KING KNOWLEDGE WORK Question 3 AB has developed two new products Product A and Product B, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 30 percent chance that competitors will take no action, a 60 percent chance that they will launch a similar product and a 10 percent chance that they will launch a better product The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows: Competitor reaction Product A Product B No action 500,000 600.000 Launch a similar product 300,000 400,000 Launch a better product (E100,000) (200,000) Another option for AB would be to launch neither product. If it chooses this course of action there is a 50 percent chance that competitors will take no action and there will be no effect on the company's profit. There is a 50 percent chance that competitors will launch a new product and company profits will reduce by 150,000 Required: a) Demonstrate, using a decision tree and based on expected value, the best course of action for the com- (12 Marks) pany b) Discuss Maximin, Maximax and regret criteria with reference to numerical examples. (6 Marks) 1 C) Decision tree is useful in decision-making and budgeting also plays an important role in decision-making', Discuss the role of budgeting in decision-making, and also evaluate zero-based and incremental budgeting (7 Marks) Total: 25 Marks END OF LIFSTION 3 KING KNOWLEDGE WORK Question 3 AB has developed two new products Product A and Product B, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 30 percent chance that competitors will take no action, a 60 percent chance that they will launch a similar product and a 10 percent chance that they will launch a better product The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows: Competitor reaction Product A Product B No action 500,000 600.000 Launch a similar product 300,000 400,000 Launch a better product (E100,000) (200,000) Another option for AB would be to launch neither product. If it chooses this course of action there is a 50 percent chance that competitors will take no action and there will be no effect on the company's profit. There is a 50 percent chance that competitors will launch a new product and company profits will reduce by 150,000 Required: a) Demonstrate, using a decision tree and based on expected value, the best course of action for the com- (12 Marks) pany b) Discuss Maximin, Maximax and regret criteria with reference to numerical examples. (6 Marks) 1 C) Decision tree is useful in decision-making and budgeting also plays an important role in decision-making', Discuss the role of budgeting in decision-making, and also evaluate zero-based and incremental budgeting (7 Marks) Total: 25 Marks END OF LIFSTION 3