Appendix, CVP under uncertainty. (R. Jaedicke and A. Robichek, adapted) The Jaro Company is considering two new colours for their umbrella products—emerald green and shocking pink. Either can be produced using present facilities. Each product requires an increase in annual fixed costs of $480,000. The products have the same selling price ($12) and the same variable costs per unit ($9.60).

Management, after studying past experience with similar products, has prepared the following probability distribution:

Probability for Event s Demanded)

Emerald Green Umbrella Shocking Pink Umbrella 50,000 0.0 0.1 100,000 0.1 0.1 200,000 0.2 0.1 300,000 0.4 0.2 400,000 0.2 0.4 500,000 01 01 1.0 1.0 Required 1. What is the breakeven point for each product?

2. Which product should be chosen, assuming that the objective is to maximize expected operating income? Why? Show your computations.

3. Suppose management is absolutely certain that 300,000 units of shocking pink will be sold, but it still faces the same uncertainty about the demand for emerald green as out¬
lined in the problem. Which product should be chosen? Why? What benefits are avail¬
able to management from having the complete probability distribution instead ofjust an expected value?