Diet Coke is contemplating introduction of a new energy drink. The company estim
ID: 420181 • Letter: D
Question
Diet Coke is contemplating introduction of a new energy drink. The company estimates that in case they produce the new energy drink it will yield a profit of $1,000,000 if sales turn out to be around 100,000,000 bottles, a profit of $200,000 if sales turn out to be 50,000,000 bottles, or they will lose $2,000,000 if sales turn out to be around 1,000,000 bottles. If Diet Coke doesn’t produce the new energy drinks, they will suffer a loss of $400,000.
a. Explain in details and provide the appropriate arguments if Diet Coke introduce the new energy drink by using:
I. a conservative approach
II. an optimistic approach
III. the middle of the road (MaxiMin Regret) approach
b. An internal study by the management estimates that the probability of selling 100,000,000 bottles is 0.3333, the probability of selling 50,000,000 bottles is 0.50, the probability of selling 1,000,000 bottles is 0.1667. Should they introduce the new diet drink? Why? Explain in details.
c. “Soft Drink Consultants” is a company that provides a tailor-made feasibility study for a consulting fee of $275,000. Should Diet Coke hire them to conduct such study? Why? Explain
Explanation / Answer
Answer:
a. Explain in details and provide the appropriate arguments if Diet Coke introduce the new energy drink by using:
I. A Conservative Approach:
Diel Coke will introduce the new energy drink for the reason to stay in the market and doesn't want to lose its existing customers to its competitors / business rivals eventhough there is a risk in incuring loss due to its new product whereas it can make up the losses from existing business
II. A Optimistic Approach:
Diel Coke will introduce the new energy drink for the reason to distrupt the market by bringing in more customers in less time by decreasing the unit price to compete with its competitiors. Low margin x Huge sales = Maximum profit.
III. A Maximin Approach:
Diel Coke will introduce the new energy drink for the reason to remain as a sustainable competitor in this sector by having its strategy of having a breakup point thing of sales whereby doesn't look after the profit or losses in its initial stage.
b. An internal study by the management estimates that the probability of selling 100,000,000 bottles is 0.3333, the probability of selling 50,000,000 bottles is 0.50, the probability of selling 1,000,000 bottles is 0.1667. Should they introduce the new diet drink? Why? Explain in details.
YES, Diet Coke should introduce the new diet drink. The reason being the more probability of having profit w.r.t. results of the internal study. It is clear from the below table that the probability of having profit is 83.33% against the opposite. When comes to Profit/Loss per bottle of energy drink it is + $100, + $250 & - $0.5 respectively. So, Diet Coke should introduce the new drink.
c. “Soft Drink Consultants” is a company that provides a tailor-made feasibility study for a consulting fee of $275,000. Should Diet Coke hire them to conduct such study? Why? Explain
As per my opinion Diet Coke should not hire "soft drink consultants" for a consulting fee of $275000, since the said amount is approximate 27.5% of the expected profit in scenario 1. So, i is not wiseable to spend 28% of the expected profit in consultation.
Thanks.
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