SCENARIO 5-12
Two Different Designs on a New Line of Winter

question 307

Short Answer

SCENARIO 5-12
Two different designs on a new line of winter jackets for the coming winter are available for your
manufacturing plants. Your profit (in thousands of dollars) will depend on the taste of the consumers
when winter arrives. The probability of the three possible different tastes of the consumers and the
corresponding profits are presented in the following table. $$\begin{array} { | c | c | r | r | } \hline \text { Probability } & \text { Taste } & \text { Design A } & \text { Design B } \\\hline 0.2 & \text { more conservative } & 180 & 520 \\\hline 0.5 & \text { no change } & 230 & 310 \\\hline 0.3 & \text { more liberal } & 350 & 270 \\\hline\end{array}$$
-Referring to Scenario 5-12, if your investment preference is to maximize your expected profit
while exposing yourself to the minimal amount of risk, will you choose a production mix that will
consist of 10%, 30%, 50%, 70%, or 90% of your production lines for Design A and the remaining
for Design B?

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Definitions:

Fair Value

An estimate of the price at which an asset or liability could be exchanged between knowledgeable, willing parties in an arm's length transaction.

Consolidated Net Income

The total earnings of a corporation and its subsidiaries after tax, representing the total profit attributable to the parent company and its shareholders.

Acquisition

The process by which one company takes over another company, either by purchasing it or merging with it.

Amortization

The process of gradually writing off the initial cost of an asset over a period.