The Acme Company is developing a product, the fixed costs are estimated to be $6000. and the unit margin 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 of these three outcomes are 600, 300, and 90, respectively. Suppose Acme could, by an early marketing campaign, change the probabilities of the market conditions from their current values to 0.75, 0.15, and 0.1. In terms of EMV, how much would the company be willing to pay at most for such a marketing campaign?
The Acme Company is developing a product, the fixed costs are estimated to be $6000. and the unit margin 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 of these three outcomes are 600, 300, and 90, respectively. Suppose Acme could, by an early marketing campaign, change the probabilities of the market conditions from their current values to 0.75, 0.15, and 0.1. In terms of EMV, how much would the company be willing to pay at most for such a marketing campaign?
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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The Acme Company is developing a product, the fixed costs are estimated to be $6000. and the unit margin 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 of these three outcomes are 600, 300, and 90, respectively.
Suppose Acme could, by an early marketing campaign, change the probabilities of the market conditions from their current values to 0.75, 0.15, and 0.1. In terms of EMV, how much would the company be willing to pay at most for such a marketing campaign? 3,072
| Fixed cost | $6,000 | ||||||||
| Unit margin | $18 | ||||||||
| Market Conditions | Probability | New probability | Sales volume | Profit | |||||
| Great | 0.45 | 0.75 | 600 | $4,800 | |||||
| Fair | 0.35 | 0.15 | 300 | -$600 | |||||
| Awful | 0.2 | 0.10 | 90 | -$4,380 | |||||
| EMV | 1,074 | ||||||||
| EMV | 3,072 |
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