VICTORIA UNIVERSITY

Case Study 1 (20%)

Due Week 5

|BEO 6501 Quantitative Analysis |Semester 2, 2014 |

Part A (5)

Drink-At-Home, Inc.

Drink-At-Home, Inc. (DAH, Inc.), develops, processes, and markets mixes to be used in nonalcoholic cocktails and mixed drinks for home consumption. Mrs. Lee, who is in charge of research and development at DAH, Inc., this morning notified Mr. Dick Jones, the president, that exciting developments in the research and development section indicate that a new beverage, an instant pina colada, should be possible because of a new way to process and preserve coconut. Mrs. Lee is recommending a major …show more content…

The reduced development program would cost $10,000 per month.
Mr. Besnette, being the great marketer that he is, is of course reluctant to be second on the market with a new product. He says that the first product on the market will usually obtain a greater share of the market, and it will be difficult to win those customers back. Consequently, he indicates that only about 50 percent of the sales that he indicated in Table 1 could be expected if Drink-at-Home waited until competing brands were already on the market. Moreover, he suspects that there is only a 50/50 chance that the competitor will be out with a product within the next six months.
There are four options: (1) orderly development of the pina colada, (2) modest development effort followed by the crash program, (3) a modest development effort for the first six months to see if a competitive product comes on the market, and (4) do nothing.
TABLE 1 Sales and Profit Potentials
|Consumer Acceptance |(Sales Potential) Probability Present Values |(Discounted Value of Future Profits) |
|Substantial |0.10 |$800,000 |
|Moderate |0.60 |$600,000 |
|Low |0.30