A manager is considering whether to make product A or product B, but only one can be produced. The estimated sales demand for each product is uncertain. A detailed investigation of the possible sales demand for each product gives the following probability distribution of -the profits for each product.
|
Product A probability distribution |
||
|
(1) |
(2) |
(3) |
|
Estimated |
Weighted |
|
|
Outcome |
probability |
(col. 1 amount x col. 2) |
|
(£) |
||
|
Profits of £6000 |
0.10 |
600 |
|
Profits of £7000 |
0.20 |
1400 |
|
Profits of £8000 |
0.40 |
3200 |
|
Profits of £9000 |
0.20 |
1800 |
|
Profits of £10 000 |
0.10 |
1000 |
|
1.00 |
||
|
Expected value |
8000 |
|
|
Product B probability distribution |
||
|
(1) |
(2) |
(3) |
|
Estimated |
Weighted |
|
|
Outcome |
probability |
(col. 1 amount x col. 2) |
|
(£) |
||
|
Profits of £4000 |
0.05 |
200 |
|
Profits of £6000 |
0.10 |
600 |
|
Profits of £8000 |
0.40 |
3200 |
|
Profits of £10 000 |
0.25 |
2500 |
|
Profits of £12 000 |
0.20 |
2400 |
|
1.00 |
||
|
Expected value |
8900 |
|
Which product should the company make?