Therefore, Candy Empire has offered Gum a Job as a Marketing Executive for a pay scale of $80,000. However, through the 6-months internship, he understood that the lifestyle of a marketing executive is taxing. Moreover, he has always wanted to maintain a healthy personal life. As such, Gum has also come up with a few alternatives. Gum has always wanted to pursue a shrimp fishing business In the gulf of Maine.
Gum knows an agriculture enthusiast who owns a fishing farm and after speaking to him about his Interests, he has told Gum that If there Is a need for funds, he Is willing to Invest In Sump’s business. Under the Investment partnership, the shrimp enthusiast will guarantee Gum an annual salary of at least $35000 If earnings In that one year fall below $35000. However, the shrimp enthusiast shall receive 90% of all earnings In excess of $200000 in a year. Gum can choose to start Bubby Gum shrimp co. Using his life-savings or get an investor into his business.
On the other hand, Gum can whose to accept the job offer from Candy Empire. Situational Problem To maintain a comfortable lifestyle in Sump’s context in the united States of America, he estimates that a salary of USED$50,OHO is needed. USED$50,OHO is the amount we have to take into consideration for Gum to eventually make a decision. Assumptions A simulation of 1000 trials is enough for the estimate to be reasonable. Wage, cost of diesel and ice remains constant throughout the year The business for proprietorship and partnership, Job offer are all based on I-year contracts.
All shrimps caught are blew be sold to markets. (Demand>Supply) Estimating distribution for uncertain variables For the Bubby Gum Shrimp Co. Case, we determine profits of the company by using a simple equation: Profit = (Selling price of shrimps X Quantity of Shrimps caught) – Total Cost of operating Bubby Gum Shrimp Selling Price of Shrimps: “During those intervening years, the average annual price had fluctuated roughly between 80 cents and $1 per pound, but In 2006 and 2007 the average annual statewide price had fallen to around 30 cents per pound. In 2008, Maine landings had risen back to 8. Lion pounds and the state’s average annual price was Just below 50 cents. ” “It’s the first time In a decade I’ve felt optimistic about the shrimp expert on shrimp market (2010). From this data, we deduce that Very Healthy Market Healthy Market Not so healthy market Price $1. 00 $0. 70 $0. 50 $0. 30 Probability 0. 1 0. 45 0. 35 We have estimated the probabilities for the market status based on the assumption that the high fluctuation in shrimp prices ($1. 00 & $0. 30) can be attributed to the sudden rise in market demand for farmed shrimp which lead to the sudden fall in prices.
However, since then there has been a steady rise in demand for wild shrimp due too stabilization of the shrimp market. As such, this indicates that it is unlikely for the market demand for wild shrimp to either increase to the pre 2002 prices (due to the availability of farmed shrimp) or decrease to the 2006-07 prices (due to the stabilization of the market). From this we can conclude that the market demand for wild shrimp is most likely to follow the current rising demand thus indicating that there is a high probability for a healthy market and a slightly lower probability for a not so healthy market.
Annual Catch of Shrimps: In an experiment done in the gulf of Maine by Vincent Blazon and Pinging He, it is found that the mean catch rate of shrimps was 151. 3 keg h-l (s. E. = 12. 4) using standard fishing trawls and gears. From the data, we deduce that shrimp catch in the gulf of Maine follows a normal distribution of: Mean (catch in keg per hour) Standard Deviation 151 . 3 12. 4 Catch per year = Catch per hour x No. Of working hours in 1 week x No. Of weeks in 1 year. From our data from US Labor Statistics, we understand that the average working hours per week in the fishing industry is at 40. 7 hours.
We assume that there are 52 working weeks per year. 45,597 Variable Cost(Wages) As viewed from source http://www. Postmistresses. Com/salary/salary-for- Fisherman, an average fisherman (deckhand) earns $21 ,OHO while a captain earns deckhands and at the Max capacity would have a captain and 5 deckhands. Fixed Cost Gum decided to use 80′ Western Rig Dagger, which costs USED 125,000. It is already equipped with net reels and cargo required for shrimp fishing. Assuming that the annual depreciation rate of the commercial shipping rate is 10%, the cost of ship used for his shrimp fishing business is USED 12,500 in a year.
Other expenses that Gum need to take into account includes: (as quoted from ZINC) 1. Diesel fuel: USED 600 for fuel for a single 12-hour run (calculated at about USED 3 a gallon, for 200 gallons) 2. Ice: about USED 180 per run Total expenses: about USED 780 for a single 12-hour run Since the average working hours in fishing industry is 2116. 4 hours per year, we can calculate the total cost for diesel and ice per annum. Therefore, we deduce that the total fixed cost sums up to be USED 1 50,066 annually.
Without any other information, Gum assume that Total cost would obey a mutinous uniform distribution from ASSIDUOUS to USED 295066. Simulation Results/ Interpretation From the simulation of 1000 trials, we were able to get the estimate of Forrest Sump’s earnings for one year, should he start Bubby Gum Shrimp Co. On his own or with an investor. Starting the company solely will bring about estimate earnings of mean $177788. 04 and SD $133730. 50, while starting it with an investor will yield estimate of mean $147686. 31 and SD $67747. 1 per year. Either way, there is a 0. 775 probability that he will earn more than the $80000 guaranteed from accepting the Job offer from Andy empire, with only 0. 139 of earning less than $50000 required to live comfortably. Therefore it is an opportunity well worth venturing in. From the histogram of earnings, we can see that the probability of making a loss if he starts a proprietorship is pretty high, about 9%, and the standard deviation is very high too in that he could earn to more than $480000. That is pretty extreme and risky.
We would advise Forrest Gum to form a partnership with the shrimp enthusiast so that his earning is never below $35000 even if he will be effectively capping his earning at around $250000. Since scrimping is his passion and $250000 is way higher than $80000 from the Job offer, this is the optimal decision Judging by results from simulation. From the histogram, we can clearly see that there are 4 “mini normal distribution” of earnings by Bubby Gum Shrimp Co. This is caused none other by the average market price of shrimp in the one year.
Price of shrimp is very volatile but at the same time integral to the earnings. If an unhealthy market (price=O. 66/Keg) occurs, a loss is almost sure to happen. On the other hand, a healthy market (2. 2/Keg) will cause earnings of more than $400000. That is pretty radical and thus more needed for better decision making. More accurate forecast will make sure Forrest Gum think twice before Jumping into unhealthy market and make a loss. Since it is so important, more resources should be allocated into forecasting the price of shrimps for the upcoming year.
Sensitivity Analysis a. Prices of Diesel + Ice b. Wages of Labor c. Mean catch of Shrimps A. Prices of Diesel + Ice (currently at 780) Price of Diesel ($) Change in Price ($) Earnings (Proprietorship) Earnings (Partnership) 1 oho +220 $141,215. 29 $127,650. 92 1550 +770 $31џ42. 27 $77,257. 30 2000 1220 -$40,037. 36 $55,619. 61 As seen, the change in price of diesel and ice by $770 may actually alter Sump’s decision because at that point in time, earning from partnership will get him the same wage as if he were to accept the Job offer from Candy Empire.
Gum might also want to consider the probability of prices of diesel and ice increasing by +770, if he finds that it is almost impossible for prices of diesel and ice to increase in such a dramatic manner. Moreover, if Gum puts more emphasis on pursuing his passion then he might want to use $50,000 as a benchmark. That way, it only makes price hinges of diesel and ice more negligible because it will require a price change of +1220 for earnings via partnership to match $50,000. From the data analysis, we conclude that the chance of going into proprietorship is much lower than partnership because of the higher risks involved.
Therefore, we should focus on comparing the change in earnings under partnerships instead of proprietorship. In conclusion, it is almost impossible for the prices changes to be so dramatic although diesel prices can be volatile. Therefore, price changes are negligible and Gum should not base decision on this factor. B. Labor Costs (currently Min. Labor Cost = $82000/year, Max. Labor Cost = $145000) Minimum Labor Costs ($) Maximum Labor Costs ($) Percentage increase in Wages (%) 174000 20 $140џ54. 73 $130,130. 67 172200 304500 110 $45,017. 6 $83,104. 69 328000 -$174,121. 28 $42,154. 23 In this case, we have examined the effects of increases in wages on his potential earnings either as a sole proprietor or as a partner. With regards to his shrimp fishing business being a sole proprietorship, there needs to be a 110% increase in the wages of his workers for it to be monetarily unsatisfying for Gum. If Gum goes into a partnership, only in the instance of a 400% increase in the wages of his workers will result in the revenue not reaching the target of USED$50,OHO.
Although the workers’ unions are strong in the United States, the probability of such dramatic rises in the wages of the workers in the course of a year is close to nil. The wages are likely to only fluctuate within a region of +1-20%. Given a 20% increment in wages, the earnings that Gum would receive still trump over the salary of the Job offer he has received. Thus, given these circumstances, Gum should go ahead with his decision o go into the shrimp fishing business and since a very dramatic increase in wages would be very unlikely, a decision to either be a sole proprietor or a partner are both sound choices.
However, if he wants to be on the safe side, a partnership would be a better choice. C. Shrimp’s landing Mean of Shrimp landing/Hrs change in mean earnings (proprietorship) EArnings (Partnership) KEG/hrs -keg/hrs $111,112. 63 $112,237. 14 1 1 egg/hrs -keg/hrs $66,490. 47 $86,120. 69 keg/hrs -keg/hrs $53,422. 67 In this analysis we are examining how a decrease in the mean amount of shrimp aught will affect Sump’s potential business earnings both as a proprietorship and as a partnership.
The results show that any decrease in the mean by more than keg/hrs will immediately make the partnership more favorable as any level below keg/hrs will always result in the partnership bringing in more revenue than the proprietorship. In addition, should the mean drop by more than keg/hrs, Gum should consider accepting the Job offer from the Candy Empire as his earnings (even as a partnership) would be no longer be sufficient enough for him to maintain his sired lifestyle.
It is also important to note that although annual shrimp landings have varied wildly in the past, recent forecasts have shown that the annual landing level has been steadily rising. So based on these observations, Gum should pursue his scrimping business as it is unlikely for there to be a significant decrease in annual shrimp landing levels in the short term. In addition, he should continue to pursue the partnership as it will allow him to maintain his desired lifestyle should there be a significant decrease in the landing levels.