Develop a decision tree for the case of a company is operating at full capacity
ID: 404209 • Letter: D
Question
Develop a decision tree for the case of a company is operating at full capacity and with product demand rising. The choice is between new equipment and overtime. A 20% rise in sales is anticipated, bringing an increase in profits of $300,000 with new equipment and $150,000 with overtime. But volume might drop 5%; therefore, these are two possible results. If there were a sales drop, profit would be $220,000 with new equipment and $175,000 with overtime. The probabilities are 60% for a sales increase and 40% for a sales decrease.
Explanation / Answer
It would be better to take new equipment choice
profit for new equipment plan
=0.6*0.2*300000+0.4*0.05*220000
=$40,400
profit for overtime plan
=0.6*0.2*150000+0.4*0.05*175000
=$21500
There fore its better to follow the new equipment plan
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