Shifters Haulage (SH) is considering changing some of the vans it uses to transport crates for customers. The new vans come in three sizes; small, medium and large. SH is unsure about which type to buy. The capacity is 100 crates for the small van, 150 for the medium van and 200 for the large van.

Demand for crates varies and can be either 120 or 190 crates per period, with the probability of the higher demand figure being 0.6. The sale price per crate is \($10\) and the variable cost \($4\) per crate for all van sizes subject to the fact that if the capacity of the van is greater than the demand for crates in a period then the variable cost will be lower by 10% to allow for the fact that the vans will be partly empty when transporting crates.SH is concerned that if the demand for crates exceeds the capacity of the vans then customers will have to be turned away.SH estimates that in this case goodwill of \($100\) would be charged against profits per period to allow for lost future sales regardless of the number of customers that are turned away.

Depreciation charged would be \($200\) per period for the small, \($300\) for the medium and \($400\) for the large van.SH has in the past been very aggressive in its decision-making, pressing ahead with rapid growth strategies. However, its managers have recently grown more cautious as the business has become more competitive.

Required:

(a) Explain the principles behind the maximax, maximin and expected value criteria that are sometimes used to make decisions in uncertain situations.

(b) Prepare a profits table showing the SIX possible profit figures per period.

(c) Using your profit table from (b) above discuss which type of van SH should buy taking into consideration the possible risk attitudes of the managers.

(d) Describe THREE methods other than those mentioned in (a) above, which businesses can use to analyze and assess the risk that exists in its decision-making.