John Smith is the production manager of Elmos Glue Company. Because of limited capacity, the...
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Accounting
John Smith is the production manager of Elmos Glue Company. Because of limited capacity, the company can produce only one of two possible products. The two products are:
A space-age bonding formula that has a 15% probability of making a profit of $1,050,000 for the company and an 85% chance of generating $210,000 in profit.
A reformulated household glue that has a 100% chance of making a profit of $315,000.
John gets a bonus of 25% of the profit from his department. John has the responsibility to choose between the two products. Assume John is more risk-averse than the top management of Elmos Glue Company.
Required:
1. Compute the expected profit of the space-age bonding formula.
2-a. Which product is John most likely to choose? multiple choice
a. A space-age bonding formula
b. A reformulated household glue
2-b. Is that the product Elmos would prefer? multiple choice
a. Yes
b. No
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