CINESA, a government-owned power company that normally uses natural gas for electricity generation, is purchasing fuels other than natu­ral gas and power from a commercially built wind farm, often at extra costs, which are trans­ferred to the customer. Total monthly fuel and wind-power costs are now averaging $6,800,000. An engineer with the utility has calculated the average revenue for the past 24 months using three fuel-mix and wind-power situations: all gas, < 30% other or wind, and ? 30% other or wind. The table below shows the number of months for each situation and the associated rev­enue. If the same situation persists for the next 2 years, determine whether the utility’s revenue will be greater or less than the costs and by how much.

Question

Answer 1

The probability of occurrence of each situation is as follows:

All gas = 12/24 = 0.500
< 30% other/wind = 9/24 = 0.375
? 30% other/wind = 3/24 = 0.125

E(R) = 5,270,000(0.50) + 7,850,000(0.375) + 12,130,000(0.125)
= $7,095,000

Difference = revenue – costs
= 7,095,000 - 6,800,000
= $295,000 greater than expenses