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Full Scale vs. Limited Production (New Lipstick) The Mauleon Company has developed a radical new lipstick. The market research firm Mauleon hire has determined
Full Scale vs. Limited Production (New Lipstick) The Mauleon Company has developed a radical new lipstick. The market research firm Mauleon hire has determined that there is a 40% probability that the new product will be a huge success, with annual sales in the vicinity 1,000,000 units. Market research also revealed a 45% probability that sales would be about 800,000 units per year and a 15% probability that sales would be about 400,000 units per year. If Mauleon decides to go into limited production of the new product, it annual foxed costs will be $600,000 and it can produce the new product for variable costs of $4 per unit. If it goes for full-scale production, annual fixed costs will be $1,500,000 but variable costs will be only $3 per unit. The company president, Emani, is a firm believer in maximizing expected profit the new lipstick will be sold for $6 per unit. a. Construct a payoff table for the problem. b. Construct a decision tree for the problem. C. Now solve the problem using the payoff table in (a). Should production be limited or full-scale? d. A research form Palmos Ltd. Boasts of a new technique that can predict next year's sales with great accuracy for $12,000. Should Mauleon take it? Show solutions.
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