ACCA PM · Chapter 9 · Question 5 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 What is the expected value of perfect information about daily demand?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) $14
Explanation
With perfect information the bakery would choose the best order for each demand level: EV = (0.3 x 40) + (0.5 x 60) + (0.2 x 100) = $62. Without information the best EV is $48. EVPI = $62 - $48 = $14, the maximum worth paying for a perfect demand forecast.
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