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ACCA Applied Knowledge · Management Accounting · Sources of data

A manager is considering buying a market report. The report costs $4,000. There is a 40% chance it will lead to a decision that increases profit by $15,000 and a 60% chance it will change nothing. Ignoring all other effects, what is the expected net benefit of buying the report?

The expected net benefit is $2,000. The expected benefit is 40% of $15,000, which is $6,000, and deducting the $4,000 cost of the report leaves $2,000. The information is therefore worth buying on this basis.

  1. A$2,000Correct
  2. B$6,000
  3. C$11,000
  4. D$(4,000)

Explanation

Expected benefit = 40% x $15,000 = $6,000. Net benefit = $6,000 - $4,000 = $2,000. Choosing $6,000 ignores the cost of the report. Choosing $11,000 deducts the cost from the full $15,000 and ignores probability.

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