The Daily Financial Times The Lowlands publishing company has decided to launch a new magazine for financial specialists with the brand new title The Daily Financial Times. The problem is that this has not been done before. The Lowlands management does not have a clue how many copies will be sold and they think it will be somewhere between 60 000 and 120 000 copies.

The magazine sells for €4 and the variable cost to print is €1.20. Unsold magazines are destroyed.

Required:

1. Prepare a results matrix (or pay-off table) for different levels of demand: 60 000, 80 000, 100 000 and 120 000.

2. Suppose Lowlands management wants to avoid being blamed afterwards for having selected the wrong production plan, what production level should they then choose?

One of Lowlands’ marketing specialists has looked at sales numbers of similar magazines in the past. This leads to the following information about demand:

3. What strategy should be chosen if management wants to maximise the expected value of future strategies?
4. What is the Expected Value of Perfect Information?
Management has decided to invite a consultancy firm to do a market study. The aim of this study is to make a reliable estimate of future demand. The consultancy firm is relatively good in predicting small sized markets and not so good in predicting larger and more mature markets.
The conditional probabilities are the following:

The above table means that the consultant will predict in 70% of the cases of 60 000 sales the right number, but in 30% of the cases the prediction is wrong. The wrong predicted values here equal chance of occurrence (10% each) when the actual sales number turns out to be 60 000.
5. What is the best strategy when the consultant has produced the report? Make a prediction for each of the outcomes the consultant may produce.
6. Suppose the consultant offers to do the market study for €6500. Should we hire the consultant?

Transcribed Image Text:

Demand p(Demand) 60000 0.20 80000 0.30 100000 0.30 120000 0.20