Decesion Tree

In: Business and Management

Submitted By leijx14
Words 555
Pages 3
Let’s suppose the prediction for the sales demand that Ann Queen derived from other comparable events is accurate. It is relatively easy to figure out the possible DVDs that can be sold with expected probability if we draw a decision tree.

From the above tree graph, we can tell that the total possibility to sell 4000 DVDs in Saturday and Sunday is 25%. If Ann Queen’s expectation about the possibility of DVD sold is accurate and nothing new information will be available after Friday’s and Saturday’s performance, we can calculate expected numbers of DVD that should be produced based on numbers of DVDs that expected to be sold. Because we do not want to over produce DVDs than we can sell. We want to produce exactly the same number of DVDs as what we can sell. Under this philosophy, since we can calculate the numbers of DVDs that expected to be sold is 3500. The number of DVDs that we need to produce is also 3500, which we believe can maximize our expected monetary value.

Suppose Ann Queen decided to produce 3500 DVDs. We can calculate the EMV to be:

If for some reason Ann Queen can get exclusive information about how many DVDs she can sell exactly on Saturday and Sunday, I will suggest her to produce exact number of DVDs that can be sold without any over production. In this case, we have four scenarios to calculate profits:

First scenario: Saturday 1000 and Sunday 1000
Total profit: 2000x8-15000=$1000
Under this scenario, the information is worth (3500-2000)x3=$4500
Explain: Since we do not have to over produce by 1500 DVDs, we can save production cost for $3/each.

Second scenario: Saturday 1000 and Sunday 3000
Total profit: 4000x8-15000=$17000
Under this scenario, the information is worth 17000-4750=$12250
Explain: profit difference between with and without information…...

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