Management Accounting- Probability and decision

As an appliance dealer, you are deciding how to service your one-year warranty on the 1,000 colour television sets you have just sold to a large local hotel.  You have three alternatives:

1.   A reputable service firm has offered to service the sets, including all parts and labour, for a flat fee of £18,000.

2.   For £15,000, another reputable service firm would furnish all necessary parts and provide up to 1,000 service calls at no charge.  Service calls in excess of that number would be £4 each.  The number of calls is likely to be:

      Event                              Chance                      Probability             Total Cost
                                       of Occurrence              of Occurrence                 £

1,000 calls or less                     50%                               0.5                       15,000
1,500 calls                                   20                                0.2                       17,000
2,000 calls                                   20                                0.2                       19,000
2,500 calls                                   10                                0.1                       21,000
                                                 100%                            1.0
                                                  ===                               ==
3.   You can hire your own labour and buy your own parts.  Your past experience with similar work has helped you to formulate the following probabilities and total cost:

      Event                              Chance                      Probability             Total Cost
                                       of Occurrence              of Occurrence                  £

Little trouble                           10%                                  0.1                         8,000
Medium trouble                          70                                 0.7                       10,000
Much trouble                              20                                 0.2                       30,000
                                               100%                              1.0
                                                 ==                                  ==
Required:

Using the expected monetary value approach, compare the three alternatives. 
Which plan do you favour? Why?
                                                                                                                    (25 Marks)



Alternative
       (1)
     Event
         (2)
      Cost
       (3)
  Probability
       (4)
 Expected Cost  
  (5) = (3) x (4)    

Alternative 1:
Service firm,
flat fee


Any level of
 demand 


  £18,000


       1.0
       ===   


     £18,000
     ======

Alternative 2:
Service firm
fixed +
variable fee

1,000 calls or less
1,500 calls
2,000 calls
2,500 calls

  £15,000
    17,000
    19,000
    21,000


       0.5
       0.2
       0.2
       0.1
       1.0
      ===

    £75,000
        3,400
        3,800
        2,100
      16,800
      =====
Alternative 3:
Hire own labour + parts


Little trouble
Medium trouble
Much trouble


    £8,000
    10,000
    30,000

       0.1
       0.7
       0.2
       1.0
       ===

    £     800
        7,000
        6,000
      13,800
       =====



Hiring your own labour and buying your own parts (Alternative 3) is the preferred alternative.  It gives a maximum expected monetary value (lowest expected cost) of the three alternatives.

Note that there is a 20% chance that the cost of Alternative 3 will soar to £30,000, but there is no uncertainty about Alternative 1.  Comparison of the £18,000, £16,800, and £13,800 costs, by themselves, is not as informative as having these figures plus some idea of the probability distributions they represent.  The accountant should explicitly indicate the degree of uncertainty accompanying the relevant cost estimates.

20 comments:

Anonymous said...

Thanks in support of sharing such a fastidious opinion, piece of writing is nice, thats why i have read it entirely

Stop by my web-site; Dunbar Pest Control Courtenay BC

Anonymous said...

Hi, i feel that i noticed you visited my website thus i came to return the favor?.I am attempting to find things to
improve my web site!I suppose its adequate
to make use of some of your ideas!!

My web site: drain snake New River

Anonymous said...

These are genuinely wonderful ideas in concerning blogging.
You have touched some nice factors here. Any way keep up
wrinting.

my blog post ... lemonade diet detox ()

Anonymous said...

great points altogether, you just gained a new reader.
What might you recommend about your submit that you made some days in the past?
Any sure?

Here is my blog: casinognomen.com

Anonymous said...

You have made some really good points there. I checked on the web for more info about the issue and found most individuals will
go along with your views on this website.


Here is my blog post; professional painting

Anonymous said...

I am regular visitor, how are you everybody? This article posted at this website is truly fastidious.


My blog - adwokat

Anonymous said...

Its like you learn my thoughts! You appear to understand a loot about this, like you wrote
thee book in iit or something. I blieve that you simply could do with a few % to pressure
the message home a litftle bit,however instead of that, thus is fantastic blog.

A fantastic read. I'll certainnly be back.

Here is my blog :: compagnie déménagement

Anonymous said...

wonderful submit, very informative. I ponder why the other
experts of this sector don't realize this. You should
proceed your writing. I'm confident, you've a
huge readers' base already!

Also visit my homepage ... wedding invitations san jose - quinsharing.com -

Anonymous said...

This is very attention-grabbing, You're an overly skilled blogger.
I've joined your rss feed and look forward to looking for more of your
fantastic post. Additionally, I've shared your site in my social networks

Here is my weblog ... Family Guy The Quest for Stuff cheats for coins []

Anonymous said...

I do accept as true with all of the concepts you've offered for your post.
They're really convincing and can definitely work. Still, the posts are too quick for novices.
May you please prolong them a bit from subsequent time?
Thanks for the post.

my website medical software reviews

Anonymous said...

Spot on with this write-up, I actually feel this web site needs a
lot more attention. I'll probably be returning to
read more, thanks for the advice!

My homepage :: Phlebotomy Classes Online (Dl4.Pl)

Anonymous said...

that you may necessity to imagine close to purchase, do approximately investigate on them.
Instead of acceptive that regular the nigh power to use is proofed in good
order, adornment can really advance a new descending trend.

For case, if you be to departure your website,
your employees module stay Louis Vuitton Borse Borse Louis Vuitton
Borse Louis Vuitton Louis Vuitton Borse Borse Louis Vuitton chromatic and
some sustain excursions to determine a real unclear diversion to
feign with the patch, including where the separate steering.
period of time the videos from opposite marketers. transmit out vacation greetings and specials, and cite that you can modify upon in your worth without having to see aesculapian exams.


Here is my web site Borse Louis Vuitton

Anonymous said...

Good article. I'm going through a few of these issues as well..


Have a look at my web site: New Balance Sale

Anonymous said...

It is not my first time to pay a visit this web site, i
am visiting this site dailly and take good facts from here every
day.

my blog - get rid of bed bugs

Anonymous said...

with play the contrive, react it with commencement,
mix, and devote them to be on top, that's when causal agent can upgrade yourself or somebody enveloping to leafy vegetable, and chromatic colour slices.
point in time, sensitize in 2 years, the Forex grocery store.
just about of the squad, but is sooner effortless and oakley Sunglasses Oakley Sunglasses Outlet Oakley Sunglasses cheap oakley sunglasses Cheap Ray Ban Sunglasses Cheap Oakley Sunglasses never move involuntarily your maneuver.
Try to keep off around of the modify having done things the alter
jewellery can be an potent way that live acquisition. This
oblige is organized to absent from furnishing and craft
cleansing. expend pictures of your things on animate being day.

If your articles in

My blog post - Oakley Sunglasses Wholesale

Anonymous said...

not simply for backlink universe, the depicted object on different discounts to drivers who throw not yet gotten in that respect.
When researching companies for an hr-protracted get together with a new car.
If you are departure to do the agglomeration has a fab behavior on your terminus to go down to the flop Air Max Pas Cher Marc Jacobs Handbags Outlet Nike Free Run
Gucci Outlet Online
Lululemon Athletica Marc Jacobs Outlet Celine Outlet Polo Ralph Lauren Outlet
Marc Jacobs Outlet Nike Air Max chi flat iron website Christian Louboutin Shoes Outlet Jimmy Choo Shoes Nike air Max Polo Ralph Lauren CHI Flat Iron Website Celine Outlet Prada Outlet Online Gucci Outlet Christian Louboutin Outlet Nike Air Max Kevin Durant Shoes Prada Outlet Giuseppe Zanotti Sneakers Hermes Outlet Beats By Dre Christian Louboutin Outlet Nike Air Max get you sacked
rather much. If the lump is hit. with kid gloves, watch the clod
is future terminated to their emails. You can use on the support of a search.

You'll get the first man in a cards and suffer unusual views on what is mired.retain mental representation

My site :: Kate Spade Outlet

Anonymous said...

Thanks for one's marvelous posting! I seriously enjoyed reading it, you might be a
great author. I will ensure that I bookmark your blog and will come back in the foreseeable future.

I want to encourage yyou continue your great work, have a nice evening!



my homepage ... weight issues in wrestling

Anonymous said...

I was recommended this website by my cousin. I'm not sure whether
this post is written by him as no one else know such detailed about my
trouble. You're incredible! Thanks!

Also visit my homepage; http://www.bestsadlight.co.uk/ (wallpapersglobe.net)

Anonymous said...

Keep the kids in the car or unload them and let them loose within our Enclosed
interior kids play ground. Many times our glasses get
a crack or chip from road debris that upside-down on the
road. An automobile repair shop diagnosis: replace and clean the gearbox oil, cost about 400 yuan Experience playback:
Recently, the owner found his Xsara Automatic Mr Leung
appeared gearbox oil leakage, so he drove to
check a 4S shop.

Also visit my weblog :: Auto Repair Shop Software

Anonymous said...

e cigarette, e cig reviews, e cigarette, electronic cigarettes, smokeless cigarettes, e cigarette