The Battle Creek Breakfast Food Company has developed a new breakfast cereal which it is considering for full-scale production. Test market results have provided the following demand estimates:
Demand in Cases
_____Per Year_____ Probability
500,000 .15
1,000,000 .25
2,000,000 .45
5,000,000 .15
Development costs have totaled $1,200,000. If the new cereal goes into production, the company expects to receive $12 per case sold, variable production costs are $5 per case, and annual fixed costs are estimated at $5,000,000. Taking all relevant costs into consideration:
What should the company do in the case of each of the following decision rules:
a) Optimistic (maximax)?
b) Pessimistic (minimax)?
c) Equally likely?
d) EMV (use given probabilities)?