AB has developed two new products, Product A and Product B, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 30 percent chance that competitors will take no action, a 60 percent chance that they will launch a similar product and a 10 percent chance that they will launch a better product. The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows: Competitor reaction Product A Product B No action £500,000 £600,000 Launch a similar product £300,000 £400,000 Launch a better product (£100,000) (£200,000) Another option for AB would be to launch neither product. If it chooses this course of action there is a 50 percent chance that competitors will take no action and there will be no effect on the company's profit. There is a 50 percent chance that competitors will launch a new product and company profits will reduce by £150,000. Required: a) Demonstrate, using a decision tree and based on expected value, the best course of action for the company. b) Discuss Maximin, Maximax and regret criteria with numerical examples. c) 'Decision tree is useful in decision-making, and budgeting also plays an important role in decision-making'. Discuss the role of budgeting in decision-making, and.also evaluate zero-based and incremental budgeting.
AB has developed two new products, Product A and Product B, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 30 percent chance that competitors will take no action, a 60 percent chance that they will launch a similar product and a 10 percent chance that they will launch a better product. The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows: Competitor reaction Product A Product B No action £500,000 £600,000 Launch a similar product £300,000 £400,000 Launch a better product (£100,000) (£200,000) Another option for AB would be to launch neither product. If it chooses this course of action there is a 50 percent chance that competitors will take no action and there will be no effect on the company's profit. There is a 50 percent chance that competitors will launch a new product and company profits will reduce by £150,000. Required: a) Demonstrate, using a decision tree and based on expected value, the best course of action for the company. b) Discuss Maximin, Maximax and regret criteria with numerical examples. c) 'Decision tree is useful in decision-making, and budgeting also plays an important role in decision-making'. Discuss the role of budgeting in decision-making, and.also evaluate zero-based and incremental budgeting.
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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Answer question a, b and c.
Transcribed Image Text:Question 3
AB has developed two new products, Product A and Product B, but has insufficient resources to
launch both products. The success of the products will depend on the extent of competitor
reaction. There is a 30 percent chance that competitors will take no action, a 60 percent chance
that they will launch a similar product and a 10 percent chance that they will launch a better
product.
The profit/loss that will be earned by each of the products depending on the extent of competitor
reaction is as follows:
Competitor reaction
Product A
Product B
No action
£500,000
£600,000
Launch a similar product
£300,000
£400,000
Launch a better product
(£100,000)
(£200,000)
Another option for AB would be to launch neither product. If it chooses this course of action there
is a 50 percent chance that competitors will take no action and there will be no effect on the
company's profit. There is a 50 percent chance that competitors will launch a new product and
company profits will reduce by £150,000.
Required:
a) Demonstrate, using a decision tree and based on expected value, the best course of action for
the company.
b) Discuss Maximin, Maximax and regret criteria with numerical examples.
c) 'Decision tree is useful in decision-making, and budgeting also plays an important role in
decision-making'. Discuss the role of budgeting in decision-making, and.also evaluate zero-based
and incremental budgeting.
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