Expected value, maximin and regret criterion Stow Health

Expected value, maximin and regret criterion

Stow Health Centre specialises in the provision of sports/exercise and medical/dietary advice to clients. The service is provided on a residential basis and clients stay for whatever number of days suits their needs.

Budgeted estimates for the next year ending 30 june are as follows:

(i) The maximum capacity of the centre is 50 clients per day for 350 days in the year.

(ii) Clients will be invoiced at a fee per day. The budgeted occupancy level will vary with the client fee level per day and is estimated at different percentages of maximum capacity as follows:

		Occupancy as
Client fee	Occupancy	percentage of
per day	level	maximum capacity
£180	High	90%
£200	Most likely	75%
£220	Low	60%

(iii) Variable costs are also estimated at one of three levels per client day. The high, most likely and low levels per client day are £95, £85 and £70 respectively.

The range of cost levels reflect only the possible effect of the purchase prices of goods and services.

Required:

(a) Prepare a summary which shows the budgeted contribution earned by Stow Health Centre for the year ended 30 June for each of nine possible outcomes.

(b) State the client fee strategy for the next year to 30 June which will result from the use of each of the following decision rules: (i) maximax; maximin; (iii) minimax regret.

Your answer should explain the basis of operation of each rule. Use the information from your answer to (a) as-relevant and show any additional working calculations as necessary.

(c) The probabilities of variable cost levels occurring at the high, most likely and low levels provided in the question are estimated as 0.1, 0.6 and 0.3 respectively.

Using the information available, determine the client fee strategy which will be chosen where maximisation of expected value of contribution is used as the decision basis.

(d) The calculations in (a) to (c) concern contribution levels which may occur given the existing budget.

Stow Health Centre has also budgeted for fixed costs of £1 200 000 for the next year to 30 June.

Discuss ways in which Stow Health Centre may instigate changes, in ways other than through the client fee rate, which may influence client demand, cost levels and profit.

Your answer should include comment on . the existing budget and should incorporate illustrations which relate to each of four additional performance measurement areas appropriate to the changes you discuss.