CASE STUDY

CASE STUDY

This is a grouped case study which carries 10% of your overall coursework marks. This assignment consists of short problems relating to the topics learned in the class. It must be submitted before or on the stated deadline. A penalty of 10% will be deducted for late submission. The submission must be in hardcopy and in A4 size paper. It must be typewritten. If it is to be handwritten, it has to be very clear and clean. Failure to abide to the instructions will cause loss of marks.

Question Number    Distribution of Marks
a    8
b    5
c    5
d    2
Total    20
The case study will be marked upon 20 and converted to 10%.

Ecco Ski
After retiring as a physician, Fernando Torres became an avid downhill skier on the steep slopes of the Blue Rocky Mountains. As an amateur inventor, Fernando was always looking for something new. With the recent deaths of several celebrity skiers, Fernando knew he could use his creative mind to make skiing safer and his bank account larger. He knew that many deaths on the slopes were caused by head injuries. Although ski helmets have been on the market for some time, most skiers considered them boring and basically ugly. As a physician, Fernando knew that some type of new ski helmet was the answer.
Fernando’s biggest challenge was to invent a helmet that was attractive, safe, and fun to wear. Multiple colors, using the latest fashion designs would be a must. After years of skiing, Fernando knew that many skiers believed that how you looked on the slopes was more important than how you skied. His helmets would have to look good and fit in with current fashion trends. But attractive helmets were not enough. Fernando had to make the helmets fun and useful. The name of the new ski helmet, Ecco, was sure to be a winner. If Fernando could come up with a good idea, he believed that there was a 20% chance that the market for the Ecco Helmet would be excellent. The chance of a good market should be 40%. Fernando also knew that the market for his helmet could be only average (30% chance) or even poor (10% chance).
The idea of how to make ski helmets fun and useful came to Fernando on a gondola ride to the top of a mountain. A busy executive on the gondola ride was on his cell phone trying to complete a complicated merger. When the executive got off of the gondola, he dropped the phone and it was crushed by the gondola mechanism. Fernando decided that his new ski helmet would have a built-in cell phone and an AM/FM Stereo radio. All of the electronics could be operated by a control pad worn on a skier’s arm or leg.
Fernando decided to try a small pilot project for Ecco. He enjoyed being retired and didn’t want a failure to cause him to go back to work. After some research, Fernando found Persistent Products (PP). The company was willing to be a partner in developing the Ecco and sharing any profits. If the market were excellent, Fernando would net $5,000. With a good market, Fernando would net $2,000. An average market would result in a loss of $2,000, and a poor market would mean Fernando would be out $5,000.
Another option for Fernando was to have Lead Basking (LB) make the helmet. The company had extensive experience in making bicycle helmets. Persistent would then take the helmets made by Lead Basking and do the rest. Fernando had a greater risk. He estimated that he could lose $10,000 in a poor market or $4,000 in an average market. A good market for Ecco would result in a $6,000 profit for Fernando, while an excellent market would mean a $12,000 profit. A third option for Fernando was to use Trish Radio TR, a radio company in Toronto, Canada. Trish Radio had extensive experience in making military radios. Lead Basking could make the helmets, and Persistent Products could do the rest. Again, Fernando would be taking on greater risk. A poor market would mean a $15,000 loss, while an average market would mean a $10,000 loss. A good market would result in a net profit of $7,000 for Fernando. An excellent market would return $13,000.
Fernando could also have Cool Cellular (CC) develop the cell phones. Thus, another option was to have Cool make the phones and have Persistent do the rest of the production and distribution. Because the cell phone was the most expensive component of the helmet, Fernando could lose $30,000 in a poor market. He could lose $20,000 in an average market. If the market were good or excellent, Fernando would see a net profit of $10,000 or $30,000, respectively.
Fernando’s final option was to forget about Persistent Products entirely. He could use Lead Basking to make the helmets, Cool Cellular to make the phones, and Trish Radio to make the AM/FM stereo radios. Fernando could then hire some friends to assemble everything and market the finished Ecco helmets. With this final alternative, Fernando could realize a net profit of $55,000 in an excellent market. Even if the market were just good, Fernando would net $20,000. An average market, however, would mean a loss of $35,000. If the market were poor, Fernando would lose $60,000.
Discussion Questions
a)    What do you recommend?
b)    What is the opportunity loss for this problem?
c)    What is the maximum amount should Fernando pay for additional information?
d)    Was Fernando completely logical in how he approached this decision problem?

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