CMA Intermediate · Management Accounting · Decision Theory
A Pune retailer is considering stocking one of three products. Profits (in Rs. lakh) under three states of demand (High, Medium, Low) are: Product A: 12, 8, 2; Product B: 10, 7, 4; Product C: 15, 6, 1. Using the maximin criterion, which product should be chosen?
Product B should be chosen under maximin. The criterion selects the option whose minimum payoff is largest. The minimum payoffs are 2 for A, 4 for B and 1 for C, so B gives the best guaranteed outcome of Rs. 4 lakh.
- AProduct A
- BProduct BCorrect
- CProduct C
- DProduct A or C, as both have equal maximum payoffs
Explanation
Maximin picks the alternative with the best worst-case payoff. Minimums: A = 2, B = 4, C = 1. The highest minimum is 4, so Product B. Product C is the maximax choice (15), which is the key distractor.
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