C&A;, a cellular phone manufacturer, is investigating the possibility of produci
ID: 3226762 • Letter: C
Question
C&A;, a cellular phone manufacturer, is investigating the possibility of producing and marketing a new line of phone. Undertaking this project will require either purchasing a CAD/CAM system or hiring and training several additional engineers, or purchasing a CAD/CAM system after a pilot study. The market for the product could be either favorable or unfavorable. With favorable acceptance by the market, sales would be 25,000 phones selling for $100 each, and with unfavorable acceptance, sales would be only 8,000 phones selling for $100 each. The cost of the CAD/CAM equipment is $500,000, but that of hiring and training three new engineers is only $375,000. However, manufacturing cost should drop from $50 each when manufacturing without CAD/CAM to $40 each when manufacturing with CAD/CAM. The probability of favorable acceptance of the new phone is 0.40; the probability of unfavorable acceptance is 0.60. The other option is to conduct a pilot study and then decide whether or not to purchase a CAD/CAM system. The pilot study will cost 10,000. C&A; will purchase the CAD/CAM system only if the result of the pilot study is positive. The probability of a positive pilot study is 50%. At this time, the probability of favorable acceptance of the new phone will be increased to 70%. All other costs and sales figures remain the same. Which of the following statements about the decision to purchase a CAD/CAM system without doing a pilot study is true? Check all that apply. C&A; will have a loss of $20,000 if the market is unfavorable. C&A; will have a profit of $1,000,000 if the market is favorable. C&A; will have a profit of $1, 500,000 if the market is favorable. C&A; will have a profit of $30,000 if the market is unfavorable. C&A; will have a profit of $20,000 if the market is unfavorable.Explanation / Answer
A and B are true
Profit in case of favourable condition = 25000*100- 40*25000 - 500000 = 100000
Loss in case of unfavourable condition = 500000 + 40*8000 - 25000*100 = 20000
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