You’re the manager of global opportunities for a U.S. manufacturer, who is consi
ID: 1188923 • Letter: Y
Question
You’re the manager of global opportunities for a U.S. manufacturer, who is considering expanding sales into Europe. Your market research has identified three potential market opportunities: England, France, and Germany. If you enter the English market, you have a 0.5 chance of big success (selling 100,000 units at a per-unit profit of $8), a 0.3 chance of moderate success (selling 60,000 units at a per-unit profit of $6), and a 0.2 chance of failure (selling nothing). If you enter the French market, you have a 0.4 chance of big success (selling 120,000 units at a per-unit profit of $9), a 0.4 chance of moderate success (selling 50,000 units at a per-unit profit of $6), and a 0.2 chance of failure (selling nothing). If you enter the German market, you have a 0.2 chance of huge success (selling 150,000 units at a per-unit profit of $10), a 0.5 chance of moderate success (selling 70,000 units at a per-unit profit of $6), and a 0.3 chance of failure (selling nothing). If you can enter only one market, and the cost of entering the market (regardless of which market you select) is $250,000, should you enter one of the European markets? If so, which one? If you enter, what is your expected profit?
Explanation / Answer
First we need to calculate expected profit from each market.
Expected profit from england = probability *( profit)
= 0.5*(100,000*$8) + 0.3*(60,000*$6) + 0.2*(0)
= $400,000 + $108,000
= $508,000
Expected profit from French = probability *( profit)
= 0.4*(120,000*$9) + 0.4*(50,000*$6) + 0.2*(0)
= $432,000 + $120,000
= $552,000
Expected profit from German = probability *( profit)
= 0.2*(150,000*$10) + 0.5*(70,000*$6) + 0.3*(0)
= $300,000 + $210,000
= $508,000
The company will be profitable in all the markets as expected profit from each market is higher than the cost of $250,000
The company should enter the FRENCH market that has the highest expected profit of $552,000
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