A Toy Manufacturer Makes Stuffed Kittens and Puppies Which Have

question 4

Essay

A toy manufacturer makes stuffed kittens and puppies which 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.
$$\begin{array} { | l | c | c | c | } \hline \text { Demand } & \text { Wind-up action } & \text { Pneumatic action } & \text { Electronic action } \\\hline \text { Light } & \$ 250,000 & \$ 90,000 & - \$ 100,000 \\\hline \text { Moderate } & 400,000 & 440,000 & 400,000 \\\hline \text { Heavy } & 650,000 & 740,000 & 780,000 \\\hline\end{array}$$
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.

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Definitions:

Indirect Method

A cash flow statement approach that adjusts net income for changes in non-cash accounts to calculate cash from operating activities.

Operating Activities

Activities directly related to the operation of the business, including cash flows from operations, investing, and financial activities.

Direct Method

A cash flow statement preparation approach that shows the specific cash inflows and outflows associated with the operating activities.

Cash Received

The actual cash gathered by a company from its various activities, including sales, financing, or investing, during a particular period.