Question

The following table lists the anticipated profits of four operations under three scenarios. Low Medium High Options Demand Demand Demand Plan A 110 160 180 Plan B 100 130 160 Plan C 145 110 185 Plan D 140 120 155 For the situation given in the table above (same data as question #22), assume that the probabilities of the outcomes are known to be a 60% chance of low demand, 20% chance of medium demand, and 20% chance of high demand. Using the expected value criterion, which plan should be chosen? A. Plan A B. Plan B OC. Plan C OD. Plan D

Answer 1

Solution:

In expected value criterion, expected value is calculated as,

Expected value = Sum of (Probability of outcome x Anticipated profit)

Plan A:

Expected value = [(0.60 x 110) + (0.20 x 160) + (0.20 x 180)]

Expected value = 134

Plan B:

Expected value = [(0.60 x 100) + (0.20 x 130) + (0.20 x 160)]

Expected value = 118

Plan C:

Expected value = [(0.60 x 145) + (0.20 x 110) + (0.20 x 185)]

Expected value = 146 (highest)

Plan D:

Expected value = [(0.60 x 140) + (0.20 x 120) + (0.20 x 155)]

Expected value = 139

Answer: On the basis of the above calculations, Plan C should be chosen as it has the highest expected value.