The Sharper Shirt Company has recently been formed by an aspiring young designer, Francine Stuart. Her first
Question:
The Sharper Shirt Company has recently been formed by an aspiring young designer, Francine Stuart. Her first product will be a man’s shirt. At this point, neither the price nor the quality decision have been made. Francine knows that at the retail level shirts typically are sold at certain fairly well defined “price points,” notably $10, $13, $17, $23, and $30. Consumers have come to expect these price groupings and the salespeople prefer to deal with shirts that fit neatly into these price groups. Naturally, higher quality shirts are expected at the higher price points.
Francine is trying to decide between going for the $ 17-shirt market or for the $30-shirt market. She has estimated her average costs to be $6 for the $17 shirt and $12 for the $30 shirt in the first year and approximately 80 percent of these figures in the second year. Note that Sharper Shirts would receive the wholesale price of only $12 for the $17 shirt and $20 for the $30 shirt. Market research activity in the form of tentative orders from retailers has resulted in the following probability distributions of demand for each shirt over the first two years.
(a) Using decision-tree analysis and assuming an opportunity discount rate of 15 percent, cal¬ culate the expected net present value of each decision.
(b) Is there much difference in the comparative risk associated with each strategy, based on the data provided?
(c) Advise Ms. Stuart about which shirt she should produce and sell.
(d) State any qualifications and assumptions which underlie your answer.
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