ACCA PM · Chapter 9 · Question 2 of 11
A bakery must decide the size of a daily order: small, medium or large. Daily demand may be low (probability 0.3), medium (probability 0.5) or high (probability 0.2). Profits ($) for each combination are: Small order: low 40, medium 40, high 40 Medium order: low 20, medium 60, high 60 Large order: low -10, medium 45, high 100 Which order size would be chosen using expected values, and what is its expected profit?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Medium, with expected profit of $48
Explanation
EV small = $40. EV medium = (0.3 x 20) + (0.5 x 60) + (0.2 x 60) = $48. EV large = (0.3 x -10) + (0.5 x 45) + (0.2 x 100) = $39.50. The medium order has the highest EV.
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