James Lawson\'s Bed and Breakfast, in a small historic Mississippi town, must de
ID: 358982 • Letter: J
Question
James Lawson's Bed and Breakfast, in a small historic Mississippi town, must decide how to subdivide (remodel) the large old home that will become its inn. There are three alternatives: Option A would modernize all baths and combine rooms, leaving the inn with four suites, each suitable for two to four adults. Option B would modernize only the second floor, the results would be six suites, four for two to four adults, two for two adults only. Option C (the status quo option) leaves all walls intact. In this case, there are eight rooms available, but only two are suitable for four adults, and four rooms will not have private baths. Below are the details of profit and demand patterns that will accompany each option Annual Profit under Various Demand Patterns Iligh p Average p Alternatives A (modernize all $94,000 0.55 $24,000 0.45 B (modernize 2nd) $82,000 0.30 $72,000 0.70 C (status quo $64,000 0.30 $52,000 0.70 This exercise contains only part b with an expected value of SJ (round your response to the nearest b) The option with the highest expected value for James Lawson's Bed and Breakfast is whole number)Explanation / Answer
Expected value of any alternative
= Probability of high demand x Annual profit under high demand + Probability of average demand x Annual profit under average demand
Thus expected value of Alternative A
= 0.55 x 94000 + 0.45 x 24000
= 51700 + 10800
= $62500
Expected value of Alternative B
= 0.30 x 82000 + 0.70 x 72000
= 24600 + 50400
= $75000
Expected value of Alternative C
=0.30 x 64000 + 0.70 x 52000
= 19200 + 36400
= $55600
The option with highest expected value is Alternative B amounting $75000
THE OPTION WITH HIGHEST EXPECTED VALUE FOR JAMES LAWSON’S BED & BREAKFAST IS B ( MODERNIZE 2ND) WITH AN EXPECTED VALUE OF $75000
THE OPTION WITH HIGHEST EXPECTED VALUE FOR JAMES LAWSON’S BED & BREAKFAST IS B ( MODERNIZE 2ND) WITH AN EXPECTED VALUE OF $75000
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