Question

A production manager is tasked to determine which one of 2 suppliers from whom to source. However, each supplier may not be able to reliably fulfill the firm’s orders on a consistent basis. The manager estimates, through some research, that if supplier 1 is chosen, the probability that they will be unable to fulfill orders is 0.3, but it would cost the manager’s firm $1,000,000 in this instance. On the other hand, if supplier 1 is able to fulfill the orders with a probability of 0.7, the firm will be able to profit $500,000. Likewise, if supplier 2 is chosen, the probability that they will be unable to fulfill orders is 0.6, but it would cost the manager’s firm $300,000 in this instance. On the other hand, if supplier 2 is able to fulfill the orders with a probability of 0.4, the firm will be able to profit $600,000. If the manager does not make a decision, they will earn a profit of $0

What is the expected profit for supplier 2? (a) $50,000 (b) $60,000 (c) $240,000 (d) $300,000

Answer 1

If supplier 2 is chosen then expected profit = 0.6*(-300000)+0.4*600000 = 60000

So correct answer is b) 60000