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DECISION TREE IN-CLASS EXERCISE: SAILBOAT COMPANY

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Question;DECISION TREE IN-CLASS EXERCISE: SAILBOAT COMPANY1Monica Britt has enjoyed sailing small boats since she was 7 years old, when her mother startedsailing with her. Today, Monica is considering the possibility of starting a company to producesmall sailboats for the recreational market. Unlike other mass produced sailboats, however, theseboats will be made specifically for children between the ages of 10 and 15. The boats will be of thehighest quality and extremely stable, and the sail size will be reduced to prevent problems ofcapsizing.Because of the expense involved in developing the initial molds and acquiring the necessaryequipment to produce fiberglass sailboats for young children, Monica is considering conducting apilot study to make sure that the market for sailboats will be adequate. She estimates that the pilotstudy will cost her $10,000. Furthermore, the pilot study can either indicate a favorable market oran unfavorable market. Her basic decision is whether to build a large manufacturing facility, asmall manufacturing facility, or no facility at all. With a favorable market, Monica can expect tomake $90,000 from the large facility or $60,000 from the small facility. If the market is unfavorable,however, Monica estimates that she would lose $30,000 with the large facility and $20,000 with thesmall facility. If Monica conducts the pilot study, she estimates that the probability of a favorablemarket will be.80 if the study suggests a favorable market. If the study is not successful, suggestingan unfavorable market, she estimates the probability of an unfavorable market to be.90. Monicafeels that there?s a 50-50 chance that the pilot study will be successful. (There?s a 50% chance thatthe study will suggest an favorable market.) Monica could choose not the conduct the study andsimply make the decision to build a large plant, small plant, or none at all. Without doing any study,she estimates the probability of a favorable market to be 0.60.Construct a decision tree that captures the nature of her decision options. Solve using Treeplan andmake a recommendation. 1 This case is from Decision Analysis, 10th edition. by Render, Stair and Hanna. Pearson Prentice Hall.

 

Paper#46313 | Written in 18-Jul-2015

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