Doug is concerned with setting a correct production level. He can produce 1000 u

Question

Doug is concerned with setting a correct production level. He can produce 1000 units or 2000 units, and regardless of demand, will produce what he chooses, either 1000 or 2000 since he must produce this before realizing demand. Regardless of production, there is a 40% chance of high demand (2500 units) and a 25% chance of low demand (750 units) and a 35% chance of average demand (1200 units). Each unit costs $8.00 to produce and sells for $11. He can only sell the minimum of either demand or production (since he can't sell what he doesn't make and can't sell what isn't demanded).

Which production decision should he make if he wants to make sure that he doesn't lose money?

A.) 1000

B.) 2000

C.) Both Might Lose Money

D.) Neither Can Lose Money

Explanation / Answer

here for 1000 production decision ; minimum profit can occur when demand is 750.

therefore for demand =750 ; profit =11*750-8*1000=250 which is positive; hence for 1000 production decision he doesn't lose money.

for 2000 production decision ; minimum profit can occur when demand is 750.

therefore for demand =750 ; profit =11*750-8*2000=-7750 which is negative; hence for 2000 production decision he may lose money.

therefore option A is correct

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