The Russo Manufacturing company The Russo Manufacturing Company must decide whether to manufacture a component part at its Milan plant or purchase the component part from a supplier. The resulting profit is dependent upon the demand for the product. If the demand for the finished product is low, Russo will incur a loss of [i.] if it decided to manufacture the component part. On the other hand, if Russo purchases the component part, it will not incur any production cost and the profit is estimated to be [ii.] when the demand of the finished product is low. In a better scenario when demand for the finished product is high, Russo will earn [iii.] if it manufactures the component part in house, or [iv.] if it purchases the part. Finally, when demand for the finished product is at medium level, Russo will earn [v.] profit if it manufactures the component part, or [vi.] if the part is purchased from a supplier. Originally the management estimate the probability of weak demand to be [vii.] and of strong demand to be [viii.]. However, the management is concerned about the accuracy of this estimation and is contemplating of conducting extra market research to determine the likelihood of different states of demand. The cost of the research is [ix.] and the research can indicate if market condition is favourable or unfavorable. The research is fairly reliable, meaning it is more likely to obtain a favourable result if the demand for the finished product is truly high. On the other hand, the report will be less likely to generate a favourable result if the demand for the finished product is truly low. The probabilities of obtaining a favourable report given a certain market condition are: P (F | low demand) = [x.] P (F | medium demand) [xi.] P (F | high demand) = [xii.] Task: Perform an analysis of the problem facing Allied Insurance and prepare a report that summarizes your findings and recommendations. Be sure to address the following issues: The payoff table of Russo Manufacturing, ignoring all the probabilities. (5 marks) Recommendations regarding which decision the management should take if they ignore the probabilities and decide to apply the following decision criteria: (5 marks) - Optimistic Approach (5 marks) - Conservative Approach (5 marks) - Minimax Regret Approach Computation of the posterior probabilities of weak demand, medium demand and strong demand given the market research is conducted. Briefly explain the meaning of these probabilities. (5 marks) A decision tree illustrating the decisions and events that Russo is facing. All the payoffs, probabilities and decision at each step need to be labelled carefully on the tree. (25 marks) A recommendation whether the market research should be undertaken. Explain clearly the reasons for your recommendation. (10 marks) A decision strategy that Russo should follow if they take the recommended action in 5. (10 marks) A sensitivity analysis to illustrate how different decisions change if the prior probability of [xiii.] change by 0.1 at a time. (20 marks)

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Demonstrate basic understanding of decision analysis

Able to identify and translate real life case study to basic decision tree

Able to compute basic calculation using Excel

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Demonstrate deep understanding of decision analysis.

Able to identify and translate complex decisions and events to a decision tree.

Ability to discern the meaning of different probabilities and their roles for the decision tree.

Ability to employ different Excel tools to achieve the answer.

[iv.] [v.] [vi.] [vii] [viii.] [ix.] [x.] [xi.] [xii.] [xiii.] (thousand Euro) (thousand Euro) (thousand Euro) (thousand Euro) (thousand Euro) (thousand Euro) (thousand Euro) 14.74 8.38 60.35 98.61 58.57 28.96 0.28 0.34 5.38 0.04 0.25 0.71 strong demand [iv.] [v.] [vi.] [vii] [viii.] [ix.] [x.] [xi.] [xii.] [xiii.] (thousand Euro) (thousand Euro) (thousand Euro) (thousand Euro) (thousand Euro) (thousand Euro) (thousand Euro) 14.74 8.38 60.35 98.61 58.57 28.96 0.28 0.34 5.38 0.04 0.25 0.71 strong demand