Expected Value with Prob

CPA Exam Forum BEC BEC Review Expected Value with Prob

This topic contains 4 replies, has 0 voices, and was last updated by  cpa_man 3 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:

    Additional sales Probability

    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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