solve the following minimizing cost problem by using a decision tree. a firm has

Question

solve the following minimizing cost problem by using a decision tree. a firm has 2 options to produce a new product: either using a high tech process or a low tech process. the fixed cot of a high tech is 60000 but the low tech is only 20000. however, the variable cost is 10$ for a high tech while 15$ for a low tech. if the market is good, sales would be 10000 units. otherwise, sales would be only 6000 units. the probabilty of good market is .60 and the probability of a bad market is .4. please find the optimal solution based on the cost

Explanation / Answer

First, need to find out potential sales unit = Probability of sales good*Quantity + probability of sales bad*Quantity = 10000*0.6 + 6000*0.4 = 8400

Total cost = Fixed cost + Quantity*Variable cost

For High Tech process:

Total cost = 60000 + 10*8400 = 144000

For Low Tech process:

Total cost = 20000 + 15*8400 = 146000

So, High Tech process is best

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