A bank plans to open a branch in one of five locations (labeled L1, L2, L3, L4, L5). Demand for bank services may be high, medium, or low at each of these locations. Profits for each location- demand combination are presented in the payoff matrix.If, in addition to the estimated profits .management of the bank assesses the probabilities of high, medium, and low demands to be 0.3.0.4, and 0.3, respectively, what is the expected opportunity loss from selecting location L4?
Answer(s): A
First, the opportunity loss matrix must be prepared
During the past few years, Wilder Company has experienced the following average number of power outages:Each power outage results in out-of-pocket costs of US $800. For US $1,000 per month, Wilder can lease a generator to provide power during outages. If Wilder leases a generator in the coming year, the estimated savings (or additional expense) for the year will be
Answer(s): C
Each outage costs US $800, but this expense can be avoided by paying US $1,000 per month (US $12,000 for the year). The expected-value approach uses the probability distribution derived from past experience to determine the average expected outages per month.3/12x0 = 0.02/12x1 = 0.166674/12x2 = 0.666673/12x3 = 0.750001.58334The company can expect to have, on average. 1.58334 outages per month. At US $800 per outage, the expected cost is US $1,266.67. Thus, paying US $1.000 to avoid an expense of US $1,266.67 saves US $266.67 per month, or US $3,200 per year.
Philip Enterprises, distributor of compact disks (CDs), is developing its budgeted cost of goods sold. Philip has developed the following range of sales estimates and associated probabilities for the year:Philip's cost of goods sold averages 80% of sales.What is the expected value of Philip's budgeted cost of goods sold?
Answer(s): D
The expected value is calculated by weighting each sales estimate by the probability of its occurrence. Consequently, the expected value of sales is US $84,000 [$60,000 x .25) + ($85,000 x .40) + ($100,000 x .35)]. Cost of goods sold is therefore US $67,200 ($84,000 x 80%).
The College Honor Society sells hot pretzels at the home football games. The pretzels are sold for $1.00 each, and the cost per pretzel is $.30. Any unsold pretzels are discarded because they will be stale before the next home game.The frequency distribution of the demand for pretzels per game is presented as follows:Unit Sales VolumeProbability2.000 pretzels.103,000 pretzels.154.000 pretzels.205.000 pretzels.356.000 pretzels.20The estimated demand for pretzels at the next home football game using an expected value approach is:
Answer(s): B
The calculation using an expected value approach weights each possible sales volume by its probability. Thus, the estimated demand is 4,400 pretzels.
The College Honor Society sells hot pretzels at the home football games. The pretzels are sold for $1.00 each, and the cost per pretzel is $.30. Any unsold pretzels are discarded because they will be stale before the next home game.The frequency distribution of the demand for pretzels per game is presented as follows:Unit Sales Volume Probability2,000 pretzels .103,000 pretzels .154,000 pretzels .205.000 pretzels .356.000 pretzels .20The estimated demand for pretzels at the next home football game using a deterministic approach based on the most likely outcome is:
A deterministic approach assumes that a value is known with certainty. If that value is deemed to be the most likely outcome, assumed demand will be 5,000 pretzels, the volume with the highest probability (35%).
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