Current data suggests that Sun Dish, Inc. does not have sufficient capacity to produce new equipment for the satellite dish. We have several options to add capacity, however. Our company may build a new plant in Wisconsin, costing us about $300,000. If market conditions turn out to be favorable, we will be making total revenue of $1,100,000 through this option. But in average or unfavorable conditions, our payoffs would be $750,000 and $400,000 respectively. Sun Dish, Inc. may also choose to buy an existing plant in Indiana from a smaller company.
A survey company could help us locate a potential plant, should we choose this option. If we do use the services of a survey company costing us $15,000, the plant which is expected to cost us $100,000 either way, would result in a payoff of $1,000,000. In average or unfavorable conditions, however, this plant would result in revenues of $500,000 or $300,000 only. Without the survey company, Sun Dish, Inc. may hope to make approximately $600,000 in favorable market conditions through the new plant it buys in Indiana.
This plant is expected to yield around $300,000 in average market conditions, and only $100,000 in unfavorable market conditions. A third option available to us for adding capacity for new equipment, is to subcontract the required capacity from available vendors. Costing approximately $10,000, this option would yield returns of $800,000 in favorable market conditions; $400,000 in average conditions; and $200,000 in unfavorable conditions.
Lastly, we may decide to purchase new equipment to increase the capacity of our existing plants. This options costs only $30,000. In favorable conditions, this choice would result in a payoff of $300,000. In average and unfavorable market conditions respectively, this option would result in $200,000 and $150,000 worth of revenue. Sun Dish, Inc. has estimated that there is a higher probability of average market conditions for the satellite dish business, than for favorable or unfavorable conditions.
Given this information, it would perhaps be best for the company to build a new plant in Wisconsin. Demand for the Satellite Dish Using its historical data, Sun Dish, Inc. has estimated that each customer of the satellite dish would pay between $50 and $80 per month for the new service. Moreover, in the first six months after its launch, the satellite dish is expected to sell at the following rates: 1000 units in the first month; 2000 units in the second month; 3500 units in the third month; 5000 units in the fourth month, 7000 units in the fifth month; and 9000 units in the sixth month.
Our company may calculate expected revenues for each month by multiplying the average selling price of each unit with the number of units expected to be sold in each month.
Keeping Sight of Our Goal With the information presented in this memo, Sun Dish, Inc. is in a very good position to begin its final decision making and planning process to undertake the new venture; that is, producing high quality satellite dishes.
Our goal is also to continue producing our remaining products with equal excellence. Although our preliminary and final decisions based on this analysis would actually be founded on estimates, we are using measurable terms for forecasting. It is true, therefore, that our final decision making and planning process would be founded on firm principles. Using the information presented in this analysis, Sun Dish, Inc. should be on its way to producing quality satellite dish services!
1. Nersesian, Roy L. (1990). Corporate Planning, Human Behavior, and Computer Simulation: Forecasting Business Cycles. New York: Quorum Books. 2. Newbury, Frank D. (1952). Business Forecasting: Principles and Practice. New York: McGraw-Hill. 3. Kress, George J. , and Snyder, John. (1994). Forecasting and Market Analysis Techniques: A Practical Approach. Westport, CT: Quorum Books.
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