Boss Trading is a bedding and upholstery manufacturing company. Its output is sold to three major furniture retailers (i.e., its customers) who represent 98% of market demand. Its current daily revenue is about $0.9 million.
The CEO is demanding expected daily profits of at least $325 thousand. As such, you (a sales analyst) were tasked to determine the minimum daily revenue the firm should generate to meet the profit target. You may then need to analyze the company’s market demand potential.
You requested data from the production cost manager to compute the expected costs per day. Using subjective probability, the manager (with 20 years of experience) provides a probability distribution for the average daily costs per unit of output, rounded to the nearest five hundred (x, measured in hundreds of dollars), in the table below. He also reported that the number of units of output in a day could be 100, 200, 400, or 500 (rounded to the nearest hundred), each occurring with the same probability.
x
15
20
25
30
35
P(x)
0.10
0.20
0.30
0.18
0.22
Note: Profit = Total revenue – Total Cost.
You will:
Compute the minimum daily revenue required to meet the expected profit target.
Report on whether there is a need to increase the customer base. Is the CEO’s profit demand realistic, assuming no change to expected costs? Briefly explain.