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CMA Foundation · Fundamentals of Business Economics and Management · Decision-making - Types and Process

Sharma Traders is considering a new product. Under a favourable market (probability 0.6) it earns Rs 50,000 profit; under an unfavourable market (probability 0.4) it incurs a loss of Rs 20,000. The expected monetary value of launching the product is:

The expected monetary value is Rs 22,000. Multiply the profit of Rs 50,000 by 0.6 to get Rs 30,000, multiply the loss of Rs 20,000 by 0.4 to get Rs 8,000, and subtract. Adding the loss instead of subtracting it gives the wrong figure of Rs 38,000.

  1. ARs 38,000
  2. BRs 22,000Correct
  3. CRs 30,000
  4. DRs 15,000

Explanation

EMV = 0.6 x 50,000 + 0.4 x (-20,000) = 30,000 - 8,000 = Rs 22,000. Rs 38,000 results from adding the loss's weighted value instead of subtracting it. Rs 30,000 ignores the loss entirely.

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