A company must choose between two machines H and L. Machine H is suited to higher levels of demand having high fixed costs but low unit variable costs, whereas machine L is suited to lower levels of demand having lower fixed costs but higher unit variable costs.

The estimated probability for low demand is 0.40 and for high demand is 0.60

The estimated profits for each machine are summarised below:

Low Demand High Demand

Probability 0.40 0.60

Machine L 120,000 175,000

Machine H 12,000 215,000

Required:

1. Calculate the expected value of profits generated by each machine and hence recommend which one should be chosen

1. If the company can employ a firm of consultants who would be able to provide a perfect prediction of actual demand how much should the company be prepared to pay for such information.

1. Using the information above explain what is meant by the maximin criterion and consequently which machine would be chosen if this criterion were to be adopted.