After retiring as a physician, Bob Guthrie became an avid downhill skier on the steep slopes of the Utah Rocky Mountains. As an amateur inventor, Bob was always looking for something new. With the recent deaths of several celebrity skiers, Bob knew he could use his creative mind to make skiing safer and his bank account larger. He knew that many deaths on the slopes were caused by head injuries. Although ski helmets have been on the market for some time, most skiers considered them boring and basically ugly. As a physician, Bob knew that some type of new ski helmet was the answer.

Bobs biggest challenge was to invent a helmet that was attractive, safe, and fun to wear. Multiple colors, using the latest fashion designs would be a must. After years of skiing Bob knew that many skiers believed that how you looked on the slopes was more important than how you skied. His helmets would have to look good and fit in with current fashion trends. But attractive helmets were not enough. Bob had to make the helmets fun and useful. The name of the new ski helmet, Ski Right, was sure to be a winner. If Bob could come up with a good idea, he believed that there was a 20% chance that the market for the Ski Right Helmet would be excellent. The chance of a good market should be 40%. Bob also knew that the market for his helmet could be only average (30% chance) or even poor (10% chance).

The idea of how to make ski helmets fun and useful came to Bob on a gondola ride to the top of a mountain. A busy executive on the gondola ride was on his cell phone trying to complete a complicated merger. When the executive got off of the gondola, he dropped the phone and it was crushed by the gondola mechanism. Bob decided that his new ski helmet would have a built-in cell phone and an AM/FM Stereo radio. All of the electronics could be operated by a control pad worn on a skiers arm or leg.

Bob decided to try a small pilot project for Ski Right. He enjoyed being retired and didnt want a failure to cause him to go back to work. After some research, Bob found Progressive Products (PP). The company was willing to be a partner in developing the Ski Right and sharing any profits. If the market were excellent, Bob would net $5,000. With a good market, Bob would net $2,000. An average market would result in a loss of $2,000, and a poor market would mean Bob would be out $5,000.

Another option for Bob was to have Leadville Barts (LB) make the helmet. The company had extensive experience in making bicycle helmets. Progressive would then take the helmets made by Leadville Barts and do the rest. Bob had a greater risk. He estimated that he could lose $10,000 in a poor market or $4,000 in an average market. A good market for Ski Right would result in a $6,000 profit for Bob, while an excellent market would mean a $12,000 profit. A third option for Bob was to use TalRad TR, a radio company in Tallahassee, Florida. TalRad had extensive experience in making military radios. TalRad could make the helmets, and Progressive Products could do the rest. Again, Bob would be taking on greater risk. A poor market would mean a $15,000 loss, while an average market would mean a $10,000 loss. A good market would result in a net profit of $7,000 for Bob. An excellent market would return $13,000.

Bob could also have Celestial Cellular (CC) develop the cell phones. Thus, another option was to have Celestial make the phones and have Progressive do the rest of the production and distribution. Because the cell phone was the most expensive component of the helmet, Bob could lose $30,000 in a poor market. He could lose $20,000 in an average market. If the market were good or excellent, Bob would see a net profit of $10,000 or $30,000, respectively.

Bobs final option was to forget about Progressive Products entirely. He could use Leadville Barts to make the helmets, Celestial Cellular to make the phones, and TalRad to make the AM/FM stereo radios. Bob could then hire some friends to assemble everything and market the finished Ski Right helmets. With this final alternative, Bob could realize a net profit of $55,000 in an excellent market. Even if the market were just good, Bob would net $20,000. An average market, however, would mean a loss of $35,000. If the market were poor, Bob would lose $60,000.

Bob has contracted you to determine/recommend the optimal strategy regarding this development and marketing decision. Since you are familiar with decision tables utilize one to identify the expected returns for each strategy. Prepare a report that will help Bob make his decision in this situation. Your report should be addressed to Bob Guthrie, President Ski Right Helmets.

Utilize the quantitative analysis approach in your report as follows: Answer question # 4 only...

1. Defining the problem: Describe what the problem entails.
2. Developing a model: Develop a payoff table for the problem identified in Step 1. Be sure to include all the identified options, payoffs, and probabilities
3. Acquiring the data: Describe the data used in the payoff table and how the data might have been acquired.
4. Solve the problem using the payoff table developed in Step 2.
   1. What are the expected returns (EMV) for each of the possible strategies?
   2. What are the maximum potential losses for the possible strategies?
   3. We are not sure of Bobs risk attitude so you need to provide information relevant to optimize and pessimism.
   4. What is the opportunity loss for this problem?
   5. Compute the expected value of perfect information
   6. What strategy do you recommend and why?
5. Testing the solution: Does the decision tree produce results that are accurate and complete.
6. Analyzing the results: What does the information you prepared in Steps 1-5 tell you about the decision situation?
7. Implementing the results: How would you implement the results?
8. Was Bob completely logical in how he approached this decision problem? Is there another alternative he might consider?