CMA Intermediate · Management Accounting · Decision Theory
In a decision tree for Kaveri Textiles, a decision node has two branches. Branch A has an EMV of Rs 18 lakh before cost and needs an investment of Rs 5 lakh. Branch B has an EMV of Rs 11 lakh before cost and needs an investment of Rs 1 lakh. Using the EMV criterion, the firm should:
Choose A. After deducting the investment, A's net EMV is Rs 13 lakh against Rs 10 lakh for B. The decision node picks the branch with the highest net EMV, not the lowest cost.
- Achoose A, net EMV Rs 13 lakhCorrect
- Bchoose B, net EMV Rs 10 lakh
- Cchoose A, net EMV Rs 18 lakh
- Dchoose B, net EMV Rs 11 lakh
Explanation
Net EMV of A = 18 - 5 = 13; B = 11 - 1 = 10. A is higher, so choose A at Rs 13 lakh. Choosing B on lower cost ignores the higher net value of A.
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