3) A company needs to decide whether to introduce a recent developed product (codename DEV) to the mass market. It is estimated that test marketing will cost $100K. Data indicates that only 30% of this company's product capture consumers' attention. Only when this product DEV is successful at the test market stage, then the company needs to consider the size of plant to set up to produce DEV in large quantity. A small factory is expected to cost around $150K to build, while a large factory costs around $250K. Productivity for small factory is 2000 units per year, while a large factory produces 4000 units a year. This company might also give up this project and receives $0 back. Given our new product in the market, there is a 40% chance that the competitor will respond with a similar product and that the price per unit sold (in $) will be as follows (assuming all production sold): Small plant Large plant 20 Competition respond Competition do not respond 35 50 65 Assuming that the life of the market for DEV is estimated to be 7 years and that the yearly running costs for factory are $50K for both sizes. What should be the company decision? Draw a decision tree (use square shape to present decision node and round shape to present chance node). Show your calculations.
3) A company needs to decide whether to introduce a recent developed product (codename DEV) to the mass market. It is estimated that test marketing will cost $100K. Data indicates that only 30% of this company's product capture consumers' attention. Only when this product DEV is successful at the test market stage, then the company needs to consider the size of plant to set up to produce DEV in large quantity. A small factory is expected to cost around $150K to build, while a large factory costs around $250K. Productivity for small factory is 2000 units per year, while a large factory produces 4000 units a year. This company might also give up this project and receives $0 back. Given our new product in the market, there is a 40% chance that the competitor will respond with a similar product and that the price per unit sold (in $) will be as follows (assuming all production sold): Small plant Large plant 20 Competition respond Competition do not respond 35 50 65 Assuming that the life of the market for DEV is estimated to be 7 years and that the yearly running costs for factory are $50K for both sizes. What should be the company decision? Draw a decision tree (use square shape to present decision node and round shape to present chance node). Show your calculations.
Chapter19: Pricing Concepts
Section: Chapter Questions
Problem 6DRQ
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Transcribed Image Text:3) A company needs to decide whether to introduce a recent developed product (codename DEV)
to the mass market. It is estimated that test marketing will cost $100K. Data indicates that only
30% of this company's product capture consumers' attention.
Only when this product DEV is successful at the test market stage, then the company needs to
consider the size of plant to set up to produce DEV in large quantity. A small factory is expected
to cost around $150K to build, while a large factory costs around $250K. Productivity for small
factory is 2000 units per year, while a large factory produces 4000 units a year. This company
might also give up this project and receives $0 back.
Given our new product in the market, there is a 40% chance that the competitor will respond
with a similar product and that the price per unit sold (in $) will be as follows (assuming all
production sold):
Small plant
Large plant
20
Competition respond
Competition do not respond
35
50
65
Assuming that the life of the market for DEV is estimated to be 7 years and that the yearly
running costs for factory are $50K for both sizes. What should be the company decision? Draw a
decision tree (use square shape to present decision node and round shape to present chance
node). Show your calculations.
Expert Solution
Step 1
Given information,
| Profit | Large Plant | Small Plant |
| Competition respond | 20 | 35 |
| Competition does not respond | 50 | 65 |
Productivity for small factory unit - 2000 unit
Large factory cost = $250 K
The large factory produces -4000 units
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