It is equally likely that annual unit sales for Widgetco’s widgets will be low or high. If sales are low (60,000), the company can sell the product for $10 per unit. If sales are high (100,000), a...

It is equally likely that annual unit sales for Widgetco’s widgets will be low or high. If sales are low (60,000), the company can sell the product for $10 per unit. If sales are high (100,000), a competitor will enter, and Widgetco can sell the product for only $8 per unit. The variable cost per unit has a 25% chance of being $6, a 50% chance of being $7.50, and a 25% chance of being $9. Annual fixed costs are $30,000.


a.  Use simulation to estimate Widgetco’s expected annual profit.


b.  Find an interval that has a 90% chance of containing Widgetco’s annual profit.


c.  Now suppose that annual unit sales, variable cost, and unit price are equal to their respective expected values; that is, there is no uncertainty. Determine Widgetco’s annual profit for this scenario.

d.  Can you conclude from the results in parts a and c that the expected profit from the simulation is equal to the profit from the scenario where each input assumes its expected value? Explain.