Question: You own Eat My Crust Inc., a pizza crust manufacturing business. For each of the following scenarios, identify expected costs, expected benefits and expected net gain (profits). Determine if it is in your best interests to pursue the opportunity.
1. You are deciding whether or not to buy out a frozen pizza firm. The firm costs $ 3 million to purchase. Theres a 35% chance that the firm will be worth $8 million in value and a 65% chance that the firm will be worth only $1 million in value. Should you buy the firm?
2. In December, pizza crust orders (from retailers) increases. You service 200 retailers, and during this time there is a 60% chance that any one retailer will increase their "usual" order from 20 units to 40 units You are trying to decide between 3 production levels:6,000 units, 6,400 units and 6,800 units. Per-unit production cost is $2 and the per-unit price charged to retailers is $4. Unsold units rot. Which production level is best?
3. You are deciding whether or not to buy a new oven for your pizza crust manufacturing plant. The oven costs $30K to purchase and install and will last 1 year. The oven will generate $4K in profits each month when operating. However there is a 15% chance each month that the oven will need repairs (during which time it generates $0 in profits for the month). Should you buy the oven?
4. You are launching a new ready-made pizza crust item for sale in supermarkets. The item costs $2 on average to manufacture. The current proposed price of your new item is $5.99. Your research suggests that that the size of the market for your product is 100,000 possible customers in total per period, 30% of which value the product at $6 and 70% of which value the product at $4. Your research also suggests that if the price of a pizza product falls below a customers value of it, the customer has an 80% chance of buying it. You have the opportunity to launch the product with an attached $2-off coupon good for the first period of sales. Should you launch at the proposed price with the coupon or without?