The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the opportunity loss table showing the potential lost profit for each purchase decision or act from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown. How many dozen T-shirts should you purchase based on minimizing the expected opportunity loss?
A) 1
B) 2
C) 3
D) 4

Question

The national sales manager for "I colored this" (ICT) T-shirts, provides all salespersons with the opportunity loss table showing the potential lost profit for each purchase decision or act from 1 to 4 dozen T-shirts. The probability of demand for each state of nature is also shown.  How many dozen T-shirts should you purchase based on minimizing the expected opportunity loss?
A) 1 
B) 2 
C) 3 
D) 4

Quizplus · Accepted Answer

We can use the expected opportunity loss formula to determine the expected cost for each decision:

Expected Cost for Decision 1 dozen = (0.15 x $600) + (0.25 x $300) + (0.35 x $100) + (0.25 x $50) = $222.50
Expected Cost for Decision 2 dozen = (0.15 x $500) + (0.25 x $600) + (0.35 x $300) + (0.25 x $100) = $267.50
Expected Cost for Decision 3 dozen = (0.15 x $400) + (0.25 x $500) + (0.35 x $600) + (0.25 x $300) = $286.25
Expected Cost for Decision 4 dozen = (0.15 x $300) + (0.25 x $400) + (0.35 x $500) + (0.25 x $600) = $288.75

Therefore, based on the expected opportunity loss, the best decision is to purchase 2 dozen T-shirts, as it has the lowest expected cost of $267.50.

The National Sales Manager for "I Colored This" (ICT) T-Shirts