Chico, Maria, Elaina, and Juan are taking a year off from school to form a partnership to develop the commercial potential of a cleaning solvent they accidentally discovered in their college chemistry lab. In liquid form, their product can remove grease stains from clothing and can launder shop towels so that they appear like new. In solid form (actually a buttery consistency), it can make a mechanic’s hands look like those of a baby in two minutes, and as a foam, it can lift grease and oil spots out of concrete in a jiffy.

Chico’s investigation of manufacturing requirements suggests that small-scale manufacturing is quite feasible and that output could be adjusted over a wide range of volumes with little change in efficiency. Potential suppliers of raw materials have been contacted, and a long list of friends who are eager for part-time work assures the availability of direct labor.

Maria has located a steel farm building for rent near the interstate highway in an area recently rezoned for commercial and industrial use. Initial cleanup, some insulation, additional lighting, gravel for the drive and loading area, and a small amount of additional office space are all that seem to be necessary to make the building suitable for their needs. She also has acquired a delivery van, which was used by a local florist before his retirement.
Elaina has worked out all of the details for advertising and other promotional activities that would be needed for the three forms of the product. She and Juan have determined the range of possible sales volumes for each form, assuming primary customers to be commercial laundries for the liquid, auto service centers for the solid, and service stations for the foam. Juan has determined optimal delivery routes and schedules to cover the midstate area and is now considering the possibility of adding delivery to two major metropolitan areas.
After much planning and several meetings with local financial institutions, the four have concluded that the product can be produced and marketed in only one of the three forms—liquid, solid, or foam—until successful financial performance of the venture is established. This success would require at least $30,000 of profit to be earned during the first year.
The four asked for your advice recently at a party. Rather than talk business at the party, you suggested that they send you the information they had gathered. A few days after the party, you received the following information from them:

Liquid Solid Foam Selling price $3.00 $3.50 $11.00 Variable costs:
Direct materials $0.40 $0.80 $3.00 Direct labor 0.10 0.20 0.60 Variable overhead 0.15 0.30 0.90 Variable selling and administrative 0.35 0.20 0.50 Total variable costs $1.00 $1.50 $5.00 Fixed costs:
Factory overhead $ 5,000 $15,000 $85,000 Selling and administrative 10,000 15,000 5,000 Sales volume information (all possible sales volumes between the estimated minimum and maximum are equally likely):
Maximum sales volume 20,000 bottles 40,000 tubs 25,000 cans Minimum sales volume 12,000 15,000 5,000 Expected sales volume 16,000 27,500 15,000 Required: (1) For each of the three forms of product, what is the

(a) maximum possible profit?

(b) minimum possible profit?

(c) expected profit?

(d) sales volume needed to earn $30,000?
(2) Which form of product seems favored relative to each of the calculations you made in (1)?
(3) Which form of the product would you recommend they introduce during the first year of operations? Why?  Lo1