Question
East Coast Import is considering two alternative advertising and marketing plans for a new line of consumer products it buys from a manufacturer in Singapore.
East Coast Import is considering two alternative advertising and marketing plans for a new line of consumer products it buys from a manufacturer in Singapore. The first plan involves contracting with a television shopping channel and is projected to have a cost of $200,000. East Coasts marketing director has analyzed this alternative and, after a joint meeting with the shopping channels manager, believes that the following probability distribution for additional profit generated is accurate:
Increased Revenue ($) | Probability |
130,000 | 0.2 |
200,000 | 0.5 |
220,000 | 0.3 |
The second marketing alternative to rely on advertising in airline magazines and newspaper inserts is projected to have a cost of $120,000. However, the marketing director thinks that this approach would not be effective for generating added revenue as the shopping channel approach. This is reflected in the following probability distribution:
Increased Revenue ($) | Probability |
90,000 | 0.3 |
120,000 | 0.4 |
160,000 | 0.3 |
The company has decided not to try both approaches simultaneously.
Use a decision tree to make your recommendation about which approach to take.
Although the company has decided not to try both approaches simultaneously, the managers did agree that if the print-advertising approach is chosen and results in $90,000 in added revenues, they may make a second decision about whether to switch to the shopping channel for an additional cost of $220,000. They assume the probabilities and outcomes of the shopping channel option would not be changed, but all profit projections will be reduced by this cost.
Use a decision tree to recommend a strategy for the company.
[Hint: Think about how many decision nodes you need to model this problem.]
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