Free Essay

Mni Report

In: Business and Management

Submitted By dowork123
Words 1259
Pages 6
Case Summary This particular case revolves around an important decision that has to be made by Bob Marsh of Marsh’s Metals, a metal brokering company in Prescott Florida. Specifically, Bob Marsh is presented with two different options in regards to what he can do with his newly acquired delivery of 10,000 kilograms of Nigerian partially refined rhenium ore (Re) that was purchased at a cost of $8000 per kg. It is estimated that Marsh would be able to sell the ore for at least $12,000 per kilogram, if not more. The two choices in this case involve doing business with one of two competitors. The first choice is centered around Marsh doing business with Bruce Fleishman Jr., his friend, of Fleishman Refining Company for a 5000kg share of the 10,000 kilogram supply. The second choice would see Marsh doing business with Huffman Smelter and Minerals for a 4500kg share of his 10,000 Kilogram supply. After analyzing all of the information through the use of the precision tree software, we are able to provide numerical evidence as to why Bob Marsh would be best suited by taking the offer presented by Huffman Smelter.
Analysis
This case study revolves around an important decision between two decisions presented to Bob Marsh in regards to his 10,000 kilograms of rhenium ore (Re) that he purchased at a cost of $8000 per kg. In this case, we know that the first option will provide Marsh with two separate sources of income at 5000kg * $13,000/kg for the portion sold to Fleishman. The other half of the ore, 5000kg, would be sold on the free market for roughly $60 million in revenue (5000kg*12,000/kg). In total, Marsh would have $65 million + $60 million in projected revenue for a total of $125 million. His actual profit in this instance would be calculated by the value less the costs of the rhenium ore. Specifically, Marsh would stand to earn a profit of $45 million ($125 million - $80 million = $45 million). Analyzing the second choice, Huffman, we can see that this option would also provide two sources of income for Marsh (4500kg * $14,500/kg). The second portion of the ore (5500kg) would then be sold on the free market for $66 million in revenue (5500kg * $12,000/kg = 66 million). Similar to the first option, we have to subtract the costs of the ore from the projected revenue in order to determine the potential profit. Here, this option would result in $131.25 in projected revenue ($65.25 million + $66 million = $131.25 million). The profit under this option would be $51.25 million ($131.25 million - $80 million = $51.25). With that said, there are additional factors to take into consideration in this case. There is a possibility that Fleishman will be a repeat customer (70% likelihood), we have to determine the net income that Fleishman’s offer would provide if he purchased 5000kg to start with and then purchased the additional 5000kg (70% likelihood). In this particular scenario, we would obtain 5000kg * $13,000/kg for the first portion sold to Fleishman. The second portion in this scenario would be sold to Fleishman at a later date at 5000kg * $13,000/kg for $65 million in revenue. The end result would be projected revenue of $65 million + $65 million = $130 million. The profit (value less costs) would be $50 million dollars in this scenario. Therefore, with the consideration of 70% likelihood that Fleishman will buy 10,000kg instead of 5000kg, we can calculate the expected value of Fleishman’s deal to be $48.5 million (70% (50 million) + 30% (45million)). This is due to the fact that there is a 30% chance that Fleishman will not be a repeat customer. Interestingly enough, we can see that even with the consideration that Fleishman could be a repeat customer, the net expected profits are still lower than those possible with the Huffman deal.

Sum of Huffman $131,250,000.00
Sum of Fleishman $125,000,000.00

50.0% 50.0% $13,000.00 $0.00 5000 50.0% 50.0% $12,000.00 $0.00 5000 45.0% 0.0% $14,500.00 $0.00 4500 55.0% 0.0% $12,000.00 $0.00 5500

Precision Tree Analysis Before discussing the specific results of the Precision Tree in this case, it is important to first understand the purpose of the software. Precision Tree’s are typically used to visually map out/detail, organize, and to conduct in depth analysis of a specific problem. Specifically, precision trees can be defined as “quantitative diagrams with nodes and branches representing different possible decision paths and chance events”. In this case, the varying branches of the Precision Tree refer to the two potential options available to Bob Marsh. The first branch represents the option offered by Fleishman where 5000kg are purchased at $13,000 and the remaining 5000kg are purchased on the free market at $12,000. The second branch on the Precision Tree represents the alternative offer from Huffman. This offer is for 4500kg at $14,500 and the remaining 5500kg would be sold at the free market price of $12,000.
Estimates of Expected Monetary Value After analyzing the Precision Tree, it can be argued that the monetary value for the Fleishman offer is $45 million – net profit. On the other hand, the expected value for the Huffman offer is $51.25 million net profit. That is a difference of $6.25 million. Therefore, the data generated through the Precision Tree leans in favor of the offer made by Huffman. It is safe to assume that this is a reasonable suggestion based on the fact that it provides Marsh with more overall profit at the end of the day (which is typically always the goal in business). Even when the impact of Fleishman being a potential repeat customer is taken in to consideration, the expected value of the Huffman offer (profit) is still greater. Therefore, in this case it can be argued that the Precision Tree provides us with the correct suggestion.
Recommendation
In this case, through analyzing the limited available information we can make a recommendation that the second option, Huffman, is the right move to make. By selling 4500 kilograms to Huffman Smelter and Minerals in San Antonio, TX, Marsh will stand to generate a larger profit when compared to option number one. It should be made clear that the primary reason for this recommendation is due to the potential profits that can be earned through this option. Simply put, the additional money to be made through option number two ($51.25 million) makes it a more attractive offer when compared to option number one ($45 million) despite the 70% probability that Fleishman could become a repeat customer. However, it should be noted that if there is a possibility of acquiring a larger supply of ore in the future, then it may make taking Fleishman’s deal a bit more appealing and a good decision assuming that the company would become a repeat customer.
Conclusion
In conclusion, in the case of Bob Marsh’s decision to sell a portion of his Rhenium ore to either Huffman Smelter or Fleishman Refining with the remaining supply being sold to the open market, we strongly suggest that Marsh consider the option of selling to Huffman. The potential profit generated through this offer creates a stronger option due to larger profits when compared to Fleishman’s offer despite the potential of him becoming a repeat customer.