A company has formalized a new-product concept and must now decide whether to pr
ID: 3296567 • Letter: A
Question
A company has formalized a new-product concept and must now decide whether to provide for long-range production capacity in its five-year plan. The company has three opportunities for profiting from the new product: sell the idea outright now to another company, lease the concept for a royalty, or develop the product in-house. If the concept is sold outright, it will bring $1,500,000. A consulting firm has surveyed the potential markets for the idea. If the concept is leased for royalty, two companies have submitted proposals and this information applies:
Size of Market
Probability
Payoffs
COMPANY A
Large
.5
$2,800,000
Marginal
.5
2,200,000
COMPANY B
Large
.5
2,600,000
Marginal
.5
2,300,000
If the company develops the concept into a new product, it can sell the rights to the product. If this alternative is selected, this information applies:
Size of Market
Probability
Payoffs
Large
.5
$2,500,000
Marginal
.5
2,200,000
If the company develops the new product and then produces and markets it, this information applies:
Size of Market
Probability
Payoffs
Large
.5
$3,000,000
Marginal
.5
1,800,000
Use a decision tree analysis and recommend a course of action for this new product idea. Show the payoffs expected for each alternative.
Size of Market
Probability
Payoffs
COMPANY A
Large
.5
$2,800,000
Marginal
.5
2,200,000
COMPANY B
Large
.5
2,600,000
Marginal
.5
2,300,000
Explanation / Answer
Please rate
Answer: Option A Sell the concept: Company A Company B Size Prob Payoff Size Prob Payoff Large 0.5 $2,800,000 Large 0.5 $2,600,000 Marginal 0.5 $2,200,000 Marginal 0.5 $2,300,000 Net payoff = $2,500,000 Net payoff = $2,450,000 Therefore company A should be selected. And the payoff of the company = $2,450,000 Option B If company develops the model and lease Size Prob Payoff Large 0.5 $2,500,000 Marginal 0.5 $2,200,000 Net payoff = $2,350,000 Option C If company develops the model and produce itself Size Prob Payoff Large 0.5 $3,000,000 Marginal 0.5 $1,800,000 Net payoff = $2,400,000 Therefore option A is the best for the companyRelated Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.