Stochastic Cost-Volume-Profit Analysis and Decision Theory
Bulk Powder Producers Ltd (BPP) have decided to enter the market for ink powder, although they do not currently possess the type of grinding machine required to produce it. BPP is a division of a much larger company, and Head Office have told them that they must lease rather than purchase the new grinding machine owing to a capital shortage. Two types of ink grinding machine are available for leasing; Type A machines require lease payments of £50000 per annum while Type B machines require lease payments of £80000 per annum. However, Type A machines grind ink powder at a variable cost of £0.50 per kilogram while Type B machines grind ink powder at a variable cost of £0.30 per kilogram. BPP has 400 customers, and on the basis of their demand for staining powders other than inks it is possible for the executives of BPP to say that there is an even chance that their demand for ink powder will lie within the range from 250–550 kilograms per customer per annum. In view of the wide margin of uncertainty involved, BPP have sent out a salesman to obtain firm orders for a year’s supply of ink powder from a sample of customers. The salesman visited four customers, and the orders he obtained were for a mean amount of 357 kilograms with a standard deviation of 104 kilograms.