Wertz Game and Toy (WGT) Company has developed an electronic toy for preschooler
ID: 347583 • Letter: W
Question
Wertz Game and Toy (WGT) Company has developed an electronic toy for preschoolers that promises to be fun to play while providing a sophisticated leaning experience. WGT believes that its design is innovative enough that it can capture sales in this year’s toy market. As WGT’s marketing manager, you have some options about how to bring this new toy to market:
A conservative approach would be to introduce a single version of the toy and see how it fares. This option would keep the costs down in case the market response is unenthusiastic.
A compromise approach is to introduce two versions of the toy, with no accessories.
A bold approach would be to bring out the full line of products, which includes the two versions of the toy along with multiple accessories. This option would be quite profitable if the market response is positive but unprofitable if the response is indifferent.
Finally, you could also choose not to introduce any toys at all.
The market response can be either Good, Fair, or Poor, with a probability of 20%, 50% and 30%, respectively. For each option, the profit under each market response is as follows:
Option
Profit under market response (millions)
Good
Fair
Poor
Single version
$100
$60
-$10
Two versions
$200
$50
-$40
Full line
$300
$40
-$100
Do nothing
$0
$0
$0
Draw the decision tree for this problem, labeling all the nodes and branches. What is the strategy that maximizes their expected profit? What is the optimal profit?
Option
Profit under market response (millions)
Good
Fair
Poor
Single version
$100
$60
-$10
Two versions
$200
$50
-$40
Full line
$300
$40
-$100
Do nothing
$0
$0
$0
Explanation / Answer
as we can see the decision tree above.
1st decision is whether to go for doing nothing or manufacturing toys. Doing nothing has zero payout under all circumstances.
manufacturing toys has another 3 decisions of whether to go for single, ot two or full line versions. (as we can see in fig above at node A).
all these decisions has three possibilities of Good, fair or poor response having probability of 20%, 50% and 305 respectively. as shown in fig above from node B,C and D.
The payouts of each have been shown in fig above.
expected profit of single version = 20%*100 + 50%*60 + 30%* (-10) = 20 + 30 - 3 = 47
expected profit of two versions = 20%*200 + 50%*50 + 30%* (-40) = 40 + 25 - 12 = 53
expected profit of full line = 20%*300 + 50%*40 + 30%* (-100) = 60 + 20 - 30 = 50
maximum expected profit among all these is for two versions, of 53 million.
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