Your company has a customer who is shutting down a production line, and it is yo

Question

Your company has a customer who is shutting down a production line, and it is your responsibility to dispose of the extrusion machine. • The company could keep it in inventory for a possible future product and estimates that the reservation value is $250,000. • Your dealings on the secondhand market lead you to believe that there is a 0.4 chance a random buyer will pay $300,000, a 0.25 chance the buyer will pay $350,000, a 0.1 chance the buyer will pay $400,000, and a 0.25 chance it will not sell. • If you must commit to a posted price, what price maximizes profits?

Explanation / Answer

If you must commit to a posted price, $400,000 would maximize profit, but there’s only a 10% chance it would sell. Since the expected value is $247,500, the best option would be to sell it for $300,000.

0.4(300,000) + 350,000(0.25) + 400,000(0.10) + 0.25(0)

120,000+87,500+40,000+0

$247,500

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.