Tony Importer wants to import ready-made dress shirts from a small country (XYZ) in South East Asia. Since the wages are low, Tony would make a lot of money if he could pull the deal together. How could pay a flat rate of $8 per shirt and could easily sell $20 on wholesale to various vendors in this country. The catch is he needs to get an import license. Since XYZ does not adhere to the child labor laws, the chance of getting an import license is fifty-fifty. The minimum order is 100,000 shirts (of various sizes) and Tony can easily sell the dress shirts. If the license is not issued, Tony has to pay $2 per shirt to the manufacture to make the existing contract null and void. Use expected value to decide to purchase or not purchase the dress shirts. Perform all calculations with the minimum order.
Tony could apply for the import license and wait before ordering the dress shirts. This will only cost Tony $500 in application and document fee. But obviously there is a catch. There are few other importers who may want to take advantages of this $12 profit per shirt ($20-$8) and there is a 70% chance someone else would take this deal and tony would lose out on this business deal. Should Tony apply for the license and wait or go ahead with the deal?
Tony could also get some help in hiring consultants who have connections with the import license bureau and they could get additional information on getting the license. One of them is Mr. Consult who does this for a fee. His past record indicates that 90% of the time he is correct in predicting an application is going to be accepted and the applicant got the license. On the flip side, his predication on the prediction of not getting a license and the applicant is turned down for license is only 60%. He charges $5000 for his services. Is the additional information is worth the fee? What should Tony do?
Tony figures out that the $8 purchase price and the $2 fee for the contract cancellation are fixed and cannot be negotiable. However he is not sure he can sell all the shirts at $20 apiece.
He would like to do a sensitivity analysis on the selling price from $12 to $25 and see the expected value.
Use decision tree to perform all the above mentioned scenarios.