Question 3

AB has developed two new products, Product A and Product B, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 30 percent chance that competitors will take no action, a 60 percent chance that they will launch a similar product and a 10 percent chance that they will launch a better product.

The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows:

Competitor reaction

Product A

Product B

No action

500,000

600,000

Launch a similar product

300,000

400,000

Launch a better product

(100,000)

(200,000)

Another option for AB would be to launch neither product. If it chooses this course ofactionthere is a 50 percent chance that competitors will take no action and there will be no effect on the company's profit. There is a 50 percent chance that competitors will launch a new product and company profits will reduce by 150,000.

Required:

a) Demonstrate, using a decision tree and based on expected value, the best course of action for the company.

b) DiscussMaximin,Maximax and regret criteria withreference to numerical examples.

c) 'Decision tree is useful indecision-making,andbudgeting also plays an important role in decision-making'.Discuss the role of budgeting in decision-making,and alsoevaluate zero-based and incremental budgeting.