ACME BLANK

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Virginia Commonwealth University *

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212

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Economics

Date

Nov 24, 2024

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xlsx

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6

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Acme Market Case (from textbook): Do we continue development and market the new product? Fixed cost $6,000 (in thousands) Unit margin $18 Market Probability Sales volume Net revenue Great 0.45 600 Fair 0.35 300 Awful 0.2 90 EMV before a EMV after ad Decision 1: Stop Development and abandon product Probability EMV Sunk/Fixed Costs Associated with Production Continue Production? Decision box: Choose EMV Acme Stop Development Continue Development Great Fair Awful Acme
Decision 1: Stop Development and abandon product VS Continue Development? EMV for Stop Development EMV for Continue Development Decision using EMV Criterion
After deducting fixed cost adjusting for fixed cost $ - =SUMPRODUCT(B6:B8,D6:D8) djusting for fixed cost $ - =SUMPRODUCT(B6:B8,E6:E8) Terminal Payoff/Loss The Acme Company must decide whether to market a new product. As in many new-product situations, there is considerable uncertainty about the eventual success of the product. The product is currently part way through the development process, and some fixed development costs have alread been incurred. If the company decides to continue development and then market the product, there will be additional fixed costs, and they are estimated to be $6 million. If the product is marketed, its unit margin (selling price minus variable cost) will be $18 Acme classifies the possible market results as “great,” “fair,” and “awful,” and it estimates the probabilities of these outcomes to be 0.45, 0.35, and 0.20, respectively. Finally, the company estimates that the corresponding sales volume (in thousands of units sold) from these three outcomes are 600, 300, and 90, respectively. Assuming that Acme is an EMV maximizer, should it finish development and then market the product, or should it stop development at this point and abandon the product?
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