Fancy Flowers Ltd is considering how many bouquets of flowers it will need at its stall at a local arts festival that is running for a few weeks. Due to supplier issues, it must choose in advance whether to prepare 200, 300 or 400 bouquets per day. Demand for bouquets can be 200, 300 or 400 per day at the festival. Any flowers not sold on the day will have to be thrown away.

The price charged per bouquet is £20, and the variable cost is £8 per bouquet. If the demand for bouquets exceeds the number of bouquets taken to the festival, then customers will have to be turned away. Fancy Flowers Ltd estimates that if this situation arises, it would cost the company £200 in loss of goodwill, irrespective of the number of customers turned away (i.e. the loss would be £200 if 100 customers were disappointed or if 300 were disappointed).

Required:

a) Prepare a pay-off table showing the profits for Fancy Flowers Ltd at all combinations of the number of bouquets prepared and demanded in each day.

b) Showing clearly your method and calculations, recommend the number of bouquets that should be prepared in advance using the following decision-making criteria:

(i) Maximax

(ii) Maximin

(iii) Minimax regret

c).

(i) Identify the additional information that would be required to calculate the expected demand for bouquets that Fancy Flowers Ltd may face each day, and describe how this calculation would be done.

(ii) Discuss TWO (2) benefits of the use of the expected value technique as a decision-making basis in the situation facing Fancy Flowers Ltd.

Answer rating: 100% (QA)

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