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CMA Final · Strategic Cost Management · Decision Making using Probability

Mehta Bakers can bake 100, 200 or 300 loaves daily. Each loaf costs Rs 20 and sells for Rs 50; unsold loaves are worthless. Daily demand is 100 (probability 0.3), 200 (0.5) or 300 (0.2). Expected profit is highest for which production level?

Producing 100 loaves gives a certain profit of Rs 3,000, which exceeds the expected profit of Rs 1,700 for 200 loaves and the negative expected profit for 300 loaves.

  1. A100 loaves
  2. B200 loavesCorrect
  3. C300 loaves
  4. D100 and 200 loaves give equal expected profit

Explanation

Profit per sold loaf is 30 and loss per unsold loaf is 20. Produce 100: profit 3,000 always, EP = 3,000. Produce 200: demand 100 gives 3,000-2,000=1,000; demand 200 or 300 gives 6,000-4,000=2,000 wait recompute: 200 sold = 6,000 minus cost 4,000 = 2,000. EP = 0.3x1,000 + 0.7x2,000 = 1,700. Produce 300: demand 100: 3,000-6,000 = -3,000... that is 3,000-6,000=-3,000; demand 200: 6,000-6,000=0; demand 300: 9,000-6,000=3,000. EP = -900+0+600 = -300. For 100 loaves, profit is 100x30-0 = 3,000 less cost? Cost 2,000, revenue 5,000, profit 3,000, so EP = 3,000. Correction: production of 100 yields profit 3,000, higher than 1,700.

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