Chapter 20, Problem 38PS

The manufacturer of a nationally distributed brand of potato chips wants to determine the feasibility of changing the product package from a cellophane bag to an unbreakable container. The product manager believes that there are three possible national market responses to a change in product package: weak. moderate. and strong. The projected payoffs, in millions of dollars, in increased or decreased pro�t compared to the current package are as follows:

Based on past experience. the product manager assigns the following probabilities to the different levels of national response:

P(Weak national response) $\text{=}\text{0}\text{.30}$

P(Moderate national response) $\text{=}\text{0}\text{.60}$

P(Strong national response) $\text{=}\text{0}\text{.10}$

a. Construct a decision tree,

b. Construct an opportunity loss table.

c. Compute the expected monetary value (EMV) for offering this new product package.

d. Compute the expected opportunity loss (EOL) for offering this new product package.

e. Explain the meaning of the expected value of perfect information (EVPI) in this problem.

f. Compute the return-to-risk ratio (RTRR) for offering this new product package.

g. Based on the results of (c), (d), and (f), should the company offer this new product package? Why?

h. What are your answers to parts (c) through (g) if the probabilities are 0.6, 0.3, and 0.1, respectively?

i. What are you answer to parts (c) through (g) if the probabilities are 0.1, 0.3, and 0.6, respectively?

Before making a �nal decision, the product manager would like to test market the new package in a selected city by substituting the new package for the o1d package. A determination can then be made about whether sales have increased, decreased, or stayed the same. In previous test marketing of other products, when there was a subsequent weak national response, sales in the test city decreased $60\%$ of the time, stayed the same $30\%$ of the time, and increased $10\%$ of the time. Where there was a moderate national response. sales in the test city decreased $20\%$ of the time, stayed the same $40\%$ of the time, and increased $40\%$ of the time. When there was a strong national response, sales in the test city decreased 5% of the time, stayed the same $35\%$ of the time, and increased $60\%$ of the time.

j. If sales in the test city stayed the same, revise the original probabilities in light of this new information.

k. Use the revised probabilities in (j) to repeat (c) through (g).

1. 1f sales in the test city decreased. revise the original probabilities in light of this new information.

m. In. Use the revised probabilities in (1) to repeat (0) through (g).