Mr. Hess of California Windows, Inc. is considering making a change in the mater

Question

Mr. Hess of California Windows, Inc. is considering making a change in the material the firm uses for panes in its residential window line. The new material has a slight mirror attribute that assists in reflecting ultra-violet light and restricts the transmission of heat. The new material will raise the cost of a standard window by $3.76. The current window is in the mature stage of the life cycle and with no modifications, Hess has estimated that sales of the window line will be 240,000 units per year for the next 5 years with a probability of 0.3, and has a 0.70 probability of selling 180,000 units per year over the four years. The standard price of a window unit is $45. With the new glass material, the price per unit can be increased to $50. However, Hess estimates that the demand for the newly designed window will be 210,000 units with a probability of 0.6, and the there will be a 0.4 probability of sales of 150,000 units. Which option will allow the company to maximize its expected monetary value (EMV)?

Explanation / Answer

Company should go with the second option as the revenue is more in that case

Year 0.3 probability 0.7 probability Sales revenue 1                 72,000               126,000           8,910,000 2                 72,000               126,000           8,910,000 3                 72,000               126,000           8,910,000 4                 72,000               126,000           8,910,000 5                 72,000           3,240,000 Standard price 45        38,880,000

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