A production firm has opted to capitalize on its existing success by constructing an extension to...

 

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A production firm has opted to capitalize on its existing success by constructing an extension to its production plant to come on stream by 2018. The firm has evaluated the decision and estimated that its profitability will improve by £650 000 if the extension is completed on time. If, however, the extension is delayed then, because of contractual production commitments, the firm stands to lose some £350 000. The firm has invited tenders for the construction work and two contractors have been shortlisted. Contractor A has indicated that they would undertake all the work themselves and that they have a track record such that 75 per cent of previous jobs have been completed on time. Contractor B, on the other hand, has a track record of 95 per cent of jobs being completed on time where Contractor B has done all the work. However, Contractor B occasionally subcontracts work to other companies – some 30 per cent of their jobs have a subcontract element in them. Their completion rate on jobs involving subcontractors is less impressive, with 40 per cent of such jobs not being completed on time. Required: a) Draw a decision tree for this situation. b) Using this information, recommend which of the two shortlisted contractors should be given the job. c) In practical terms how useful do you think the technique would be for the firm? What other information might you take into account? A production firm has opted to capitalize on its existing success by constructing an extension to its production plant to come on stream by 2018. The firm has evaluated the decision and estimated that its profitability will improve by £650 000 if the extension is completed on time. If, however, the extension is delayed then, because of contractual production commitments, the firm stands to lose some £350 000. The firm has invited tenders for the construction work and two contractors have been shortlisted. Contractor A has indicated that they would undertake all the work themselves and that they have a track record such that 75 per cent of previous jobs have been completed on time. Contractor B, on the other hand, has a track record of 95 per cent of jobs being completed on time where Contractor B has done all the work. However, Contractor B occasionally subcontracts work to other companies – some 30 per cent of their jobs have a subcontract element in them. Their completion rate on jobs involving subcontractors is less impressive, with 40 per cent of such jobs not being completed on time. Required: a) Draw a decision tree for this situation. b) Using this information, recommend which of the two shortlisted contractors should be given the job. c) In practical terms how useful do you think the technique would be for the firm? What other information might you take into account?

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