Voltaire, a renowned pastry chef employed at a four-star hotel, has decided to open his own exclusive pastry shop. He has $100,000 to invest and the information he has obtained is as follows:
◆ There is a 55% probability the market size in the area will be 600,000 pastries per year and a 45% chance it will be 450,000 pastries per year.
◆ Price per pastry is assumed to be $4.00 and this is the basis for predicting Voltaire’s market share.
◆ Variable costs are $2.60 per pastry.
The market share Voltaire will capture depends on where he locates. There are two possibilities:
◆ Location A costs $38,000 annual rent, where Voltaire will capture 30% of the pastry market (his market share). Fixed costs excluding rent are estimated at $90,000 per year.
◆ Location B costs $12,000 annual rent, where Voltaire will capture 22% of the pastry market (his market share). Fixed costs excluding rent are estimated at $54,000 per year.
1. Based on your quantitative analysis, what is the best choice of location for Voltaire?
2. There is a consultant who sells industry market information. How much should Voltaire be willing to pay to know with certainty what the total market size is?