Question 1 The CEO for marketing and sales of concern is considering the possibility of introducing a new line of inexpensive wrist watches, which would be oriented primarily toward young adults. The watch would have a plastic faceplate and wristband and a variety of features, including an alarm, a chronograph, and the ability to store and retrieve various split times. The watch has been designed to come in a variety of colours and styles. The retail price of the watch is expected to be R19. At this price, the CEO is of the opinion that there is a substantial market for the watch. To help gain further information, the CEO has hired a marketing research firm to study the market potential for this new venture. The marketing research team conducted a survey and a pilot study to determine the potential market for the new watch being considered by the organisation. The team, realizing that there is market risk associated with any new product, looked at the potential market on a five-point scale, the marketing research team looked at a variety of production, or stocking, policies related to each of the marketing segments. The stocking policies involve producing 100 000 to 500 000 watches. The worst market scenario for the organisation was still expected to bring profitability through all stocking ranges. (Remember, the worst-case marketing scenario was assigned a value of 1 on the five-point scale.) The probability of having a 1-type market was estimated to be 0, 10. A stocking policy of 100 000 units was expected to return a net profit of R100 000 for the organisation. A stocking policy of 150 000 units was expected to return only R90 000. Similarly, higher stocking policies for a market potential of 1 were expected to yield lower profits. A stocking policy of 200 000 was expected to return R85 000 in net profits. The stocking policies of 250 000, 300 000, 350 000, 400 000, 450 000 and 500 000 were expected to yield net profits of R80 000, R65 000, R50 000, R45 000, R30 000 and R20 000 respectively. The next-best market scenario was categorized by the number 2. This market potential was categorized as below average and the marketing research team estimated that the chance of getting a below average market was 20%. The net profit for the beginning stocking policy of 100 000 units was estimated to be R110 000. The net profit for stocking 150 000 units was R120 000. If the organisation stocked 200 000 units, the net profit would be R110 000. A net profit of R120 000 would be realized if the stocking policy was 250 000 units. Stocking policies of 300 000, 350 000, 400 000, 450 000, and 50 00 would result in net profits of R100 000, R100 000, R95 000, R90 000, and R85 000 respectively. The marketing research team estimated that the probability of an average market was 50%. This average market was coded with a 3 on the five-point scale. In general, profits were significantly higher for all stocking policies with this average market scenario. As before, profitability figures were estimated for all the stocking policies, ranging from 100 000 to 500 000 units. The net profitability's for this range are R120 000, R140 000, R135 000, R155 000, R155 000, R160 000, R170 000, R165 000, and R160 000. A good market potential for the watches was given a 4 on the five-point scale. The probability, however, of a good market was relatively low. It was estimated to be 10%. Net profitability factors for stocking policies that range from 100 000 to 500 000 units were estimated to be R135 000, R155 000, R160 000, R170 000, R180 000, R190 000, R200 000, R230 000 and R270 000 The probability of a very good market was estimated to be 10%. This market received a 5 on the scale. Probability factors for this market, in general, were higher. The profitability factors for stocking policies that range from 100 000 to 500 000 were R140 000, R170 000, R175 000, R180 000, R195 000, R210 000, R230 000, R245 000, and R295 000. As the resident Industrial Engineer the CEO entreated you to validate the findings of the research company. You are required to: a. Compute the expected monetary values for each of the stocking policy alternatives. (9) b. Recommend and motivate a stocking policy to the CEO. (3) C. Compute the expected value of perfect information for this situation. (2) d. The CEO has received information that the original probability estimations were not accurate. Market 2 has a probability of o, 28 while market 5 has a probability of 0, 02. The information also covers the stocking option for 500 000 watches. The return given a very good market is now estimated to be R340 000. In your opinion does this new information change any decision? Motivate your answer. What is the impact of the new probability values and the new return for a very good market for stocking 500,000 units? (11) [25] Question 1 The CEO for marketing and sales of concern is considering the possibility of introducing a new line of inexpensive wrist watches, which would be oriented primarily toward young adults. The watch would have a plastic faceplate and wristband and a variety of features, including an alarm, a chronograph, and the ability to store and retrieve various split times. The watch has been designed to come in a variety of colours and styles. The retail price of the watch is expected to be R19. At this price, the CEO is of the opinion that there is a substantial market for the watch. To help gain further information, the CEO has hired a marketing research firm to study the market potential for this new venture. The marketing research team conducted a survey and a pilot study to determine the potential market for the new watch being considered by the organisation. The team, realizing that there is market risk associated with any new product, looked at the potential market on a five-point scale, the marketing research team looked at a variety of production, or stocking, policies related to each of the marketing segments. The stocking policies involve producing 100 000 to 500 000 watches. The worst market scenario for the organisation was still expected to bring profitability through all stocking ranges. (Remember, the worst-case marketing scenario was assigned a value of 1 on the five-point scale.) The probability of having a 1-type market was estimated to be 0, 10. A stocking policy of 100 000 units was expected to return a net profit of R100 000 for the organisation. A stocking policy of 150 000 units was expected to return only R90 000. Similarly, higher stocking policies for a market potential of 1 were expected to yield lower profits. A stocking policy of 200 000 was expected to return R85 000 in net profits. The stocking policies of 250 000, 300 000, 350 000, 400 000, 450 000 and 500 000 were expected to yield net profits of R80 000, R65 000, R50 000, R45 000, R30 000 and R20 000 respectively. The next-best market scenario was categorized by the number 2. This market potential was categorized as below average and the marketing research team estimated that the chance of getting a below average market was 20%. The net profit for the beginning stocking policy of 100 000 units was estimated to be R110 000. The net profit for stocking 150 000 units was R120 000. If the organisation stocked 200 000 units, the net profit would be R110 000. A net profit of R120 000 would be realized if the stocking policy was 250 000 units. Stocking policies of 300 000, 350 000, 400 000, 450 000, and 50 00 would result in net profits of R100 000, R100 000, R95 000, R90 000, and R85 000 respectively. The marketing research team estimated that the probability of an average market was 50%. This average market was coded with a 3 on the five-point scale. In general, profits were significantly higher for all stocking policies with this average market scenario. As before, profitability figures were estimated for all the stocking policies, ranging from 100 000 to 500 000 units. The net profitability's for this range are R120 000, R140 000, R135 000, R155 000, R155 000, R160 000, R170 000, R165 000, and R160 000. A good market potential for the watches was given a 4 on the five-point scale. The probability, however, of a good market was relatively low. It was estimated to be 10%. Net profitability factors for stocking policies that range from 100 000 to 500 000 units were estimated to be R135 000, R155 000, R160 000, R170 000, R180 000, R190 000, R200 000, R230 000 and R270 000 The probability of a very good market was estimated to be 10%. This market received a 5 on the scale. Probability factors for this market, in general, were higher. The profitability factors for stocking policies that range from 100 000 to 500 000 were R140 000, R170 000, R175 000, R180 000, R195 000, R210 000, R230 000, R245 000, and R295 000. As the resident Industrial Engineer the CEO entreated you to validate the findings of the research company. You are required to: a. Compute the expected monetary values for each of the stocking policy alternatives. (9) b. Recommend and motivate a stocking policy to the CEO. (3) C. Compute the expected value of perfect information for this situation. (2) d. The CEO has received information that the original probability estimations were not accurate. Market 2 has a probability of o, 28 while market 5 has a probability of 0, 02. The information also covers the stocking option for 500 000 watches. The return given a very good market is now estimated to be R340 000. In your opinion does this new information change any decision? Motivate your answer. What is the impact of the new probability values and the new return for a very good market for stocking 500,000 units? (11) [25]