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Global Expansion: Decision Making with Uncertainty

You're the manager of global opportunities for a U.S. manufacturer, who is considering expanding sales into Europe. Your market research has identified three potential market opportunities: England, France and Germany.

If you enter the English market, you have a .5 chance of big success (selling 100,000 units at a per-unit profit of $8), a .3 chance of moderate success (selling 60,000 units at a per-unit profit of $6), and a .2 chance of failure (selling nothing).

If you enter the French market, you have a .4 chance of big success (selling 120,000 units at a per-unit profit of $9), a .4 chance of moderate success (selling 50,000 units at a per-unit profit of $6), and a .2 chance of failure (selling nothing).

If you enter the German market, you have a .2 chance of huge success (selling 150,000 units at a per-unit of $10), a .5 chance of moderate success (selling 70,000 units at a per-unit profit of $6), and a .3 chance of failure (selling nothing).

a)If you can enter only market, and the cost of entering the market (regardless of which market you select) is $250,000, should you enter one of the European markets?

b)If so, which one?

c)If you enter, what is your expected profit?

Solution Preview

Please refer attached file for better clarity of tables.

Solution:

Market : England
State Probability Operating Profit Cost of entering market Net Profit Expected Profit
P NP P*NP
High Success 0.50 100000 units at per unit profit of $8=800000 250000 550000 275000
Moderate Success 0.30 60000 units at per unit profit of $6=360000 250000 110000 33000
Failure 0.20 Selling Nothing=0 250000 -250000 -50000
...

Solution Summary

Solution describes the steps for selecting the european market among the given options. There is uncertainty about success. It also charts and calculates expected profit for each market and state.

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