How many sausages should John Bull purchase

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Reference no: EM132405765

Questions -

(1) The table below is a probability distribution of potential quantity of sales of Gourmet sausages during a game. John Bull has to pay a concession fee of $200 to receive a permit to sell sausages at the stadium. Gourmet sausages can be bought at wholesale for $2.00 and sold in the stadium for $3.50 each. Unsold sausages cannot be returned. Given the probability distribution:

a. How many sausages should John Bull expect to sell?

b. How many sausages should John Bull purchase? Gourmet sausages can only be purchased in batches of 50 units as indicated in the probability distribution.

SALES	Probability
100	0.05
150	0.06
200	0.10
250	0.20
300	0.25
350	0.30
400	0.04

(2) John approached you with a business proposition to invest in a project. The Annual Cash Flows (CF_t) are uncertain. However, the following probability distribution provides you with expectations:

Probable Cash Flow (CF)	Probability P(CF)
$80,000	.25
$120,000	.65
$150,000	.10

a. What is the expected Annual Cash Flow from this project?

b. If the cash flows are expected for three years and the current rate of return on investments is 9.5%, what is the expected Present Value of the projected cash flows?

c. Would you agree to invest $275,000 in this project? Explain!

(3) Your company is considering two products for a new market. The probability distribution for the demand for the two products is presented in the table below. Q(A) and Q(B) are the possible quantities of each product that could be sold. P(A) and P(B) are the probabilities of selling the corresponding quantities.

Q(A)	P(A)	Q(B)	P(B)
10000	0.15	10000	0.25
30000	0.20	30000	0.30
50000	0.40	50000	0.35
60000	0.25	60000	0.15

You have the following additional information: The projected selling price for DESIGN "A" is $60. The fixed cost of its production is$75,000. Its variable cost is $35 a unit. The selling price for DESIGN "B" is $80. Its fixed cost of production is $110,000. Variable cost of production is $48 a unit.

Which project is expected to be more profitable?

Reference no: EM132405765

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