Value of Perfect Information: Vendo Company operated the concession stands at the university football stadium. Records of past sales indicate that there are basically four kinds of football weather, that sales of hot dogs depend on the weather, and that the percentage of football games played in each kind of weather is as follows:

Hot dogs cost Vendo Company 60 cents each and are sold for $1.00. Hot dogs unsold at the end of each game are worthless. Ignore income taxes.

Required:

a. Prepare a table with four rows and four columns showing the contribution margin from each of the four purchasing strategies of buying 10,000, 20,000, 30,000, or 40,000 hot dogs and the four weather conditions (snow, rain, clear/warm, and clear/cold).

b. Assuming that the chances of snow, rain, clear/warm, and clear/cold are 10. percent, 20 percent, 40 percent, and 30 percent, respectively, compute the expected contribution margin from each of the following purchasing strategies: (1) Buy 10,000 hot dogs. (2) Buy 20,000 hot dogs. (3) Buy 30,000 hot dogs. (4) Buy 40,000 hot dogs.

c. What is the optimal purchasing strategy in the absence of a weather forecast, and what is the expected contribution margin from following this strategy? (This answer will be the largest of the four expected payoffs computed in b.)

d. If Vendo had a perfect weather forecast for each game, it would buy 10,000 hot dogs when snow is predicted: 20.000 when rain is predicted; 30,000 when clear/ warm is predicted; and 40,000 when clear/cold is predicted. What is the expected average contribution margin per football game, assuming the availability of a perfect weather forecast and that the four kinds of weather will occur in the frequencies 10, 20, 40, and 30 percent?

e. What is the expected dollar value to Vendo Company of a perfect weather forecast per football game? That is, what is the expected dollar value of the information from a perfect weather forecast?

Transcribed Image Text:

Weather Percentage of Game Days Hot Dogs Sold Snow 10% 10,000 Rain 20 20,000 Clear/warm 40 30,000 Clear/cold 30 40,000