You’re the manager of global opportunities for a U.S. manufacturer, who is considering expanding sales into Europe. Your market research has identified 3 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 (sell 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 (sell 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 potential profit?
To determine the potential profit and decide whether to enter one of the European markets, we need to calculate the expected profit for each market and compare them. The expected profit is calculated by multiplying the probability of each outcome by its corresponding profit and summing them up.
Let's start by calculating the expected profit for entering the English market:
Expected profit (England) = (0.5 * $8 * 100,000) + (0.3 * $6 * 60,000) + (0.2 * $0 * 0) - $250,000
= $4,000,000 + $1,080,000 + $0 - $250,000
= $4,830,000 - $250,000
= $4,580,000
Next, let's calculate the expected profit for entering the French market:
Expected profit (France) = (0.4 * $9 * 120,000) + (0.4 * $6 * 50,000) + (0.2 * $0 * 0) - $250,000
= $4,320,000 + $1,200,000 + $0 - $250,000
= $5,520,000 - $250,000
= $5,270,000
Finally, let's calculate the expected profit for entering the German market:
Expected profit (Germany) = (0.2 * $10 * 150,000) + (0.5 * $6 * 70,000) + (0.3 * $0 * 0) - $250,000
= $3,000,000 + $2,100,000 + $0 - $250,000
= $5,100,000 - $250,000
= $4,850,000
Comparing the expected profits of each market, we can see that entering the French market has the highest expected profit of $5,270,000. Therefore, if you can only enter one European market, you should choose the French market.
By entering the French market, your potential profit would be $5,270,000.