This involves the use of decision trees.
A decision tree is a graphical representation of a decision process indicating decision alternatives, states of nature, associated probabilities and conditional payoffs for each combination of a decision alternative and a state of nature.
Illustration 2:
Assume that a Software Company has just won a contract worth $80,000 if it delivers a successful product on time, but only $40,000 if it is late. It faces this problem now of whether to produce the software of to subcontract at a cost of $50,000. The subcontractor is so reliable that it is certain it will produce the software on time (prob.1)
If the software is produced in-house the cost will be $20,000 but based on past experience there is only a 90% chance that a successful product is produced. In the event of the software not being successful, there would be insufficient time to re-write the whole package internally. However, there would be the option of late rejection at an extra cost of $10,000 or late sub- contracting on the same terms as before. With the late subcontracting the sub-contractor has a
50% chance of producing it on time. Assume that the subcontractor will be paid $50,000 regardless of whether he meets the deadline or not.
Required:
Using a decision tree advice the manager.
Titany answered the question on
October 12, 2021 at 05:12