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Office chair Chair Co has also developed a new type of office chair and management is trying to formulate a budget for this product. They have decided to match the production level to demand, however, demand for this chair is uncertain.
Management have collected the following information:
Demand (units)
Probability
Worst possible outcome
10,000
0.3
Most likely outcome
22,000
0.5
Best possible outcome
35,000
0.2
The selling price per unit is $25. The variable cost per unit is $8 for any production level up to 25,000 units. If the production level is higher than 25,000 units then the variable cost per unit will decrease by 10% and this reduction will apply to all the units produced at that level.
Total fixed costs are estimated to be $75,000.
Chair Co uses cost-plus pricing when setting prices for its products.
not sure how to work this out
Using an expected value approach, what is the expected budgeted contribution of the office chairs (to the nearest whole $)?
$362,600
10,000/ 17.00/ 170,000/ 0.3 /51,000
22,000/ 17.00/ 374,000/ 0.5/187,000
35,000/ 17.80/ 623,000/ 0.2 /124,600then sum up the end figures (51,000+187,000+124,600)
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