Product Break-Even Analysis and Profit Targets
Added on 2020-03-23
15 Pages2022 Words181 Views
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DECISION SUPPORTTOOLSSTUDENT ID:[Pick the date]
Question 1(a) In order to highlight the key differences in the decision making under the given situationsfollowing aspects are noteworthy.1)Complexity involved – Under certainty decision making essentially constitutes ofroutine decision making for which there are processes established. With regards tounder risk decision making, there are specialised tools which can be applied so as toevaluate the various outcomes using probabilistic scenarios and thus the complexitylevel is moderate. However, under complete uncertainty, decision making isexceptionally complex and pain staking as the challenges are unique (Medhi, 2001).2)Amount of information available – As the name suggests, under certainty, the highestamount of reliable information is available. However, under risk the informationavailable is not 100% certain while in case of complete uncertainty, no information isavailable (Eriksson & Kovalainen, 2015).3)Tools used – Established processes are enough for decision making under certainty.However, under risk since the outcomes are not certain, hence probabilistic analysis anmodelling is used using approaches such as decision tree. But, in case of completeuncertainty decision making, creativity becomes imperative since other tools do notwork in absence of reliable information (Hair et. al., 2015).b) 1) The stock market would be selected by the optimist as apparent from the table below.2) The bonds would be selected by the pessimist as apparent from the table below.3) The real estate would be selected as per regret criterion as apparent from the matrix shownbelow.
4) The Expected Monetary Value (EMV) has been estimated considering the likelihood of agood economy as 0.3 while that for the bad economy as 0.7. The bonds tend to lead to highestEMV and thereby would be selected in accordance with this criterion.5) The expected value for perfect information may be computed using the approach highlighted below.EVPI = P(Good economy)*Best outcome + P(Poor economy)*Best outcome - Highest EMVHence, substituting the given values in the above formula, we obtain thatEVPI = (0.3*80000) + (0.7*20000) – 23000Hence, the EVPI has come out to be $ 15,000.Question 2(a)Considering both likely market conditions, the EMV needs to be computed for both theoptions that Jerry has and then the option which yields the higher value should be selectedby Jerry.
Clearly, with an EMV of $ 20,000, opening a large shop is the rational choice that Jerry should make.(b) The respective accuracy in relation to the market research services offered by the friendsis summarised as followsIn light of the above probability, the posterior probability needs to be found out for thevarious outcomes of the market research outcomes. The revision of probability in the event ofa favourable study is illustrated through the use of the following table.The revision of probability in the event of a unfavourable study is illustrated through the use of the following table.
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