The management of Madeira Computing is considering the introduction of a wearable electronic device with the functionality of a laptop computer and phone. The fixed cost to launch this new product is $300,000. The variable cost for the product is expected to be between $160 and $240, with a most likely value of $200 per unit. The product will sell for $300 per unit. Demand estimates for the product vary widely, ranging from 0 to 20,000 units, with 4000 units the most likely.
a. Compute profit for the base-case, worst-case, and best-case scenarios.
b. Model the variable cost as a uniform random variable with a minimum of $160 and a maximum of $240. Model product demand as 1,000 times the value of a gamma random variable with the shape parameter (alpha) of 3 and a scale parameter (beta) of 2. Construct a simulation model to estimate the mean profit and the probability that that the project will result in a loss.
c. What is your recommendation with regard to the introduction of the product?