CMA Intermediate · Management Accounting · Decision Theory
Sundaram Foods can choose one of three acts. Demand is High with probability 0.4 and Low with probability 0.6. Payoffs (High, Low) are: Act A ₹50,000 and ₹20,000; Act B ₹30,000 and ₹35,000; Act C ₹70,000 and −₹5,000. Which act maximises EMV, and what is that EMV?
Act B is best with an EMV of ₹33,000. Act A gives ₹32,000 and Act C gives only ₹25,000 once its possible loss is weighted by probability. The highest single payoff, ₹70,000 in Act C, is irrelevant to the EMV criterion.
- AAct A, ₹32,000
- BAct B, ₹33,000Correct
- CAct C, ₹70,000
- DAct B, ₹35,000
Explanation
EMV of A = 0.4×50,000 + 0.6×20,000 = 32,000. EMV of B = 12,000 + 21,000 = 33,000. EMV of C = 28,000 − 3,000 = 25,000. Act B is best at ₹33,000. Choosing C at ₹70,000 is a maximax approach that ignores probabilities.
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