CASE STUDY PICPA-PLM MBA2

Group 4

Gemma C. Nuevo Maria Lourdes P. Potenciano Deogracias B. Yumul Managerial Economics Dean Delia L. Olivar

Title: WARREN AGENCY, INC. Viewpoint : Mr. Thaddeus Warren Operator of Real Estate Agency

Problem Statement
The major problem of the case is whether Warren would accept or reject the proposition of the client. If Warren would accept the offer of the client, he would have to decide on the following: 1. If he will be successful in selling A, would he continue in selling B or C or stop selling any of the properties; 2. If he will continue selling B or C after successfully selling A, which will he sell next, B or C?

Problem Statement
3. If he will be successful in selling B, will he continue to sell C or stop selling? 4. If he chose C and succeeded selling it, will he continue to sell B or stop selling? 5. After successfully selling A, which of the two properties would be ideal to sell first, property B or C?

Statement of the Objectives

The main objective is to determine the best option available for Mr. Warren. Specific Objectives 1. To determine if Warren will accept or reject the offer of his client; 2. To come out with a plan on the best course of action in case he decides to accept the offer. 3. To determine which property to sell next if he is going to be successful in selling property A within a month; 4. To determine if he will sell one, two or three properties; 5. To find out the cumulative profit or loss for every alternative courses of action he will make.

Areas of Considerations
1. The client wished the properties to sell. The selling price and the 4% commission were indicated as follows: Property Selling Price Commission A $ 25,000 $1,000 B 50,000 2,000 C 100 ,000 4,000

Areas of Considerations
2. The client laid down his conditions for the sale: a. Property A must be sold first within a month. b. If property A will not be sold within a month, the deal is off, he cannot sell B and C anymore. c. If Warren is able to sell property A, he will be given the commission for A and has the option to stop at this point or continue selling either B or C under the same condition (that is, sell within a month or no commission on the second property and no chance to sell the third property. d. If he succeeded in selling the first two properties, he will have the option of selling the third.

Areas of Considerations
3. If Warren accepts the offer to sell, there will be selling costs involved whether the property is sold or not and Warren estimated the probability of selling each property . Property Selling Cost Probability of selling A $ 800 70% B 200 60% C 400 50%

Diagram
Property (A, B, C) s means SOLD ns means NOT SOLD Alternative Actions Cumulative Profit 1. As Bs Cs $ 5,600 2. As Bs Cns 1,600 3. As Bs 2,000 4. As Bns 0

Diagram
Property (A, B, C) s means SOLD ns means NOT SOLD Alternative Actions Cumulative Profit 5. As Cs Bs $ 5,600 6. As Cs Bns 3,600 7. As Cs 3,800 8. As Cns -200

Diagram
Property (A, B, C) s means SOLD ns means NOT SOLD Alternative Actions Cumulative Profit 9. As 200 10. Ans -800 11. Do not accept 0

Actions by Warren
1. Reject the offer 2. Sell A only and then stop selling (.7) (200) + (.3) (-800) = 3. Sell A then Sell B and then stop selling -100 + (.6) (1,800) + (.4) (-200) = 4. Sell A, Sell B and Sell C

Expected Value
0 -100 900

-100 + (.6) (1,800) + (.4) (-200) + (.5) (3,600) +(.5) (-400) = 5. Sell A, then Sell C and then stop selling -100 + (.5) (3,600) + (.5) (-400) =

2,500

1,500

6. Sell A, then Sell C then Sell B -100 +(.5) (3,600) + (.5) (-400) + (.6)+1,800) + (.4) (-200) = 2,500 The expected value analysis showed that the option to accept the offer and trying to sell all the properties would give Warren a higher rate of success.

Alternative Courses of Actions

1. Warren can accept the offer to sell A within a month and stop then with an earning of only $200 ( 1,000 commission less cost of 800) 2. Warren can accept the offer to sell A, if he failed to sell within a month, he stop with a loss of $800. 3. Warren can accept the offer to sell A and if he was able to sell A , he can continue to sell B and if successful his total income will be $2,000 (A and B commission minus A and B costs). 4. Warren can accept the offer after the successful sales of A and B, he can decide to continue selling C and get an additional profit of $3,600 with a cumulative profit of $5,600 for the three properties.

Alternative Courses of Actions

5. Warren can stop selling C, after successfully selling A and failed with selling B. 6. Warren can accept the offer and if he was able to sell A, he can decide to continue and sell C which if he was successful will give him a total net income of $3,800 (A and C commission minus cost of A and C) 7. Warren can accept the offer in selling A and C and if he was successful, he can decide to sell B with an additional yield of $1,800 8. Warren can accept the offer and if he was not successful in selling C after selling A, he can stop at this point.

Payoff Table
Actions Success in Selling A A A,B A, B , C A A,C A, C, B C B Failure in Selling Profit (loss) 200 (800) 2,000 5,600 0 3,800 5,600 (200)

1. Accept to sell A and stop 2. Accept to sell A and stop 3. Accept A and sell B next 4. Accept A and sell B and then C 5. Stop selling C after failure from B 6. Sell C next after the success of A 7. Continue to sell C after A and B

8. Stop selling C after the success of A and B A

Analysis
If the profit is the only consideration, then Warren would absolutely accept the offer because selling the three properties would give him a net profit of $5,600. The client , however gave conditions that will necessitate Warren to carefully study the offer. First , he cannot just sell any of the property but should be sold one after the other. Second, he was given only a month for each property to be sold. Looking back at the diagram, that if he is successful in selling A, he should not sell C next because if he failed to sell C, it would give him a loss of 200 which has a 50% probability of occurrence. The next option he should make after selling A would be to try selling B and if successful will give him a cumulative profit of 2,000 and the failure will result to breakeven.

Recommendation
1. Accept the offer of the client. The prospect of earning substantially from the offer of the client is attractive for Warren to take the chance.

Plan of Actions
1. Sell A within a month for a profit of $200. 2. After selling A , to sell B for a combined profit of $2,000. 3. His last action would be to sell C which is 5050 chance of being sold and not being sold. If he will be successful with selling C, he will earn a cumulative profit of $5,600 and failing to sell C will give him a cumulative profit of $1,600.

THANK YOU !
Uncertainty is a quality to be cherished, therefore if not for it, who would dare to undertake anything?