Brinkley Corporation needs to estimate the profit for a new product. Profit is selling price minus cost. The selling price for the product will be $45/unit. The cost of the new product will comprise procurement, labor, and transportation costs. Probability distributions for the purchase cost, the labor cost, and the transportation cost are estimated as follows: Procurement Cost ($) Probability Labor Cost ($) Probability Transportation Cost ($) Probability
10 0.25 20 0.10 3 0.75
11 0.45 22 0.25 5 0.25
12 0.30 24 0.35
25 0.30

Required:
Compute profit per unit for the worst case.

Brinkley Corporation

Profit per unit for the worst case is:

= $7.05.

Explanation:

a) Data and Calculations:

Selling price for the product = $45 per unit

Cost of the new product =

Procurement  Probability    Labor    Probability  Transportation Probability

   Cost ($)                          Cost ($)                             Cost ($)

10                     0.25              20            0.10                  3                   0.75

11                      0.45              22            0.25                 5                  0.25

12                     0.30              24            0.35

                                             25            0.30

Procurement  Probability    Labor    Probability  Transportation Probability

   Cost ($)                          Cost ($)                             Cost ($)

2.50 (10 * 0.25)                 2.00 (20 * 0.10)                 2.25 (3 * 0.75)

4.95 (11 * 0.45)                  5.50 (22 * 0.25)                 1.25 (5 * 0.25)

3.60 (12 * 0.30 )                8.40 (24 * 0.35)

                                         7.50 (25 * 0.30)

11.05                               23.40                                    3.50

Procurement cost =  $11.05

Labor cost =              23.40

Transportation cost    3.50

Total cost =             $37.95

Selling price per unit = $45.00

Total cost per unit          37.95

Profit per unit =              $7.05