1. Spillsberry Foods must determine whether or not to market a new cake mix nati
ID: 1941987 • Letter: 1
Question
1. Spillsberry Foods must determine whether or not to market a new cake mix nationally. Management must also decide whether to conduct a local consumer test marketing program. If the mix is successful, Spillsberry’s profits will increase by $500,000; if the mix fails, the company will lose $250,000. Not marketing the product will not affect profits. The cake mix is considered to have a 60% chance of success without testing. .a. Construct a payoff table for the prior analysis. Then, using the maximum expected payoff approach, determine Spillsberry’s Maximum EMV action (GO or NOGO) and the associated expected payoff.
b. Determine the expected value of perfect information (EVPI) for this situation.
Now suppose the local test marketing option will cost $20,000. Moreover, if the national market demand would lead to a success, the probability of a favorable test market is 80%, whereas if the market demand would lead to a national failure, the probability of an unfavorable test market is 90%.
c. Write down the conditional test market result probability table based on the data given above.
d. Using probability tables, develop the joint probability table and posterior probabilities for national sales results given test marketing outcomes. Show the different steps in the Bayesian process, identifying the joint probabilities and marginal test marketing result probabilities obtained as intermediate results.
e. Construct the decision tree for the entire decision (including the test marketing option). By backward induction, determine Spillsberry’s optimal course of action.
f. Determine EV|SI, EVSI and ENGSI for this situation. Clearly state the decision rule obtained and maximum expected payoff EMV* for the optimal decision rule.
Explanation / Answer
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