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Draw a decision tree for the above company and write down the REVENUES and COSTS at the end of branches.

Draw a decision tree for the above company and write down the REVENUES and COSTS at the end of branches.

Practical Management Science
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Use the following information to answer multiple-choice Questions 21 to 30. A fibre glass company is considering the possibility of introducing a new product. Because of the expense involved in developing the initial moulds and acquiring the necessary equipment to produce fibreglass, it has decided to conduct a pilot study to make sure that the market will be adequate. They estimate that the pilot study will cost £12,000. Furthermore, the pilot study can be either successful or unsuccessful. The basic decisions are to build a large manufacturing facility, a small manufacturing facility, or no facility at all. With a favourable market, the company can expect to make £100,000 from the large facility or £60,000 from the smaller facility. If the market is unfavourable, however, they estimate that they would lose £40,000 with a large facility, while they would lose only £30,000 with the small facility. The company estimates that the probability of a favourable market given a successful pilot study is 0.7. The probability of an unfavourable market given an unsuccessful pilot study result is estimated to be 0.8. They feel that there is a 50-50 chance that the pilot study will be successful. Of course, the company could decide not to commission the pilot study and therefore make the decision as to whether to build a large facility, small facility or no facility at all. Without doing any testing in a pilot study they estimate that the probability of a successful market is 0.7. Draw a decision tree for the above company and write down the REVENUES and COSTS at the end of branches.
Transcribed Image Text:Use the following information to answer multiple-choice Questions 21 to 30. A fibre glass company is considering the possibility of introducing a new product. Because of the expense involved in developing the initial moulds and acquiring the necessary equipment to produce fibreglass, it has decided to conduct a pilot study to make sure that the market will be adequate. They estimate that the pilot study will cost £12,000. Furthermore, the pilot study can be either successful or unsuccessful. The basic decisions are to build a large manufacturing facility, a small manufacturing facility, or no facility at all. With a favourable market, the company can expect to make £100,000 from the large facility or £60,000 from the smaller facility. If the market is unfavourable, however, they estimate that they would lose £40,000 with a large facility, while they would lose only £30,000 with the small facility. The company estimates that the probability of a favourable market given a successful pilot study is 0.7. The probability of an unfavourable market given an unsuccessful pilot study result is estimated to be 0.8. They feel that there is a 50-50 chance that the pilot study will be successful. Of course, the company could decide not to commission the pilot study and therefore make the decision as to whether to build a large facility, small facility or no facility at all. Without doing any testing in a pilot study they estimate that the probability of a successful market is 0.7. Draw a decision tree for the above company and write down the REVENUES and COSTS at the end of branches.
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