2. The Supe Company must decide whether or not to introduce a new diet soft drin

Question

2. The Supe Company must decide whether or not to introduce a new diet soft drink. Management oes introduce the diet soda it will yield a profit of $1.25 million if sales are 100 million, a t sales are 50 million, or it will lose $1.75 million if sales are only 1 million bottles.I 54 profit of $300,000 if per Cola does not market the new diet soda, it will suffer a loss of $400,000 a. Construct a payoff table for this problem. b. Construct a regret (opportunity loss) table for this problem nternal marketing research study has found P (100 million in sales) 1/2; P (50 million in sales)-1/3; P (1 million in sales-1/6. Should Super Cola introduce the new diet soda based on expected payoff (lprofits? d. Based on expected opportunity losses, which strategy is best for Super Cola? e. What is the EVPI (expected value of perfect information? f. A consulting firm can perform a more thorough study for $350,000. Should management have this study performed? If the conditional probabilities are .75..15 and.10 for the three states, what would be the expected value of sample information. (EVSI.? Bayes Redision Last, staple all sheets together.

Explanation / Answer

(a)

(b)

Regret Table

(c)

Yes. It should introduce the product as 0.433 > -0.34

(d)

Expected opportunity loss

Expected opportunity loss is least for introducing the product. So, it should be introduced.

(e)

EVPI = Minimum of Expected opportunity loss = $0.285

(f)

When EVPI is $0.285 million, why should it pay $0.35 million? The study must not be performed.

(g)

EVSI =  $1.029 - $0.433 (from part c) = $0.596 million

States of nature 100 million 50 million 1 million Options Introduce $1.25 $0.30 ($1.75) Don't introduce ($0.40) ($0.40) ($0.04)

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