Question

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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  • CreatedJanuary 26, 2015
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