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EFI: Decision making under uncertainty

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Exquisite Foods Incorporated (EFI) sells premium foods. Three independent strategies are being considered to promote a new product, Soufflés for Microwaves, to dual-career families. Currently the contribution margin ratio on EFI's foods is 65% which is expected to apply to the new product. EFI's policy for promoting new products permits only one type of advertising campaign until the product has been established.

Strategy One. The first strategy concentrates on television and magazine advertising. EFI would hire a marketing consultant to prepare a 30-second video commercial and a magazine advertisement. The commercial would air during the evening to address the working market, while the magazine advertisement would be placed in magazines read by career-minded individuals. This advertising campaign would provide EFI $230,000 expected contribution from sales.

Strategy Two. The second strategy promotes the product by offering 25% off coupons in the Sunday newspaper supplements, with a projected 15% redemption rate on sales revenue. EFI would hire a marketing consultant for $5,000 to design a one-quarter page, two-color coupon advertisement. The coupon would be distributed in the Sunday newspaper supplements at a cost of $195,000. Based on prior experience, EFI expects the following additional sales from this form of advertisement:

Expected sales Probability
$500,000 10%
600,000 25%
700,000 35%
800,000 20%
900,000 10%

Strategy Three. The third strategy offers a $0.50 mail-in rebate coupon attached to each box of Soufflés for Microwaves. EFI would hire a marketing consultant for $5,000 to create a one-sixth page, one-color rebate coupon. Printing and attaching costs for the rebate coupon are $0.07 per package and EFI is planning to include the rebate offer on 500,000 packages. Although 500,000 packages may be sold, only a 10% redemption rate is expected. EFI expects the following additional sales from this type of promotion:

Expected sales Probability
$400,000 10%
450,000 30%
500,000 35%
550,000 20%
600,000 5%

Required

1. EFI wishes to select the most profitable marketing alternative to promote Soufflés for Microwaves. Recommend which of the three strategies presented above should be adopted by EFI. Support your recommendation with appropriate calculations and analysis; the calculations should appear on a separate sheet of paper, not included in the page limit for the writing assignment.
2. What selection criteria, other than profitability, should be considered in arriving at a decision on the choice of promotion alternatives?

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This posting contains a problem on Decision Making under Uncertainty. It choses the least costly alternative for promoting a new product of EFI.

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