Expected Value of Sales: Jackson, Inc., manufactures and distributes a line of toys. The company neglected to keep its doll house line current. As a result, sales have decreased to approximately 10,000 units per year from a previous high of 50,000 units. The doll house was recently redesigned and is considered by company officials to be comparable to its competitors' models. Joan Blocke, the sales manager, is not sure how many units can be sold next year, but she is willing to place probabilities on her estimates. Blocke's estimates of the number of units that can be sold during the next year and the related probabilities are as follows:

The units will sell for $20 each. The entire year's sales must be manufactured in one production run. If demand is greater than the number of units manufactured, sales will be lost. If demand is below supply, the extra units cannot be carried over to the next season and must be discarded. Production and distribution cost estimates are listed below.

The company must decide on the optimal size of the production run.

Required: Prepare a payoff table for the different sizes of production runs required to meet the four sales estimates prepared by Joan Blocke. If Jackson, Inc., relied solely on the expected monetary value approach to make decisions, what size of production run would be selected?

Transcribed Image Text:

Estimated Sales in Units 20,000 30,000 40,000 50,000 Probability .10 .40 282 .30 20