sabella Knight has a big decision to make. She is faced with three different str
ID: 3145718 • Letter: S
Question
sabella Knight has a big decision to make. She is faced with three different strategic alternatives for retail outlet locations: Downtown, Suburban, or Regional. Projected revenue (R), variable cost percentage (VCP), and Fixed Cost are shown in the tables below. Market probabilities are Improving Market = 41%, Unchanged Market = 35%, and Declining Market = 24%. Note: as part of your payof computations, use variable cost = R x VCP.
Based on this data, match the questions with the answers below.
Downtown EMV
Suburban EMV
Regional EMV
Which alternative should Isabella choose?
Suburban
$18,240,414
None of the answers on this list is true.
$19,798,266
-$4,836,963
Downtown
$20,923,855
$16,630,350
$21,163,352
$24,572,796
$15,060,724
Regional
15 points
Table 1: Projected Revenue Alternatives Improving Market Unchanged Market Declining Market Downtown $253,131,340 $213,380,973 $126,796,881 Suburban $205,295,264 $152,816,444 $107,882,588 Regional $181,549,536 $138,764,448 $98,982,123 Table 2: Variable Cost Percentage Alternatives Variable Cost Percentage Downtown 25% Suburban 30% Regional 35% Table 3: Fixed Costs Alternatives Construction Costs Relocation Costs Downtown $128,682,250 $12,930,857 Suburban $83,711,050 $9,609,642 Regional $71,527,130 $5,625,530Explanation / Answer
To calculate the EMV (Expected monetary value) of each of the locations of downtown, suburban and regional we 1st have to calculate the variable cost for different locations during different market probabilities.
to calculate the VC in improving market of downtown = (VCP*R) of downtown
= 25% * $253,131,340 = $63,282,835
Similarly we calculate the VC in unchanged market for downtown = 30% * $213,380,973 = $53,345,243
Similarly we calculate all the Variable costs for different markets for different locations, the final value of variable costs calculated is given in table below:
Fixed cost is given to us which will be the same no matter what kind of market condition or probablity
FC = Construction cost +relocation cost
Now we calculate the net income in dowtown if the market is improving = R-VC-FC = $253,131,340 - $63,282,835 - $128,682,250 - $12,930,857 = $48,235,398
Similarly we calculate the net income in unchanged market for downtown = $213,380,973 - $53,345,243 - $128,682,250 - $12,930,857 = $18,422,623
Similarly we calculate all the Net income for different markets and different locations, the final value of Net income calculated is given in table below:
Expected monetary value of Downtown location = NIimproving*probablityimproving + NIunchanged*probablityunchanged + NIdeclining*Probabilitydeclining
= 48,235,398*41% + 18,422,623*35% + (-46515446)*24%
= $15,060,724
Similarly we calculate EMV for Suburban location = 50,385,993*41% + 13,650,819*35% + -17,802,880*24%
= $21,163,352
Similarly we calculate EMV for Regional location = 40,854,538*41% + 13,044,231*35% + 12,814,280*24%
= $18,240,414
Correspondingly from the given table EMV downtown area = K
EMV suburban area = I
EMV regional area = B
The best alternative to be chosen should be Suburban location sinc its EMV has come out as highest among the three which means it can provide much more profit than other two, which is option A in the given table.
Variable cost Improving market Unchanged market Declining market Downtown $63,282,835 $53,345,243 $31,699,220 Suburban $61,588,579 $45,844,933 $ 32,364,776 Regional $63,542,338 $48,567,557 $34,643,743Related Questions
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