### Expected Value with Prob

CPA Exam Forum BEC BEC Review Expected Value with Prob

This topic contains 4 replies, has 2 voices, and was last updated by  cpa_man 4 years, 3 months ago.

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• #178140

cpa_man
Member

Guys I am sure a lot of you have seen the below example:

Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs \$2 and sells for \$3 through regular stores. Any boxes not sold through regular stores are sold through Dough's thrift store for \$1. Dough assigns the following probabilities to selling additional boxes:

60 .6

100 .4

What is the expected value of Dough's decision to buy 100 additional boxes of muffins?

a. \$28

b. \$40

c. \$52

d. \$68

Ans:

Since Dough earns \$1 profit per box (\$3 sales price – \$2 cost), this represents \$76 (76 boxes x \$1 profit) of additional

profit. However, the twenty-four unsold boxes would have to be sold at a \$1 loss per box (\$1 sales price· . \$2 cost) through Dough's thrift store. Therefore, the expected value of the decision to purchase the additional muffins is \$52 net profit (\$76 profit – \$24 loss).

My question is why are we considering 76 boxes? and 24 boxes? I am confused actly rather wrong, when I think:

Step 1: EV of selling 60% of the boxes =[.6 x60 boxes x \$1 ]

Step 2: EV of selling 40% of the boxes =[.4 x40 boxes x \$1 ] —-this is what i initially thought, which is wrong.

Step 3: EV of selling 100% of the boxes =[.4 x100 boxes x \$1 ]

Can any one please answer why step 2 is wrong. It will help me understand this question. Thank you all.

#424514

dutkas
Member

Think of it this way,

In this particular question there is a 40% chance that ALL 100 boxes will be sold at a profit = \$40 of profit (.4*100)

There is also a 60% chance only 60 of the 100 will be sold at a profit. = 36\$ of profit (.6*60)

There is also a 60%(NOT 40%) chance that 40 of the 100 will be sold at a loss = 24\$ of loss (.6*40)

\$40 + 36 – 24 = 52

Your error was that you though there was a 40% chance to sell 40 boxes rather than 60%. I think… let me know if this helps.

#424515

cpa_man
Member

thanks dutkas, um taking bec on 2nd of july, and still not sure how to prepare for communication 🙁 how r u preparing?

#424516

dutkas
Member

I am just reviewing all of my multiple choice understanding the underlying meaning behind everything whether I get it right or wrong. I have always been a good writer so in terms of the format, I am not worried. I am worried that I will be given topics I can not fully develop. I have a strong understanding of BEC so hopefully I have maximized my chances at drawing a favorable subject! We shall see.

#424517

cpa_man
Member

best of luck bro!

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