Decision Making Under Uncertainty

Exquisite Foods Incorporated (EFI) sells premium foods. Three independent strategies are being considered to promote a new product, Souffls for Microwaves, to dual-career families. Currently the contribution margin ratio on EFIs foods is 65%, which is expected to apply to the new product. EFI's policy for promoting new products permits only one type of advertising campaign until the product has been established.

Strategy One

The first strategy concentrates on television and magazine advertising. EFI would hire a marketing consultant to prepare a 30-second video commercial and a magazine advertisement. The commercial would air during the evening to address the working market, while the magazine advertisement would be place in magazines read by career-minded individuals. This advertising campaign would provide EFI $230,000 expected contribution from sales.

Strategy Two

The second strategy promotes the product by offering 25% off coupons in the Sunday newspaper supplements, with a projected 15 percent redemption rate on sales revenue. EFI would hire a marketing consultant for $5,000 to design a one-quarter page, two-color coupon advertisement. The coupon would be distributed in the Sunday newspaper supplements at a cost of $195,000. Based on prior experience, EFI expects the following additional sales from this form of advertisement.

Expected sales	Probability
$ 500,000	10%
600,000	25
700,000	35
800,000	20
900,000	10

Strategy Three

The third strategy offers a $0.50 mail-in rebate coupon attached to each box of Souffls for Microwaves. EFI would hire a marketing consultant for $5,000 to create a one-sixth page, one-color rebate coupon. Printing and attaching costs for the rebate coupon are $0.07 per package, and EFI is planning to include the rebate offer on 500,000 packages. Although 500,000 packages may be sold, only a 10 percent redemption rate is expected. EFI expects the following additional sales from this type of promotion:

Expected sales	Probability
$400,000	10%
450,000	30
500,000	35
550,000	20
600,000	5

1. Exquisite Foods Incorporated (EFI) wishes to select the most profitable marketing alternative to promote Souffls for Microwaves. Recommend which of the three strategies presented above should be adopted by EFI. Support your recommendation with appropriate calculations and analysis. (Round your intermediate computations and final answers to 2 decimal places.)