Specimen Exam applicable from September 2016 - related question

Question 25. 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 Probability (units) 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. Using probabilistic budgeting, what is the expected budgeted contribution of the product? A $282,000 B $357,000 C $287,600 D $362,600 answer: 25 D As the variable cost per unit is changing depending on the production level, contribution for each level needs to be calculated and then the probabilities applied to the outcomes. Following on the rationale explained in the answer, the expected budgeted contribution shall be $358,600 instead of $362,600.. being: units contrib. prob. $ 10000 25-8 0.3 51,000 22000 25-8 0.5 187,000 25000 25-8 0.2 85,000 10000 25-7.2 0.2 35,600 expected bud. contrib.$358,600. Why are they applying the discounted variable costs to all the units in the 0.2 probability level? Many thanks in advance.