Business Development: Decision Support Tools Assignment

This assignment solution comprehensively addresses decision support tools, encompassing various decision-making methodologies and practical applications. The student explores five distinct steps in decision-making, alternative strategies, and the construction of payoff matrices to analyze profits and losses under different scenarios. The solution delves into the application of optimist, pessimist, Laplace, and regret criteria, alongside expected monetary value calculations, to determine optimal decisions. Furthermore, it investigates the use of simulation in MS Excel to optimize overbooking strategies for a hotel, providing a detailed analysis of costs associated with different overbooking levels. Finally, the assignment applies regression analysis to predict car prices based on mileage and age, evaluating the models' significance and explanatory power to identify the best-fit model for price prediction.

Running Head: DECISION SUPPORT TOOLS
Decision Support Tools
Name of the Student
Name of the University
Author Note

1DECISION SUPPORT TOOLS
Table of Contents
Answer 1..........................................................................................................................................3
Part A...........................................................................................................................................3
Part B...........................................................................................................................................3
Part C...........................................................................................................................................4
Answer 2..........................................................................................................................................8
Part A...........................................................................................................................................8
Part B...........................................................................................................................................8
Part C...........................................................................................................................................8
Part D...........................................................................................................................................8
Part E...........................................................................................................................................9
Answer 3........................................................................................................................................10
Part A.........................................................................................................................................10
Part B.........................................................................................................................................10
Part C.........................................................................................................................................10
Part D.........................................................................................................................................11
Answer 4........................................................................................................................................12
Part A.........................................................................................................................................12
Part B.........................................................................................................................................14
Part C.........................................................................................................................................14

2DECISION SUPPORT TOOLS
Answer 5........................................................................................................................................15
Part A.........................................................................................................................................15
Part B.........................................................................................................................................15
Part C.........................................................................................................................................16

3DECISION SUPPORT TOOLS
Answer 1
Part A
There are five different steps that has to be followed in order to make a decision in any
real life situations where there exists a multiple number of options and decision cannot be made
randomly on which option will be apt to the situation. To come out of that situation, the
following steps has to be followed:
 The problem has to be identified at first. The type of decision which is of interest to the
person has to be identified at the beginning.
 Some information has to be gathered related to the event on which the decision has to be
made.
 While conducting the process of collection of information, several alternative approaches
of solving the problem can also be identified. With the help of imagination and extra
information, relevant alternative procedures can be constructed.
 The collected information has to be assessed with the help of the alternatives developed
while the collection process and the potential of each of the alternatives has to be
evaluated.
 The alternative with the highest potential or the alternative that will be the best for the
person or the business has to be selected.
Part B
The different processes or strategies that are available in the market are known as the
alternatives. With the help of the analysis, one of the alternatives or the strategies will be termed
as the best and that alternative will be chosen.

4DECISION SUPPORT TOOLS
The different situations that exist in the market are the state of nature. For example, let us
consider the following example of a payoff matrix where the values in each cell will give the
profit earned by the product.
Alternatives
State of Nature
Good Economy Poor Economy
Strategy 1 $1,200 ($100)
Strategy 2 $1,600 $100
Part C
1. The constructed payoff matrix is given in table 1.1.
Table 1.1: Payoff Matrix of Profits / Losses
Purchase
(kg)
Sales (kg)
10 15 20 25 30
10 $150 $150 $150 $150 $150
15 $25 $225 $225 $225 $225
20 ($100) $100 $300 $300 $300
25 ($225) ($25) $175 $375 $375
30 ($350) ($150) $50 $250 $450
2. The number of kg of fish that will be bought by an optimist will be 30 kg as there
is a chance of having a maximum profit if the whole 30 kg of fish is sold.
Table 1.2: Optimist
Purchase (kg) Sales (kg) Best Profit / Loss
10 15 20 25 30
10 $150 $150 $150 $150 $150 $150
15 $25 $225 $225 $225 $225 $225
20 ($100) $100 $300 $300 $300 $300
25 ($225) ($25) $175 $375 $375 $375
30 ($350) ($150) $50 $250 $450 $450

5DECISION SUPPORT TOOLS
3. The number of kg of fish that will be bought by a pessimist will be 10 kg as there
is a chance of having a maximum profit suffering the minimum amount of loss
Table 1.3: Pessimist
Purchase
(kg)
Sales (kg) Least Profit /
Loss10 15 20 25 30
10 $150 $150 $150 $150 $150 $150
15 $25 $225 $225 $225 $225 $25
20 $(100) $100 $300 $300 $300 $(100)
25 $(225) $(25) $175 $375 $375 $(225)
30 $(350) $(150) $50 $250 $450 $(350)
4. If the fish vendor used Laplace criterion, then the number of kg bought by the fish
vendor will be 15 kg.
Table 1.4: Laplace Criterion
Purchase (kg) Sales (kg) Expected Profit
10 15 20 25 30
10 $30 $30 $30 $30 $30 $150
15 $5 $45 $45 $45 $45 $185
20 -$20 $20 $60 $60 $60 $180
25 -$45 -$5 $35 $75 $75 $135
30 -$70 -$30 $10 $50 $90 $50
5. If the fish vendor used the criterion of regret, then the number of kg bought by the
fish vendor will be 30 kg.
Table 1.5: Criterion of Regret
Purchase (kg) Sales (kg) Maximum
10 15 20 25 30
10 $0 $75 $150 $225 $300 $300
15 $125 $0 $75 $150 $225 $225
20 $250 $125 $0 $75 $150 $250
25 $375 $250 $125 $0 $75 $375
30 $500 $375 $250 $125 $0 $500

6DECISION SUPPORT TOOLS
6. If the fish vendor based his decision on maximising expected monetary value,
then the number of kg bought by the fish vendor will be 20 kg.
Table 1.6: Expected Monetary Value
Purchase (kg) Sales (kg) Expected Profit
10 15 20 25 30
10 $15 $30 $60 $30 $15 $150
15 $3 $45 $90 $45 $23 $205
20 -$10 $20 $120 $60 $30 $220
25 -$23 -$5 $70 $75 $38 $155
30 -$35 -$30 $20 $50 $45 $50
7. Cost price of the fish fillets = $15 per kg
Selling price of the fish fillets = $30 per kg
Rate of disposal of unsold fillets = $10 per kg
MP = Marginal profit earned by each unit = $(30 – 15) = $15
ML = Marginal loss suffered from not selling an additional unit = $(15 – 10) = $5
Hence p¿= ML
MP + ML = 5
15+5 = 5
20 =0.25
Let z indicate the cumulative probability of the number of fillets to be sold
The value of z for p¿=0.25 is 0.67
The weekly demand for fillets is normally distributed.
Mean = 20 kg
Standard Deviation = 5 kg
Thus, the optimum order size = 20 + z * 5
= 20 + (0.67 * 5)
= 23.35 fillets

7DECISION SUPPORT TOOLS
~ 23 fillets.

8DECISION SUPPORT TOOLS
Answer 2
A firm is considering marketing of a product. The product can be a success or a failure.
Probability of the product to be a success is P (S) = 0.3 and that of failure is P (F) = 0.7.
If the product is a success, profit = $1,000,000
If the product is a failure, loss = $600,000
Let Fa denote a favorable market and U denote an unfavorable market.
Part A
Thus, expected profit or loss from marketing of the product = $(1,000,000 * 0.3) + (600,000 *
0.7) = - $120,000
There is a loss from the marketing of the product. Thus, the product should not be marketed.
Part B
The expected value of perfect information about the success of the product $1,000,000 and the
expected value of perfect information about the failure of the product -$600,000.
Part C
The revised prior probabilities will be:
P (S) = (0.3 * 0.7) + (0.3 * 0.3) = 0.3
P (F) = (0.7 * 0.2) + (0.7 * 0.8) = 0.7
Part D
The posterior probability of success given a favourable survey result is given by

9DECISION SUPPORT TOOLS
P (Fa | S) * P (S) = 0.7 * 0.3 = 0.21
Part E
The maximum amount that the firm should be paying for the market survey is
(0.3 * 1,000,000) – (0.7 * 600,000) = $420,000

10DECISION SUPPORT TOOLS
Answer 3
Part A
Simulation has been conducted in MS Excel.
Part B
The results of the simulation are given in figure 3.1 and figure 3.2 shows the formulas.
Figure 3.1: Simulation Outputs
Figure 3.2: Simulation formulae
Part C

11DECISION SUPPORT TOOLS
If the number of rooms overbooked each day is 0, the average daily cost is around $92
If the number of rooms overbooked each day is 1, the average daily cost is around $80
If the number of rooms overbooked each day is 2, the average daily cost is around $122.50
If the number of rooms overbooked each day is 3, the average daily cost is around $200
If the number of rooms overbooked each day is 4, the average daily cost is around $263
If the number of rooms overbooked each day is 5, the average daily cost is around $312
Thus, the number of overbookings that gives the minimum average daily cost over the 30
days is 1 room.
Part D
Dear Manager,
As a result of the analysis conducted on the information provided for the number of
rooms to be overbooked, it has been observed that if no rooms are overbooked in a day, the
average daily cost is around $92. If only one room is overbooked, then the average daily cost
incurred is $80. Now, as the number of overbooked rooms increase, the average daily cost
incurred by Heartbreak Hotel is increasing gradually. Thus, it would be beneficial for the
business to keep one room overbooked. In this case, if the rooms are not filled, the cost incurred
by the hotel will be minimum. The cost incurred for no overbooked room is also higher than the
cost incurred for one overbooked room. Thus, it would be a much better option to have only one
room overbooked.
Thanking You