You’re the manager of global opportunities for a U.S. manufacturer, who is considering expanding
sales into Europe. Your market research has identified three potential market opportunities:
England, France, and Germany. If you enter the English market, you have a 0.5 chance of big
success (selling 100,000 units at a per-unit profit of $8), a 0.3 chance of moderate success (selling
60,000 units at a per-unit profit of $6), and a 0.2 chance of failure (selling nothing). If you enter
the French market, you have a 0.4 chance of big success (selling 120,000 units at a per-unit profit
of $9), a 0.4 chance of moderate success (selling 50,000 units at a per-unit profit of $6), and a 0.2
chance of failure (selling nothing). If you enter the German market, you have a 0.2 chance of
huge success (selling 150,000 units at a per-unit profit of $10), a 0.5 chance of moderate success
(selling 70,000 units at a per-unit profit of $6), and a 0.3 chance of failure (selling nothing). If you
can enter only one market, and the cost of entering the market (regardless of which market you
select) is $250,000, should you enter one of the European markets? If so, which one? If you enter,
what is your expected profit?
To determine whether you should enter one of the European markets and which one to choose, we will calculate the expected profit for each market opportunity and compare them.
Let's start by calculating the expected profit for entering the English market:
Expected profit from big success:
0.5 * (100,000 units * $8 per unit profit) = $400,000
Expected profit from moderate success:
0.3 * (60,000 units * $6 per unit profit) = $108,000
Expected profit from failure:
0.2 * $0 = $0
Total expected profit from entering the English market:
$400,000 + $108,000 + $0 = $508,000
Now, let's calculate the expected profit for entering the French market:
Expected profit from big success:
0.4 * (120,000 units * $9 per unit profit) = $432,000
Expected profit from moderate success:
0.4 * (50,000 units * $6 per unit profit) = $120,000
Expected profit from failure:
0.2 * $0 = $0
Total expected profit from entering the French market:
$432,000 + $120,000 + $0 = $552,000
Next, let's calculate the expected profit for entering the German market:
Expected profit from huge success:
0.2 * (150,000 units * $10 per unit profit) = $300,000
Expected profit from moderate success:
0.5 * (70,000 units * $6 per unit profit) = $210,000
Expected profit from failure:
0.3 * $0 = $0
Total expected profit from entering the German market:
$300,000 + $210,000 + $0 = $510,000
Now, let's compare the expected profits from each market opportunity:
Expected profit from the English market: $508,000
Expected profit from the French market: $552,000
Expected profit from the German market: $510,000
Based on these calculations, the highest expected profit is from entering the French market with a total of $552,000. Therefore, you should choose to enter the French market.
Please note that these calculations assume that the probabilities and unit profits remain constant and do not consider other factors such as market conditions, competition, or potential risks. It's essential to conduct further analysis and evaluate other relevant factors before making a final decision.