Final answer:
To maximize expected profit for your homemade pies, compare the likelihood of selling each additional pie against the cost of pies that might go unsold. If the additional profit is greater than the potential lost cost, make more pies. Aligning your production with expected demand and marginal costs is key to your decision.
Step-by-step explanation:
To determine if you should make more or less than 45 homemade pies to sell in order to maximize expected profit, you must consider your average sales, costs, and the potential for unsold goods. If you expect to sell on average 45 pies, making exactly that amount means you are matching expected demand without any waste. However, the decision to make more or fewer pies should be influenced by the estimated probability of selling each additional pie and the associated incremental profit or loss.
Each pie costs you $2.50 to make and sells for $4.50, giving you a profit of $2.00 per pie. Any unsold pie has no retail value and is donated. To maximize profit, you must weigh the likelihood of selling additional pies against the certainty of incurring costs for pies that go unsold. As long as the potential profit from selling an additional pie exceeds the cost incurred if it remains unsold, it is favorable to produce more. Conversely, if the likelihood of selling pies beyond the 45th decreases significantly, it becomes more prudent to avoid making more than the average expected sales.
The concept discussed here is similar to the principle of producing at the point where Price (P) equals Marginal Revenue (MR) and Marginal Cost (MC), as long as the price covers the average variable cost. This is important because it ensures that variable costs are covered and contributes to the payment of fixed costs, minimizing losses when profits cannot be achieved.