Fly Co sells electronic equipment and is about to launch a new product onto the market. The company needs to prepare its budget for the coming year, and is trying to decide whether to launch the new product at a selling price of 36 or 45 per unit. The following information has been obtained from market research: Selling Price per unit 36 Selling Price per unit 45 Probability Sales volume Probability Sales volume 05 120,000 04 108,000 04 110,000 02 100,000 01 140,000 04 94,000

Notes 1) Variable production costs would be 13 per unit for production volumes up to and including 100,000 units each year. However, if production exceeds 100,000 units each year, the variable production cost per unit would fall to 11 for all units produced.

2) Advertising costs would be 900,000 per annum at a selling price of 36 and 970,000 per annum at a price of 45.

3) Fixed production costs would be 550,000 per annum.

Required: a) Calculate each of the six possible profit outcomes which could arise for Fly Co in the coming year. (12 marks)

b) Calculate the expected value of profit for each of the two price options and recommend, on this basis, which option Fly Co would choose. (4 marks)