Javier Pena has always been interested in financing artistic projects. He has re
ID: 383253 • Letter: J
Question
Javier Pena has always been interested in financing artistic projects. He has recently been offered two financing opportunities in the fashion industry: financing a new line of avant-garde youth fashions designed by Jorge Vera, and financing a line of business attire designed by Paolo Ricci. Javier has had a lot of past experience with these two designers, and has observed that 20% of Vera’s fashion lines are “hits” and 80% are “misses”. Furthermore, Ricci’s fashion lines are “hits” 30% of the time, and are “misses” 70% of the time.
Javier’s net liquid assets amount to $750,000. As a result he can afford to finance at most one of the two fashion lines. However he does have the option of pre-testing at most one of the fashion lines at the upcoming design show in San Francisco, before deciding which, if any, fashion line he would like to finance for the entire U.S. market for the fall fashion season. The costs and revenue associated with the two fashion lines are given below:
Javier has observed, based on previous years, that of the avant-garde fashion lines that were hits nationwide, 80% were hits in the San Francisco pre-test; of the avant-garde fashion lines that were misses nationwide, 40% were hits in the San Francisco pre-test. Of the business attire fashion lines that were hits nationwide, 90% were hits in the San Francisco pre-test; of the business attire fashion lines that were misses nationwide, 60% were hits in the San Francisco pre-test. While Javier may find pre-test results useful, he knows the accuracy of this kind of test is not high enough to compel him in all cases to act in accordance with the pre-test results. In any event, Javier is willing to act on the basis of expected monetary values (i.e. maximize expected profit).
You have just been hired by Javier to help him analyze his problem so that he can decide what actions to take. He expects a relatively short report of your findings! Include:
a. What should Javier do in all possible situations?
b. How much money will he make on average?
c. What is Javier’s potential maximum loss?
Fashion Line Jorge Vera (avant-garde) Paolo Ricci (business attire) Net cost of San Francisco pre-test $200,000 $75,000 Additional cost of US production of line after a San Fran pre-test $500,000 $275,000 Cost of US Production if not pre-tested in San Fran $600,000 $325,000 Revenue if fashion line is a "hit" $3,900,000 $1,800,000 Revenue if fashion line is a "miss" $300,000 $100,000Explanation / Answer
IN MY OPIINION JAVIER FINANCE COST IS$700000 FOR AVANT GRADE .WHILE SAME IS $350000 IN BUSINESS ATTIRE.WHILE TOTAL COST INVOLVED IN POST PRODUCTION FOR AVANT GRADE IS REDUCED BY JUST $100000 SAME IS REDUCED BY$200000 IN CASE OF BUSINESS ATTIRE.
AVANT GRADE ($200000+$600000)=$800000 WITHOUT SANFRANSICO.
AVANT GRADE($200000+500000)=$700000 WITH SANFRANSICO TEST.
BUSINESS ATTIRE($75000+32500= $400000 WITHOUT PRE TEST
BUSINESS ATTIRE(75000+275000=$350000 WITH TEST.
IE COST INVOLVED IS IN A RATIO OF 2:1
HE CAN HAVE SURPLUS OF FUNDS TO FINANCE AVANT GRADE EVEN AFTER FINANCING BUSINESS ATTIRE.
SITUATION 1- AVANT GRADE FINANCE-COST INVOLVED IS $600000 FOR US PRODUCTION.WITHOUT TEST MAXIMUM REVENUE LOSS-(600000-300000)$300000. ON OTHER HAND COST WITH PRETEST WILL BE-$700000WITH MAXIMUM LOSS OF$.$ 400000 .
SITUATION 2- BUSINESS ATTIRE COST 325000 WITH MAXIMUM LOSS OF 225000 WITHOUT PRE TEST WHILE350000 WITH TEST WITH MAXIMUM LOSS OF 250000 IN CASE OF FAILURE.
SO FOR COST SAVING FIRST BUSINESS ATTIRE SHOULD BE FINANCED.
B- FOR AVANT GRADE COST IS600000 WHILE POSSIBLE REVENUE IS ABOUT 3200000 WHILE
ON OTHER HAND BUSINESS ATIRE COST IS 325000 WHILE REVENUES IS ABOUT110000.
C- POSSIBLE MAXIMUM LOSS FOR AVANT GRADE-300000 WITH OUT TESTING
BUSINESS ATTIRE LOSS WOULD BE MAXED TO225000 WITHOUT TESTING
SO ON SCALE OF ECONOMY FIRST BUSINESS ATTIRE BE FINANCED IF ANY SURPLUS ARISES THEN AVANT GRADE COULD BE LOOKED INTO.
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