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