Icenice Ltd manufactures and sells ice lollies. Its bestselling product the Icetwist has a production capacity of 3,600 units per month. The direct costs of one unit of Icetwist are 60 pence and its usual selling price per unit is £1; however as a seasonal product, the sales quantities are hard to predict. Based on weather forecasts the expected sales for the coming month are as follows:

Demand	Probability
1,200 units	0.2
1,500 units	0.3
2,100 units	0.4
2,700 units	0.1

The Sales Director of Icenice has been in negotiations with a potential customer who is willing to enter a contract to purchase a fixed quantity of Icetwist for 90 pence per unit. The customer is considering whether to order a fixed monthly quantity of 900, 1500, 2100 or 2400 units.

Required

a)       Calculate all possible contribution levels that could result from accepting this contract.

b)       Recommend which quantity the Sales Director should agree to supply on the fixed contract based on each of the following; expected value, maximax, maximin, minimax regret.

c)       Critically evaluate the limitations of using the calculations in parts 1 and 2 above for decision making and discuss two non-financial considerations that could be accounted for in addition to the financial solutions presented above.

Answer rating: 100% (QA)

ANSWER Q3 a TABLE SHOWING CONTRIBUTION FROM DIFFERENT LEVELS OF CONTRACT UNITS SALE UNITSA 900 1500 2100 2400 SELLING PRICE PER UNIT 100 PENCE 100 PEN... View the full answer