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Cerebrosoft Case

The document presents a decision tree analysis for determining the optimal pricing strategy for a product. It considers three price levels ($50, $40, $30) under different market conditions (severe, moderate, weak). It calculates expected monetary values for each strategy with and without conducting additional market research. Conducting research results in a higher expected value of $886,385 for a medium price of $40 compared to $665,000 without research.

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DEEP725
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© © All Rights Reserved
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362 views16 pages

Cerebrosoft Case

The document presents a decision tree analysis for determining the optimal pricing strategy for a product. It considers three price levels ($50, $40, $30) under different market conditions (severe, moderate, weak). It calculates expected monetary values for each strategy with and without conducting additional market research. Conducting research results in a higher expected value of $886,385 for a medium price of $40 compared to $665,000 without research.

Uploaded by

DEEP725
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Decision Tree Analysis

Price:
$
$
$

50.00
40.00
30.00

Research cost:
Payoff Table:
High price
Sales
Income
50000 $ 2,500,000.00
30000 $ 1,500,000.00
20000 $ 1,000,000.00

$
50.00
-Development
$ 1,700,000.00
$
700,000.00
$
200,000.00

Medium price
Sales
Income
50000 $ 2,000,000.00
30000 $ 1,200,000.00
20000 $
800,000.00

$
40.00
-Development
$ 1,200,000.00
$
400,000.00
$
-

Low price
Sales

$
30.00
Income
-Development
50000 $ 1,500,000.00 $
700,000.00
30000 $
900,000.00 $
100,000.00
20000 $
600,000.00 $
-200,000.00

Maximum:
`

Equally:

High
Medium
$ 1,650,000.00 $ 1,150,000.00
$

816,666.67 $

483,333.33

Research Prob.
State of nature
Severe
Modarate
Weak

P(Sur.Sev.|nat)
Prior Prob
0.80
0.15
0.03

0.20
0.25
0.55

State of nature
Severe
Modarate
Weak

P(Sur.Mod.|nat)
Prior Prob
0.15
0.80
0.07

0.25
0.30
0.45

State of nature

P(Sur.Weak.|nat)

Prior Prob

Severe
Moadrate
Weak

0.05
0.05
0.90

0.30
0.35
0.35

State of nature
Severe
Modarate
Weak

P(Sur.Sev.|nat)
Prior Prob
0.80
0.15
0.03

0.25
0.35
0.40

State of nature
Severe
Modarate
Weak

P(Sur.Mod.|nat)
Prior Prob
0.15
0.80
0.07

0.30
0.40
0.30

State of nature
Severe
Moadrate
Weak

P(Sur.Weak.|nat) Prior Prob


0.05
0.05
0.90

0.40
0.50
0.10

State of nature
Severe
Modarate
Weak

P(Sur.Sev.|nat)
Prior Prob
0.80
0.15
0.03

0.35
0.40
0.25

State of nature
Severe
Modarate
Weak

P(Sur.Mod.|nat)
Prior Prob
0.15
0.80
0.07

0.40
0.50
0.10

State of nature
Severe
Moadrate
Weak

P(Sur.Weak.|nat) Prior Prob


0.05
0.05
0.90

0.50
0.45
0.05

No Research:

Do Research:

High=
Medium=
Low=
EMV=

$
$
$
$

665,000.00
470,000.00
252,500.00
665,000.00

High= $
Medium= $
Low= $

790,087.08
460,069.66
130,052.25

Severe

EMV= $

790,087.08

Modarate
High=
Medium=
Low=
EMV=

$
$
$
$

830,738.12
492,590.50
154,442.87
830,738.12

High=
Medium=
Low=
EMV=

$
$
$
$

886,385.02
537,108.01
187,831.01
886,385.02

Weak

Decision Tree Analysis


Units:

Probabilities:
50000
30000
20000

High
0.2
0.7
0.1

10,000.00

Payoff
-Suport and Shipping
Net Profit
$
1,650,000.00 $ 1,650,000.00
$
650,000.00 $
650,000.00
$
150,000.00 $
150,000.00

Medium
Low
0.20
0.25
0.25
0.35
0.55
0.40
0.25
0.30
0.30
0.40
0.45
0.30
0.30
0.40
0.35
0.50
0.35
0.10

0.35
0.40
0.25
0.40
0.50
0.10
0.50
0.45
0.05

Decision nodes
-Suport and Shipping
Net Profit
$
1,150,000.00 $ 1,150,000.00
$
350,000.00 $
350,000.00
$
-50,000.00 $
-50,000.00

$?

-Suport and Shipping


Net Profit
$
650,000.00 $
650,000.00
$
50,000.00 $
50,000.00
$
-250,000.00 $
-250,000.00
Low
$
$

Max
650,000.00 $ 1,650,000.00
150,000.00 $

Joint Prob

816,666.67

New Prob
0.16
0.04
0.02
0.21

Joint Prob

0.75
0.18
0.08
1.00
New Prob

0.04
0.24
0.03
0.31
Joint Prob

No Research

Research?
0.12
0.78
0.10
1.00

New Prob

0.02
0.02
0.32
0.35
Joint Prob

0.04
0.05
0.91
1.00
New Prob

0.20
0.05
0.01
0.26
Joint Prob

0.76
0.20
0.05
1.00
New Prob

0.05
0.32
0.02
0.39
Joint Prob

$?
0.12
0.83
0.05
1.00

New Prob
0.02
0.03
0.09
0.14

Joint Prob

0.15 Do Research
0.19
0.67
1.00

Severe

New Prob
0.28
0.06
0.01
0.35

Joint Prob

0.81
0.17
0.02
1.00
New Prob

0.06
0.40
0.01
0.47
Joint Prob

0.13
0.86
0.01
1.00
New Prob

0.03
0.02
0.05
0.09

0.27
0.24
0.49
1.00
Modarate

$?

Weak

$?

State of nature nodes

Severe

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

0.2
Modarate
0.7
Weak
High
$ 50.00

0.1

Severe
Medium
$ 40.00

0.2
Modarate
0.7
Weak

Low
$ 30.00

0.1

Severe
0.2
Modarate
0.7
Weak
0.1

Severe
0.2
Modarate
0.7

Weak
High
$ 50.00

0.1

Severe
Medium
$ 40.00

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units

50000

0.2
Modarate
0.7
Weak

Low
$ 30.00

0.1

Severe
0.2
Modarate
0.7
Weak
0.1

Severe
0.2
Modarate
0.7
Weak
High
$ 50.00

0.1

Severe
Medium
$ 40.00

0.2
Modarate

0.7
Weak
Low
$ 30.00

0.1

Severe

Units
Units

30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

0.2
Modarate
0.7
Weak
0.1

Severe
0.2
Modarate
0.7
Weak
High
$ 50.00

0.1

Severe
Medium
$ 40.00

0.2
Modarate
0.7
Weak

Low
$ 30.00

0.1

Severe

0.2
Modarate
0.7
Weak
0.1

Units
Units
Units

50000
30000
20000

Units
Units
Units

50000
30000
20000

0.20 $
0.25 $
0.55 $

1,650,000.00 EMV=
650,000.00
150,000.00

575,000.00

0.25 $
0.30 $
0.45 $

1,650,000.00 EMV=
650,000.00
150,000.00

675,000.00

0.30 $
0.35 $
0.35 $

1,650,000.00 EMV=
650,000.00
150,000.00

775,000.00

0.25 $
0.35 $
0.40 $

1,150,000.00 EMV=
350,000.00
-50,000.00

390,000.00

0.30 $
0.40 $
0.30 $

1,150,000.00 EMV=
350,000.00
-50,000.00

470,000.00

0.40 $
0.50 $
0.10 $

1,150,000.00 EMV=
350,000.00
-50,000.00

630,000.00

0.35 $
0.40 $
0.25 $

650,000.00 EMV=
50,000.00
-250,000.00

185,000.00

0.40 $
0.50 $
0.10 $

650,000.00 EMV=
50,000.00
-250,000.00

260,000.00

0.50 $
0.45 $
0.05 $

650,000.00 EMV=
50,000.00
-250,000.00

335,000.00

0.75 $
0.18 $
0.08 $

1,640,000.00 EMV=
640,000.00
140,000.00

$ 1,349,112.15

0.12 $
0.78 $
0.10 $

1,640,000.00 EMV=
640,000.00
140,000.00

710,388.35

0.04 $
0.05 $
0.91 $

1,640,000.00 EMV=
640,000.00
140,000.00

229,928.06

0.75 $
0.18 $
0.08 $

1,140,000.00 EMV=
340,000.00
-60,000.00

907,289.72

0.12 $
0.78 $
0.10 $

1,140,000.00 EMV=
340,000.00
-60,000.00

396,310.68

0.04 $
0.05 $
0.91 $

1,140,000.00 EMV=
340,000.00
-60,000.00

11,942.45

0.75 $
0.18 $
0.08 $

640,000.00 EMV=
40,000.00
-260,000.00

465,467.29

0.12 $
0.78 $
0.10 $

640,000.00 EMV=
40,000.00
-260,000.00

82,233.01

0.04 $
0.05 $
0.91 $

640,000.00 EMV=
40,000.00
-260,000.00

-206,043.17

0.76 $
0.20 $
0.05 $

1,640,000.00 EMV=
640,000.00
140,000.00

$ 1,373,459.36

0.12 $
0.83 $
0.05 $

1,640,000.00 EMV=
640,000.00
140,000.00

729,378.24

0.15 $
0.19 $
0.67 $

1,640,000.00 EMV=
640,000.00
140,000.00

454,814.81

0.76 $
0.20 $
0.05 $

1,140,000.00 EMV=
340,000.00
-60,000.00

926,767.49

0.12 $

1,140,000.00 EMV=

411,502.59

0.83 $
0.05 $

340,000.00
-60,000.00

0.15 $
0.19 $
0.67 $

1,140,000.00 EMV=
340,000.00
-60,000.00

191,851.85

0.76 $
0.20 $
0.05 $

640,000.00 EMV=
40,000.00
-260,000.00

480,075.61

0.12 $
0.83 $
0.05 $

640,000.00 EMV=
40,000.00
-260,000.00

93,626.94

0.15 $
0.19 $
0.67 $

640,000.00 EMV=
40,000.00
-260,000.00

-71,111.11

0.81 $
0.17 $
0.02 $

1,640,000.00 EMV=
640,000.00
140,000.00

$ 1,434,964.03

0.13 $
0.86 $
0.01 $

1,640,000.00 EMV=
640,000.00
140,000.00

760,985.01

0.27 $
0.24 $
0.49 $

1,640,000.00 EMV=
640,000.00
140,000.00

667,027.03

0.81 $
0.17 $
0.02 $

1,140,000.00 EMV=
340,000.00
-60,000.00

975,971.22

0.13 $
0.86 $
0.01 $

1,140,000.00 EMV=
340,000.00
-60,000.00

436,788.01

0.27 $
0.24 $
0.49 $

1,140,000.00 EMV=
340,000.00
-60,000.00

361,621.62

0.81 $
0.17 $
0.02 $

640,000.00 EMV=
40,000.00
-260,000.00

516,978.42

0.13 $
0.86 $
0.01 $

640,000.00 EMV=
40,000.00
-260,000.00

112,591.01

0.27 $
0.24 $
0.49 $

640,000.00 EMV=
40,000.00
-260,000.00

56,216.22

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