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Good afternoon, The assignment is Adriana owns My Best Friend,…
Good afternoon,
The assignment is
Adriana owns My Best Friend, a pet grooming boutique. A high-end developer purchased a large tract of land nearby and is constructing luxury condominium townhomes. According to city records, once the project is completed there will be approximately 180 new families in her immediate service area. Adriana is considering hiring a part-time groomer at an additional cost of $18,500 per year in wages. She estimates a possible increase of $27,500 in net revenue as a result of increased business brought about by this change to the neighborhood. However, there is also a chance of decreased demand for services, should the bylaws of the owners’ association prohibit pets, particularly coupled with existing competition from grooming services offered by large retail chain stores such as PetSmart. She projects a possible loss of $16,000 off last year’s net revenue. Data show that 70% of regional associations allow pets; whereby, the other 30% are pet-free communities. Adriana believes that if she does not hire the part-time worker, her business would generate the same revenue as the prior year.
Do you think Adriana should hire a groomer? Support your objective advice using quantitative data analysis by applying probability theory relative to the estimated value of hiring the new groomer. Your explanation should include (1) a decision tree diagram (using Excel) to assist in evaluating Adriana’s dilemma; and (2) a recommendation of a course of action, which explicitly explains why Adriana should take your counsel. Identify uncertainty and risk, and explain the probable outcomes using the decision tree diagram and any numerical data to back up your position.
The response. Would this be correct?
Adriana’s decision to hire a part-time groomer should be based on an objective analysis of the expected profitability of the venture and the risks associated with it. To evaluate Adriana’s dilemma, a decision tree diagram can be constructed using Excel to illustrate the possible outcomes of her decision. The decision tree below outlines the four potential scenarios that could result from Adriana hiring or not hiring the part-time groomer.
The first branch of the decision tree is labeled “Hire Groomer,” which has two branches: “Pet Allowed” (70% probability) and “No Pets” (30% probability). If Adriana hires the groomer, the expected value of doing so will depend on the likelihood of either of these two outcomes. If pets are allowed, Adriana can expect to generate an additional net revenue of $27,500; if pets are not allowed, she can expect to lose $16,000. The expected value for this branch is calculated as follows:
Expected Value = (0.7 x $27,500) + (0.3 x -$16,000) = $17,650
The second branch of the decision tree is labeled “No Groomer,” which has a single outcome of no change in net revenue from the prior year. The expected value for this branch is calculated as follows:
Expected Value = 0 x $0 = $0
In this case, the expected value of Adriana hiring the groomer is substantially higher than that of not hiring the groomer ($17,650 versus $0). Therefore, it is objectively more profitable for Adriana to hire a part-time groomer. Moreover, Adriana should consider the risk associated with her decision. If she does not hire the groomer, there is no risk of losing money; however, if she does hire the groomer, there is a chance that she could lose money if pets are not allowed in the new townhomes.
In conclusion, based on a quantitative data analysis of the expected value and risk associated with hiring the part-time groomer, Adriana should hire the groomer. Doing so will increase her expected revenue by $17,650, while still exposing her to some level of risk if pets are not allowed in the new townhomes.
