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Decision Making Under Uncertainty

Exquisite Foods Incorporated $($EFI$)$ sells premium foods. Three independent strategies are being considered to promote a new product, Souffl$$s for Microwaves, to dual$-$career families. Currently the contribution margin ratio on EFI$$s 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

$ $500,00010\%$

$600,00025$

$700,00035$

$800,00020$

$900,00010$

Strategy Three

The third strategy offers a $$0\mathrm{.}50$ mail$-$in rebate coupon attached to each box of Souffl$$s 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\mathrm{.}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

$$400,00010\%$

$450,00030$

$500,00035$

$550,00020$

$600,0005$

Required:

$1.$ Exquisite Foods Incorporated $($EFI$)$ wishes to select the most profitable marketing alternative to promote Souffl$$s 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.$)$