Maxie Co sells pharmaceuticals and is about to launch a new product, Drug G onto the market. It needs to prepare its budget for the coming year and is trying to decide whether to launch the product at a price of $40 or $50 per unit.

The following information has been obtained from market research.

Notes. Variable production costs would be $15 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 $12 for all units produced. Advertising costs would be $800,000 per annum at a selling price of $40 and $870,000 at a selling price of $50. Fixed production costs would be $350,000.

(a) Calculate each of the six possible profit outcomes which could arise for Maxie Co in the coming year. (b) Calculate the expected value of profit for each of the two pricing options and recommend, on this basis, which option Maxie Co should choose. (c ) Briefly explain the maximin decision rule and the maximax decision rule. Identify which prices should be chosen by management if they use these rules to decide which prices to charge. (d) Discuss two factors that may give rise to uncertainty when setting budgets.