Maria Cakes plans to launch a new line of consumer entertainment products, but is concerned that they will not have the necessary labor force and facilities to launch the products this year. If Maria Cakes uses their owned manufacturing facilities, there is only a 20% probability that they will launch the products in time to be first to market and 80% probability they will be 2nd to market. However, it they outsource the manufacturing, there is an 80% probability that they will be first to market and 20% probability they will be 2nd to market. If Maria Cakes is first to market, they will earn $10M in profits while they will only earn $2M in profits if they are second to market. It will cost the company $5M to outsource the manufacturing, (so they will earn $5M in profits if they outsource and are first to market and negative $3M (-$3M) in profits if they are second to market). Using simple cash-flow analysis (and ignoring any time value of money or taxes), should they outsource manufacturing or handle the manufacturing using their own facilities?
Create the Payout Matrix and complete the calculations:
|
Probability |
Payout |
Exp. Value |
Expected Outcome Value (Net Cash Flow) |
||
|
External Mfg. (Outsource) Cost = $5M |
1st to Market |
80% |
|||
|
2nd to Market |
20% |
||||
|
Internal Mfg. Cost = $0M |
1st to Market |
20% |
|||
|
2nd to Market |
80% |
Recommendation based on Expected Outcome Value?
