C&A, a cellular phone manufacturer, is investigating the possibility of producin
ID: 419975 • 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.
See attached file for the decision tree. 25000 x (100-40) 500000 -1000000 388000 Favorable (0.4)1 CAD/CAM Unfavorable (0.6) 8000 x (100-40) 500000 --20000 No CAD/C Favorable (D.4) 25000 x (100-50)-375000 -875000 365000 Unfavorable (0.6) 8000 x (100-50)-375000 -25000 Pilot Study Favorable (0.7 25000 x (100-40)-500000-10000 -990000 F avorable (0.5) Unfavorable (0.3) 349500 684000 8000 x (100-40) 500000 -10000 30000 Unfavorable (0.5) 8000 x (100-50)-375000-10000 - 15000Explanation / Answer
From the decision tree above we can see that
C&A will have a loss of $20000 when the market is unfavourable
C&A will have a profit of $1000000 when market is favourable
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