As the Manager of a growing beauty product company, you are considering widening the product range by launching a new product: a hair dressing tonic. The incremental profit is $700 per unit and the necessary investment in equipment is $39 million. The marketing department has given you the estimated demand as follows:

Units demanded 30,000 40,000 50,000 60,000 70,000

Probability 0.05 0.10 0.20 0.30 0.35

QUESTION:

1) Compute the expected profits for all the possible events (states of nature)

2) Prepare a pay-off table for this decision situation

3) Advise the board of directors whether the new product should be introduced.

Hint: Use the expected value criterion

4) The board has now resolved to obtain expert information and is in the process of contracting a marketing consultancy firm for this purpose.

Suggest the maximum amount that your company should be willing to pay for the consultancy.

Support your answer with the relevant workings.

Answer rating: 100% (QA)

To solve this decision problem we can use the expected value criterion to calculate the expected pro... View the full answer