Remains intact unfortunately there is the chance that

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remains intact. Unfortunately, there is the chance that the parking lot next door will be convertedinto another storefront in which caseThe Buzzwill incur losses of not only convenient parkingfor customers, but also a significant loss of visibility. Therefore, because Palo Alto is soexpensive, Blake will have to use her entire advertising budget of $10,000 in order to counteractthe damage done by the converted parking lot. The owners of the lot have confided to Blake thatthere is an 80 % chance that they will modify their lot to accommodate shop owners because thepotential rent for a store is significantly more than they make for the current parking lot.Furthermore, Blake still has to take into consideration the price of coffee beans, which as statedearlier have a 30% chance of increasing from their current price of $0.75 to $1.25 per cup ofcoffee. Once again, taking into consideration both the potential cost of coffee and the potentialnew storefront location Blake will set her selling price of coffee (remember there will be 4varying options). Finally, based on her coffee price, there will be 4 different average amounts ofcoffee purchased per week. Overall, with the probabilities and potential sales/profits taken intoaccount the Palo Alto location has an expected profit of$380,274 in one year.Alternative 3: Redwood CityBlake’s last option for her Bay Area location is Redwood City. The cheapest of all the locations;it would only require an initial investment of $50,000 and monthly rent of $3,600. However, thisdoes imply that overall she cannot charge as much per cup of coffee. In addition, since RedwoodCity is not perfectly analogous to her brand image she would need to spend more of heradvertising budget, $4,000 out of $10,000, to give off the correct impression to her customers.10
MooreOnce again she faces the same uncertainty of the price of coffee beans—a 30% chance that it willincrease to $1.75—that affects the price she will be able to sell each cup of coffee for.Additionally, Redwood City faces the particular problem of a coffee house competitor openingup just down the block. In this case, the amount of the customers and sales Blake could havewould decrease. But, if Blake were able to act quickly (which she has to) she could scare off theother potential coffee house owners and therefore she only places a 25% probability on thecompetitors opening a new store location. As with the other locations Blake will set her coffeeprice based upon the outcomes of these uncertainties and then her weekly sales will be directlyaffected by these prices (there are four possibilities for each). With all uncertainties taken intoaccount, the expected profit in Redwood City is $ $383,410.Decision Tree ConstructionFigure 2 (below—also shown larger in the appendix) shows a tree for Blake’s location decision.

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Term
Spring
Professor
RossDShachter
Tags
Blake, Los gatos

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