Question 2

Sydney Ltd manufactures and sells a single product in NSW. Management of the company believes that some changes in marketing and distribution should be made in cope with the changing business environment. Owing to some uncertainties in the business environment, the sales price and sales demand are forecasted as follows:

Price Probability ($)

31 0.2

32 0.35

33 0.45

Demand Probability (000 units)

45 0.4

50 0.5

55 0.1

If the changes are made, management of the company estimates that the variable cost is $20 per unit and fixed costs are $330,000. Management of the company has designed the following tables in order to calculate the expected value of the contribution of the product if some changes are made.

Table 1: Contribution generated ($000)

Price Demand 45 ($) (000 units)

31 A

32 D

33 G

Table 2: Joint probability table

Price Probability ($)

31 0.2

32 0.35

33 0.45

Demand 50 (000 units) B

E

H

Demand 45 (000 units) 0.4

Demand 55 (000 units) C

F

I

J M P

Demand 50 (000 units) 0.5

K N q

Demand 50 (000 units) T

W

Z

Demand 55 (000 units) 0.1

L O R

Table 3: Expected value of contribution ($000)

Price Demand 45 ($) (000 units)

31 S

32 V

33 Y

Required

Demand 55 (000 units) U

X

AA

Calculate the all figures (from A to AA) in the above Tables 1, 2 and 3 and find out the expected value of profit .( 10 marks)