Question

Lafarge is a French industrial company specializing in three major products: cement, construction aggregates, and concrete. Lafarge Zambia operates 2 integrated cement plants (situated in Ndola and Lusaka) with a total production capacity of 1.4 million tonnes per annum. Lafarge Zambia is considering to develop a new plant in the central province of Zambia. The following three options available. These are to open a small plant, a medium-sized plant, or no plant at all. The marketing department has advised that the market for a plant in central province can be good, average, or bad. The probabilities for these three possibilities are 0.2 for a good market, 0.5 for an average market, and 0.3 for a bad market. The net profit or loss figures for the medium-sized and small plant for the various market conditions are given in the following table. Building no plant at all yields no loss and gain.

Alternative	Good market (k)	Average market (k)	Bad market (k)
Small plant	1,350,000	450,000	-720,000
Medium-sized plant	1,800,000	630,000	-1,080,000
No plant	0	0	0

The above information has been given to you as management accountant of Lafarge.

Required

1. Which of the three options would you recommend and why?

Basing on the minimax regret criterion and the minimum Expected Opportunity loss criterion, which would you recommend? (10 mar

Answer 1

Minimax regret criterion : Based on opportunity loss or regret, the difference between the optimal profit and actual payoff for a decision for a given state of nature

1. Create an opportunity loss table by determining the opportunity loss for not choosing the best alternative
2. Opportunity loss is calculated by subtracting each payoff in the column from the best payoff in the column.
3. Find the maximum opportunity loss for each alternative and pick the alternative with the minimum value of maximum opportunity loss

Alternative	State of Nature
Good Market	Average Market	Bad Market
Small Plant	1800000-1350000 = 450000	630000 - 450000 = 180000	0 - ( - 720000) = 720000 (Minimax)
Medium Plant	1800000 -1800000 = 0	630000 - 630000 = 0	0 - ( - 1080000) = 1080000
No Plant	1800000 – 0 = 1800000	630000 - 0 = 630000	0 - 0 = 0

Minimax regret criterion and the minimum Expected Opportunity loss criterion have same meaning due to which they are using and in between.