L et's solve this problem step by step.
We need to create a payoff table to determine the
optimal production quantity for Asra and Co Ltd.
Given:
- Selling price per drum: ₹100
- Cost per drum: ₹55
- Demand frequencies:
- 2000 drums: 8 months
- 3000 drums: 16 months
- 6000 drums: 12 months
Step 1: Calculate the probabilities for each demand level.
Total months = 8 + 16 + 12 = 36
Probability of demand for 2000 drums, P (2000) =
8 2
=
36 9
Probability of demand for 3000 drums, P (3000) =
16 4
=
36 9
Probability of demand for 6000 drums, P (6000) = 12
36
=
1
Step 2: Create a payoff table for each production quantity and demand level.
\multicolumn3c
Production Demand
Quantity 2000 3000 6000
2000 90000 90000 90000
3000 65000 135000 135000
6000 −30000 40000 270000
Explanation:
- If 2000 drums are produced, the profit is 2000 × ₹ 100 - 2000 × ₹ 55 = ₹90000, regardless of
the demand.
- If 3000 drums are produced and the demand is 2000, the profit is 2000 × ₹ 100 - 3000 × ₹ 55
= ₹65000.
- If 3000 drums are produced and the demand is 3000 or 6000, the profit is 3000 × ₹ 100 -
3000 × ₹ 55 = ₹135000.
- If 6000 drums are produced and the demand is 2000, the profit is 2000 × ₹ 100 -
6000 × ₹ 55 = -₹30000 aloss.
- If 6000 drums are produced and the demand is 3000, the profit is 3000 × ₹ 100 -
6000 × ₹ 55 = ₹40000.
- If 6000 drums are produced and the demand is 6000, the profit is 6000 × ₹ 100 -
6000 × ₹ 55 = ₹270000.
Step 3: Calculate the expected profit for each production quantity.
Expected profit for 2000 drums:
2 4 1
E(2000) = 90000 × + 90000 × + 90000 × = 90000
9 9 3
Expected profit for 3000 drums:
2 4 1
E(3000) = 65000 × + 135000 × + 135000 × = 110000
9 9 3
Expected profit for 6000 drums:
2 4 1
E(6000) = −30000 × + 40000 × + 270000 × = 96666.67
9 9 3
Therefore, the optimal production quantity for Asra and Co Ltd is 3000 drums, as it yields
the highest expected profit of ₹110000.
