A furniture store has had numerous inquiries regarding the availability of furniture and equipment that could...
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A furniture store has had numerous inquiries regarding the availability of furniture and equipment that could be rented for large outdoor summer parties. This includes such items as folding chairs and tables, a deluxe grill, propane gas, and lights. No rental equipment of this nature is available locally, and the management of the furniture store is considering forming a subsidiary to handle rentals. An investigation revealed that most people interested in renting wanted a complete group of party essen- tials (about 12 chairs, four tables, a deluxe grill, a bottle of propane gas, tongs, etc.). Management decided not to buy a large number of complete sets because of the financial risk involved. That is, if the demand for the rental groups was not as large as anticipated, a large financial loss might be incurred. Further, outright purchase would mean that the equipment would have to be stored during the off-season. It was then discovered that a firm in Collingwood leased a complete party set for $560 for the summer season. This amounts to about $5 a day. In the promotional literature from the Collingwood firm, a rental fee of $15 was suggested. For each set rented, a profit of $10 would thus be earned. It was then decided to lease from the Collingwood firm, at least for the first season. The Collingwood firm suggested that on the basis of the combined experience of similar rental firms in other cities, either 41, 42, 43, 44, 45, or 46 complete sets be leased for the season. On the basis of this sugges- tion, management must now decide on the most profitable number of complete sets to lease for the season. The leasing firm in Collingwood also made available some additional information gathered from several rental firms similar to the newly formed subsidiary. Note in the following table (which is based on the experi- ence of the other rental firms) that for 360 days of the total of 6000 days' experience-or about 6% of the days- these rental firms rented out 41 complete party sets. On 10% of the days during a typical summer, they rented 42 complete sets, and so on. Chapter 17 Number of Number of Number of Number of Sets Rented Days Sets Rented Days 40 44 2400 41 360 45 1500 42 600 46 300 43 840 47 a. Construct a payoff table. (As a check figure, for the act of having 41 complete sets available and the event of renting 41, the payoff is $410.) b. The expected daily profit for leasing 43 complete sets from the Collingwood firm is $426.70; for 45 sets, $431.70; and for 46 sets, $427.45. Organize these expected daily profits into a table, and complete the table by finding the expected daily profit for leasing 41, 42, and 44 sets from the Collingwood firm. c. On the basis of the expected daily profit, what is the most profitable action to take? d. The expected opportunity loss for leasing 43 party sets from the Collingwood firm is $11.60; for 45 sets, $6.60; for 46 sets, $10.85. Organize these into an expected opportunity loss table, and complete the table by computing the expected opportunity loss for 41, 42, and 44. e. On the basis of the expected opportunity loss table, what is the most profitable course of action to take? Does this agree with your decision for part (c)? f. Determine the value of perfect information. Explain what it indicates in this problem. A furniture store has had numerous inquiries regarding the availability of furniture and equipment that could be rented for large outdoor summer parties. This includes such items as folding chairs and tables, a deluxe grill, propane gas, and lights. No rental equipment of this nature is available locally, and the management of the furniture store is considering forming a subsidiary to handle rentals. An investigation revealed that most people interested in renting wanted a complete group of party essen- tials (about 12 chairs, four tables, a deluxe grill, a bottle of propane gas, tongs, etc.). Management decided not to buy a large number of complete sets because of the financial risk involved. That is, if the demand for the rental groups was not as large as anticipated, a large financial loss might be incurred. Further, outright purchase would mean that the equipment would have to be stored during the off-season. It was then discovered that a firm in Collingwood leased a complete party set for $560 for the summer season. This amounts to about $5 a day. In the promotional literature from the Collingwood firm, a rental fee of $15 was suggested. For each set rented, a profit of $10 would thus be earned. It was then decided to lease from the Collingwood firm, at least for the first season. The Collingwood firm suggested that on the basis of the combined experience of similar rental firms in other cities, either 41, 42, 43, 44, 45, or 46 complete sets be leased for the season. On the basis of this sugges- tion, management must now decide on the most profitable number of complete sets to lease for the season. The leasing firm in Collingwood also made available some additional information gathered from several rental firms similar to the newly formed subsidiary. Note in the following table (which is based on the experi- ence of the other rental firms) that for 360 days of the total of 6000 days' experience-or about 6% of the days- these rental firms rented out 41 complete party sets. On 10% of the days during a typical summer, they rented 42 complete sets, and so on. Chapter 17 Number of Number of Number of Number of Sets Rented Days Sets Rented Days 40 44 2400 41 360 45 1500 42 600 46 300 43 840 47 a. Construct a payoff table. (As a check figure, for the act of having 41 complete sets available and the event of renting 41, the payoff is $410.) b. The expected daily profit for leasing 43 complete sets from the Collingwood firm is $426.70; for 45 sets, $431.70; and for 46 sets, $427.45. Organize these expected daily profits into a table, and complete the table by finding the expected daily profit for leasing 41, 42, and 44 sets from the Collingwood firm. c. On the basis of the expected daily profit, what is the most profitable action to take? d. The expected opportunity loss for leasing 43 party sets from the Collingwood firm is $11.60; for 45 sets, $6.60; for 46 sets, $10.85. Organize these into an expected opportunity loss table, and complete the table by computing the expected opportunity loss for 41, 42, and 44. e. On the basis of the expected opportunity loss table, what is the most profitable course of action to take? Does this agree with your decision for part (c)? f. Determine the value of perfect information. Explain what it indicates in this problem.
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step 1 of 6 a Event Act 41 42 42 44 45 46 41 410 410 410 ... View the full answer
Related Book For
Financial Accounting Tools for Business Decision Making
ISBN: 978-1118644942
6th Canadian edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine
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