From the four scenarios listed, which scenario do you believe adds the mostexpectedtotal profits with the least amount of operational risk over a 5-year period and why?

Scenario: "Product Launch"

You are the lead project manager for two product launches. Product "Redesign" is a redesigned product of your company's bestselling product.Product "New" is a completely new product in a new product category. The initial plan is to price product "Redesign" at $425 per unit and product "New" at $600 per unit.Based on these prices, the head of marketing believes that over the next 5 years the company could sell anywhere from 235,000 to 550,000of product "Redesign" and 125,000 to 425,000 of product "New".He believes that there is a 50% chance that demand will be at the low end and a 50% chance that demand could be at the high end.In essence an equal chance that actual demand will fall anywhere on this demand curve.To achieve these projected sales numbers, for each product, the company will need to spend $8,000,000 dollars in marketing over 5 years, plus compensate the company's direct sales staff with a 5% sales commission on the purchase price of the product for each unit that is sold.

In order to understand the impact to the company's financial position, you discuss with the Vice President of Operations the operational cost structure of these two products. For product "Redesign", she is projecting that the company will need to invest $30,000,000 for manufacturing equipment which will allow the company to make 500,000 units of this product over 5 years.For product "New", she is projecting that the company will need to invest $36,000,000 for manufacturing equipment which will give the company the capacity to make 350,000 units of this product over 5 years.As seen inExhibit A below, The V.P. of operations has also developed a thorough list of the raw material and labor cost needed to manufacture each product as well as the manufacturing overhead.As you study this information you notice an interesting detail, the company will not have enough manufacturing capacity if demand for both products is on the high-end of the sales projections.You discuss this limitation with the VP of Operations.In your discussion, she feels that with an additional investment of $10,000,000 million dollars for product "Redesign", operations can increase capacity to 750,000 units over 5 years, and for an additional investment of $5,000,000 million dollars for product "New", operations can increase capacity to 475,000 units over 5 years.However, based on your initial breakeven analysis this additional investment will not pay for itself unless demand for both products significantly increases.

Based on this dilemma you strategize with the VP of Marketing on ways to increase demand. He proposes to lower the price of each product.The V.P. of marketing believes that if the price of product "Redesign" is lowered to $370 per unit, forecasted sales will be anywhere from 375,000 to 800,000 units over 5 years, and if the price for product "New" is lowered to $550 per unit forecasted sales will be anywhere from 185,000 to 457,000 units over 5 years.Again, he believes there is an equal chance that actual demand could be anywhere on this forecasted demand curve.Based on the data from this scenario, what decision do you make?Do you launch product "Redesign" or product "New" and at what price point do you launch the product at?

Your analysis will include looking at the expected operating profit and risk under four scenarios:

1. Scenario 1: Price product "Redesign" at $425 per unit and keep capacity at 500,000 units
2. Scenario 2: Lower the price of product "Redesign" to $370 per unit and expand capacity to 750,000 units.
3. Scenario 3: Price product "New" at $600 per units and keep capacity at 350,000 units
4. Scenario 4: Lower the price of product "New" to $550 per units and expand capacity to 475,000 units

Exhibit A: Operational Costs Product Product Redesign New Initial capital equipment 30,000,000 36,000,000 Incremental capital equipment to expand 10,000,000 5,000,000 Material cost per unit $ 148-75 $ 24000 Direct Product Labor cost per hour $ 2?.50 25.00 Direct Product Labor hours to make one 3 2 Management Salary Per Year $ 100,000 $ 100,000 Supervisor Salary.r Per Year $ ?5,000 $ ?5,000 Number of Managers 3 3 Number of Supervisors 10 10