XVZ Ltd is introducing a new product. The company has carried out some market research studies and analysed the selling prices of similar types of competitive products that are currently being sold.

The information suggests that a selling price of £18, £19 or £20 is appropriate. The company intends to hire machinery to manufacture the product at a cost of £200000 per annum, but if annual production is in excess of 60 000 units then additional machinery will have to be hired at a cost of

£8000 per annum. The variable cost is expected to be either £5 or ~6 per unit produced, depending on the outcome of future wage negotiations. The market research department has produced the following estimate of sales demand for each possible selling price. These estimates are based on pessimistic, most likely and optimistic forecasts, and subjective probabilities have been attached to them. The estimates are as follows:

The probabilities for the unit variable cost are 0.6 for a variable cost of £5 per unit and 0.4 for a variable cost of £6 per unit. The company has also committed itself to an advertising contract of £40000 per annum.

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Pessimistic Most likely Optimistic 18 19 20 Units Units Units sold Probability sold Probability sold Probability 70000 0.3 80000 90000 0.2 222 60000 0.1 30000 0.4 0.5 70 000 0.7 60 000 0.5 90000 0.2 70000 0.1