M3-5 A publishing company is planning on developing an advanced quantitative analysis book for graduate students in doctoral programs. The company estimates that sales will be normally distributed, with mean sales of 60,000 copies and a standard deviation of 10,000 books. The book will cost $16 to produce and will sell for $24; fixed costs will be $160,000.

1. What is the company’s break-even point?

2. What is the EMV?

M3-6 Refer to Problem M3-5.

1. What is the opportunity loss function?

2. Compute the expected opportunity loss.

3. What is the EVPI?

4. What is the probability that the new book will be profitable?

5. What do you recommend that the firm do?

M3-7 Barclay Brothers Company, the firm discussed in this module, thinks it underestimated the mean for its game Strategy. Rudy Barclay thinks expected sales may be 9,000 games. He also thinks that there is a 20% chance that sales will be less than 6,000 games and a 20% chance that he can sell more than 12,000 games.

1. What is the new standard deviation of demand?

2. What is the probability that the firm will incur a loss?

3. What is the EMV?

4. How much should Rudy be willing to pay now for a market research study?

M3-8 True-Lens, Inc., is considering producing long-wearing contact lenses. Fixed costs will be $24,000, with a variable cost per set of lenses of $8. The lenses will sell to optometrists for $24 per set.

1. What is the firm’s break-even point?

2. If expected sales are 2,000 sets, what should True-Lens do, and what are the expected profits?

M3-9 Leisure Supplies produces sinks and ranges for travel trailers and recreational vehicles. The unit price on its double sink is $28 and the unit cost is $20. The fixed cost in producing the double sink is $16,000. Mean sales for the double sinks have been 35,000 units, and the standard deviation has been estimated to be 8,000 sinks. Determine the expected monetary value for these sinks. If the standard deviation were actually 16,000 units instead of 8,000 units, what ­effect would this have on the expected monetary value?

M3-10 Belt Office Supplies sells desks, lamps, chairs, and other related supplies. The company’s executive lamp sells for $45, and Elizabeth Belt has determined that the break-even point for executive lamps is 30 lamps per year. If Elizabeth does not make the break-even point, she loses $10 per lamp. The mean sales for executive lamps has been 45, and the standard deviation is 30.

1. Determine the opportunity loss function.

2. Determine the expected opportunity loss.

3. What is the EVPI?

M3-11 Elizabeth Belt is not completely certain that the loss per lamp is $10 if sales are below the break-even point (refer to Problem M3-10). The loss per lamp could be as low as $8 or as high as $15. What effect would these two values have on the expected opportunity loss?

M3-12 Leisure Supplies is considering the possibility of using a new process for producing sinks. This new process would increase the fixed cost by $16,000. In other words, the fixed cost would double (see Problem M3-9). This new process will improve the quality of the sinks and reduce the cost it takes to produce each sink. It will cost only $19 to produce the sinks using the new process.

1. What do you recommend?

2. Leisure Supplies is considering the possibility of increasing the purchase price to $32 using the old process given in Problem M3-9. It is expected that this will lower the mean sales to 26,000 units. Should Leisure Supplies increase the selling price?

M3-13 Quality Cleaners specializes in cleaning apartment units and office buildings. Although the work is not too enjoyable, Joe Boyett has been able to realize a considerable profit in the Chicago area. Joe is now thinking about opening another Quality Cleaners in Milwaukee. To break even, Joe would need to get 200 cleaning jobs per year. For every job under 200, Joe will lose $80. Joe estimates that the average sales in Milwaukee will be 350 jobs per year, with a standard deviation of 150 jobs. A market research team has approached Joe with a proposition to perform a marketing study on the potential for his cleaning business in Milwaukee. What is the most that Joe would be willing to pay for the market research?

M3-14 Diane Kennedy is contemplating the possibility of going into competition with Primary Pumps, a manufacturer of industrial water pumps. Diane has gathered some interesting information from a friend of hers who works for Primary. Diane has been told that the mean sales for Primary are 5,000 units and the standard deviation is 50 units. The opportunity loss per pump is $100. Furthermore, Diane has been told that the most that Primary is willing to spend for market research for the demand potential for pumps is $500. Diane is interested in knowing the break-even point for Primary Pumps. Given this information, compute the break-even point.

M3-15 Jack Fuller estimates that the break-even point for EM5, a standard electrical motor, is 500 motors. For any motor that is not sold, there is an opportunity loss of $15. The average sales have been 700 motors, and 20% of the time sales have been between 650 and 750 motors. Jack has just been approached by Radner Research, a firm that specializes in performing marketing studies for industrial products, to perform a standard marketing study. What is the most that Jack would be willing to pay for market research?

M3-16 Jack Fuller believes that he has made a mistake in his sales figures for EM5 (see Problem M3-15 for details). He believes that the average sales are 750 instead of 700 units. Furthermore, he estimates that 20% of the time, sales will be between 700 and 800 units. What effect will these changes have on your estimate of the amount that Jack should be willing to pay for market research?

M3-17 Patrick’s Pressure Wash pays $4,000 per month to lease equipment that it uses for washing sidewalks, swimming pool decks, houses, and other things. Based on the size of a work crew, the cost of the labor used on a typical job is $80. However, Patrick charges $120 per job, which results in a profit of $40 per job. How many jobs would be needed to break even each month?

M3-18 Determine the EVPI for Patrick’s Pressure Wash in Problem M3-17 if the average monthly demand is 120 jobs, with a standard deviation of 15.

M3-19 If Patrick (see Problem M3-17) charged $150 per job while his labor cost remained at $80 per job, what would be the break-even point?