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MGMT20005 Business Decision Analysis

Tutorial 1: Decision making without probabilities

Case Problem 1

To produce a new line of recreational products, Southland Corporation needs to construct either a small plant or large plant. The best selection of plant size depends on how the market reacts to the new product line.

To conduct an analysis, marketing management has decided to view the possible long-run demand as either low, medium, or high. The following payoff table shows the projected profit in millions of dollars.

Using the steps in decision analysis, find the optimal plant size by applying the optimistic approach, the conservative approach, and the opportunity loss approach, respectively.

Case Problem 2

Hudson Corporation is considering 3 options for managing its data processing operation: continuing with its own staff, hiring an outside vendor to do the managing (referred to as outsourcing), or using a combination of its own staff and an outside vendor.

The annual cost of each option (in thousands of dollars) depends on future demand as follows. Apply the 4-step of decision analysis with the optimistic, the conservative, and the opportunity loss approaches to minimise the total annual cost.