C&A, a cellular phone manufacturer, is investigating the possibility of producin
ID: 451141 • 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 is true about the decision to do a pilot study before deciding whether or not to purchase a CAD/CAM system? Check all that apply.
1) C&A will have a loss of $15,000 if the result of the pilot study is unfavorable.
2) C&A will have a profit of $684,000 if the result of the pilot study is favorable.
3) C&A will have a loss of 30,000 if the pilot study is unfavorable.
4) C&A will have a profit of $15,000 if the result of the pilot study is unfavorable.
5) C&A will have a profit of $990,000 if the result of the pilot study is favorable.
Explanation / Answer
C&A will have an expected profit of $684,000 if the result of the pilot study is favorable.
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