EMBA J23: Bond Computers is developing and testing a new computer workstation, Spectre007, which it will introduce to the market in the next 6 months: Analytics Assignment, UOO, Ireland
| University | University Of Oxford (UOO) |
| Subject | EMBA J23: Analytics |
Bond Computers is developing and testing a new computer workstation, Spectre007, which it will introduce to the market in the next 6 months. Spectre007 will be sold under a three-year warranty covering parts and labor. The company has decided to subcontract the service support for the warranty and has entered negotiations about the support contract with Felix Support. Felix has proposed two different pricing schemes for the subcontract.
The first involves the payment of a fixed fee of £1m and the second a variable fee of £240 per workstation sold, subject to a minimum fee of £0.5m. Under both schemes, the payment will be made one year after the introduction of the workstation to the market at which point the product will be replaced by newer models not covered by the warranty service subcontract. At the moment, there is uncertainty about the sales potential of the new workstation.
Sales of Spectre007 are expected to come from two sources: (i) the successful closure by senior management of a major purchase of 1,000 units by a long-standing customer, (ii) the efforts of regional sales offices. Given the state of the negotiations with the longstanding customer, the current estimate of the probability of successful closure of the major purchase is 50%. Regional sales of Spectre007 would be boosted by the successful closure, and the management of Bond Computers has estimated the regional sales potential (in addition to the major purchase), as shown in the table below.
- Use a decision tree to establish which of the two pricing schemes minimizes the expected value of costs for Bond.
- By how much would the variable fee (currently £240) and the minimum fee (currently £0.5m) have to change before your answer to (a) changes?
- What are the most that Bond should pay now for information regarding whether they will achieve a successful closure of the major purchase?
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