Case Study 1 (20%)
Due Week 5
BEO 6501 Quantitative Analysis Semester 2, 2014
Part A (5)
Drink-At-Home, Inc. (DAH, Inc.), develops, processes, and markets mixes to be used in nonalcoholic cocktails and mixed drinks for home consumption. Mrs. Lee, who is in charge of research and development at DAH, Inc., this morning notified Mr. Dick Jones, the president, that exciting developments in the research and development section indicate that a new beverage, an instant pina colada, should be possible because of a new way to process and preserve coconut. Mrs. Lee is recommending a major program to develop the pina colada. She estimates that expenditure on the development may be as much as $100,000 and that as much as a year's work may be required. In the discussion with Mr. Jones, she indicated that she thought the possibility of her outstanding people successfully developing such a drink now that she'd done all the really important work was in the neighborhood of 90 percent. She also felt that the likelihood of a competing company developing a similar product in 12 months was 80 percent.
Mr. Jones is strictly a bottom line guy and is concerned about the sales volume of such a beverage. Consequently, Mr. Jones talked to Mr. Besnette, his market research manager, whose specialty is new product evaluation, and was advised that a market existed for an instant pina colada, but was some-what dependent on acceptance by both grocery stores and retail liquor stores. Mr. Besnette also indicated that the sales reports indicate that other firms are considering a line of tropical drinks. If other firms should develop a competing beverage the market would, of course, be split among them. Mr. Jones pressed Mr. Besnette to make future sales estimates for various possibilities and to indicate the present (discounted value of future profits) value. Mr. Besnette provided Table 1.
Mr. Besnette's figures did not include (1) cost of research and development, (2) cost of new production equipment, or (3) cost of introducing the pina colada. The cost of the new production equipment is expected to be $ 100,000 because of the special way the coconut needs to be handled, and the cost of introducing the new product is expected to be about $150,000 because of the point-of purchase displays that would be necessary to introduce the new product.
Mrs. Lee has indicated that she does have alternative development proposals, which are:
1. A reduced research program to see someone else comes out with the product first and if not, then proceed with a crash program. The reduced program for the first eight months would cost $10,000 per month. One advantage of this is that if the effort was unsuccessful, then development costs would be held to the eight-month figure (8 months × $ 10,000 = $80,000). The likelihood of success under this approach is the same as the more orderly development. (The likelihood of a competing company developing a product in 8 months is 60 percent.) The crash development program would take place in months 9 through 12 and would cost an additional $60,000. It would proceed only if the eight-month study guaranteed a success.
2. Use a reduced research program and maintain an awareness of industry developments to see if someone else develops a product. If someone else has developed a product at the end of six months, it would cost only an additional $30,000 to analyze their product and duplicate it. The reduced development program would cost $10,000 per month.
Mr. Besnette, being the great marketer that he is, is of course reluctant to be second on the market with a new product. He says that the first product on the market will usually obtain a greater share of the market, and it will be difficult to win those customers back. Consequently, he indicates that only about 50 percent of the sales that he indicated in Table 1 could be expected if Drink-at-Home waited until competing brands were already on the market. Moreover, he suspects that there is only a 50/50 chance that the competitor will be out with a product within the next six months.
There are four options: (1) orderly development of the pina colada, (2) modest development effort followed by the crash program, (3) a modest development effort for the first six months to see if a competitive product comes on the market, and (4) do nothing.
TABLE 1 Sales and Profit Potentials
Consumer Acceptance (Sales Potential) Probability Present Values (Discounted Value of Future Profits)
Substantial 0.10 $800,000
Moderate 0.60 $600,000
Low 0.30 $500,000
What do you recommend? Explain and support your arguments!
Part B (14)
For years The Glass Slipper restaurant has operated in a resort community near a popular ski area of New Mexico. When the owners: James and Deena Weltee built The Glass Slipper, they had a vision of the ultimate dining experience. As the view of surrounding mountains was breathtaking, a high priority was placed on having large windows and providing a spectacular view from anywhere inside the restaurant. Special attention was also given to the lighting, colours and overall ambience, resulting in a truly magnificent experience for all who come to enjoy gourmet dining. Since its opening, The Glass Slipper has developed and maintained a reputation as one of the Ã¢â‚¬Å“must visitÃ¢â‚¬Â places in that region of New Mexico.
While James loves to ski and truly appreciates the mountains and all that they have to offer, he also shares DeenaÃ¢â‚¬â„¢s dream of retiring to a tropical paradise and enjoying a more relaxed lifestyle on the beach. After some careful analysis of their financial condition, they knew that retirement was many years away. Nevertheless, they were hatching a plan to bring them closer to their dream. They decided to sell The Glass Slipper and open a bed and breakfast on a beautiful beach in Mexico. While this would mean that work was still in their future, they could wake up in the morning to the sight of the palm trees blowing in the wind and the waves lapping at the shore. They also knew that hiring the right manager would allow them to begin a semi-retirement in a corner of paradise.
To make this happen, James and Deena would have to sell The Glass Slipper for the right price. The price of the business would be based on the value of the property and equipment, as well as projections of future income. A forecast of sales for the next year is needed to help in the determination of the value of the restaurant. Sales for more than ten years are available in the Excel file Case Study 1.xlsx.
1. Prepare a graph of the data. Analyse whether the data is stationery and has any pattern. (2)
2. Develop a trend line model using regression. Analyse whether the slope of this line consistent with what you observed in question 1. Is the model good enough to be used to forecast monthly sales for the next year? Explain. (4)
3. With the condition of the data, what method of forecasting do you think that can be used? Explain. (1)
4. Do forecasting using method in question 3 for the next yearÃ¢â‚¬â„¢s sales. (3)
5. Discuss whether the slope in the model in question no. 4 is different from that of model in question 2. (1)
6. Develop a multiple regression model by accommodating the seasonal component; forecast the next yearÃ¢â‚¬â„¢s sales. (3)
Render, S, Stair, RM & Hanna, ME 2012, Quantitative Analysis for Management, 11th edn, Pearson, Boston Columbus.
This assignment is worth 20% of the total mark for the subject. This is a group assignment, which must be submitted in pairs of two students. Each member of the group will receive the same mark. However, students who do not cooperate or contribute equally towards the work of the group may be penalised and /or asked to make an individual submission for the whole assignments.
You are required to demonstrate in this assignment your knowledge of the subject. Further, you should use EXCEL program to do all statistical calculation.
You are encouraged to submit your assignment using a word processor to improve your presentation. You will lose marks for bad presentation. English expression will also be counted within the marking scale. Report presentation is 1 mark.
Use A4 size paper and fasten assignment on the left-hand side. Do not use folder or plastic covers. Students must retain a copy of their assignment. Also remember plagiarism is a serious offence.
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Due: End of week 5.