Jan finished culinary school and wants to start her own past

Jan finished culinary school and wants to start her own pastry business. She has a few options, and believes that a sensitivity analysis would help her to make the best business decision. She is considering three options, and is confident that there is a strong demand (.6) because there is only one other bakery in the town. Building in the newer area of town where there has been recent growth. Strong demand payoff $7 million, weak demand payoff $2 million. Renting an existing bakery location that was leased by a company that recently went out of business. Strong demand payoff $9 million, weak demand $4 Million. Renovating in the historic district where there is a lot of tourism and foot traffic. Strong demand payoff $12 million, weak demand $7 million. Using three decisions, complete the equations and label each component of the equation. Use page 114 and 115 as a model, as well as the equation below to get you started. In addition, construct a decision table to go with the equations (see page 110). In five to seven sentences, explain what decision you believe Jan should make, and why. EV(d_1) = 0.6(7) + .4(2) = ___ EV(d_2) = 0.6( ) + .4( ) = _____ EV(d_3) = 0.6 (12) + .4( ) = ________

Solution

E(d1) = 0.6(7) + 0.4(2) =5

E(d2) = 0.6(9) + 0.4(4) = 7

E(d3) = 0.6(12) + 0.4(7) = 10

Jan should make the 3 decision as the expected demand is the maximum for it. So Jan is expected to make a maximum profit by choosing the 3rd option.

Decision	Strong demand	weak demand	Expectations
d1	7	2	5
d2	9	4	7
d3	12	7	10