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Hello,
I am trying to work through question 1 of the June 2011 past paper, I am a bit lost after looking at the answer. I am not sure how they arrived at $1,400,000 for 280,000 bags and $1,000,000 for 200,000 bags when computing the loss of bags disposed as well as how the third level on the pay off table, that is the $325, $640, $1000 was derived. Please assist.
Thanks in advance
If they decide to produce 280,000 bags and the weather is good, then demand will be 350,000 bags. However since they only produce 280,000 they can only sell 280,000. The profit is $5 per bag and so the total profit is 280,000 x $5 = $1,400,000.
The same applies if the weather is good and they produce 200,000 bags. The can only sell what they produce and so they will sell 200,000 and make $5 profit on each – $1,000,000 in total.
If the produce 350,000 bags and the weather is poor, then the demand will be 200,000. So they will only sell 200,000 at $5 which gives 1,000,000. The remaining 150,000 bags will have cost $4 to make and will cost another $0.50 to dispose of and so $4.50 in total. So the loss on the 150,000 not sold will be 150,000 x $4.50 = $675,000.
This gives a final profit of 1,000,000 – 675,000 = $325,000and so on……
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