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7 expected monetary value may be defined as a the probability that each outcome will 4300351


7) Expected monetary value may be defined as:

A) the probability that each outcome will occur

B) the probability that each outcome will not occur

C) the weighted average of the outcomes with the probability of each outcome serving as the weight

D) the average of all possible outcomes


8) What would be the expected monetary value for the following data using the probability method?

ProbabilityCash Inflows






A) $40,000

B) $188,000

C) $106,000

D) $60,000

9) Lobster Liquidators will make $500,000 if the fishing season weather is good, $200,000 if the weather is fair, and would actually lose $50,000 if the weather is poor during the season. If the weather service gives a 40% probability of good weather, a 25% probability of fair weather, and a 35% probability of poor weather, what is the expected monetary value for Lobster Liquidators?             

A) $500,000

B) $232,500

C) $267,500

D) $200,000


Answer the following questions using the information below:


Patrick Ross has three booth rental options at the county fair where he plans to sell his new product. The booth rental options are:


Option 1:$1,000 fixed fee, or

Option 2:$750 fixed fee + 5% of all revenues generated at the fair, or

Option 3:20% of all revenues generated at the fair.


The product sells for $37.50 per unit. He is able to purchase the units for $12.50 each.


10) How many actions and events will a decision table contain?

A) 1 action and 3 events

B) 1 action and 6 events

C) 2 actions and 3 events

D) 3 actions and 6 events

11) Which option should Patrick choose to maximize income assuming there is a 40% probability that 70 units will be sold and a 60% probability that 40 units will be sold?

A) Option 1

B) Option 2

C) Option 3

D) All options maximize income equally.


12) There is no unique breakeven point when there are multiple cost drivers.


13) When there are multiple cost drivers the simple CVP formula of Q = (FC + OI)/CMU can still be used.


14) An expected value is the weighted average of the outcomes, with the probability of each outcome serving as the weight.

15) Produce Company needs to know the pounds of apples to have on hand each day. Each pound of apples costs $0.50 and can be sold for $0.80. Unsold apples are worthless at the end of the day. The following demands were found after studying the last six months' sales:


200 pounds of apples 30% of the time

300 pounds of apples 40% of the time

400 pounds of apples 30% of the time



Determine whether Produce Company should order 200, 300, or 400 pounds of apples.



Ordered         Demand Probability         Expected Value








Demand example: 300 units ordered; but demand is either 300 or 400 units:

($0.80 × 300) – ($0.50 × 300) = $90

Expected value example:

Order 400: ($(40) × 0.30) + ($40 × 0.40) + ($120 × 0.30) = $40

Answer: Should order 300 pounds of apples to maximize profit.

16) Lauren had been a manager of a major hotel chain for 15 years. Due to a hotel owner's illness, Lauren was offered the opportunity to purchase a hotel near a vacation area she had often visited.  After obtaining a lawyer and an accountant to assist her, Lauren did an analysis of the business and evaluated several contingencies relating to various scenarios that might occur based on economic and weather season circumstances. Since the expected monetary value of the various scenarios was much higher than the price of the hotel, she decided to purchase the hotel. She resigned her position, obtained a loan, and purchased the hotel. The following year, there was a severe economic downturn and also a very bad weather season that reduced the number of guests and also caused a resulting mold situation in the hotel building that required expensive repair work. Lauren ran short of cash, became emotionally distraught, and eventually had to sell the hotel at a significant loss. Was it a bad decision for her to purchase the hotel instead of keeping her other managerial position?  Explain.




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