Case Study 1: Project Management Decision Trees

A local toy manufacturer has three different mechanisms that can be installed in a doll that it sells. The different mechanisms have three different setup costs (overheads) and variable costs and, therefore, the profit from the dolls is dependent on the volume of sales. The anticipated payoffs are as follows:

	Light Demand	Moderate Demand	Heavy Demand
Probability	0.25	0.45	0.3
Wind-up action	$325,000	$190,000	$170,000
Pneumatic action	$300,000	$420,000	$400,000
Electrical action	-$400,000	$240,000	$800,000

1. What is the ultimate objective in the use of decision trees to product design? How is this objective accomplished? (5 marks)

2. Draw the decision tree (8 marks)

3. What is the EMV of each decision alternative? (8 marks)

4. Which action should be selected? (4 marks)