1. (a) You are the brand manager for Velvetskin body lotion at Bew-T cosmetics. Velvetskin's annual...

  

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1. (a) You are the brand manager for Velvetskin body lotion at Bew-T cosmetics. Velvetskin's annual sales are 300.000 bottles, with each bottle costing $5 to produce, and selling for $12. The research and development department have just developed a new body lotion formula. You must decide whether to change the Velvetskin product to the new formula or stay with the old formula. The variable cost of production for the new formula will be $7 per bottle. This is slightly higher than for the old formula, but you feel an increase in sales might compensate for the higher costs. You plan to sell the new Velvetskin for $12 per bottle. You believe that annual sales will fall into one of three scenarios: High (600,000 bottles sold); Medium (300,000 bottles sold) or Low (200,000 bottles sold). You estimate the chances of these scenarios to be 0.3, 0.4 and 0.3 respectively. (i) Under which if any of the three scenarios would you introduce the new [3] Velvetskin formula? Explain your reasoning. (ii) Given that you do not know which sales scenario will hold, would you [3] introduce the new Velvetskin formula? Explain your reasoning. (b) For the Bew-T problem in (a), you are considering hiring Inside Info, a leading market research company. Although Inside cannot predict sales figures exactly, they will indicate whether they believe the new formula product will be a "Hit" or a "Flop". Based on historical performance, Inside are equally likely to indicate Hit or Flop. If Inside tells you the new formula is going to be a Hit, you believe the probabilities of High, Medium and Low sales scenarios will be 0.6, 0.3 and 0.1 respectively. If they say Flop, then you believe the probabilities will be 0.0, 0.5 and 0.5 respectively. (1) Would you introduce the new formula if Inside indicates it will be a [5] Hit? Explain your reasoning. (ii) Would you introduce the new formula if Inside indicates it will be a [5] Flop? Explain your reasoning. [4] (iii) Inside state a fee of $150,000 to perform this test market study on your new formula. Would you hire Inside at this fee? If your answer is No, what is the maximum fee you would be willing to pay for the information they are providing? Explain your reasoning. (c) Suppose that, in a Linear Programme with two decision variables ₁ and [5] 22, you are given two constraints: A. 72₁ +3₂ ≤ $$80; B. 4z₁ + 6x₂ ≤ 12. When you run a solver, the solver says that: for constraint A, the shadow price is S$0.45; for constraint B, there is a slack of 3. Which (if either) of the constraints A and B is/are binding? Which is/are nonbinding? Explain your reasoning. 1. (a) You are the brand manager for Velvetskin body lotion at Bew-T cosmetics. Velvetskin's annual sales are 300.000 bottles, with each bottle costing $5 to produce, and selling for $12. The research and development department have just developed a new body lotion formula. You must decide whether to change the Velvetskin product to the new formula or stay with the old formula. The variable cost of production for the new formula will be $7 per bottle. This is slightly higher than for the old formula, but you feel an increase in sales might compensate for the higher costs. You plan to sell the new Velvetskin for $12 per bottle. You believe that annual sales will fall into one of three scenarios: High (600,000 bottles sold); Medium (300,000 bottles sold) or Low (200,000 bottles sold). You estimate the chances of these scenarios to be 0.3, 0.4 and 0.3 respectively. (i) Under which if any of the three scenarios would you introduce the new [3] Velvetskin formula? Explain your reasoning. (ii) Given that you do not know which sales scenario will hold, would you [3] introduce the new Velvetskin formula? Explain your reasoning. (b) For the Bew-T problem in (a), you are considering hiring Inside Info, a leading market research company. Although Inside cannot predict sales figures exactly, they will indicate whether they believe the new formula product will be a "Hit" or a "Flop". Based on historical performance, Inside are equally likely to indicate Hit or Flop. If Inside tells you the new formula is going to be a Hit, you believe the probabilities of High, Medium and Low sales scenarios will be 0.6, 0.3 and 0.1 respectively. If they say Flop, then you believe the probabilities will be 0.0, 0.5 and 0.5 respectively. (1) Would you introduce the new formula if Inside indicates it will be a [5] Hit? Explain your reasoning. (ii) Would you introduce the new formula if Inside indicates it will be a [5] Flop? Explain your reasoning. [4] (iii) Inside state a fee of $150,000 to perform this test market study on your new formula. Would you hire Inside at this fee? If your answer is No, what is the maximum fee you would be willing to pay for the information they are providing? Explain your reasoning. (c) Suppose that, in a Linear Programme with two decision variables ₁ and [5] 22, you are given two constraints: A. 72₁ +3₂ ≤ $$80; B. 4z₁ + 6x₂ ≤ 12. When you run a solver, the solver says that: for constraint A, the shadow price is S$0.45; for constraint B, there is a slack of 3. Which (if either) of the constraints A and B is/are binding? Which is/are nonbinding? Explain your reasoning.

Answer rating: 100% (QA)

a To determine whether to introduce the new Velvetskin formula we need to calculate the expected profit under each scenario Under the old formula the profit per bottle sold is 7 12 selling price 5 pro... View the full answer