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Decision Tree Sums

An intelligent smartphone company is deciding whether to expand its business in a small way or a big way. There is a 70% chance of high demand and 30% chance of low demand for each option. Expanding big would yield $300,000 in high demand and $50,000 in low demand, while expanding small would yield $200,000 in high demand and $80,000 in low demand. A decision tree technique should be used to advise the best option.

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Kesavan Sivakumar
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85 views

Decision Tree Sums

An intelligent smartphone company is deciding whether to expand its business in a small way or a big way. There is a 70% chance of high demand and 30% chance of low demand for each option. Expanding big would yield $300,000 in high demand and $50,000 in low demand, while expanding small would yield $200,000 in high demand and $80,000 in low demand. A decision tree technique should be used to advise the best option.

Uploaded by

Kesavan Sivakumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1. Intelligent Smart phones Sdn. Bhd is a new generation smart phone company.

The
company is in business for 5 years and they have crossed the breakeven point, the
management team is planning to expand and they are in a dilemma on whether to
expand the business in a small way or to expand the business in a big way, following is
the information available to make the decision. You being a consultant need to advise
the management on how to go about this decision. Use decision tree technique to make
the decision.

High demand ( in $) Probability Low Demand( in Probability


of Success $) of Success

Situation one RM 300,000 70% RM 50,000 30%


Expand Big

Situation one RM 200,000 70% RM 80,000 30%


Expand
Small

2. Jenny Lind is a writer of romance novels. A movie company and a TV network


both want exclusive rights to one of her more popular works. If she signs with
the network, she will receive a single lump sum, but if she signs with the movie
company, the amount she will receive depends on the market response to her
movie. What should she do?

- Movie company Payouts


a. Small box office - $200,000
b. Medium box office - $1,000,000
c. Large box office - $3,000,000

- TV Network Payout
d. Flat rate - $900,000

- Probabilities
e. P(Small Box Office) = 0.3
f. P(Medium Box Office) = 0.6
g. P(Large Box Office) = 0.1
3. A glass factory specializing in crystal is experiencing a substantial backlog, and the
firm's management is considering three courses of action:
A) Arrange for subcontracting
B) Construct new facilities
C) Do nothing (no change)

The correct choice depends largely upon demand, which may be low, medium, or high.
By consensus, management estimates the respective demand probabilities as 0.1, 0.5,
and 0.4.
Given the payoffs on the next page, manually create and solve this problem using a
decision tree.
The management estimates the profits when choosing from the three alternatives (A,
B, and C) under the differing probable levels of demand. These profits, in thousands
of dollars are presented in the table below:

0.1 0.5 0.4


Low Medium High
A 10 50 90
B -120 25 200
C 20 40 60

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