A toy manufacturer makes stuffed kittens and puppies that have relatively lifelike motions. There are three different mechanisms which can be installed in these "pets." These toys will sell for the same price regardless of the mechanism installed, but each mechanism has its own variable cost and setup cost. Profit, therefore, is dependent upon the choice of mechanism and upon the level of demand. The manufacturer has in hand a forecast of demand that suggests a 0.2 probability of light demand, a 0.45 probability of moderate demand, and a probability of 0.35 of heavy demand. Payoffs for each mechanism-demand combination appear in the table below.
Construct the appropriate decision tree to analyze this problem. Use standard symbols for the tree. Analyze the tree to select the optimal decision for the manufacturer.
Definitions:
Imagery
The use of visually descriptive or figurative language in writing to create vivid pictures in the reader's mind or the use of visual representations in the mind through imagination.
Logical Sequence
The orderly and coherent structure and progression of ideas, events, or steps.
Management Decisions
Decisions made by individuals in managerial positions that affect the direction, operation, and success of an organization.
Peter Drucker
Peter Drucker was an Austrian-born American management consultant, educator, and author, whose ideas on management and business leadership profoundly influenced modern management practices.
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