Need a decision tree analysis of Morris Manufacturing decision situation using expected value, and the appropriate decision(s) with this criterion. Kindly use Palisade Decision Tools

Problem 1:Morris Manufacturing Company

On January 15, 2002, the monthly meeting of the Morris Manufacturing Company's Board of Directors was held at the company's offices in Hamilton. All four directors were present. From the chair, Charles Blake, the president of Morris Manufacturing began the meeting by informing the directors of the background of negotiations with the Dayton Electric Products Corporation. Dayton was a manufacturer of heavy-duty industrial equipment, and the home office and principal manufacturing facility was located in Vancouver.

"In 1995 Dayton asked us to determine whether a heavy-duty overhead crane with a 50-ton capacity could be built. The crane was needed to move one of a series of new generators from the construction area to the testing shop, a distance of about 600 feet. Our design engineer, John Stiles, did some figuring for us and wrote them that such a crane could be built for about $200,000. Dayton then decided not to make the capital investment at that time but to continue to use its old, but serviceable, crane. During the next 5 years we checked with them from time to time, and found varying degrees of interest in a new crane.

"Then last year Dayton indicated definite interest in resuming serious talks. We drew up some tentative plans based on the gauge, capacity, height, and other specifications of their overhead track, and sent the plans to Carl Mosley, Dayton's chief engineer. Mosley approved the plans and, as usual, we took this as an assurance that the track was a normal, level, industrial installation, permitting the proposed simple six-wheel design for the crane. In spite of a general increase in costs in the interim, John Stiles was able to submit again the original bid of $200,000. The order was placed, and our production costs finally turned out to be $150,000. The crane was shipped on September 25, 2001, on schedule.

"Unfortunately, Dayton's track foundation was not adequate for a six-wheeled crane of this capacity, and began to bend and crack.Dayton would not accept the crane and returned it at a cost of $5,000 to us. John then undertook an engineering study and concluded that the cost of rebuilding the crane with a 12-wheel design would be about $160,000. A further review of the costs developed no useful shortcuts. On October 15, a revised total price of $350,000 was offered to Dayton.

"No firm reply was received by the end of October, so I arranged for a meeting with Dayton's general manager, Bob Hendricks, and Carl Mosley. John Stiles went to Vancouver with me, and the first thing we did was look at the damaged rails. They had already repaired the track and were again operating their old crane. Right away, we could see that the rail structure was completely inappropriate for the six-wheel design, and that it could not stand the pounds-per-square-inch loads generated by six wheels. Apparently that had not occurred to Carl Mosley, since their existing crane was of an "antique" 10-wheel design, and he figured that we would know how many wheels a crane should need. Well, we really should have inspected the tracks, since this rail design is as old as Dayton's crane.

"Hendricks said that he thought that $350,000 was a greater investment than Dayton could consider. He felt that a suitable crane should cost about $280,000, and thought that he could get a competitive bid for about that much. We left the meeting with the understanding that we would review the design to see if costs could be reduced enough to get below the quotation of October 15. Both Hendricks and Mosley indicated that there was "no big rush" for us, and I suspect that they may be willing to keep plugging along with that old dinosaur.

There was a knock at the door, and John Stiles entered. "I've asked John to give us some further information on this matter," Blake said, "and I would like to give the floor to him at this time."

"Thank you, Mr. Blake. We quoted Dayton a figure of $350,000 based on our present estimate of the costs of modification and the production cost of the original crane.Now, though, with an indication that a suitable crane at $280,000 would probably be acceptable to them, we could reconsider. But I would like to remind you that it would have been impossible to have built a 12-wheeled crane originally for $280,000. I would say that there is an even chance that we'd get the order at $280,000, since nobody else could build a 12-wheel for any less. At a lower figure of $220,000, say, I'd bet on a 90% chance of getting the order. At the higher price of $350,000 I'd say we'd have only a 25% chance of getting the order".

"What about trying to sell the crane to someone else, instead of trying to sell it to Dayton?" asked one of the directors.

"There's some chance of that." Stiles replied. "I know of another company, Stern Industries, that might take the crane off our hands. I'd guess there is a 30% chance they would purchase it-but the price we could get is a different matter. I'd say that three prices are possible: $100,000, $150,000, and $180,000.Presuming that Stern does, in fact, purchase the crane, I think the most likely sales price is $150,000; we have about a 7 out of 10 chance of getting that figure. The chances of only getting a price of $100,000 are about 2 in 10, and there is about a 1 in 10 chance we'd see the $180,000 figure. In addition to a lower selling price, another drawback is that just to get a salesman out there and to prepare the sale would cost us about $10,000, and then we're at the point I mentioned above of either getting the sale or losing it. Also, if we try initially to sell to Stern, we will eliminate any chance of selling the crane to Dayton.

"If we do decide to go all out in trying to sell the crane to Dayton, we're going to have to develop a good, revised design.I figure that this will cost us about $20,000. No matter what bid price we try, if they reject it, we can always try to sell the crane to Stern. With the time delay I'd guess that we'd have only a 15% chance of selling the crane to Stern. If we can sell it, I think that the price and chances that I mentioned earlier would be the same."

"How about scrapping this turkey, John?" asked Blake.

"I've been thinking about that, too. I think we should consider scrapping the crane at any point that things start looking too expensive and risky. We could salvage at least $50,000 from it, and we would certainly avoid a lot of uncertainty"

At this point Charles Blake thanked John Stiles, excused him from the meeting, and turned to the other directors. "As you might suspect, there is the possibility of pressing Dayton on the legal point that they studied and approved our plans for the initial crane, and that they, therefore, must accept the crane as designed. However, I think that this is a very poor idea, since the last thing we want to do is become involved in a lawsuit over this thing. There is the possibility that a growing company like Dayton will be a source of future business for us, but not if we sue them."

We need to perform a decision tree analysis of Morris Manufacturing decision situation using expected value, and indicate the appropriate decision(s) with this criterion.