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Hi John!
I have some issues dealing with question in the Kaplan kit.
Need your help.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 per annum.
Based on the expected value criterion, which of the following represents the correct
advice which Tree Co should be given?1. The answer is “Do not employ a sales manager as profits would be expected to fall by $1,300”.
2. The explanation in the book does not makes thing clear. Could you please explain it?
Thanks.
The profits that could be earned are:
Good manager: 180,000 + 30% = 234,000
Average manager: 180,000 + 20% = 216,000
Poor manager: 180,000 + 10% = 198,000Expected profit = (0.35 x 234,000) + (0.45 x 216,000) + (0.20 x 198,000) = 218,700
This is an increase in profit of 218,700 – 180,000 = 38,700.
However the cost of the manager is 40,000.
So there would be an overall fall in profit of 40,000 – 38,700 = 1,300.
So do not employ the manager.
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