Answer (A) is correct . Expected value is a means of associating a dollar amount with each of the possible outcomes of a probability distribution. The outcome yielding the highest expected value (which may or may not be the most likely one) is the optimal alternative. The expected value of each outcome, and of the project as a whole, can be determined through the preparation of a payoff table, as follows: ? Monthly Sales Income Expected In Units Probability (Loss) Value 10,000 .2 ¡Á $(4,000) = $??? (800) 20,000 .3 ¡Á 10,000 = 3,000 30,000 .3 ¡Á 30,000 = 9,000 40,000 .2 ¡Á 60,000 = 12,000 $23,200 Answer (B) is incorrect because The amount of $24,000 results from failing to account for the $4,000 loss at the 10,000-unit sales level. Answer (C) is incorrect because The amount of $24,800 results from improperly treating the $4,000 from the 10,000-unit level as income rather than as a loss. Answer (D) is incorrect because The amount of $25,000 results from improperly weighting the monthly sales units, rather than the income and loss figures, by the probabilities.
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