The management of Madeira Computing is considering the introduction of a wearable electronic device with the functionality of a phone. The fixed cost to launch this new product is $300,000. The variable cost for the product is expected to be between $160 and $240, with a most likely value (mode) of $200 per unit. The product will sell for $300 per unit. Demand for the product is expected to range from 0 to approximately 20,000 units, with 4,000 units being the most likely (i.e. the mode). As noted by Camm (Ch 11.1, p 502) When making a decision in the presence of uncertainty, the decision maker should be interested not only in the average, or expected, outcome, but also in information regarding the range of possible outcomes. In particular, decision makers are interested in risk analysis, that is, quantifying the likelihood and magnitude of an undesirable outcome.

Cost Distribution: Assume that the variable cost can be well-approximated by a uniform random variable with a minimum of $160 and a maximum of $240. Demand Distribution: Assume that the product demand can be well-approximated as 1,000 times the value of a gamma random variable with an alpha parameter of 3 and a beta parameter of 2. Please refer to the Appendix in Camm Ch11 on page 550 for further details on the Gamma Distribution.

Question : Given the rejection criteria listed below, provide a recommendation as to whether this product should be given further consideration.

Reject products with potential losses of more than $500k.

Reject products with in which the probability of a loss is greater than 25%.

If the fixed investment cost is greater than $250k, reject products in which the average profit is less than $300k.