Question
ABC Products, Inc. has the option of (a) proceeding immediately with the production of new plasma TV that has just completed prototype testing or (b)
ABC Products, Inc. has the option of (a) proceeding immediately with the production of new plasma TV that has just completed prototype testing or (b) having the value analysis team do a study before proceeding to production. For each of the alternatives, there will be afixed costincurred prior to production. Beyond that, there are two possibleprofit marginseach with consequent ensuing sales levels. The probability ascribed to each of the profit margins has also be determined. These value are reported in the table that follows:
Production Option | Fixed Cost | Probable Outcomes Depending on Profit Margin | |||||
---|---|---|---|---|---|---|---|
Profit Margin | Sales | Probability | Profit Margin | Sales | Probability | ||
Produce New Plasma TV | $1800 | $2.4 | 16000 | 0.7 | $1.7 | 25000 | 0.3 |
Value Analysis Study | $23400 | $4.9 | 23000 | 0.1 | $2.1 | 31000 | 0.9 |
Note that since the probabilities of the two profit margins for the decision alternatives not the same, a decision tree, as below, can be used to structure the scenario. What is the expected profit of the more profitable of the two options?
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