CMA Intermediate · Management Accounting · Decision Theory
Sundaram Foods can launch a new snack. If demand is high (probability 0.4) profit is Rs 50 lakh; if demand is low (probability 0.6) the profit is Rs 10 lakh. The expected monetary value (EMV) of launching is:
The EMV is Rs 26 lakh, found by weighting each outcome by its probability: 0.4 times 50 plus 0.6 times 10. A simple average ignoring probabilities would wrongly give Rs 30 lakh.
- ARs 26 lakhCorrect
- BRs 30 lakh
- CRs 20 lakh
- DRs 60 lakh
Explanation
EMV = 0.4 x 50 + 0.6 x 10 = 20 + 6 = Rs 26 lakh. Rs 30 lakh is the simple average of the two outcomes, which ignores the probabilities. Rs 60 lakh just adds the outcomes.
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