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# Managerial Decision Making Exam Essay

EXAMINATION PAPER
JUNE 2000

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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 |
|Campaign | |
| |Low |Medium |High |
|Campaign A |-20 |40 |110 |
|Campaign B |-30 |80 | 90 |
|Campaign C | 0 |40 |100 |

Required:

i) From the company’s point of view, is this as it stands a
situation of risk or uncertainty? Distinguish clearly between

(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 company’s 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 |
|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

HT’s 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 firm’s 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

Assume 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 .

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Managerial Decision Making Exam Essay
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BUSINESS SCHOOL EXAMINATION PAPER JUNE 2000 MODEL ANSWERS 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). __________
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