Question

‍You have just decided to add a new line to you manufacturing plant. Compute the expected loss/profit from the addition if you estimate the following:

i. There is a 50% chance that profit will increase by $100,000
ii. There is a 30% chance that profit will remain the same
iii. There is a 20% chance that profit will decrease by $15,000

Answer 1

The expected profit from the addition is $47,000

Step-by-step explanation:

Total Addition can be calculated by netting expected values of all situations as follow:

Expected value = %Chance x additional Profit/loss

i Expected profit = 50% x $100,000 = $50,000

ii Expected profit = 30% x $0 = $0 (Profit is same there is no addition)

iii Expected profit = 20% x ($15,000) = ($3,000)

The expected profit from the addition = $50,000 + ($3,000) = $47,000