MANAGEMENT UNIERSITY OF

AFRICA

NAME: EMILLY MUMBI KARANJA

ADMISSION NO:
ODLBML/28/01416/3/22

UNIT NAME: MANAGEMENT

ACCOUNTING

UNIT CODE: BML 108

CONTINUES ASSIGNMENT TEST

LECTURES NAME: MWAKA KITUU

JANUARY-APRIL 2024
J&J Company’s managers are in a dilemma on what would be the best price to set for its single
product. There are three possible demand conditions that would affect product’s sales which are
Best possible, Most likely or Worst possible. Three alternative selling prices have been identified
for the Company’s product, which are $ 16, $ 18, and $ 22 if the demand conditions happen to be
Best possible, Most likely and Worst possible respectively.

The table below shows the number of units of the product that can be sold within a particular
period given the various demand conditions and the various alternative selling prices:
Alternative Selling Prices

Demand conditions $ 10 $ 12 $ 14

Best possible 8,000 7,000 4,000

Most likely 6,000 4,000 2,000

Worst possible 4,000 2,000 1,000

The variable cost per unit of product is $ 6 while the total fixed cost for the period is $ 15,000.

The probabilities of the states of demand are 0.2, 0.5, and 0.3 for Best possible, Most likely, and
Worst possible demand conditions respectively.

Required:

Using proper evaluation, determine the best selling price to set for the Company’s product
under each of the following methods:

a) Maximax criterion (3 Marks)

b) Maximin criterion (3 Marks)

c) Minimax criterion (3 Marks)

d) Expected Monetary Value (EMV) (3 Marks)

e) Expected Opportunity Loss (EOL) (3 Marks)

a) Maximax Criterion:
 Aims for the maximum possible profit regardless of demand probability.

For each price, calculate the maximum attainable profit under each demand
scenario:

$16: 8,000 units * ($16 - $6) = $80,000 (Best)

$18: 6,000 units * ($18 - $6) = $72,000 (Most Likely)

$22: 4,000 units * ($22 - $6) = $64,000 (Worst)

Choose the price with the highest maximum profit: $16 with $80,000.

b) Maximin Criterion:

Aims for the minimum profit that is guaranteed under the worst-case demand
scenario.

For each price, calculate the profit under the Worst demand:

$16: 4,000 units * ($16 - $6) - $15,000 = $37,000

$18: 2,000 units * ($18 - $6) - $15,000 = $9,000

$22: 1,000 units * ($22 - $6) - $15,000 = -$5,000

Choose the price with the highest minimum profit: $16 with $37,000.

c) Minimax Regret Criterion:

Aims to minimize the maximum potential regret (opportunity loss) associated

with each price choice.

For each price, calculate the opportunity loss for each demand scenario
compared to the best possible profit under that scenario:

$16: Best: $0, Most Likely: $8,000 * ($18 - $16) = $16,000, Worst: $4,000 * ($22 -
$16) = $24,000

$18: Best: $16,000 * ($22 - $18) = $64,000, Most Likely: $0, Worst: $2,000 * ($22
- $18) = $8,000

$22: Best: $8,000 * ($22 - $16) = $48,000, Most Likely: $4,000 * ($22 - $18) =
$16,000, Worst: $0
 Choose the price with the minimum maximum regret: $18 with $64,000.

d) Expected Monetary Value (EMV):

Considers both profits and demand probabilities.

For each price, calculate the weighted average profit across all demand
scenarios:

$16: ($80,000 * 0.2) + ($48,000 * 0.5) + ($37,000 * 0.3) = $52,300

$18: ($64,000 * 0.2) + ($54,000 * 0.5) + ($9,000 * 0.3) = $45,900

$22: ($48,000 * 0.2) + ($42,000 * 0.5) + (-$5,000 * 0.3) = $30,300

Choose the price with the highest EMV: $16 with

e) Expected Opportunity Loss (EOL)

Expected profit for $10 selling price:

Best possible demand: (8,000 * ($10 - $6)) = $32,000

Most likely demand: (6,000 * ($10 - $6)) = $24,000

Worst possible demand: (4,000 * ($10 - $6)) = $16,000

Total expected profit: (0.2 * $32,000) + (0.5 * $24,000) + (0.3 * $16,000) = $25,600

Expected profit for $12 selling price:

Best possible demand: (7,000 * ($12 - $6)) = $42,000

Most likely demand: (4,000 * ($12 - $6)) = $24,000

Worst possible demand: (2,000 * ($12 - $6)) = $12,000

Total expected profit: (0.2 * $42,000) + (0.5 * $24,000) + (0.3 * $12,000) = $27,600

Expected profit for $14 selling price:

Best possible demand: (4,000 * ($14 - $6)) = $32,000

Most likely demand: (2,000 * ($14 - $6)) = $16,000

Worst possible demand: (1,000 * ($14 - $6)) = $8,000

Total expected profit: (0.2 * $32,000) + (0.5 * $16,000) + (0.3 * $8,000) = $19,200
Next, let's calculate the expected opportunity loss for each selling price:

Expected opportunity loss for $10 selling price:

EOL = $25,600 - $15,000 = $10,600

Expected opportunity loss for $12 selling price:

EOL = $27,600 - $15,000 = $12,600

Expected opportunity loss for $14 selling price:

EOL = $19,200 - $15,000 = $4,200

Finally, compare the expected opportunity losses and choose the selling price with
the lowest EOL:

$14 selling price has the lowest EOL of $4,200. Therefore, the best selling price
to set for the Company’s product under the Expected Opportunity Loss method is
$14.