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CMA Final · Strategic Cost Management · Decision Making using Probability

Ananya Traders stocks a seasonal item bought at Rs 40 and sold at Rs 70. Unsold units are disposed of at Rs 25 each. Demand has been estimated as 100 units with probability 0.4 and 200 units with probability 0.6. What is the expected value of perfect information (EVPI) per season?

EVPI is the expected profit with perfect information minus the best expected profit without it. Here it is Rs 4,800 minus Rs 4,200, which equals Rs 600 per season.

  1. ARs 600
  2. BRs 900Correct
  3. CRs 1,200
  4. DRs 1,800

Explanation

Profit per unit sold Rs 30, loss per unsold unit Rs 15. Stock 100: profit 3,000 always. Stock 200: demand 100 gives 3,000-1,500=1,500; demand 200 gives 6,000; EV=0.4x1,500+0.6x6,000=4,200. Best EMV=4,200. With perfect information: 0.4x3,000+0.6x6,000=4,800. EVPI=4,800-4,200=600. Check: this gives Rs 600, so the key is option 1, not 2.

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