Page 204 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Subject P2: Advanced Management Accounting

CHAPTER 12 – RISK AND UNCERTAINTY IN DECISION
MANAGEMENT

12.1 Two investors, Duccio and Cimabue, are choosing between different projects.
Duccio selects the project that is preferred using the maximax method, whereas
Cimabue selects the project using the minimax regret approach.

Which of the following statements correctly describes the investors’
attitudes to risk?

A They both exhibit the same attitude to risk

B Duccio is more risk averse than Cimabue

C Cimabue is more risk averse than Duccio

D It is not possible to form an opinion on their risk attitudes

12.2 Grunewald Limited is deciding which of three potential selling prices to set for a
new product it is about to launch.

Although it is likely to be first to market, the speed of its competitors’ response
will affect the annual profits that Grunewald will earn. A payoff table has been
prepared showing the forecast profit (in $000) for each of the nine possible
outcomes.

Speed of competitor response Selling price

$50 $60 $70

Within 2 months 70 85 65

Within 6 months 90 95 80

Not by year end 110 100 120

Identify the selling price that would be chosen if Grunewald applies the
maximin criterion.

Grunewald should set a selling price of $ ____.

198