A General Manger of
Harley-Davidson has to decide on the size of a new facility. The GM has
narrowed the choices to two: large facility or small facility. The company has
collected information on the payoffs. It now has to decide which option is the
best using probability analysis, the decision tree model, and expected monetary
value.
Options:
|
Facility |
Demand Options |
Probability |
Actions |
Expected Payoffs |
|
Large |
Low Demand |
0.4 |
Do Nothing |
($10) |
|
Low Demand |
0.4 |
Reduce Prices |
$50 |
|
|
High Demand |
0.6 |
$70 |
||
|
Small |
Low Demand |
0.4 |
$40 |
|
|
High Demand |
0.6 |
Do Nothing |
$40 |
|
|
High Demand |
0.6 |
Overtime |
$50 |
|
|
High Demand |
0.6 |
Expand |
$55 |
Determination of chance
probability and respective payoffs:
|
Build Small: |
|
|
Low Demand |
0.4($40)=$16 |
|
High Demand |
0.6($55)=$33 |
|
Build Large: |
|
|
Low Demand |
0.4($50)=$20 |
|
High Demand |
0.6($70)=$42 |
Determination of Expected
Value of each alternative
Build Small: $16+$33=$49
Build Large: $20+$42=$62
