Mylo runs a cafeteria situated on the ground floor of a large corporate office block. Each of the five floors of the building are occupied and there are in total 1,240 employees. Mylo sells lunches and snacks in the cafeteria. The lunch menu is freshly prepared each morning and Mylo has to decide how many meals to make each day. As the office block is located in the city centre, there are several other places situated around the building where staff can buy their lunches and the level of demand for lunches in the cafeteria is uncertain.
Mylo has analysed daily sales over the previous six months and established four possible demand levels and their associated probabilities. He has produced the following payoff table to show the daily profits which could be earned from the lunch sales in the cafeteria:

A. If Mylo adopts a maximin approach to decision-making, which daily supply level will he choose?
(a) 450
(b) 620
(c) 775
(d) 960

B. If Mylo adopts a minimax regret approach to decision-making, which daily supply level will he choose?
(a) 450
(b) 620
(c) 775
(d) 960

C. Which of the following statements is/are true if Mylo chooses to use expected values to assist in his decision-making regarding the number of lunches to be provided?
1 Mylo would be considered to be taking a defensive and conservative approach to his decision.
2 Expected values will ignore any variability which could occur across the range of possible outcomes.
3 Expected values will not take into account the likelihood of the different outcomes occurring.
4 Expected values can be applied by Mylo as he is evaluating a decision which occurs many times over.
(a) 1, 2 and 3
(b) 2 and 4
(c) 1 and 3
(d) 4 only

D. The human resources department has offered to undertake some research to help Mylo to predict the number of employees who will require lunch in the cafeteria each day. This information will allow Mylo to prepare an accurate number of lunches each day.
What is the maximum amount which Mylo would be willing to pay for this information (to the nearest whole $)?
(a) $191
(b) $359
(c) $478
(d) $175

E. Mylo is now considering investing in a speciality coffee machine. He has estimated the following daily results for the new machine:

Which of the following statements are true regarding the sensitivity of this investment?
1 The investment is more sensitive to a change in sales volume that sales price.
2 If variable costs increase by 44 per cent the investment will make a loss.
3 The investment’s sensitivity to incremental fixed costs is 550 per cent.
4 The margin of safety is 84.6 per cent.
(a) 1, 2 and 3
(b) 2 and 4
(c) 1, 3 and 4
(d) 3 and 4 only

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Demand level 420 620 775 960 450 Probability ($) 0-15 0-30 0-40 0-15 Supply level 620 ($) 775 ($) 960 ($) 1,170 980 810 740 1,170 1,612 1,395 1,290 1,170 1,612 2,015 1,785 1,170 1,612 2,015 2,496