The managers of MGAF Specialty Products are considering shifting their product emphasis to create a new sales mix. The new sales mix has greater risk; the potential profits and losses are larger than under the current sales mix. The managers have gathered marketing and cost data and have run a computerized simulation of expected operating results under the current sales mix and under the proposed sales mix. Below are distributions of the income for each period based on 5,000 trials of the simulation.

REQUIRED
A. Which sales mix should the managers select assuming they are risk neutral?
B. Which sales mix should the managers select under each of the following decision rules?
Explain.
1. Minimize the maximum potential loss.
2. Minimize the probability of operating at less than breakeven.
3. Maximize the potential amount of income.
4. Maximize the probability of earning $20,000 or more each period.
5. Maximize the probability of earning $30,000 or more each period.
C. Identify possible reasons why one sales mix might be riskier than another.
D. Explain how the company’s risk appetite would affect the managers’ decisionrule.

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Current Sales Mix Proposed Sales Mix Range of Income Probability Range of Income Probability 1% 10,000) to (5,000) (30,000) to (20,000) (20,000) to (10,000) 6% (5,000) to (10,000) to 0 to 5,000 5,000 to 10,000 10,000 to 15,000 15,000 to 20,000 20,000 to 25,000 25,000 to 30,000 30,000 to 35,000 10 10 12 30 10 4 35,000 to 40,0002 0 to 10,000 10,000 to 20,000 20,000 to 30,000 30,000 to 40,000 40,000 to 50,000 50,000 to 60,000 60,000 to 70,000 42 16 4 2 100% 100%