Case-
More and more, people are using energy drinks as a quick pick-me-up during the day. These beverages, which are intended to energize the consumer and are known to aid alertness, usually contain caffeine or taurine in addition to herbal ingredients, such as ginseng, and various vitamins and minerals. The market is extremely competitive.
Diet Coke is contemplating introduction of a new energy drink and a new brand of root beer. We will analysis each decision separately. First we consider analysis of their decision regarding the new energy drink. The company estimates that if they don't produce the new energy drink they will yield a profit of $1,000,000 if sales turn out to be around 100,000,000 bottles, a profit of $200,000 if sales turn out to be 50,000,000 bottles, or they will lose $2,000,000 if sales turn out to be around 1,000,000 bottles. If Diet Coke doesn't market the new energy drinks, they will suffer a loss of $400,000.
a. Draw a decision tree for this problem
b. Set up a payoff table and explain
c. Set up a regret table and explain
d. Explain in details and provide the appropriate arguments if Diet Coke introduce the new energy drink by using
I. a conservative approach
II. an optimistic approach
III. the middle of the road (MaxiMin Regret) approach
e. An internal study by the management estimates that the probability of selling 100,000,000 bottles is 0.3333, the probability of selling 50,000,000 bottles is 0.50, the probability of selling 1,000,000 bottles is 0.1667. Should they introduce the new diet drink? Why? Explain in details.
f. Soft Drink Consultants is a company that provides a tailor-made feasibility study for a consulting fee of $275,000. Should Diet Coke hire them to conduct such study? Why? Explain
Diet Coke is also considering introduction of a new brand of diet root beer. An internal study by the management estimates that the probability of success for their new diet root beer is 0.60. Of course they have the option of not producing the product. They have estimated the following payoff table for each choice.
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Choices
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Introduction of the new product will be a success
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Introduction of the new product will be a Failure
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Produce the new brand of diet root beer
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$250,000
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-$300,000
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Do not produce the new brand of diet root beer
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-$50,000
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-$20,000
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Beside "Soft Drink Consultants", they have asked the help of another consulting firm "Innovative Research Inc." to help managers of Diet Coke to make an optimum decision. "Soft Drink Consultants" provides two indicators (I1 and I2) for which P(I1/s1) = 0.70 and P(I1/s2) = 0.40. The "Innovative Research Inc." provides two indicators (J1 and J2), for which P(J1 / s1) = 0.60 and P(J1/s2) = 0.30.
a. After receiving such results, recommend an optimal decision for Diet Coke, assuming that management believes that results of neither consulting firms' are correct and their study will NOT be used. Over what range of probability of success their decision is optimal?
b. Calculate the EVPI
c. Calculate the EVSI and the efficiency for both consultants.
d. If both consultants charge $5,000, which firm should be hired and why?
e. If Soft Drink Consultants charges $10,000 and the "Innovative Research Inc." charges $4,000, which consulting firm should be used and why. Explain in details.