The AsYouLikeIt Hamburger Shop is considering adding a new l

The As--?You--?Like--?It Hamburger Shop is considering adding a new location. The investment at each of the four potential sites is the same. The price they can charge for hamburgers is set by the competition in the area.

Factor                                       Site A      Sit B        Site C      Site D

Fixed Cost                                $10,500      $8,200        $6,100         $11,750

Variable Cost per Unit          $0.70            $0.75          $0.85           $0.65

Price per Unit                         $1.80            $1.70           $1.75           $1.65

Forecast Volume (units)       21,000          22,500          18,600       23,700

a. Given the information below, which site is expected to be the most profitable?

b. Now assume that forecast volume has some uncertainty around it. Assume a weak--?demand scenario in which sales are expected to be 15% below the forecasted volume, a moderate demand scenario in which sales are expected to be at the forecasted volume, and a strong demand scenario in which sales are expected to be 10% above the forecasted volume. Set up the payoff table illustrating the profits for each site under each new demand scenario.

c. Assuming probabilities of 0.20, 0.70, and 0.10, for weak, moderate, and high demand respectively, use the Expected Value approach to recommend which site to choose.

d. What other factors should one consider before recommending (or making) a decision?

Solution

Profits = Selling Price per Unit x Unit Sales - Variable Costs per Unit x Unit Sales - Fixed Costs

for A

profit =21000(1.8-.7) -10500 =$12600

B=>(1.7-.75)*22500 -8200 =$13175

C=>(1.75-.85)*18600 -6100 =>$10640

D=>(1.65-.65)*23700-11750 =>$11950

B has the maximum profit

2)pay off table

c)for siteA->.2*9135+.7*12600+.1*14910 =$12138

B->.2*9968.75+.7*13175+.1*15312.5 =1247.5

C->.2*8129+.7*10640+.1*12314=$10305.2

D->.2*8395+.7*11950+.1*14320 =$11476

Here also the maximum profit is for B

d)fcators can be availibility of people at the site,environemnt friendly etc