Recently, Curbo Company has received a large sum of money from the estate of a former stockholder. Management is undecided about the most profitable means of investing this money. The Accounting Department has worked with the Engineering and Production Departments, and the Market Research Department is evaluating the alternatives available. After eliminating a few alternatives that would not fully meet company objectives, they believe the following actions are feasible:
1. Hire sales training personnel to upgrade the selling techniques of the marketing force. Management believes that income will increase $100,000 if an excellent market prevails and $90,000 in an average market, and there would be a $20,000 loss in a poor market.
2. Upgrade their present product by employing skilled engineers to improve the quality of the motors contained in the product. With these operations, a sales price increase will be warranted that is expected to result in a $200,000 income increase in an excellent market, a $125,000 income increase in an average market, and a $140,000 loss in a poor market.
3. Manufacture a complementary product that would also increase sales for the present product. Forecasts indicate a $160,000 increase in total income in an excellent market, a $120,000 total income increase in an average market, and a $50,000 loss in a poor market.
An assessment of the probabilities for each environmental condition is excellent, 40 percent; average, 15 percent; and poor, 45 percent.
1. Prepare a payoff table for each of the alternatives available.
2. Determine the opportunity cost of the alternatives available.
3. Determine the expected value of the alternative actions being considered.
4. Evaluate the alternatives, including the course of action you would advise the company to take.
5. Assume perfect advance information can be obtained. How much should the company be willing to pay for it?
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