Question

Sidneyland is a popular theme park in Southern California that is now planning for its eventual re-opening after closing during Covid-19. In years past, New Years Eve was the single largest day of revenue earned by the park due to the high sales volume of NYE themed merchandise. However, this year it is uncertain if Sidneyland will even be opened on New Years Eve, and the time to order the 2021 apparel is approaching. The first purchase deadline is at the end of October, at which point Sidneyland 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​. Sidneyland’s public health and data science consultants estimate that there is a​40% chance that the local Covid-19 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 Sidneyland’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 Sidneyland 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 Sidneyland 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 Sidneyland buys the merchandise at the end of October?

E) What decision should Sidneyland make at the end of October? Explain.

Answer 1

A. The different times to make decision is when October is approaching and till the end of October because at that time it has to be taken into account that the Sidneyland will open or not as the deadline to order things is coming. The second time to make decision is November end taking into account that the situation of Covid-19 is improved or not and will Sidneyland open on new year's eve.

B. Suppose that Sidneyland waits till November and health conditions get better then goods should be purchased though the price will be higher that time because the chances of opening increases by 90%, so there is a channce to earn great profit. Now, the strategy that should be followed is that try to accomodate variety over quantity so that while purchasing you spend less and while selling you have more variety ti show case. Also buy those sizes that are sold more.

C. If Sidneyland did not buy the goods in October and waits till November then there will be two scenarios:

Scenario 1:

The health conditions did not improve and so it is nearly confirmed that the Sidneyland won't open. Thus it will be good because if not profit they did not have to bear loss.

Scenario 2 :

The health conditions improve and Sidneyland is opening. Thus in this case they have a chance to purchase goods. It will be an earning but it will be a loss too because they will be buying it at a much higher price.

D. Now if Sidneyland buys the product at the end of October, there will be two scenarios:

Scenario 1 :

The health conditions did not get better and Sidneyland does not open. In this case there will be a huge loss because none of the items will be sold. Although Sidneyland can sell its goods online but for that they need a website and more money has to be spent in that case.

In this case there is a chance of loss.

Scenario 2 :

The health conditions improves from October to November and now there is a great chance that Sidneyland will open on New Year's eve. In this case, the owners wil get a chance to make high profit because the goods are purchased at a lower price and will be sold at a much more higher price.

In this case, there is a chance of huge earning.

E. At the end of October, Sidneyland should strictly analyse the health conditions to take into account that it will open on New Year's eve or not. There decision should be purely based on the analysis. Analysis should also be done for November to December and December to January before concluding anything. Statistical data should be prepared of the past months to get a clarity.

Also if they decide to buy goods at a higher price then also they should have a backup plan that  if in any case Sidneyland did not open in New Year's Eve then what they will do of these goods.