Case Problem ‘Bicycle Shop’

Jerry Smith is thinking about opening a bicycle shop in his hometown. Jerry loves to take his own bike on 50-mile trip with his friends, but he believes that any small business should be started only if there is a good chance of making a profit. Jerry can open a small shop, a large shop, or no shop at all. The profits will depend on the size of the shop and whether the market is favorable or unfavorable for his products. Because there will be a 5-year lease on the building that Jerry is thinking about using, he wants to make sure that he makes the correct decision. Jerry is also thinking about hiring his old marketing professor to conduct a marketing research study. If the study is conducted, the study could be favorable (i.e., producing a favorable market) or unfavorable (i.e., producing an unfavorable market).
Jerry Smith has done some analysis about the profitability of the bicycle shop. If Jerry build the large bicycle shop, he will earn $60,000 if the market is favorable, but he will lose $40,000 if the market is unfavorable. The small shop will return a $30,000 profit in a favorable market and a $10,000 loss in an unfavorable market. At the present time, he believes that there is 50-50 chance that the market will be favorable. His old marketing professor will charge $5,000 for the marketing researching. It is estimated that there is a 0.6 probability that the survey will be favorable. Furthermore, there is a 0.9 probability that the market will be favorable given a favorable outcome from the study. However, the marketing professor has warned Jerry that there is only a probability of 0.12 of a favorable market if the marketing research results are not favorable.
Prepare a Managerial Report structured as follows:
2.1 Structure and present your paper in the form of a Managerial Report, with a cover page, table of content, executive summary, main body, appendixes.
2.2 Prepare a payoff table and develop a decision tree.
2.3 Based on the calculated EMVs for all decision alternatives, answer the question: ‘Should Jerry conduct and use the marketing research?’
2.4 Jerry is unsure the 0.6 probability of a favorable marketing research study is correct. How sensitive is Jerry’s decision to this probability value? How far can this probability value deviate from 0.6 without causing Jerry to change his decision?
2.5 Using the results from the sensitivity analysis (task 4), prepare a sensitivity diagram.
2.6 Apply software tools for the decision tree (recommended tool: MS Excel Add-Ins TreePlan)