Payoff Table – Specimen Exam Practice

Hi ,

I am struggling to answer the question below :

2 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 bags
Each 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)
(10 marks)

I have worked out the question as follows:

cement sells $9 – Cost to make $4 = $5

Knowledge Decision
(Demand) Good AVG Poor
(000’s)
350 bags (350×5) 1750
280 bags (280×5) 1400
200 bags 200×5) 1000

After this I become confused and cannot get to an answer. Can you assist me further please ?

Thank you in advance.