Electrolux have contacted the Nene Electronics Company which manufactures subassemblies for electronics hardware. The company is based in Cranford, Northants, and has a world-wide reputation for the excellence of its products.

In their letter to Nene Electronics, Electrolux have asked if they would be interested in the manufacture of a sub-assembly for incorporation in the electronics hardware sold to the Azteca Car Company. Three other electronics companies were also being approached to submit a bid for the job, and Electrolux suggested that a prototype should be submitted with the bid. Drawings of the subassembly required were included with the letter and it was pointed out that an initial order for 10,000 of these sub-assemblies would be awarded to the company with the best proposal, with further order 10,000 unites per annum if the initial batch proved acceptable.

Bob Hartley, Nene Electronic’s MD, spent a long time thinking about this letter. His first concern was that he could not be sure about the costs incurred in the development of a prototype. From the drawings he estimated that there would be a 20% likelihood that the prototype cost would be $1,217, a 50% likelihood it would be $1,825.50 and a 30% likelihood that it would be $2,434.

Mr. Hartley felt that after the prototype was completed, he could decide on the magnitude of the bid. He could either bid high or low. Preparation of the bid would cost $365.10. If he bid high, he realized that the chances of winning the contract would be small, but if he were awarded the contract the company would be assured a good profit. If, on the other hand, he bid low, the likelihood of receiving the manufacturing contract would be substantially greater, although expected profits would be low.

At this stage, Bob felt that if the prototype cost is $1,825.50 his high bid would have to be $60,850 and his low bid would be $53,548. If the prototype costs $1,217 his high bid would be $54,765 and the low bid would be $47,463. Finally, a prototype cost of $2,434 would lead to a high bid of $73,020 and a low bid of $58,416.

Whether the company won the contract would depend only upon the level of the bid. If the bid was high it would have a 30% chance of winning, whereas, if the bid was low it would have a 70% chance of winning.

Manufacturing costs would depend only on the cost of the prototype. If the prototype cost was $1,217 manufacturing costs for all 10,000 items would be $14,604. A prototype cost of $1,825.50 would result in the manufacturing cost of $21,906 and a prototype cost of $2,434 would result in a manufacturing cost of $42,595.

There was one other alternative that Mr. Hartley had to consider. It was possible for Nene Electronics not to build the prototype and still submit a bid. Again, a high or low bid could be submitted. Without experience gained by building a prototype he felt the lowest the low bid could be was $58,416 while the high bid would be $73,020. Under the circumstance, the chance of winning, given that high bid was submitted, would be 10% while the possibility of winning, given a low bid, would be 30%. In setting these probabilities he realized that it was reasonable for them to be this low since Electrolux would not have a prototype by which to judge Nene’s bid. If the contract was won there would be a 20%, 50%, and 30% chance that manufacturing costs would be $14,604, $21,906, and $42,595 respectively.

How would be the diagram tree to make the best decision?

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Yes a decision tree is helpful in making the correct major decision bid with or witho... View the full answer