Cement Co is a company specialising in the manufacture of cement, a product used in the bu
Each bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has to be disposed of at a cost of $0·50 per bag.
Cement Co has decided to produce at one of the three levels of production to match forecast demand. It now has to decide which level of cement production to select.
Required:
(a) Construct a pay off table to show all the possible profit outcomes. (8 marks)
(b) Decide the level of cement production the company should choose, based on the following decision rules:
(i) Maximin (1 mark)
(ii) Maximax (1 mark)
(iii) Expected value (4 marks)
You must justify your decision under each rule, showing all necessary calculations.
(c) Describe the ‘maximin’ and ‘expected value’ decision rules, explaining when they might be used and the attitudes of the decision makers who might use them. (6 marks)