Exam 13: Decision Making

A company is screening ideas for new services.Five alternative service ideas are being considered.Management identified four criteria and weighted them as follows: A = 30,B = 10,C = 20,and D = 40.They have also come up with scored values for the five alternatives and the four criteria as shown following.Management has decided that if an alternative has less than a total scored value of 600,it should automatically be rejected.Use the preference matrix technique to determine which idea should be accepted. Alternatives Criterion 1 2 3 4 5 A 8 5 3 7 5 B 7 3 6 6 4 C 2 4 5 3 3 D 4 5 2 3 8

In decision theory,the different courses of action that a decision maker can choose are called ________.

Demron is in serious negotiations to purchase a welding machine that will enable them to perform their own welding.They currently have their welding outsourced at a cost of $1.50 per weld and a fixed cost of $45,000.Their marketing team feel that they can sustain an annual sales volume sufficient to require 35,000 welds.If a fancy new welding rig costs $13,500 what is the maximum variable cost per weld that Demron should be willing to pay in order to bring this process in-house?

A crafty operations manager has developed this decision tree to evaluate the alternatives for a planned expansion.If the probability of high demand is 0.6,what is the best course of action?

Minor Video has opened a new store renting videocassettes.Fixed costs are $60,000,and the variable cost per unit is $1.50.The average sale is $5 per customer.Use the following axes to determine the break-even quantity graphically.Next,refine your solution by solving it algebraically.(Show your work for credit.)

Making a decision under risk using the expected value criterion is the equivalent of using the Laplace decision rule under uncertainty.

Choosing the alternative that is the best weighted payoff using decision making under uncertainty would be

Choosing the alternative that minimizes lost-opportunity costs using decision making under uncertainty would be

Luvmatics plans to produce a new product. Three different models are planned: the Regular, Large, and Jumbo. The fixed costs depend on which of two locations are used; in San Francisco the fixed costs would be $2.5 million per year, but in Tuttle the fixed costs would be $1.2 million. Sale prices and variable costs for the three models are shown in the table. Table A 1 Model Regular Large Jumbo Variable Cost \ 5 /unit \ 7 /unit \ 10/ unit Sale Price \ 25/ unit \ 41 /unit \ 68/ unit -Use the information in Table A.1.How much does Luvmatics make for each Jumbo unit that is produced in Tuttle and sold at the listed price?

Erasmus Valero must decide among four alternatives for a oil exploration project.He estimates that the probability of high demand is 0.3 and the probability of low demand is 0.7.What is the best choice with the payoffs shown in the tree?

A(n)________ is the difference between a given payoff and the best payoff for a given state of nature.

The Forsite Company is screening three new product ideas.Resource constraints allow only one idea to be commercialized at the present time.The following estimates have been made for the five performance criteria that management feels are most important.If the five criteria are equally weighted,what are the best and worst alternatives? Estimated Rating Product Performance Criterion A B C 1. Demand uncertainty and project risk 0.3 0.9 0.2 2. Similarity to present products 0.7 0.8 0.6 3. Expected return on investment 1.0 0.4 0.8 4. Compatibility with current manufacturing process 0.4 0.7 0.6 5. Competitive advantage 0.4 0.6 0.5

If probabilities for events can be estimated,then the situation faced by the decision maker is called ________.

The decision rule in decision making under uncertainty most appropriate for the pessimistic manager would be

The square nodes in a decision tree represent the alternatives in a sequential decision situation.

The decision rule most appropriate for the realistic manager using decision making under uncertainty would be

Which one of the following statements about break-even analysis,as we applied it to evaluating products or services,is best?

Sensitivity analysis is a technique for systematically changing parameters in a model to determine the effects of such changes.

In order for a decision tree to be a valuable decision tool,the decision-maker should be in a condition of

A new minor league baseball team is coming to town and the owners have decided to build a new stadium,either small or large.The success of the team with regard to ticket sales will be either high or low with probabilities of 0.75 and 0.25,respectively.If demand for tickets is high,the large stadium would provide a payoff of approximately $20 million.If ticket sales are low,the loss on the large stadium would be $5 million.If a small stadium is constructed,and ticket sales are low,the payoff is $500,000 after deducting the cost of construction.If ticket sales are high,the team can choose to build an upper deck,or to maintain the existing facility.Expanding the stadium in this scenario has a payoff of $10 million,whereas maintaining the same number of seats has a payoff of only $3 million. a.Draw a decision tree for this problem. b.What should management do to achieve the highest expected payoff?