The Operations Manager for a Local Bus Company Wants to Decide

question 98

Multiple Choice

The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000) will vary depending upon whether passenger demand is low, medium, or high, as follows: If he feels the chances of low, medium, and high demand are 30 percent, 30 percent, and 40 percent respectively, what is his expected value of perfect information?

• A) $15,000
• B) $61,000
• C) $69,000
• D) $72,000
• E) $87,000

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Definitions:

Variable Cost

A cost that changes in proportion to the level of activity or volume of output in a business.

Capacity

In finance, the ability of an individual or organization to repay a loan or meet financial obligations.

Fixed Costs

Costs that do not vary with the volume of production or sales, such as rent, salaries, and insurance.

Selling Price

The fixed or negotiated amount at which a product or service is sold to customers.