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Chapter 12





                           Payoff tables and decision criteria




                             When evaluating alternatives, management decisions will depend upon
                             risk appetite/attitudes to risk. To consider the risk borne by each
                             alternative it is necessary to consider ALL the different possible
                             profits/losses that may arise. A payoff table is simply a table that
                             illustrates all possible profits/losses.


               Daily supply


                                        Probability  40 salads  50 salads  60 salads  70 salads

                           40 salads        0.10          $80            $0         $(80)       $(160)
               Daily       50 salads        0.20          $80         $100           $20          $(60)
               demand
                           60 salads        0.40          $80         $100          $120          $40


                           70 salads        0.30          $80         $100          $120         $140

                    These show the profits that can be made from different possible outcomes.
                     There are normally two factors to consider – demand (which forms one axis of
                     the table) and supply (which forms the other axis).


                    The table shows the different profits from each different combination of demand
                     and supply. For example, if there are 3 different supply (or order) levels, and
                     three different possible demand levels then there will be 9 (3 × 3) different
                     potential profit levels.

                    Probabilities are used on these different profit levels to calculate expected
                     profits (which are then used for decision making).



                  Illustrations and further practice


                  Now read the ‘Geoffrey Ramsbottom’ illustration from Chapter 12.












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