CMA Intermediate · Management Accounting · Decision Theory
Kaveri Traders expects a festival-season order to yield a profit of ₹40,000 with probability 0.3, ₹20,000 with probability 0.5 and a loss of ₹10,000 with probability 0.2. What is the expected monetary value (EMV) of the order?
The EMV is ₹20,000. Each payoff is multiplied by its probability and the products are added: 12,000 plus 10,000 minus 2,000. The loss must be deducted, and probabilities must be used rather than a simple average of the outcomes.
- A₹20,000Correct
- B₹16,667
- C₹22,000
- D₹24,000
Explanation
EMV = 0.3×40,000 + 0.5×20,000 + 0.2×(−10,000) = 12,000 + 10,000 − 2,000 = ₹20,000. ₹16,667 is the simple average, which ignores probabilities. ₹22,000 leaves out the loss term, and ₹24,000 adds the loss instead of subtracting it.
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