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"Q1 Peter Equipment Toys must decide the course of action to follow in promoting a new whistling yo-yo.
"Q1 Peter Equipment Toys must decide the course of action to follow in promoting a new whistling yo-yo. Initially, management must decide whether to market the yo-yo or to conduct a test marketing program. After test marketing the yo-yo, management must decide whether to abandon it or nationally distribute. A national success will increase profits by $500,000, and a failure will reduce profits by $100,000. Abandoning the product will not affect profits. The test marketing will cost Peter Equipment Toys a further $10,000. If no test marketing is conducted, the probability for a national success is judged to be 0.45. The assumed probability for a favorable test marketing result is 0.50. The conditional probability for national success given favorable test marketing is 0.80; for national success given unfavorable test results, it is 0.10. Construct the decision tree diagram and perform backward induction analysis to determine the optimal course of action if a net change in profits is the expected payoff.Q2 Silverstone Tire co., a tire manufacturer, wants to select one of three feasible prototype designs for a new longer-wearing radial tire. The costs of making the tires follow:Tire Fixed Cost ($) Variable Cost per Unit ($)A 60,000 30B 90,000 20C 120,000 15There are three levels of unit sales: 4000 units, 7,000 units and 10,000 units; the respective probabilities are 0.30, 0.50 and 0.2. The selling price will be $75 per tire.I. Construct the payoff table.II. Determine the expected payoff for each act. According to the Bayes decision rule, which is the best act?III. Calculate EVPI.IV. Complete the opportunity loss table and compute the expected opportunity losses. Then, determine the optimal expected opportunity loss."
