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CVP under uncertainty: discrete probability distribution for sales
Management is considering producing one of two proposed new products, Product A or Product B. Both products have the same unit contribution margin of $4 and the same incremental fixed costs of $400 000 per annum. Sales volumes, however, are uncertain, but the following probability distributions of sales have been estimated:
Sales
Units
Probability Distribution
Product A
Product B
50 000
0.1
0.2
75 000
0.3
100 000
125 000
150 000
225 000
0
Required:
(a) Calculate the breakeven sales units for each product. (b) Calculate the expected sales for each product.
(c) Calculate the expected profit for each product.
(d) What is the probability of making a loss on (i) Product A? (ii) Product B? (e) What is the probability of making a profit on (i) Product A? (ii) ProductB?
(f) What is the maximum profit possible on each product?
(g) Would management be indifferent between selecting either product?
Explain your answer.
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