A probabilistic budget
PIB has recently developed a new product, and is planning a marketing strategy for it. A choice must be made between selling the product at a unit price of either $15 or $17.
Estimated sales volumes are as follows.
At price of $15 per unit At price of $17 per unit Sales volume Probability Sales volume Probability
|
Units
|
|
Units
|
|
|
20,000
|
0.1
|
8,000
|
0.1
|
|
30,000
|
0.6
|
16,000
|
0.3
|
|
40,000
|
0.3
|
20,000
|
0.3
|
|
|
|
24,000
|
0.3
|
(a) Sales promotion costs would be $5,000 at a price of $15 and $12,000 at a price of $17.
(b) Material costs are $8 per unit.
(c) Labour and variable production overhead costs will be $5 per unit up to 30,000 units and $5.50 per unit for additional units.
(d) Fixed production costs will be $38,000.
The management of PIB wish to allow for the risk of each pricing decision before choosing $15 or $17 as the selling price.
Required
Determine which sales price would be preferred if the management selected the alternative which did the following.
(a) Minimised the worst possible outcome of profit.
(b) Maximised the best possible outcome of profit.