Management Accounting - I ( Minimax Regret)

 

The minimax regret strategy is the one that minimizes the maximum regret. It is useful for a risk-averse decision maker. Essentially, this is the technique for a ’sore loser’ who does not wish to make the wrong decision. ‘Regret’ in this context is defined as the opportunity loss through having made the wrong decision.

QUESTION:

Following up from the pay-off table example, Geoffrey Ramsbottom's table looks as follows:

Daily supply
Daily Demand		Probability	40 salads	50 salads	60 salads	70 salads
	40 salads	0.10	$80	$0	$(80)	$(160)
	50 salads	0.20	$80	$100	$20	$(60)
	60 salads	0.40	$80	$100	$120	$40
	70 salads	0.30	$80	$100	$120	$140

 How many salads should Geoffrey decide to supply if the minimax regret rule is applied?

ANSWER:

                                                                    REGRET TABLE

Daily supply
Daily Demand		40 salads	50 salads	60 salads	70 salads
	40 salads	$0 (80-80)	$80 (80-0)	$160  (80+80)	$ 240  (160+80)
	50 salads	$20 (100-80)	$0 (100-100)	$80 (100-20)	$160 (100+60)
	60 salads	$40 (120-80)	$20 (120-100)	$0 (120-120)	$80 (120-40)
	70 salads	$60 (140-80)	$40 (100-140)	$20 (140-120)	$0 (140-140)
Maximum Regret		$60	$ 80	$160	$240

EXPLANATION:

If the minimax regret rule is applied to decide how many salads should be made each day, Geoffrey needs to calculate the 'regrets'. This means Geoffrey needs to find the biggest pay-off for each demand row, then subtract all other numbers in this row from the largest number.

ü  For 40 Salads, we need to take the number which is highest in the row, it means 80. Then, we need to deduct for each category in that row. In this case, we have a loss of ($80) and ($160) to be added with the largest amount of $80.

ü  For 50 salads, we need to take the number which is highest in the row, it means $100. Then, we need to deduct for each category in that row. In this case, we have a loss of ($60) to be added with the largest amount of $100.

ü  For 60 salads, we need to take the number which is highest in the row, it means $120. Then we need to deduct for each category in that row. In this case, we don’t have any loss amount.

ü  For 80 salads, we need to take the number which is highest in the row, it means $ 140. Then we need to deduct for each category in that row. In this case also, we don’t have any loss amount.