A company marketing a new product has found that sales have suddenly escalated, and it is...
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A company marketing a new product has found that sales have suddenly escalated, and it is having difficulty coping with increased demand. It can either invest £250,000 in improving equipment to enable this level of production to be sustained or outsource production of this item. If production is kept in-house the company will make a profit of £5 per item. If production is outsourced, the profit will be £2 per item. For the coming year it is estimated that there is a 70% chance that demand will remain at 100,000 units, a 20% chance that it will fall slightly to 75,000 units and a 10% chance that the current market condition represent a temporary "blip" and demand will drop back to its former level of 10,000 units. It is anticipated that this product will only be saleable during the next 12 months, at the end of which time the new equipment will be worthless. A payoff table has been produced to summarise this information: OUTCOMES (DEMAND in 000s) 100 75 10 What are the values of A, B, C, D, E and F? PROBABILITY 0.70 0.20 E EMV Invest in equipment 250 A B PAYOFF (£000s) ACTION F Outsource C 150 D 172 A company marketing a new product has found that sales have suddenly escalated, and it is having difficulty coping with increased demand. It can either invest £250,000 in improving equipment to enable this level of production to be sustained or outsource production of this item. If production is kept in-house the company will make a profit of £5 per item. If production is outsourced, the profit will be £2 per item. For the coming year it is estimated that there is a 70% chance that demand will remain at 100,000 units, a 20% chance that it will fall slightly to 75,000 units and a 10% chance that the current market condition represent a temporary "blip" and demand will drop back to its former level of 10,000 units. It is anticipated that this product will only be saleable during the next 12 months, at the end of which time the new equipment will be worthless. A payoff table has been produced to summarise this information: OUTCOMES (DEMAND in 000s) 100 75 10 What are the values of A, B, C, D, E and F? PROBABILITY 0.70 0.20 E EMV Invest in equipment 250 A B PAYOFF (£000s) ACTION F Outsource C 150 D 172
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Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey
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