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Dear Sir,
In the question “Sweet Cicely (Sept/Dec 17)” the answer says
– The variability of demand for SC’s chocolate bars is a risk, and the probabilities of different levels of demand can be estimated.
I can not find this information in the question. Your advice please.
Thanks,
KTI think this risk is strongly implied by:
2nd para: “….. demand for SC chocolate bars will be influenced by external factors such as consumer tastes for chocolate over other sweets, and even the suggested health benefits of certain types of chocolate.” It would seem that these external influences are somewhat random.
3rd para ” In some countries, however, governments are considering introducing additional
taxes on products containing sugar in order to reduce the consumption of chocolate and confectionery products.” This might or might spread to other countries.Dear Ken,
I saw it’s mentioned to risk but I don’t see probabilities can be estimated. How can we know the probabilities can be estimated in this question?
Thanks,
KTWhen the answer says ‘can be estimated’ it is meaning this in the sense ‘have been estimated’ as, in App 2, probabilities are quoted.
Presumably this must have been done using some of sort of market survey, but almost certainly, in real life, the probabilities would be fairly unreliable.
Dear Sir,
For the same Question (Sweet cicely sept/dec 2017) I am stuck on part (b) the minimax regret table.
I have calculated the regret as (12) for option 2 and (36) for option 3 ( with an annual demand of 50 million). After doing this much I have gotten stuck.
In the NPV table we see that option 1 (supplying 50 mil) when the demand is 60 mil would make an NPV of 6.0. I did not understand this as it looks like that would be the right decision? Since 6 is higher than 4 (Npv of supplying 50mil for 50 mil demand). How is it possible that the NPV is higher there?
Going on to the calculation down the option 1 row.. the answer scheme says:
Annual demand Option 1
50 0
60. (10)
70. (11)I am totally lost as to how they got these values due to the confusion I mentioned above.. since 6 is higher than 4, where is the regret there..ans how is it calculated? And since both NPVs and 60 and 70 mil demand are 6, why is the regret 10 at 60 and 11 at 70?
Hope my question was phrased in a way that is understandable to you sir!
Would be so thankful for some help, living in Algeria and trying my best to hopefully pass this paper in September.
Thanks a bunch, hope you are well..
Elizabeth.Hi Ken,
I am in a similar situation like Elizabeth. Please, can you tell us how they got the answers to the calculations?First apologies to Elizabeth – I appear to have missed her question from July and failed to respond at all.
When constructing a regret table, the focus is on regret: you now know what happened and are deciding how much you wish you had made another choice.
So, if annual demand turns out to be 50 and you had chosen Option 1 you would be really happy knowing you’d got it right, so no regrets. Had you chosen Option 2 you would see you were down on your luck by 4 down to 8 loss ie 12 below best. Similarly, if you had chosen Option 3 your regret would be 4 down to -32 = 36.
If annual demand turns out to be 60 then had you chosen Option 2 you would be cock-a-hoop and performing cartwheels with joy: you had chosen what turned out to be best. Option 1 would see you 16 down to 6 below best, so a regret of 10 and Option 3 would be 16 down to -24 = 40 down on your luck.
If demand turned out to be 70 there would be no regret id you had chosen Option 3 but then regrets of 17 down to 6 = 11 for option 1 and 17 down to 16 = regret of 1 for option 2.
For the demand of 50 million, Option 1 is the best outcome of 4.0. If that option is chosen, then there will be no regret. Hence, the answer is 0.
But, if option 2 is chosen, SC stands to lose 4.0 plus the negative NPV of (8.0) that option 2 gives. So, SC will lose -4-8 (-12.0).
If option 3 is chosen, SC will lose 4.0 for not choosing option 1, and another 32.0. That is -4.0 -32.0 (-36.0)
60 million demand:
The best option is 2 at NPV of 16.0.
If option 2 is chosen, the regret will be 0.
If option 1 is chosen, the regret will be 16.0 -6.0 (which option 1 gives). That will give 11.0.
If option 3 is chosen, the regret will be the loss of 16.0 and another loss of 24.0 (which is the negative NPV for choosing option 3).
That will give -16.0 -24.0 = -40.0.
70 million demand
The best option is 3 at 17.0
If option 3 is chosen, there will be no regret
If option 1 is chosen, there will be a regret of 17.0 -6.0 (option NPV)
= 11.0.
If option 2 is chosen, the regret will be 17.0 – 16.0 (option 2 NPV) =1.0.
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