Samsung camera has 2 design options for its new line of camera products. Design Option A: has a 0.9 probability of selling 61,000 cameras and a 0.1 probability of selling 63,000 cameras. The design will cost $1,000,000. Design Option B: has an alpha 0.8 probability of selling 68,000 good cameras and an alpha 0.2 probability of selling 62,000 good cameras. The design will cost $1,350,000. In addition, the company needs to use expensive screens which causes an additional manufacturing cost of $250,000 for this design.
In any option, each camera will cost $75 to produce and the selling price for each good camera is $150.
1. Draw the decision tree appropriate to the alternatives and outcomes stated.
2. Using the decision tree and EMV, what is their best choice? (Show your calculation for profits for each probability/option and EMV)
Question 5. Jollibee have fond memories of ice skating at a local park. An artist has captured the experience in a drawing and hopes to reproduce it and sell framed copies to current and former residents. He thinks he can sell 400 copies of the refined version at $125 each if the market is good. If the market is not good, he will sell only 300 at $90 each. He can make a deluxe version of the same drawing instead. He feels that if the market is good, he can sell 500 copies of the deluxe version at $100 each. If the market is not good, he will sell only 400 copies at $70 each. In either case, production costs will be approximately $35,000.
Required
1. What should he do if he believes there is a 50% probability of a good market? Why?
To answer the first question, we need to calculate the expected monetary value (EMV) for each design option. EMV is calculated by multiplying the probability of each outcome by its associated monetary value and summing them up.
For Design Option A:
- Probability of selling 61,000 cameras = 0.9
- Probability of selling 63,000 cameras = 0.1
- Selling price per camera = $150
- Cost to produce per camera = $75
- Manufacturing cost for the design = $1,000,000
Expected profit for Design Option A:
EMV = (0.9 * 61,000 * ($150 - $75)) + (0.1 * 63,000 * ($150 - $75)) - $1,000,000
For Design Option B:
- Probability of selling 68,000 good cameras = 0.8
- Probability of selling 62,000 good cameras = 0.2
- Selling price per camera = $150
- Cost to produce per camera = $75
- Manufacturing cost for the design = $1,350,000
- Additional manufacturing cost for screens = $250,000
Expected profit for Design Option B:
EMV = (0.8 * 68,000 * ($150 - $75)) + (0.2 * 62,000 * ($150 - $75)) - $1,350,000 - $250,000
Compare the EMV for both design options and choose the one with the higher value. The option with the higher EMV is considered the best choice.
Now for the second question regarding the artist selling framed copies of a drawing, we need to calculate the expected profit for each scenario and then make a decision based on the probabilities and profits.
Scenario 1 (Good market):
- Number of copies sold of the refined version = 400
- Selling price for each copy = $125
- Production cost = $35,000
Expected profit for the refined version in a good market:
EMV = 400 * ($125 - $35,000)
Scenario 2 (Not good market):
- Number of copies sold of the refined version = 300
- Selling price for each copy = $90
- Production cost = $35,000
Expected profit for the refined version in a not good market:
EMV = 300 * ($90 - $35,000)
Scenario 3 (Good market):
- Number of copies sold of the deluxe version = 500
- Selling price for each copy = $100
- Production cost = $35,000
Expected profit for the deluxe version in a good market:
EMV = 500 * ($100 - $35,000)
Scenario 4 (Not good market):
- Number of copies sold of the deluxe version = 400
- Selling price for each copy = $70
- Production cost = $35,000
Expected profit for the deluxe version in a not good market:
EMV = 400 * ($70 - $35,000)
Compare the expected profits for each scenario and choose the best option based on probabilities and profits.