Ariba Ltd produces a range of ground coffee for commercial use within cafés and restaurants. The company is looking to extend its business and is considering bidding for the franchise to operate a coffee bar within a local shopping centre.
Research suggests that over the one-year period of the franchise, income and costs are likely to be:
|
Sales Revenue (£)
|
Probability
|
|
30,000
|
0.1
|
|
40,000
|
0.2
|
|
60,000
|
0.4
|
|
70,000
|
0.2
|
|
80,000
|
0.1
|
|
Variable Costs £
|
Probability
|
|
12,000
|
0.2
|
|
20,000
|
0.5
|
|
28,000
|
0.3
|
|
|
|
|
|
|
The franchise licence cost will be £24,000.
Required
(a) Prepare a probability distribution table and using this table, calculate the probability of:
(1) Not making a loss;
(2) Earning a profit of at least £8,000
(b) Discuss the limitation of the expected value approach to assessing the risks of taking on the franchise. What other factors should be considered by Ariba Ltd?