Question

Zap, Inc., manufactures and sells a broadleaf herbicide that kills unwanted grasses and weeds. Via their television infomercials, Zap encourages homeowners to “take control of their yards” by purchasing one of their “ZAP” kits. Each ZAP kit includes a 32-ounce bottle of weed and grass killer concentrate and a 16-ounce bottle of poison ivy and tough brush killer concentrate. Anticipating high sales, Zap produced 50,000 ZAP kits at a cost of $7.50 per kit. Unfortunately, Zap overestimated the demand for their product. After a year of infomercials, the company had only sold 25,000 units at a price of $19.95 per unit.

The company is in a quandary about what to do with the remaining 25,000 units. Zap could sell the remaining 25,000 units to a national home-improvement store for $7.00 a unit. Alternatively, the company could sell the product via its Web site—under this option, Zap believes they could sell 60% of the remaining units if they reduced the price to $9.95. (Any remaining units would be thrown away). Finally, Zap has ruled out running additional infomercials due to the high cost of TV advertising

. Required:

a. What is Zap's decision problem, including its goals?

b. What are Zap's options with respect to the 25,000 unsold ZAP kits?

c. What is the increase in cash flow associated with each of Zap's options?

d. What should Zap do with the remaining ZAP kits?

Answer 1

a. Zaps decision problem is to determine cash flow that could be generated from the options available. Goal is to choose the option with highest cash flows.

b. Zap's options are:
Option 1: Sell remaining 25,000 units to national home-improvement store for $7.00 a unit.
Option 2: Sell 60% of the remaining units via Website at a reduced price of $9.95

c. Increase in Cash Flow
Option 1 = 25000 x $7 = $175000
Option 2 = 25000 x 60% x $9.95 = $149250

d.
Zap should Sell remaining 25,000 units to national home-improvement store for $7.00 a unit as it provides higher cash flows.