The Jeffrey William Company is considering introducing a new line of Christmas tree ornaments that glow in the dark and play melodies. If it introduces the product, it will back it up with a $100,000 advertising campaign using the slogan “let your tree sing out in joy.” The company estimates that sales will be a function of the economy and demand will be for 10,000, 50,000, or 100,000 cases. Each case nets the company $24 and costs $18 to produce (not including the expense of the advertising campaign). Because the ornaments will be produced in a factory in Asia, the firm must order in multiples of 40,000 cases. Any unsold cases can be sold to a liquidator for $15 per case. If the company introduces the product and demand for the ornaments exceeds availability, management estimates it will suffer a goodwill loss of $1 for each case the company is short.
a. Determine the payoff table for this problem.
b. If the company president wishes to minimize the firm’s maximum regret, what decision will she make regarding the ornaments?
c. Suppose demand for 100,000 ornaments is twice as likely as demand for 10,000 ornaments, and demand for 50,000 ornaments is three times as likely as demand for 100,000 ornaments. What decision should the company make using the expected value criterion?
d. Suppose the company can conduct a marketing survey to get a better idea of the demand for the ornaments. What is the most the company should pay for any such survey?