Butler, Inc. has total inventory of $200,000. Butler has this entire inventory s

Question

Butler, Inc. has total inventory of $200,000. Butler has this entire inventory stored in one warehouse. There is a 4% change that a fire could occur. If this fire occurs, then Butler will lose their entire inventory. [Option A]

As an alternative to keeping their entire inventory in one warehouse, Butler is considering separating their inventory evenly into two different warehouses. Once again, there is a 4% chance that a fire could occur in each warehouse. If this fire occurs, then Butler would once again lose their entire inventory in that particular warehouse. [Option B]

Construct the probability distribution for total losses under Option A. Once again remember that if a fire occurs, the loss will be $200,000. Hint: Think about the definition of a probability distribution and apply it in this case.

Explanation / Answer

Under Option A,

There is 4% chance that Butler will loose $200,000

Hence probability distribution of loss is:

P(loss = $200,000) = 0.04 = 4%

P(loss = $0) = 0.96= 96%

P(loss other than 0 or 200000) = 0

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