3. (20 marks) A company has identified a potential new type of cereal which would require...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
3. (20 marks) A company has identified a potential new type of cereal which would require $900,000 in start-up costs to launch. If it turns out to be a major success, there will be a $5,000,000 contribution to profit. A minor success would give a profit contribution of $1,000,000, while a failure would have a profit contribution of only $250,000. The company is most worried about this third possibility, since in this case the net profit would be $250,000 minus $900,000, i.e. a loss of $650,000. In the past, one new product in twenty became a major success, one new product in five became a minor success, and the other three-quarters of them became failures; there is no reason to suspect that this product would be any different from the rest. Some of their competitors use an outside independent market research firm to give them advice about new products. The fee for the research firm is $25,000; in return, the consumer products company would be told that the proposed product either "looks well" or "looks poorly". The research company had established a track record which gave them confidence about saying the following: (a) If a product would be a major success, they would say "looks well" with prob- ability 0.8; (b) If a product would be a minor success, they would say "looks poorly" with probability 0.7; (c) If a product would be a failure, they would say "looks poorly" with probability 0.9. Develop a decision tree and solve it to obtain a recommendation. 3. (20 marks) A company has identified a potential new type of cereal which would require $900,000 in start-up costs to launch. If it turns out to be a major success, there will be a $5,000,000 contribution to profit. A minor success would give a profit contribution of $1,000,000, while a failure would have a profit contribution of only $250,000. The company is most worried about this third possibility, since in this case the net profit would be $250,000 minus $900,000, i.e. a loss of $650,000. In the past, one new product in twenty became a major success, one new product in five became a minor success, and the other three-quarters of them became failures; there is no reason to suspect that this product would be any different from the rest. Some of their competitors use an outside independent market research firm to give them advice about new products. The fee for the research firm is $25,000; in return, the consumer products company would be told that the proposed product either "looks well" or "looks poorly". The research company had established a track record which gave them confidence about saying the following: (a) If a product would be a major success, they would say "looks well" with prob- ability 0.8; (b) If a product would be a minor success, they would say "looks poorly" with probability 0.7; (c) If a product would be a failure, they would say "looks poorly" with probability 0.9. Develop a decision tree and solve it to obtain a recommendation.
Expert Answer:
Answer rating: 100% (QA)
Answer If the company decides not to use the research firm then the ex... View the full answer
Related Book For
Advanced Financial Accounting
ISBN: 978-0078025624
10th edition
Authors: Theodore E. Christensen, David M. Cottrell, Richard E. Baker
Posted Date:
Students also viewed these accounting questions
-
A company has identified the following 3 options for obtaining a part 1 buy the parts at $200 per unit including raw materials 2 make the parts using a traditional machine at $75 per part including...
-
A company has identified a takeover target with a current equity value of 2 billion. It believes that it can create 0.5 billion of value by acquiring this company and that it will need to pay a...
-
Five independent coin tosses result in HIIHHII. It turns out that if the coin is fair the probability of this outcome is (l/2)5 = 0.03125. Does this produce strong evidence that the coin is not fair?...
-
Which step in the recruitment process involves attracting potential candidates to the organization? A. Selection B. Induction C. Job analysis D. Sourcing
-
The following information is available for Chads Chocolates: Actual production....... 2,800 boxes Budgeted production ...... 3,200 boxes Standard direct labor hours... 3 DLH per box Actual direct...
-
If the recommended adult dosage for a drug is D(in mg), then to determine the appropriate dosage c for a child of age a, pharmacists use the equation c = 0.0417 D(a + 1). Suppose the dosage for an...
-
Derive the equation that is equivalent to Eqs. (15-32b) and (15-32c) in terms of a partial pressure driving force and a \(\log\) mean partial pressure difference: \[ \begin{equation*}...
-
Senior Security Co. offers a range of security services for senior citizens. Each type of service is considered within a separate department. Mary Pincus, the overall manager, is compensated partly...
-
Jim owns a 1952 Chevrolet pickup truck that he has carefully restored (adjusted basis $12,000). Sadly, the truck is destroyed in a freak accident on October 15, 2022 and Jim collects the truck's FMV...
-
Activity B Sorting Protein Facts It is important to know what denatures protein, how protein functions in food, and how it contributes to good health. The list below includes key facts about these...
-
Idris Inc. manufactures entry and dining room lighting fixtures. Five activities are used in manufacturing the fixtures. These activities and their associated budgeted activity costs and activity...
-
5x + 13x-6 x + 2x2 - 9x - 18 Consider the function (a) A root is a value of the variable where the function evaluates to zero; that is, a value of a such that f(x) = 0. Find the roots of the given...
-
Elfalan Corporation produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 43,000 units per month is as follows: Per Unit...
-
task : create questionnaire for pet friendly hotel clients . main objective here is to promote our pet services at pet friendly hotels . I have attached pictures for reference on what services we...
-
Safety Development Corporation had relatively large idle cash balances and invested them as follows in securities to be held as non- strategic investments: 2023 Feb. 7 Purchased 2,700 common shares...
-
The normal freezing point of ethanol (CH3CH2OH) is -117.30 C and its Kfp value is 1.99 C/m. A nonvolatile, nonelectrolyte that dissolves in ethanol is testosterone . How many grams of testosterone,...
-
Pressure (kPa) 22,089 D 101 0.6 A Ice (solid) Water (liquid) Triple point B Water vapor (gas) 100 374 0 0.01 Temperature (C) Critical point
-
Find the reduced echelon form of each of the matrices given in Problems 120. c 1 26 + 4
-
The trial balance data presented in Problem P6-34 can be converted to reflect use of the cost method by inserting the following amounts in place of those presented for Randall Corporation: Investment...
-
What are the major causes of a dissolution? What are the accounting implications of a dissolution?
-
Refer to the information in Problem P12-23. Assume the U.S. dollar is the functional currency. In P12-23 Additional Information 1. Western Ranching uses average cost for cost of goods sold. Inventory...
-
Equipment costing \($640,000\), with an expected useful life of twelve years and an expected salvage value of \($20,000\), was purchased at the beginning of the year. Calculate the depreciation...
-
Swift Trucking Company purchased a long-haul tractortrailer for \($400,000\) at the beginning of the year. The expected useful life of the tractor-trailer rig was eight years or 500,000 miles....
-
The following are financial data taken from the 2015 annual report of Pfizer, Inc: Calculate the following ratios for 2015 and 2014: intangible asset turnover, fixed asset turnover, accumulated...
Study smarter with the SolutionInn App