Appendix, CVP under uncertainty. (R. Jaedicke and A. Robichek, adapted) (15 minutes) Bomuldstaft, AS, 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 EUR 400,000. The products have the same selling price (EUR 10) and the same variable costs per unit (EUR 8).

Management, after studying past experience with similar products, has prepared the following probability distribution:  lop1

REQUIRED 1. What is the breakeven point for each product?
2. Which product should be chosen, assuming the objective is to maximise expected operating profit? 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 outlined in the problem. Which product should be chosen?
Why? What benefits are available to management from having the complete probability distribution instead of just an expected value?
Intermediate level

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EVENT (UNITS DEMANDED) EMERALD GREEN UMBRELLA PROBABILITY FOR 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 0.1 0.1 1.0 1.0