EastBend Corporation is interested in producing and selling an innovative new popcorn popper. The decision they face is the typical "Make or Buy" decision that is often faced by manufacturers. On one hand, EastBend could produce the popcorn popper itself and subcontract different subassemblies, such as the heating element or the housing.
Cost estimates in this case are as follows:
Alternative: Make Popcorn Popper
Cost per Unit $ Chance %
$35.00..........................25%
$42.50..........................25%
$45.00..........................37%
$49.00..........................13%
On the other hand, the company could have the entire machine made by a subcontractor. The subcontractor, however, faces similar uncertainties regarding the costs and has provided EastBend Corporation with the following schedule of costs and chances.
Alternative: Buy Popcorn Popper
Cost per Unit $ Chance %
$37.00...........................10%
$43.00...........................40%
$46.00...........................30%
$50.00...........................20%
Complete the following tasks:
(1) Construct a decision tree to capture the above scenario.
(2) Write down the number of decision strategies that you can find from your tree.
(3) Write down the expected cost for each decision strategy.
(4) Generate the risk profile for the decision tree. The risk profile only includes the Cumulative Chart.
(5) Explain which optimal decision strategy should be chosen based upon the results from (3) and (4).