# Accounting Problem Set-Abraham Lincoln University .

Problem A: Computer Reseller A computer reseller needs to decide how many laptops to order next month. The lowest end laptop costs \$220 and the retailer can sell these for \$300. However, the laptop manufacturer already announced that they are coming out with a new model in a couple of months. Any laptops that will not be sold by the end of next month will have to be heavily discounted at half-price. The reseller also needs to consider that every time he fails to fulfill a laptop order, he stands to lose \$25 for every unit. Based on the past months’ sales, the reseller estimates the demand probabilities for sales (S) as follows: P(0 units) = 0.3; P(1 units) = 0.4; P(2 units) = 0.2; P(3 units) =0.1. The reseller thinks it’s a good idea to conduct a survey on whether or not his customers are going to buy laptops and how many. The survey results will either be Yes (Y), No (N) or Don’t Know (DK). The probability estimates of the results based on the demand for number of units are: P(Y|S = 0 units) = 0.1 P(Y|S = 1 units) = 0.2 P(Y|S = 2 units) = 0.3 P(Y|S = 3 units) = 0.9 P(N|S = 0 units) = 0.8 P(N|S = 1 units) = 0.3 P(N|S = 2 units) = 0.1 P(N|S = 3 units) = 0.1 What you need to do: 1) Build the reseller’s payoff matrix (table). 2) Determine the reseller’s best decision without conducting the survey 3) Compute for the resellers’ EVPI. 4) If the reseller conducts the survey, what would be the best strategy? 5) Determine the maximum amount the reseller should pay to conduct the survey. Explain your answer. Problem B: Mountain Peak College The career counselor at Mountain Peak College has a tough job. She is expected to provide information to help students decide which major they should take. The counselor knows that she can use quantitative analysis to help her with her work. She did a survey and came up with six most popular degree programs at her college. One of the biggest factors she considered was the “earning” power of the degree in four different economic conditions. The table below presents the information she collected on the degree programs. The amounts shown are 3-year gross salaries of the alumni she surveyed. During recession: During average economy: Game design engineer = \$145k Game design engineer = \$175k Nursing = \$150k Nursing = \$180k Hospitality = \$115k Hospitality = \$165k Business = \$130k Business = \$180k Biotechnology = \$115k Biotechnology = \$145k Computer Science = \$125k Computer Science = \$150k During good economy: During a bullish economy: Game design engineer = \$220k Game design engineer = \$260k Nursing = \$205k Nursing = \$215k Hospitality = \$220k Hospitality = \$320k Business = \$210k Business = \$280k Biotechnology = \$235k Biotechnology = \$305k Computer Science = \$190k Computer Science = \$250k The college offered to pay for a projection of the probability of each economic condition over the next 3 years. The research company estimated that: P(recession) = 0.20; P(average economy) = 0.40; P(good economy) = 0.30; P(bullish economy) = 0.10 What you need to do: 1) Build the payoff table showing the 3-year gross salaries of the different careers. 2) Determine the best degree program in terms of the projected gross salary using the following approaches: o Maximax o Laplace o Hurwicz (α=.50) o Expected value 3) Determine what degree program the career counselor should recommend to the students. Explain your reasoning. Problem C: Janus Seagull Janus Seagull had a car accident and was out of work for a year. Janus believes that the accident was caused by a vehicle defect. He consulted some lawyers and planned to sue the vehicle manufacturer. During negotiations, the legal team of the vehicle manufacturer offered a \$700K settlement. However, Janus needs to settle the \$100K in legal fees. Janus asked his lawyer for advice and the lawyer told him that he has a 50% chance of winning the case. If Janus loses, he will incur legal fees of \$75K. If he wins, the full requested settlement is also not guaranteed. The lawyer believes that there is a 50% chance that Janus will receive full settlement of \$3 million, of which Janus needs to settle \$1 million in legal fees. There is a 50% chance that the jury will award Janus \$1 million, of which 50% will be taken up by legal fees. What you need to do: 1) Use a decision tree to determine what is Janus’ best option. You need to show the complete decision tree in your submission. 2) Recommend Janus’ best option and explain your why this is so. Problem D: La Comida Foods would like to introduce a new line of tropical sauces and marinades. To introduce the new product line, La Comida can either introduce the products first in selected geographic areas to gauge consumer response OR go full-blast and launch the new product line nationally. The cost of introducing the products in selected geographic areas for gauging consumer response is \$150K. If the company decides to introduce the product this way, it would need to see the responses to the products before they decide to launch the product line nationally. The probability of a favorable response in the selected geographical areas is estimated at 0.60. La Comida can also decide not to go for the launching in the product in selected geographical areas and go ahead with the nationwide launch or not. If La Comida Foods decides to go fullblast in launching the products nationally and are a success, the company estimates that they will gain an annual income of \$1.6 million. If the products are not a hit, the company will realize losses to the tune of \$700K. La Comida estimates the probability of success for the sauces and marinades to be 0.50, if these are introduced without gauging consumer response. If the company decides to introduce in selected geographical areas to gauge consumer response, and the response is favorable, then the probability of a successful nationwide introduction increases to 0.80. If the consumer response during the introduction in the selected geographical areas is unfavorable, then the probability of national success drops to 0.30. What you need to do: 1) Using a decision tree analysis, help La Comida decide if they should introduce their new products through a selected geographical area. You have to show your complete decision tree in your submission. 2) Recommend the best strategy or course of action that La Comida should take for introducing their new line of marinades and sauce. Explain why.