Mark MUpp Has Just Been Fired as the University Bookstore Manager

question 6

Essay

Mark M.Upp has just been fired as the university bookstore manager for setting prices too low (only 20 percent above suggested retail).He is considering opening a competing bookstore near the campus, and he has begun an analysis of the situation.There are two possible sites under consideration.One is relatively small, while the other is large.If he opens at Site 1 and demand is good, he will generate a profit of $50,000.If demand is low, he will lose $10,000.If he opens at Site 2 and demand is high, he will generate a profit of $80,000, but he will lose $30,000 if demand is low.He also has the option of not opening at either site.He believes that there is a 50 percent chance that demand will be high.A market research study will cost $5,000.The probability of a good demand given a favorable study is 0.8.The probability of a good demand given an unfavorable study is 0.1.There is a 60 percent chance that the study will be favorable.
(a)Should Mark use the study? Why?
(b)If the study is done and the results are favorable, what would Mark's expected profit be?

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Definitions:

Bad Debts

Accounts receivable that a company has determined are uncollectible, leading to their recognition as a loss.

Adjustment

Amendments made to accounts or financial statements to correct errors, update values, or reallocate revenues and expenses.

Credit Sales

Transactions where goods or services are sold to a customer with an agreement to pay at a later date, typically allowing a specific period before payment is due.

Bad Debts

Bad debts are amounts owed to a company that are no longer considered collectible, leading to their recognition as a loss.