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 purchasing a 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.
1. 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 $20,000 if the market is unfavorable. C&A will have a profit of $1,000,000 if the market is favorable. C&A will have a profit of $30,000 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 $1,500,000 if the market is favorable.
2. Which of the following statements is true about the decision to do a pilot study before deciding whether or not to purchase a CAD/CAM system? Check all that apply.
C&A will have a profit of $990,000 if the result of the pilot study is favorable. C&A will have a profit of $15,000 if the result of the pilot study is unfavorable. C&A will have a loss of $15,000 if the result of the pilot study is unfavorable. C&A will have a loss of 30,000 if the pilot study is unfavorable. C&A will have a profit of $684,000 if the result of the pilot study is favorable.
3. Which of the following statements is true about the decision to hire and train engineering without the purchase of a CAD/CAM system? Check all that apply.
C&A will have a profit of $875,000 if the market is favorable. C&A will have a profit of $105,000 if the market is unfavorable. C&A will have a profit of $625,000 if the market is favorable. C&A will have a loss of $25,000 if the market is unfavorable. C&A will have a profit of $25,000 if the market is unfavorable.