the special cosmetics contract, a specialized drying machine is required. AquaHarvest owns a suitable machine that was purchased 3 years ago for $50,000. Its current net book value is $20,000. If not used for this contract, the machine could be sold today for $15,000. After the contract, the machine will have no resale value and will cost $2,000 to dismantle and dispose of. What is the relevant cost of using the drying machine for the special contract?

**Section B - Case 1: AquaHarvest** AquaHarvest operates a sustainable offshore kelp farm. The farm produces two joint products: Premium Kelp and Standard Kelp. The joint processing costs are $50,000 per month. Premium Kelp can be sold at the split-off point for $30,000. Alternatively, it can be further processed into Kelp Supplements at an additional cost of $15,000, and then sold for $48,000. Should AquaHarvest process the Premium Kelp further, and what is the incremental financial impact?

**Section C** **CyberShield** is a SaaS company developing a new AI threat detection module. **Part A (12 marks)** The launch of the new module faces uncertainty regarding market demand. The management accountant has prepared a payoff table showing the Net Present Value (NPV) of the project under three pricing strategies and three market demand scenarios. | Pricing Strategy | Low Demand (Prob: 0.3) | Medium Demand (Prob: 0.5) | High Demand (Prob: 0.2) | | :--- | :--- | :--- | :--- | | High Price | -$2m | $4m | $10m | | Medium Price | $1m | $5m | $7m | | Low Price | $3m | $4m | $5m | 1. Calculate the Expected Value (EV) for each pricing strategy and recommend the best strategy based on EV. 2. Determine the optimal strategy if the management team adopts a 'Maximin' approach. 3. Determine the optimal strategy if the management team adopts a 'Minimax Regret' approach (show your regret table). 4. Briefly discuss the limitations of using Expected Values for this decision. **Part B (8 marks)** CyberShield currently uses incremental budgeting for its R&D department. The CFO is proposing a switch to Zero-Based Budgeting (ZBB) to better control costs and allocate resources to the most promising AI projects. Evaluate the suitability of Zero-Based Budgeting for CyberShield's R&D department. Include both advantages and disadvantages in your evaluation.

Section A CodeCraft sells two software products: Basic and Pro. The sales mix is 3 units of Basic for every 1 unit of Pro. Basic: Selling price $50, Variable cost $20. Pro: Selling price $120, Variable cost $40. Total fixed costs are $85,000. What is the break-even revenue for the company? (Round to the nearest whole dollar)

Section A CraftWorks manufactures custom furniture. It is currently facing a shortage of skilled labor. It can either make a specific table leg in-house or buy it from an external supplier. Variable cost to make: $15 External purchase price: $22 Skilled labor hours required to make: 0.5 hours What is the extra cost of buying externally per limiting factor (skilled labor hour)?

Section A NovaTech is launching a revolutionary new virtual reality headset. The product is highly innovative, protected by patents, and aimed at early adopters who are relatively price-insensitive. The product life cycle is expected to be short due to rapid technological advancement. Which pricing strategy is most appropriate for NovaTech's new headset?

Section A EventPro is organizing an outdoor music festival. The profit depends heavily on the weather. Profits: Good weather (Probability 0.4): $100,000 Average weather (Probability 0.5): $40,000 Poor weather (Probability 0.1): -$20,000 (Loss) What is the Expected Value (EV) of the profit for the festival?

Section B - Case 2: CyberShield CyberShield is a tech startup developing a new B2B SaaS (Software as a Service) platform for cybersecurity. Market research shows that at a monthly subscription price of $100, demand is 5,000 users. If the price is increased to $110, demand falls to 4,000 users. Calculate the Price Elasticity of Demand (PED) using the simple formula: (% change in quantity demanded) / (% change in price). (Enter the absolute value to one decimal place)

Section B - Case 2: CyberShield CyberShield is a tech startup developing a new B2B SaaS (Software as a Service) platform for cybersecurity. The company wants to find the profit-maximizing price. The demand equation is P = 200 - 0.02Q. The marginal cost (MC) of adding a new user is constant at $20 per month. What is the optimum selling price to maximize profit?

Section B - Case 2: CyberShield CyberShield is a tech startup developing a new B2B SaaS (Software as a Service) platform for cybersecurity. The founders are deciding between three marketing strategies (Aggressive, Moderate, Conservative). The payoff matrix (profits in $000s) depends on competitor reaction: Strategy | Weak Reaction | Strong Reaction Aggressive | 500 | -100 Moderate | 300 | 100 Conservative | 150 | 120 If the founders are extremely risk-averse, which strategy will they choose using the Maximin rule?

Section B - Case 2: CyberShield CyberShield is a tech startup developing a new B2B SaaS (Software as a Service) platform for cybersecurity. Assume the probabilities of competitor reaction are: Weak (0.6) and Strong (0.4). Expected Value (EV) of Aggressive = (500*0.6) + (-100*0.4) = 260 EV of Moderate = (300*0.6) + (100*0.4) = 220 EV of Conservative = (150*0.6) + (120*0.4) = 138 A market research firm offers to find out exactly what the competitor will do. What is the Expected Value of Perfect Information (EVPI)?

Section B - Case 2: CyberShield CyberShield is a tech startup developing a new B2B SaaS (Software as a Service) platform for cybersecurity. The founders are worried about the accuracy of their estimates. They decide to calculate how much the estimated sales volume can fall before the project breaks even (NPV = 0). What technique are they using?

**Section A** Apex Consulting is deciding whether to accept a special one-off contract. The contract requires 500 hours of highly skilled labor. Apex currently has spare capacity of 200 hours for this labor grade. The remaining 300 hours would need to be diverted from an existing project that generates a contribution of $40 per hour. The skilled labor is paid a fixed weekly salary, and no overtime is possible. What is the relevant cost of labor for this special contract?

**Section A** GreenFields Farm uses linear programming to determine the optimal mix of two crops (Wheat and Barley) to plant, given constraints on land and fertilizer. The optimal solution has been found, and the shadow price for fertilizer is calculated to be $15 per kg. Which of the following best describes the meaning of this shadow price?

**Section A** OmniStream, a cross-border digital streaming multinational, charges different monthly subscription fees in different countries for the exact same service. Which TWO of the following conditions must exist for OmniStream's price discrimination strategy to be effective and profitable?

**Section A** A company is choosing between three mutually exclusive projects (A, B, and C). The outcomes depend on the state of the economy. The payoff matrix (showing profit in $000s) is as follows: | Project | Weak Economy | Stable Economy | Strong Economy | |---|---|---|---| | A | 40 | 70 | 100 | | B | 20 | 80 | 130 | | C | 50 | 60 | 80 | If the management team is highly risk-averse and uses the maximin decision rule, which project will they choose?

**Section B - Case 1: VoltCell Manufacturing** VoltCell is a heavy manufacturing and tech company that produces advanced solid-state batteries for electric vehicles. The company is evaluating a new battery model, the 'QuantumCell', which has an expected life cycle of 4 years. VoltCell is considering its pricing strategy for the launch of the QuantumCell. The battery represents a significant technological breakthrough, has no direct competitors currently, and appeals to early adopters in the luxury EV market. Which pricing strategy is most appropriate for the launch of the QuantumCell?

**Section C** **Scenario: TransGlobal Logistics** TransGlobal Logistics operates a large fleet of cross-border freight trucks. Currently, they maintain their fleet in-house. The annual costs for the in-house maintenance department are: - Mechanics' salaries (fixed contracts): $400,000 - Parts and materials (variable): $1,200 per truck serviced - Apportioned head office overheads: $150,000 - Depreciation of maintenance equipment: $80,000 A third-party company, FleetCare, has offered to take over the maintenance on a 'pay-as-you-go' basis, charging $2,500 per truck serviced. If TransGlobal outsources to FleetCare, the mechanics will be made redundant, incurring a one-off total redundancy cost of $100,000. The maintenance equipment could be sold immediately for $50,000. The head office overheads will not change. The number of trucks requiring service next year is uncertain due to fluctuating trade tariffs. The probabilities are: - Low demand: 200 trucks (Probability 0.3) - Medium demand: 350 trucks (Probability 0.5) - High demand: 500 trucks (Probability 0.2) **Required:** (a) Calculate the Expected Value (EV) of the number of trucks requiring service next year. (3 marks) (b) Using relevant costing principles and the Expected Value calculated in part (a), determine whether TransGlobal should continue to maintain the trucks in-house or outsource to FleetCare for the next year. Show all calculations clearly. (12 marks) (c) Discuss TWO limitations of using Expected Values as the primary basis for this decision. (5 marks)

Section A BioGenix has developed a breakthrough, patented gene-therapy drug that cures a rare disease. There are currently no competitors, but the patent expires in 5 years. Research and development costs were extremely high. Which pricing strategy is most appropriate for BioGenix at the launch of this drug?

Section A GlobalBuild is evaluating whether to continue a cross-border construction project. They have already spent $500,000 on initial architectural designs. They have also signed a legally binding contract to lease specialized cranes for $100,000, which must be paid regardless of whether the project continues. In the context of relevant costing for the decision to continue the project, which TWO of the following statements are correct?

Section A HarvestCo must decide which crop to plant: Wheat, Corn, or Soy. The profit depends on the summer weather (Wet, Normal, Dry). A management accountant has created a regret table (opportunity loss table) and is applying the minimax regret rule. What is the objective of the minimax regret decision rule?

Section C MetroGrid Power is a public utility transitioning to renewable energy. They must choose one of three infrastructure upgrade options. The Net Present Value (NPV) of each option depends on whether the government passes a 'High Subsidy' or 'Low Subsidy' green energy bill. Probabilities: High Subsidy = 0.6, Low Subsidy = 0.4. Payoff Table (NPV in $ millions): Option A (Solar Focus): High Subsidy = $50m, Low Subsidy = $10m Option B (Wind Focus): High Subsidy = $40m, Low Subsidy = $25m Option C (Mixed Grid): High Subsidy = $35m, Low Subsidy = $30m MetroGrid currently uses an annual budgeting process but is finding it too rigid given the rapid changes in renewable technology and government policy. The CFO has proposed switching to a Rolling Budget. Required: (a) Calculate the Expected Value (EV) for each option and recommend which option MetroGrid should choose based strictly on EV. (6 marks) (b) Discuss the limitations of using Expected Values for this specific decision. (6 marks) (c) Evaluate the CFO's proposal to switch from annual budgets to rolling budgets, highlighting the behavioral and operational impacts on MetroGrid's managers. (8 marks)

**Section A** EcoTransit operates a fleet of electric buses. The company has fixed costs of $240,000 per month. The average ticket price is $4.00, and the variable cost per passenger (electricity, ticketing fees) is $1.60. Calculate the breakeven revenue per month for EcoTransit. (Enter your answer as a whole number, without the $ sign)

**Section A** A software startup has developed a revolutionary AI-driven video editing tool. There are currently no direct competitors. The company needs to recover its high initial development costs quickly before competitors enter the market in 12-18 months. Which pricing strategy is MOST appropriate for this product?

**Section A** The management of DeepSea Drilling is evaluating three potential offshore sites. The CEO is highly risk-averse and wants to ensure the company avoids catastrophic losses, regardless of the potential upside. Which decision-making rule under uncertainty should the CEO use?

**Section B - Case 1: AeroDrone Tech** AeroDrone Tech is an agricultural technology startup developing the 'AgriScout', a drone designed to monitor crop health. Market research indicates that large-scale farms would be willing to pay $1,200 for such a drone. AeroDrone's investors require a profit margin of 20% on the selling price. The current estimated production cost of the AgriScout is $1,050. AeroDrone's marketing team estimates that at a price of $1,200, demand will be 5,000 units. If the price is increased to $1,300, demand will fall to 4,000 units. What is the Price Elasticity of Demand (PED) for the AgriScout? (Use the basic PED formula: % change in quantity / % change in price)

**Section C** AquaPure Utility is a state-owned water company evaluating a new water purification project. The project requires an immediate investment of $2,000,000 in new filtration equipment. The following financial information has been gathered for the first year of operations: 1. Revenue from new water connections: $800,000. 2. Direct operating costs (chemicals, labor): $300,000. 3. Apportioned general head office overheads: $150,000. 4. Depreciation on the new equipment: $200,000. 5. A feasibility study for this project was completed last month at a cost of $50,000. This invoice has not yet been paid. Furthermore, AquaPure is considering shifting its entire organizational budgeting process from Incremental Budgeting to Zero-Based Budgeting (ZBB) to combat rising inefficiencies. **Required:** (a) Identify the relevant cash flows for the first year of the project and calculate the net relevant cash flow. Briefly explain your treatment of items 3, 4, and 5. (10 marks) (b) Discuss the behavioral and operational implications for AquaPure Utility of shifting from Incremental Budgeting to Zero-Based Budgeting (ZBB). (10 marks)