Incorrect Question 7 0/0.1 pts C&A;, a cellular phone manufacturer, is investiga
ID: 332349 • Letter: I
Question
Incorrect Question 7 0/0.1 pts C&A;, a cellular phone manufacturer, is investigating the possibility of producing and marketing a new line of phone. Undertaking this project will require either purchasinga CAD/CAM system or hiring and training several additional engineers, or purchasing a CAD/CAM system after a pilot study. The market for the product could be either favorable or unfavorable. With favorable acceptance by the market, sales would be 25,000 phones selling for $100 each, and with unfavorable acceptance, sales would be only 8,000 phones selling for $100 each. The cost of the CAD/CAM equipment is $500,000, but that of hiring and training three new engineers is only $375,000. However, manufacturing cost should drop from $50 each when manufacturing without CAD/CAM to $40 each when manufacturing with CAD/CAM. The probability of favorable acceptance of the new phone is 0.40; the probability of unfavorable acceptance is 0.60. The other option is to conduct a pilot study and then decide whether or not to purchase a CAD/CAM system. The pilot study will cost $10,000. C&A; will purchase the CAD/CAM system only if the result of the pilot study is positive. The probability of a positive pilot study is 50%. At this time, the probability of favorable acceptance of the new phone will be increased to 70%. All other costs and sales figures remain the same. Which of the following statements about the decision to purchase a CAD/CAM system without doing a pilot study is true? Check all that apply. C&A; will have a profit of $1,000,000 if the market is favorable. C&A; will have a profit of $1,500,000 if the market is favorable. C&A; will have a profit of $20,000 if the market is unfavorable. C&A; will have a loss of $20,000 if the market is unfavorable. C&A; will have a profit of $30,000 if the market is unfavorable.Explanation / Answer
About the decision to purchase CAD/CAM,
Payoff, if market is favorable = Expected sales * ( selling price - cost ) - cost of CAD/CAM equipment
= 25000*(100-40) - 500000
= $ 1,000,000 (profit)
Payoff, if market is unfavorable = Expected sales * ( selling price - cost ) - cost of CAD/CAM equipment
= 8000*(100-40) - 500000
= - $ 20,000 (loss)
Therefore, correct statements are following:
1. C&A will have a profit of $ 1,000,000 if the market is favorable
3. C&A will have a loss of $ 20,000 if the market is unfavorable