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Tree Co is considering employing a sales manager. Market research has shown that a good
sales manager can increase profit by 30%, an average one by 20% and a poor one by 10%.
Experience has shown that the company has attracted a good sales manager 35% of the
time, an average one 45% of the time and a poor one 20% of the time. The company’s
normal profits are $180,000 per annum and the sales manager’s salary would be $40,000
Based on the expected value criterion, which of the following represents the correct
advice which Tree Co should be given?
A Do not employ a sales manager as profits would be expected to fall by $1,300
B Employ a sales manager as profits will increase by $38,700
C Employ a sales manager as profits are expected to increase by $100
D Do not employ a sales manager as profits are expected to fall by $39,900
i dont know how to solve this question
The profit (before the cost of the sales manager) will increase by either 54,000 with a probability of 0.35, or by 36,000 with a probability of 0.45, or by 18,000 with a probability of 0.20.
Calculate the expected increase in the normal way and compare with the extra cost of the sales manager of 40,000.