The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000) will vary depending upon whether passenger demand is low, medium, or high, as follows:
If he feels the chances of low, medium, and high demand are 30 percent, 30 percent, and 40 percent respectively, what is the expected annual profit for the bus that he will decide to purchase?
A) $15,000
B) $61,000
C) $69,000
D) $72,000
E) $87,000

Question

The operations manager for a local bus company wants to decide whether he should purchase a small, medium, or large new bus for his company. He estimates that the annual profits (in $000) will vary depending upon whether passenger demand is low, medium, or high, as follows: 
If he feels the chances of low, medium, and high demand are 30 percent, 30 percent, and 40 percent respectively, what is the expected annual profit for the bus that he will decide to purchase?
A) $15,000 
B) $61,000 
C) $69,000 
D) $72,000 
E) $87,000

Quizplus · Accepted Answer

To find the expected annual profit, we need to calculate the weighted average of the profits for each level of demand:

Expected profit = (0.3 x $50,000) + (0.3 x $60,000) + (0.4 x $80,000) 
Expected profit = $15,000 + $18,000 + $32,000 
Expected profit = $65,000

Therefore, the best choice would be a large new bus, which has an expected profit of $72,000, the highest among the three options.

The Operations Manager for a Local Bus Company Wants to Decide