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Risk and Uncertainty – Maximin – ACCA Performance Management (PM)

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  1. Hi John

    Thanks for these lectures.. do we assume in this question that John has to sign the contract for one of the quantities could he also be better off not signing the contract at all and selling it outside.

    My question is can we add a row where the contract size is 0 ?

  2. Dear John,
    Why we termed the Maximin a Risk Avoider approach. Just because we selected the best from worst outcomes?

    What if we have selected from best outcomes? Would it have increased the risk? if yes, how?

    • It is a risk avoider because with Maximin there is no risk of doing worst.

      Selecting the best of the best outcomes is maximax, and as I explain in my lectures, this is a risk seeker approach because although you might end up with the best outcome there is a risk of doing a lot worse.

      • Dear John,

        Thank you for all the content, i’m struggling to understand how you arrived at the answers for the table in part (a) of the question. I do not understand it.

        Thank you.

      • I have watched again like you advised, but i still want to know how you arrived at the prices for the profit table. Thank you.

      • The question (I assume you have downloaded the lecture notes) says that each unit costs $6 to make.
        The normal selling price is $11, and so each ‘normal’ sales gives a profit of $5 per unit.
        Those sold to the customer on the contract are sold for $9 and so they give a profit of $3 per unit.

        To get the total profit we multiply the normal sales units by $6 each, the contact sale units by $3 each, and then add the two together.

    • It is a risk avoider because with Maximin there is no risk of doing worst.

      Selecting the best of the best outcomes is maximax, and as I explain in my lectures, this is a risk seeker approach because although you might end up with the best outcome there is a risk of getting a lot worse.

    • Yes they are in the syllabus and you can find free lectures on both of them in the Paper MA section because they are revision from Paper MA.

      The could be part of a Section C question, but it is very unlikely for either of them to be a whole question in Section C.

      • I don鈥檛 follow, into which chapter questions do they incorporate them into? And is the formulas for them given?

      • I am not sure which bit you do not follow.

        The regression formula are given – the formula sheet provided in the exam is printed in our free lecture notes.

    • You won’t be required to prepare a full profit table, but you might need to do a small one for your own workings. Alternatively you might be given a profit table and be asked to use one or more of the decision making criteria.

    • The answer/profit is neither of both but $3500 as per the lecture and my understanding, see below:
      contract 500*$3=1500 ( $3 is used as profit from contract is $9 minus $6) Demand 400 *$5=$2000 ($5 is used as profit from demand is $11 minus$6). Therefore the total profit would be $3500 being $1500 +$2000.

      The only time $5000 profit was made for contract amount of 500 was when original demand was both 700 and 900. Additionally, you would want to be mindful of the limited capacity given in the question at 1200. In this case, you would have to reduce the 900 by 200 so as to stay within the limited capacity range. Why the reduce the 900 and not the 500?? In practical terms, any business man would want to honour a signed contract. In this case we assumed that John signed the contract and must honour it or else lega implications may take effect. Hope this helps.

  7. Sir in the above example for 900 units the total profit is calculated how since if we follow the same as for 400 500 and 700 units its coming out to be different as in 300X3 +900X5 =5400 , 500X3+900X5=6000….. and so on ….Request you to explain for 900 units only ….

    • Do note that in the question it says that the maximum production is 1,200 units.

      We must sell whatever contract we have agreed and so the normal demand can only have what is left.

      If the contract is for 300 units then we are able to sell 900 to the normal demand.
      If the contract is for 500, then we are only able to sell 700 to normal demand (1200 – 500).
      If the contract is for 700, then we can only sell 500 to normal demand (1200 – 700).
      If the contract is for 800, then we can only see 400 to normal demand (1200 – 800).

  8. Hello Sir, I am a little confused for the combination with contract 500 units and demand 700 units, their total is 1200 units and it is ok, but the profit is (500 x $3) + (700 x $5) = $5000

    • mmandangu:

      Each unit sold to normal customers gives a contribution of 11 – 6 = $5 per unit.
      Each unit sold to contract customers gives a contribution of 9 – 6 = $3 per unit.

      So….if, for example, they sell 300 units to contract customers and 500 units to normal customers, then the total contribution is (300 x $3) + (500 x $5) = $3,400.

      It is the same workings for all of them.
      (I assume that you did download the free lectures notes before watching the lecture, so you have the example in front of you?)

  12. Sipho: It depends on the wording of the question, and every question is different in the exam. You have to decide from the wording which is uncertain and which is the choice.
    You can only get good at this by practicing all of the decision making under uncertainty questions in your Revision Kit.

    • Hi John,
      I find it hard to find which is our choice, which is uncertain. In this Chapter 10 example 1, the demand is “uncertain” with provided probability in the question. I am confused because I thought with known probabilities, it is defined as “risk”. Uncertainty, by definition, is not measurable, not quantified. Please explain to me in simple words or example if possible. Thank you so much!!!!

      • You are correct about the distinction between risk and uncertainty. However in the exam, the uncertain item is the one for which we are given probabilities. It is only for expected values that the probabilities are relevant (and the risk can be measured although that is not examinable). The other ways of making decisions ignore the probabilities and treat them as being uncertain.

  13. good day John. i have a question on the profit table. is it always the case that we first supply the quantity for the contract then the balance for normal customers?or it can be the other way round (ie supply normal customers first then the balance to the contract to reach max1200units)

  14. is the opentution lectures is enough to go ahead for exams or it is needed to purchase the bpp material or revision kits for coming exams of march …

    Iam new to ACCA so we can attempt the one subject paper at a time or go for two subject papers …

    thanks

    • I will answer you, but in future please ask this sort of question in the Ask the Tutor Forum and not as a comment on a specific lecture.

      The lectures cover everything you need to study in order to pass the exams well.

      However question practice is vital, and so you should buy a Revision Kit from one of the ACCA approved publishers (BPP or Kaplan) – they are full of past exam questions and other exam standard questions to practice. Apart from this you do not need any other books if you are watching the free lectures.

      You are allowed to attempt up to four papers at one sitting, but four is much too many because they are not easy exams. Many people do attempt two papers at the same sitting, but that really depends on how much time you have available for studying and how easy or difficult you are finding the studying.

  15. sir i have a doubt regarding the profit table … how u calculated this below table

    contract size 400 500 700 900
    300 2900 ? ? ?
    500 ?
    pls explain in detail the calculation u have done after in this table like how u arrived on first table of 300 .. 2900 and then 3400, 4400, 5400 and other table too . hope you solve the calculation doubt

  17. Sir, I am a bit confused regarding the Pay-off table we make. There is a row and a column. Either row or column of the table can be a decision that the company makes
    For example Make 400 or 500 or 600 units
    And either column or row of the table can be the actual units that would be sold of the company.
    For example Sell 400 or 500 or 600 units.
    and than by taking into account both how many we MAKE and SELL we calculate the profit relating to that decision. Like if we Make 500 units and Sell 400 units than our profit at that side of the table will be calculated by 400*profit per unit right?

  18. Thanks for this presentation. However, my reservation is that the calculation of profits using the tabular approach is a time consuming process. The maximin approach to decision making is making decision based on the worst possible outcome that may occur. It is the maximum of the minimum worst outcome possible.

  19. Part a Ex1 , I got contract size 700 x 3 = 2100 + (700 x 5=3500) = 5600 not 4600 which you got..
    Please could you explain? I got different answers for 900 and 500, 900 and 700, 900 and 800, and 700 and 800.

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