Question

You're the manager of global opportunities for a U.S. manufacturer, who is considering expanding sales into Asia. Your market research has identified the market potential in Malaysia, Philippines, and Singapore as described next:

Success Level

Big          Mediocre              Failure

Malaysia Probability                   0.3                   0.3                        0.4 Units                    1,200,000           600,000                       0 Philippines                     Probability                  0.3                  0.5                         0.2    Units                    1,000,000           320,000                     0 Singapore Probability                      0.7                0.2                          0.1    Units                     700,000             400,000                       0

The product sells for $10 and has unit costs of $8. If you can enter only one market, and the cost of entering the market, (regardless of which market you select) is $250,000, should you enter one of these markets? If so, which one? if you enter, what is your expected profit?

Answer 1

Answer)
Probability of the units sold at various success level in the each country is given.
On the basis of these probabilities, we can calculate the expected sales in each country.
CASE 1 - Malaysia
Calculate the expected sales -
Expected Sales = [1,200,000 * 0.3] + [600,000 * 0.3] + [0 * 0.4]
Expected Sales = 360,000 + 180,000 + 0 = 540,000 units
Price per unit = $10
Total expected revenue = Expected sales * Price per unit
Total expected revenue = 540,000 * $10 = $5,400,000
Cost per unit = $8
Cost of entering the market = $250,000
Total cost = Production cost + Entry cost
Total cost = [$8 * 540,000] + $250,000 = $4,320,000 + $250,000 = $4,570,000
Expected profit = TR - TC = $5,400,000 - $4,570,000 = $830,000
The expected profit in Malaysia is $830,000.
CASE 2 - Philippines
Calculate the expected sales -
Expected Sales = [1,000,000 * 0.3] + [320,000 * 0.5] + [0 * 0.2]
Expected Sales = 300,000 + 160,000 + 0 = 460,000 units
Price per unit = $10
Total expected revenue = Expected sales * Price per unit
Total expected revenue = 460,000 * $10 = $4,600,000
Cost per unit = $8
Cost of entering the market = $250,000
Total cost = Production cost + Entry cost
Total cost = [$8 * 460,000] + $250,000 = $3,680,000 + $250,000 = $3,930,000
Expected profit = TR - TC = $4,600,000 - $3,930,000 = $670,000
The expected profit in Philippines is $670,000.
CASE 3 - Singapore
Calculate the expected sales -
Expected Sales = [700,000 * 0.7] + [400,000 * 0.2] + [0 * 0.1]
Expected Sales = 490,000 + 80,000 + 0 = 570,000 units
Price per unit = $10
Total expected revenue = Expected sales * Price per unit
Total expected revenue = 570,000 * $10 = $5,700,000
Cost per unit = $8
Cost of entering the market = $250,000
Total cost = Production cost + Entry cost
Total cost = [$8 * 570,000] + $250,000 = $4,560,000 + $250,000 = $4,810,000
Expected profit = TR - TC = $5,700,000 - $4,810,000 = $890,000
The expected profit in Singapore is $890,000
The expected profit is highest in case of Singapore.
So,
The firm should enter Singapore.
If it enters Singapore then its expected profit would be $890,000.