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Hi ,
Can you please explain the following question below ? It was question 2 , in the specimen paper found on OT. Can you also please specify which part of the syllabus this belongs too ? I am slightly confused and I am struggling to find it in the course notes.
Cement Co is a company specialising in the manufacture of cement, a product used in the building industry. The
company has found that when weather conditions are good, the demand for cement increases since more building
work is able to take place. Cement Co is now trying to work out the level of cement production for the coming year
in order to maximise profits. The company has received the following estimates about the probable weather conditions
and corresponding demand levels for the coming year:Weather Probability Demand
Good 25% 350,000 bags
Average 45% 280,000 bags
Poor 30% 200,000 bagsEach bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has to be disposed
of at a cost of $0·50 per bag. Cement Co has decided to produce at one of the three levels of production to match
forecast demand. It now has to decide which level of cement production to select.
Required:
(a) Construct a pay-off table to show all the possible profit outcomes. (8 marks)
(b) Determine the level of cement production the company should choose, based on the decision rule of
maximin. Show your calculations clearly and justify your decision. (2 marks)Thank you in advance and I hope to hear from you soon 🙂
Kind Regards,
I cannot write up a full answer to the question (and the answer is available on the ACCA website anyway).
It is Chapter 10 of the Lecture Notes (although as always, there is no point in using the notes on their own – they are notes that go with the free lectures).
Thank you very much @John Moffat
Hi John,
ACCA didnt provide answer for profit derivation for demand option 350,000 bags under poor weather = $325,000. Could you pls show the calculation for this. Thank you for your guidance.
They make 350,000 so the cost is 350,000 x $4 = $1,400,000
They sell 200,000 so the revenue is 200,000 x $9 = $1,800,000
The remaining 150,000 have to be disposed of at a cost of 150,000 x $0.50 = $75,000
Therefore the profit is 1,800,000 – 1,400,000 – 75,000 = $325,000
You can find lectures working through the whole of this exam linked from the following page: https://opentuition.com/acca/pm/acca-performance-management-pm-revision-lectures/
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