Answer question nos. 1-3 based on the following information:
An automobile company’s annual sales of its small cars depend on the state of the economy as well as on whether the company uses some high profit individual as its brand ambassador in advertisements of its product. The state of the economy is “good”, “okay” and “bad” with probabilities 0.3, 0.4 and 0.3 respectively. The company may choose a high profile individual as its brand ambassador in TV ads or may go for the TV ads without a high profile brand Ambassador.
If the company fixes price at Rs. 3.5 lakh, the annual sales of its small cars for different states of the economy and for different kinds of TV ads are summarized in table 3. The figures in the first row are annual sales of the small cars when the company uses a high profile individual as its brand ambassador in its TV ads and the ones in the second row are that when the company does not use any brand ambassador in its TV ads, for different states of the economy.
                                         Table 3:
Without knowing what exactly will be the state of 39. the economy in the coming one year, the company will either have to sign a TV ad contract with some high profile individual, who will be the company’s brand ambassador for its small car for the next one year, or go for a TV ad without featuring any high profile individual. It incurs a cost of Rs. 3.45 lakh (excluding the payment to the brand ambassador) to put a car on the road.
When the company’s profit is uncertain, the company  makes  decisions  on  basis  of  its expected profit. If the company can earn a profit x; with     40. probability pi (the probability depends on the state of economy), then the expected profit of the company is.
Question 1. The maximum that the company can afford to pay its brand ambassador is
A. Rs. 10.0 crore
B. Rs. 10.6 crore
C. Rs. 10.8 crore
D. Rs. 12.0 crore
E. Rs. 16.4 crore
Question 2. Mr. Khan, a popular film actor, agreed to sign the contract to become the company’s brand ambassador for Rs. 9 crore. The cost to the company of putting a car on the road also got escalated. The maximum escalation in cost of putting a car on the road, for which the company can afford to sign the contract with Mr. Khan is
A. Rs. 900
B. Rs. 967
C. Rs. 1250
D. Rs. 1267
E. Rs. 1333
Question 3. Mr. Khan, a popular film actor, agreed to sign the contract to become the company’s brand ambassador for Rs. 9 crore. The cost to the company of putting a car on the road also got escalated by Rs. 1000. If the company signs the contract with Mr. Khan, its profit will
A. increased by Rs. 40 lakh
B. increased by Rs. 60 lakh
C. decreased by Rs. 20 lakh
D. decreased by Rs. 40 lakh
E. decreased by Rs. 50 lakh
Answers and Explanations
Answer 1. (D)
Expected profit of the company when brand ambassador is used (P1):
P1 = (3.5 – 3.45)[105 × 0.3 + 8 × 104 × 0.4 + 5 × 104 × 0.3] lakh
Expected profit of the company when brand ambassador is not used (P2):
P2 = (3.5 – 3.45)[8 × 104 × 0.3 + 5 × 104 × 0.4 + 3 × 104 × 0.3] lakh
∴   Additional profit = P1 – P2 = Rs. 12.0 crore.
⇒ Maximum that the company can afford to pay its brand ambassador = Rs. 12.0 crore.
Answer 2. (C)
When profit of Rs.12.0 crores, then Profit/unit = Rs. 5000
When profit is (12.0 – 9.0) = Rs.3 crore, then profit/units
⇒ With signing of contract and no increase in cost, company will have a profit of Rs.1250/unit
⇒ Maximum escalation in cost = Rs. 1250
Answer 3. (B)
Profit of Rs.1250/unit results in additional profit of Rs. 3 crores.
Since the cost is going up by Rs. 1000/unit
Therefore, profit/unit = Rs. 1250 – Rs. 1000 = Rs. 250
∴   Addition/increase in profit
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