Risk and Decision Making Uncertainty and Risk - Payoff Tables Past ACCA Question - Cement Co. Cement Co is a company specialising in the manufacture of cement, a product used in the building industry. The company has found that when weather conditions are good, the demand for cement increases since more building work is able to take place. Last year the weather was so good and the demand for cement so great that Cement Co was unable to meet demand. Cement Co is now trying to work out the level of cement production for the coming year in order to maximise profits. The company does not want to miss out on the opportunity to eam large profits by running out of cement again. However, it doesn't want to be left with large quantities of the product unsold at the end of the year, since it deteriorates quickly and then has to be disposed of. The company has received the following estimates about the probable weather conditions and corresponding demand levels for the coming year: Weather Probability Demand Good 25% 350.000 bags Average 45% 280.000 bags Poor 30% 200,000 bags Each bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has to be disposed of at a cost of $0-50 per bag. Cement Co has decided to produce at one of the three levels of production to match forecast demand. It now has to decide which level of cement production to select Required: (a) Construct a pay-off table to show all the possible profit outcomes. (8 marks) (b) Decide the level of production the company should choose based upon the following decision rules: i Maximin Maximax iii. Expected value (6 marks) (c) Describe the maximin and expected value decision rules, explaining when they might be used and the attitudes of the decision makers who might use them (6 marks (20 marks 26