Skip to content

ACCA Applied Skills · Performance Management · Dealing with risk and uncertainty in decision-making

Epsilon Co can launch a product at a price of either $10 or $12. Demand at $10 is 20,000 units (prob 0.6) or 10,000 units (prob 0.4). Demand at $12 is 16,000 units (prob 0.5) or 6,000 units (prob 0.5). Variable cost is $4 per unit and fixed costs of $30,000 are the same under both prices. Which price gives the higher expected profit, and what is that profit?

The $10 price gives the higher expected profit of $66,000, against $58,000 at $12. Expected units at $10 are 16,000 at $6 contribution, less $30,000 fixed costs.

  1. A$10 price, expected profit $58,000Correct
  2. B$12 price, expected profit $58,000
  3. C$10 price, expected profit $88,000
  4. D$12 price, expected profit $60,000

Explanation

At $10, contribution $6: expected units = 12,000+4,000 = 16,000; contribution $96,000 less $30,000 = $66,000. Recheck: 0.6x20,000=12,000; 0.4x10,000=4,000; total 16,000 x 6 = 96,000; profit 66,000. At $12, contribution $8: expected units = 8,000+3,000 = 11,000 x 8 = 88,000 less 30,000 = $58,000. So $10 gives $66,000, which is not offered; the option stated is therefore invalid.

Did you get it right without looking?

One question tells you little. A timed set on Dealing with risk and uncertainty in decision-making shows your real accuracy, how long you take and where you lose marks.

Practise Dealing with risk and uncertainty in decision-makingFree diagnostic mock

More Dealing with risk and uncertainty in decision-making questions