The fixed cost of $6 million in the Acme problem is evidently not large enough t

Question

The fixed cost of $6 million in the Acme problem is evidently not large enough to make Acme abandon the product at the current time. How large would the fixed cost need to be to make the abandon option the best option? Enter your answer in $1,000s.

The fixed cost of $6 million in the Acme problem is evidently not large enough to make Acme abandon the product at the current time. How large would the fixed cost need to be to make the abandon option the best option? Enter your answer in $1,000s. Explain how the decision tree, especially the version in Figure 6.5, answers this question easily. The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Explanation / Answer

here expected value should be less than 0 for Acme abandon the product at the current time

expected value =value at node after decision -fixed cost <0

10800*0.45+5400*0.35+1620*0.2<fixed cost

fixed cost >7074

hence required fixed cost = 7074

(from above diagram we can see that value at above node is 7074 from where we can make decision)

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