Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You are trying to decide whether to open a new restaurant, so you are uncertain about what your annual revenues and costs might be.

 

You are trying to decide whether to open a new restaurant, so you are uncertain about what your annual revenues and costs might be. You estimate that there is a 0.25, 0.60, and 0.15 probability the new restaurant will generate $500, $300, or $200 thousand in annual revenue. Alternatively, you estimate there is a 0.4 and 0.6 probability that your operating costs will be $350 or $150 thousand. This information is used to construct the probability distribution of profits below. Revenue Value ($1,000) 500 300 200 500 300 200 Prob. 0.25 0.60 0.15 0.25 0.60 0.15 Operating Cost Value ($1,000) 350 350 350 150 150 150 Prob. 0.4 0.4 0.4 0.6 0.6 0.6 Profit Value ($1,000) 500 350 150 300 350-50 200 350-150 500 150 350 150 300 150 200-150=50 Prob. 0.25 x 0.4 0.60 x 0.4 0.15 x 0.4 0.25 x 0.6 0.60 x 0.6 0.15 x 0.6 0.10 0.24 0.06 0.15 0.36 0.09 a. Use the probability distribution in this table to calculate the restaurants annual expected profit. Based on the expected value criterion, should you open this restaurant? (10 points)

Step by Step Solution

3.42 Rating (155 Votes )

There are 3 Steps involved in it

Step: 1

Expected value formula N Pi xi ... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Managerial Accounting

Authors: Karen W. Braun, Wendy M. Tietz

4th edition

978-0133428469, 013342846X, 133428370, 978-0133428377

More Books

Students also viewed these Accounting questions