Question

Disneyland is planning for its re-opening after closing during coronavirus. In the past, New Years Eve was the single largest day of revenue earned by the park due to the high sales of NYE themed products. However, this year it is uncertain if Disneyland will even be opened on New Years Eve, and the time to order the 2021 apparel is coming up. The first purchase deadline is at the end of October, at which point Disneyland can either buy the goods in full for $100,000 or defer the decision until the end of November. At the end of November, the rush order price rises to $150,000 . There is no cost nor profit if no purchase is made. Disneyland’s public health consultants estimate that there is a 40% chance that the local coronavirus situation improves from the end of October to the end of November, a 60% chance that it stays in the current most restrictive tier. If it improves, the experts predict a 90% chance the park is open on NYE, compared to a 30% chance if it stays in the current most restrictive tier.

Assuming that all goods sell for $200,000 if the park is open on NYE but are otherwise unsellable, answer the following questions about Disneyland’s purchasing strategy if their goal is to maximize expected merchandise profit.

a. What are all of the different times to make a decision, and what decisions can be made at those times?

b. Supposing that Disneyland defers and waits to make a decision at the end of November and supposing further that the public health scenario improves from October to November, what strategy should they take and what is the resulting expected earnings (or losses)?

c. Using the projections from the end of October, what are the expected merchandise earnings (or losses) if Disneyland elects to defer the decision from October to November?

d. Using the projections from the end of October, what are the expected merchandise earnings (or losses) if Disneyland buys the merchandise at the end of October?

e. What decision should Disneyland make at the end of October- buy goods in full at end of October or defer the decision until end of November? Explain.

i have the most of the answers but need help in how to get there!!!

(a) ?

(b) $30,000 profit

(c) $12,000 profit

(d) $8,000 profit

(e) Defer to the end of November

Answer 1

(a)

The different times to make a decision are at the end of October and at the end of November. They have to make a decision on whether to buy or defer it during the end of October. At the end of November, they have to make a decision whether to buy or not buy.

(b)

Supposing that Disneyland defers and waits to make a decision at the end of November and supposing further that the public health scenario improves from October to November.

If the above scenario happens, it is given that there is a 90 % probability that Disneyland will be open on NYE. If it is open on NYE, it is expected to generate $ 200,000 in revenue.

Therefore, expected revenues = ( probability of disneyland being open ) x ( revenues generated )

Expected revenues = 0.9 x 200,000

Expected revenues = $ 180,000

Cost of buying the merchandize = $ 150,000 ( since price increases in November end )

Profit = Expected revenues - costs

=> Expected Profits = $ 180,000 - $ 150,000

=> Expected Profits = $ 30,000

If Disneyland does not choose to buy, profits will remain zero.

Since the expected profits are higher if they bought the NYE themed goods, they should buy them. The expected profits in case they bought it would be $ 30,000.

(c)

If Disneyland elects to defer the decision from October to November

It has to decide either to buy or not buy in November end now.

If it decides not to buy, there is no profit or loss.

However, if it decides to buy at the end of November, its profits will depend on if Disneyland opens or not.

Now, Disneyland will decide to buy only if the situation improves in November. ( Because, if the situation does not improve in November end, the probability if it opening is only 30%. And expected revenues will be only $ 60,000 ( 0.3 x 200,000 ), which is less than the cost of goods ( $ 150,000 ). Therefore, it will choose not to buy if the situation stays in the current most restrictive tier. )

Probability of Disney buying in November = Probability of situation improving by November end = 0.4

Cost it incurs when Disneylad buys = $ 150,000

Profits if Disneyland opens = Revenes - costs = $ 200,000 - $ 150,000 = $ 50,000

Profits ( losses ) if Disneyland does not open = Revenues - costs = 0 - $ 150,000 = - $ 150,000

Probability of opening = 0.9 ( Since Disneyland will buy only if situation improves )

Probability of not opening = 0.1 ( Since Disneyland will buy only if situation improves )

Expected Profits = ( Probability of opening * profits if it opens ) + ( probability of not opening * profits if it does not open )

=> Expected Profits = ( 0.9*50000 ) + ( 0.1* 150000 )

=> Expected Profits = $ 30,000

However, this will happen only if the situation improves by November end.

Proababilty of buying = 0.4 ( Since Disneyland will buy only if situation improves )

Expected profits = ( probability of buying * expected profits when bought )

Expected profits = 0.4*30000

Expected profits = $ 12,000

(d)

If Disneyland buys the goods in October to November

Costs incurred if bought at end of October = $ 100,000

Probability of Corona virus situation improving = 40 %

Probability of situation staying in the current most restrictive tier = 60 %

Probability of park opening if situation improves = 90 %

Probability of park opening if it stays in the current most restrictive tier = 30 %

Probability of park opening = ( probability of situation improving * probability of park opening if situation improves ) + ( probability of situation staying in the current most restrictive tier * probability of park opening when situation stays in current restrictive tier)

Probability of park opening = ( 0.4 x 0.9 ) + ( 0.6 x 0.3 )

Probability of park opening = 0.54

Revenues generated when the park is open = $ 200,000

Expected revenues = probability of park opening x revenues generated when park is open

Expected revenues = 0.54*200,000

Expected revenues = $ 108,000

Costs if bought at end of October = $ 100,000

Expected Profits = Expected revenues - costs = 108,000 - 100,000

Expected Profits = $ 8,000

(e)

Disneyland should make the decision of defering to end of November since the expected profits are higher in that scenario.