MA – Aug 2022 – L2 – Q5b – Decision making techniques

This question calculates the monthly expected profit of running a canteen service using demand and variable cost probabilities

Question

Aunty Dede Caterers runs a canteen service at a University and the following estimated information is available for the sale of lunch packs:

Monthly Demand	Probability	Variable Cost per Pack (GH¢)	Probability
2,000 packs	0.3	GH¢30	0.5
2,500 packs	0.5	GH¢15	0.4
3,000 packs	0.2	GH¢20	0.1

The probabilities of demand and the probabilities of variable cost are mutually exclusive. The selling price of a lunch pack is GH¢50, and the University charges a monthly fee of GH¢1,200 for the usage of the cafeteria.

Required:
Calculate the monthly expected profit of running the canteen.

Answer

Step 1: Expected Monthly Demand

Expected Monthly Demand=600+1,250+600=2,450 packs

Step 2: Expected Variable Cost per Pack

Expected Variable Cost per Pack=(GH¢30×0.5)+(GH¢15×0.4)+(GH¢20×0.1)

Expected Variable Cost per Pack=15+6+2=GH¢23

Step 3: Expected Revenue

Expected Revenue=2,450 packs×GH¢50=GH¢122,500

Step 4: Expected Total Variable Costs

Total Variable Costs=2,450 packs×GH¢23=GH¢56,350

Step 5: Calculate the Monthly Expected Profit

Expected Profit=Expected Revenue−Total Variable Costs−Fixed Costs

Expected Profit=GH¢122,500−GH¢56,350−GH¢1,200=GH¢64,950

Tags: Costing Techniques, Decision Making, Expected Profit, Probability Analysis
Level: Level 2

Topic: Decision making techniques
Series: AUG 2022

Uploader: Kwame Aikins