An expected cost combines possible outcomes using their probabilities. It describes a model's weighted average, rather than the amount that must appear on the next bill. Keep those two interpretations separate before comparing options.
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List the fictional outcomes and assumptions
In an original classroom model, option A costs 60 currency units in a low-demand outcome and 180 in a high-demand outcome. Assume their probabilities are 0.75 and 0.25.
The outcomes are mutually exclusive and exhaustive in this simplified model, and their probabilities add to one. These are invented assumptions, not estimates from customer research.
Calculate the weighted average
The expected cost is 0.75 × 60 + 0.25 × 180 = 45 + 45 = 90 units. Taking the unweighted average of 60 and 180 would give 120, incorrectly treating the outcomes as equally likely.
The expected value ninety is not itself one of the model's two possible bills. The realised cost is sixty or one hundred and eighty, depending on the outcome.
Compare a fixed alternative without overstating the result
Suppose fictional option B costs 100 units in either outcome. A has the lower expected cost under the stated assumptions, but it costs more than B in the high-demand outcome.
A budget limit or other constraint may therefore matter alongside the average. The expectation alone does not prove that one option is acceptable in every outcome or determine a complete decision.
Test how much depends on the probabilities
If the high-demand probability were instead 0.5, with low demand also 0.5, A's expected cost would be 120. Changing an assumption can reverse the comparison, so the source of each probability belongs beside the calculation.
This is general business-numeracy learning relevant to CBPA interests, not an organiser's required method or a completed student project. The figures are fictional. Students should independently justify any probabilities used in their own permitted work and keep model assumptions distinct from observed evidence.
Continue reading: CBPA Business Project Skills: Make a Decision Matrix You Can Explain.
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Official information and further reading: Source 1
