Assume the same information for Turcotte as in Problem 11-36. Working brake pads yield a profit of $25. If defective brake pads are identified before they are shipped, they can be fixed and sold as working brake pads. However, the process of inspecting and repairing brake pads that are predicted to be defective incurs costs. If a brake pad is predicted to be defective, it costs $8 to re-inspect it and, if found to be actually defective, it costs an additional $12 to repair. Turcotte incurs a net loss of $50 for defective brake pads shipped to customers because of additional costs (including reputation costs).

Required

1. Fill in the payoff matrix below as in Exhibit 11-21.

2. James is deciding whether to use a cutoff of 0.25 or 0.5. Complete the confusion matrices below using the pruned tree for each cutoff as in Exhibits 11-19 and 11-20 based on the validation set presented in Problem 11-36.

3. What cutoff value should James use? Explain.

4. Sarah is uncertain about the $50 net loss if a defective brake pad is shipped to customers. At what loss would Sarah prefer to use the other cutoff value (i.e., the cutoff value Sarah did not choose in requirement 3)?

Data from Problem 11-36:

Sarah Letourneau is the management accountant at Turcotte Manufacturing, an auto supplier that produces brake pads. Turcotte’s customers have high safety standards, and managers at Turcotte believe they can gain a competitive advantage by reducing the number of defective brake pads they produce. Sarah works with an external data science consulting company to develop a prediction model that identifies defective brake pads (y = 1) before they are shipped to Turcotte’s clients. After building the model on a training dataset, Sarah tests its accuracy on the validation set below.

Transcribed Image Text:

EXHIBIT 11-21 Actual Outcomes Payoff Matrix Default Repay Predicted Outcomes Default (Do Not Invest in Loan) True Positives (A) $12 False Positives (Y) $12 Repay (Invest in Loan) False Negatives (Z) -$70 True Negatives (B) $45