C207 Task 2-2

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C207 Task 2 1 C207 Task 2 Western Governors University Regina Cousar Carson Gaines January 27, 2024

C207 Task 2 2 A. MPC has employed Drug Market Analysis Inc. to help them make a crucial decision as to how to obtain a competitive advantage over other drug companies. MPC is considering developing a new drug, exploiting their current drug for new uses, or making no changes to their current drug line. MPC is now faced with an important business question: Which of the three previously mentioned options will produce the highest profitability? B. Profits per Unit New Drug (.67) Existing Drug (.99) No Change (.83) Demand per Unit FAV- 4,966 UNFAV -1,205 FAV -5,377 UNFAV - 1,807 FAV -1,101 UNFAV - 541 Payoff FAV- $3,327.22 UNFAV - $807.35 FAV -$5,323.23 UNFAV -$1,788.93 FAV -$913.83 UNFAV -$449.03 Probability FAV -77% UNFAV -23% FAV -61% UNFAV - 39% FAV -89% UNFAV - 11% C1. See accompanying Excel spreadsheet. C2. In the given scenario, a decision tree analysis is appropriate because it allows for the analysis of multiple options and variables at the same time. The favorable and unfavorable markets can be researched together providing side by side analysis to make for an easier and efficient final decision. MPC must make an expedient decision as to how to continue with their products. A decision tree analysis that provides MPC will all the relevant data together, allows the company to make a quick and confident decision.

C207 Task 2 3 D1. In a decision tree analysis, demand values are used to determine predicted profits and payoffs, which affects the evaluation of each option, regarding financial viability. In each case, it shows the demand for a product on the market and the outcomes of each decision. In this scenario, the demand represents the quantities that MPC expects to sell in both a favorable and unfavorable market. The quantities are shown as units per month providing insight into projected sales volumes in both market conditions. The demand will assist MPC in allocating their resources during fluctuating markets. When the analysis is complete, the demand amount is multiplied by the profit per unit arriving at the payoff. Probability measures the level of uncertainty around each decision. Probabilities are essential for determining the success or failure for each strategic choice in a decision treen analysis under various market conditions. For MPC, the probabilities indicate the percentage of the inventory projected to be sold in favorable and unfavorable market conditions. The probabilities listed are for a favorable market. The probabilities of an unfavorable market are obtained by subtracting the probability in a favorable market from 100. The payoff in both market settings will be multiplied by the corresponding probability percentages and then added together to calculate the expected value. The calculations can be found in the accompanying Excel spreadsheet. If MPC decides to implement a new drug, the probability in a favorable market will be 77%. This results in the probability of an unfavorable market being 23%. The demand for a new drug line in a favorable market is 4966 units while the demand for an unfavorable market is 1,205 units per month. Exploiting the current drug carries a 61% probability in a favorable market. In an unfavorable market, the current drug has a 39% probability. The demand with the exploitation of the existing drug in a favorable market is 5,377 units and 1,807 units in an unfavorable market. MPC also has the option of keeping the current drug. This option carries a

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C207 Task 2 4 probability of 89% in a favorable market and an 11% probability in an unfavorable market. The demand in a favorable market is 1,101 units per month and 541 units in an unfavorable market. D2. Calculating the expected value of each option is vital to MPC’s final decision of which avenue to pursue. Expected value is calculated by multiplying the payoff for a favorable market by the corresponding probability. The same calculation is executed for an unfavorable market. The two amounts are then added together. MPC must perform the same calculation for the new drug, existing drug exploitation, and making no change options. The calculated amounts are then compared to determine which option has the highest expected value. The expected value calculations can be found on the accompanying Excel spreadsheet. D3. A data set limitation would be the use of probabilities and estimates. While this provides an informed decision, it does not provide 100% accurate numbers. These calculations may be the best that MPC can obtain, but it is still an assumption or educated guess as to what their eventual success. A decision tree limitation is the generality used in the study when determining the projected consumption of the drug. For instance, the location of sales for the drug can play a large part as to how much of the current drug is purchased. The population of the west coast may consume more than the population in the south. An international market may have different factors that determine if they buy MPC’s drug line. E. After completing the decision tree analysis, MPC should look to exploit their current drug line. This option has the highest demand and profitability of the three options. The expected value of the existing drug is $3,944.85. This far exceeds the expected value of developing a new drug or making no change which are $2,747.65 and $862.70 respectively.

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