Motorking Corporation, a market leader in the production of specialized engine additives, is considering introducing a new "gas extender" product. This product is added to an automobile’s gasoline to extend mileage and reduce exhaust emissions. Motorking's manufacturing facility can produce 50,000 cases of the new product per year with a set-up cost of $100,000. The average variable cost per case would be $5. Large orders, (i.e., above 50,000 cases) will be subcontracted to a local refining company. Motorking has signed a secrecy agreement with the vendor that guards the basic process. The variable cost per case, if the new product is produced outside, is $9. Whether the product is manufactured by Motorking or by the vendor, there is a $12 per case cost for marketing and overhead.
Motorking's production manager is considering three production levels for the new product: 50,000 cases, 75,000 cases, and 100,000 cases. The level of sales will depend on the state of the economy. Sales estimates prepared by the marketing manager indicate that if the economy is strong then Motorking will sell 100,000 cases, if the economy is moderate they will sell 70,000 cases, and if the economy is weak they will sell only 40,000 cases. The marketing department forecasts that there is a 45 percent chance of a strong market and a 20 percent of a weak market.
A case of the new product is priced to sell at $39.95. Unsold units will be sold at a clearance sale with a 55 percent discount. Before deciding on a method and level of production, the production manager wishes to evaluate the possibility of hiring a local market research firm to conduct a survey. The manager has received a proposal from Decision Systems Inc. (DSI). DSI proposes to conduct the survey for $20,000. In the past, DSI has demonstrated the following performance:
Correctly predicted a strong economy 10 out of 15 times (three times they predicted a moderate economy and two times a weak economy). Correctly predicted a moderate economy 7 out of 10 times (two times they predicted a strong economy and one time a weak economy). Correctly predicted a weak economy 5 out of 6 times (one time they predicted a moderate economy). The production manager wishes to know:
4) Should Motorking purchase the forecasting service? (Please provide excel functions/explanations with the steps to get this answer)