[Anonymous]

Guys I am sure a lot of you have seen this example below:

Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs $2 and sells for $3 through regular stores. Any boxes not sold through regular stores are sold through Dough’s thrift store for $1. Dough assigns the following probabilities to selling additional boxes:

Additional sales Probability

60 .6

100 .4

What is the expected value of Dough’s decision to buy 100 additional boxes of muffins?

a. $28

b. $40

c. $52

d. $68

Ans:

Since Dough earns $1 profit per box ($3 sales price – $2 cost), this represents $76 (76 boxes x $1 profit) of additional

profit. However, the twenty-four unsold boxes would have to be sold at a $1 loss per box ($1 sales price· . $2 cost) through Dough’s thrift store. Therefore, the expected value of the decision to purchase the additional muffins is $52 net profit ($76 profit – $24 loss).

My question is why are we considering 76 boxes? and 24 boxes? I am confused actly rather wrong, when I think:

Step 1: EV of selling 60% of the boxes =[.6 x60 boxes x $1 ]

Step 2: EV of selling 40% of the boxes =[.4 x40 boxes x $1 ] —-this is what i initially thought, which is wrong.

Step 3: EV of selling 100% of the boxes =[.4 x100 boxes x $1 ]

Can any one please answer why step 2 is wrong. It will help me understand this question. Thank you all.