Scenario 16-2 Consider the Problem Facing Two Firms in the Fast-Food Restaurant

question 178

Multiple Choice

Scenario 16-2
Consider the problem facing two firms in the fast-food restaurant market, Firm A and Firm B.Each company has just come up with an idea for a new fast-food menu item, which it would sell for $6.Assume that the marginal cost for each new menu item is a constant $2 and the only fixed cost is for advertising.Each company knows that if it spends $12 million on advertising, it will get 2 million consumers to try its new product.Firm A has done market research which suggests that its product does not have any staying power in the market.Even though it could get 2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future.Firm B's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year.On the basis of its market research, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units.
-Refer to Scenario 16-2.If Firm B decides to advertise its product,what can it expect to happen

• A)It will incur a loss of $36 million per year.
• B)It will have a profit of $96 million per year.
• C)It will have a profit of $84 million per year.
• D)It will exit the industry.

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Definitions:

Days' Sales

An indicator of a company's efficiency in managing its inventory, it calculates the number of days it typically takes to sell the entire inventory.

Average Accounts Receivable

The mean value of accounts receivable over a given period, indicating the average amount owed to a company by its customers.

Inventory Turnover

A measure of how often a company's inventory is sold and replaced over a certain period, indicating the efficiency of inventory management.

Days' Sales

A financial ratio that measures the average time it takes a company to convert its inventory into sales.