Answer (B) is correct . Without protection, the company will have sales of either $80,000 or $120,000. With protection, the company will have sales of either $120,000 or $180,000. The $20,000 cost of tents must be subtracted from these amounts to compute the net contribution. Thus, the contribution if the berries are protected will be either ? $100,000 or $160,000. The problem can be solved algebraically with the following formula (X = the probability of frost): X ($80,000) + (1 – X) ($120,000) = X ($160,000) + (1 – X) ($100,000) $80,000 X + $120,000 – $120,000 X = $160,000 X + $100,000 – $100,000 X $120,000 – $40,000 X = $100,000 + $60,000 X $120,000 = $100,000 + $100,000 X $20,000 = $100,000 X X = .200 In other words, if the probability of frost is 20%, management will be indifferent between providing and not providing protection. At a frost expectancy of greater than 20%, management should provide protection.
Answer (A) is incorrect because If frost has a probability of .167, the expected value of not providing protection exceeds that of providing protection.
Answer (C) is incorrect because If the probability of frost is greater than .200, an expected value analysis indicates the company should provide protection.
Answer (D) is incorrect because If the probability of frost is greater than .200, an expected value analysis indicates the company should provide protection.
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