Managerial Decision Making Exam Essay Example For Students

Managerial Decision Making Exam Essay BUSINESS SCHOOL EXAMINATION PAPER JUNE 2000 Module Code: Module Title: Managerial Decision Making Date: Time: INSTRUCTIONS TO CANDIDATES: Section A is compulsory. It is worth 50 marks; the share of marks for each question is shown alongside it. Answer any TWO questions from Section B. Each question is worth 25 marks. Time allowed: 2 hours and 15 minutes (plus 10 minutes reading time). ____________________________________________________________________________ _ SECTION A Harry Tomfilger (HT) is a supplier of fashion clothing. It faces a decision on the choice of advertising campaign for a new product that it plans to introduce through major high street retailers. The impact of any advertising campaign is believed to be closely linked to levels of consumer spending over the next year; to simplify matters, the possible alternatives have been characterised as high, medium or low expenditure. The Marketing Director has set out her assessment of the likely pay-offs from the three advertising campaigns in the form of the matrix given below (showing net sales revenues in 000s under each scenario). The company does not, initially at least, have reliable estimates of the probability of each level of consumer spending occurring. | |Consumer Spending | |Advertising | | |Campaign | | | |Low |Medium |High | |Campaign A |-20 |40 |110 | |Campaign B |-30 |80 | 90 | |Campaign C | 0 |40 |100 | Required: i) From the companys point of view, is this as it stands a situation of risk or uncertainty? Distinguish clearly between the two, giving additional examples. (4 marks) Situation of uncertainty because reliable (objective) probability measures are not available to the company ie three states of nature but no indication of their likelihood of occurrence. (2 marks for uncertainty + explanation + 2 marks for suitable examples). ii) Showing your workings, what advice would you give under each of the following criteria? (these are worth 2 marks each): a) Maximin b) Maximax c) Hurwicz Alpha (assuming a value for ? of 0.8). (6 marks) (a) Campaign C (0) (b) Campaign A (110) (c) Campaign A = 0.8(110) + 0. 2(-20) = 84*, Campaign B = 0.8(90) + 0.2(-30) = 66, Campaign C = 0.8 (100) + 0.2(0) = 80 iii) Assume, now, that the companys Marketing Director, using the latest government predictions, decides that the probability of low consumer spending is 20% and that of high consumer spending, 35%. What is the risk neutral decision for the company? (5 marks) Campaign A = 0. 2(-20) + 0.45(40) + 0.35(110) = 52.5 Campaign B = 0.2(-30) + 0.45(80) + 0. 35(90) = 61.5* ( maximum EV) Campaign C = 0.2(0) + 0.45(40) + 0.35(100) = 53 iv) What is the maximum that HT should be prepared to pay for information that will tell it with certainty what will happen to consumer spending next year (ie whether it will be low, medium or high)? Show clearly the method used. (5 marks) Two possible methods (a. EV perfect info-EV imperfect info, or b. Minimum EOL) a. 0.2(0) + 0.45(80) + 0.35(110) 61. 5 = 74.5 61.5 = 13 b. Opp. Loss Matrix | |Consumer Spending | |Advertising | | |Campaign | | | |Low |Medium |High | |Campaign A |20 |40 | 0 | |Campaign B |30 |0 | 20 | |Campaign C | 0 |40 | 10 | EOL(A) = 22, EOL(B) = 13*, EOL(C) = 21.5 HTs sister company, Clothesline, produces a trouser press for use by busy executives. The annual demand function for the product is estimated at: P = 380 0.02Q MR = 380 0.04Q (where P = price per unit, Q = annual quantity sold) The firms marginal cost function is given as: MC = 20 + 0.08Q Required: v) Advise Clothesline on the output level and price that maximise sales revenue from the trouser press. (4 marks) MR = 380 0.04Q = 0 Q = 380/0. 04 = 9500, P = 380 0.02(9500) = 190 vi) Calculate the output and price that maximise profits from the product. (5 marks) MC = MR 20 + 0.08Q = 380 0.04Q 0.12Q = 360 Q = 360/0. 12 = 3000, P = 380 0.02(3000) = 320 Seattles Suburbs History. EssayAssume now that the company is re-organised into separate manufacturing and distribution divisions, which both aim is to maximise profits. The total costs of the manufacturing division are estimated to be: TC = 10,000 +10Q + 0.03Q2. MCmfg = 10 + 0.06Q MCdist = 20 + 0. 08Q -(10 + 0.06Q) = 10 + 0.02Q Required: vii) What is the optimal transfer price between the manufacturing and distribution divisions? (Assume that there is no .