Question 1. This option is favored by John but appears riskier because as far as Ecosneak is concerned, the market is un

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Question 1.
This option is favored by John but appears riskier because as far
as Ecosneak is concerned, the market is untested and there are a
number of rival firms already operating in the segment.
Nevertheless, there is potential growth in the market and it offers
a route to expansion for the company. It would require investing
€170,000 in 2023 in additional warehouse capacity and other fixed
assets. John believes that the company could capture 10% of the
kid’s market each year from 2024 (the total market size currently
amounts to 50,000 pairs of sneakers annually). Each pair of kid’s
sneakers is estimated to generate a net profit of €10. (Assume that
this will have no impact on company sales in the men’s and women’s
markets which will remain at current levels, as will all other
costs). The overall kid’s market will grow by 5% per year over the
six-year planning period. Find the payback period.


Question 2. You are given the following data by Ecosneak:

Their annual promotional budget (of €300,000)
• The cost of each Billboard advert (€2,000) and the cost of each
Magazine advert (€5,000);
• The estimated ‘reach’ of each Billboard advert (20% of the men’s
and women’s total market in 2022) and each Magazine advert (45% of
the men’s and women’s market in 2022);
• There is a signed contract with World of Sports that Ecosneak
will place at least 30 adverts per year in the Magazine;
• There is a limit of 100 on the number of dedicated Billboard
spaces available in Edinburgh for Ecosneak to use:
• Q.1 Use this information to formulate Ecosneak’s promotional
campaign as a linear programming problem but do not solve it.
• Q.2 Use the information given in the case study to undertake a
scenario analysis of first-year profits in the kid’s market. Set up
the profit ‘model’ and use this to calculate ‘base-case’,
‘worst-case’, and ‘best-case’ scenarios for first-year
profit.
• Q.3 Explain to Ecosneak management the value and limitations of
using scenario analysis as a decision-making technique.