Manju Bachchan has enjoyed sailing small boars since she was 7 years old when her mother started
Question:
Manju Bachchan has enjoyed sailing small boars since she was 7 years old when her mother started sailing with her. Today, Manju is considering the possibility of starting a company to produce small sailboats for the recreational market. Unlike other mass-produced sailboats, however, these boats will be made specifically for children between the ages of 10 and 15. The boats will be of the highest quality and extremely stable, and the sail size will be reduced to prevent problems of capsizing.
Her basic decision is whether to build a large manufacturing facility, a small manufacturing facility, or no facility at all. With a favourable market, Manju can expect to make $90,000 from the large facility or $60,000 from the smaller facility. If the market is unfavourable, however, Manju estimates that she would lose $30,000 with a large facility, and she would lose only$20,000 with the small facility. Because of the expense involved in developing the initial moulds and acquiring the necessary equipment to produce fibreglass sailboats for young children, Manju has decided to conduct a pilot study to make sure that the market for the sailboats will be adequate. She estimates that the pilot study will cost her $10,000. Furthermore, the pilot study can be either favourable or unfavourable. Manju estimates that the probability of a favourable market given a favourable pilot study is 0.8. The probability of an unfavourable market given an unfavourable pilot study result is estimated to be 0.9. Manju feels that there is a 0.65 chance that the pilot study will be favourable. Of course, Manju could bypass the pilot study and simply make the decision as to whether to build a large plant, small plant, or no facility at all. Without doing any testing in a pilot study, she estimates that the probability of a favourable market is 0.6. What do you recommend?
Cost Management Accounting and Control
ISBN: 978-0324559675
6th Edition
Authors: Don R. Hansen, Maryanne M. Mowen, Liming Guan