Motorking Corporation

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Motorking Corporation New Gas Extender

As Motorking Corporation considers introducing its now “gas extender” product into the market, the management must consider various factors to determine if this is a good financial move. The production manager needs to determine if the product will generate a profit for the corporation, how much product is expected to sell to determine how much to produce and how much to outsource.

The first thing that the production manager must consider is the optimal quantity of cases that can be produced. The marketing manager has indicated that if the economy is strong then Motorking will sell 100,000 cases. If the economy is moderate Motorking will sell 70,000 cases, and if the economy is weak, then
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This gives the production manager a 62.5% prediction that the economy will be weak and an 83.3% prediction that economy will be strong.

Motorking Corporation must also determine whether or not to sign a contract with DSI to conduct the survey. Based on the forecasted profits, a decision tree was constructed using the past market research study conducted by DSI to provide a graphical representation of the decision-making process. It shows the natural or logical progression that will occur over time.

For the Motorking Corporation, the DSI tree estimates a profit of $1,885,137.50 in a strong economy and after subtracting the DSI fee of $20,000 leaves the corporation with $1,865,137.50 which is greater than $1,577,291 (This is Motorking’s Expected Value for Perfect Information). This proves that the Motorking should hire DSI to conduct a market survey.

The expected value approach is used to determine the expected value with perfect information (EVPI). The EVPI is obtained by subtracting the expected value without perfect information (EMV) from the EVPI.

The maximum payment that Motorking Corporation should pay for perfect information is $56,672.

Maximum payment for DSI services should be $327,846.88 ($1,885,137.50 – $1,577,291)

Motorking Corporation understands that the fuel additive industry is 1.3 billion dollars in the U.S. and is divided up by the
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