A General Manger of Harley-Davidson has to decide on the size of a new facility.

Question

A General Manger of Harley-Davidson has to decide on the size of a new facility. The GM has narrowed the choices to two: large facility or small facility. The company has collected information on the payoffs. It now has to decide which option is the best using probability analysis, the decision tree model, and expected monetary value.

Options:

Determination of chance probability and respective payoffs:

Determination of Expected Value of each alternative
Build Small: $16+$33=$49
Build Large: $20+$42=$62

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Facility Demand Options Probability Actions Expected Payoffs Large Low Demand 0.4 Do Nothing ($10) Low Demand 0.4 Reduce Prices $50 High Demand 0.6 $70 Small Low Demand 0.4 $40 High Demand 0.6 Do Nothing $40 High Demand 0.6 Overtime $50 High Demand 0.6 Expand $55

Explanation / Answer

So the decision tree and probaility calculations are correct.

The conclusion is as below for the most optimal decision.

It is clear the best decision is to build large, if the demand is high it is great, if the demand is low then reduce prices the expected return fo this is $62 as compared to the best possible expected return of small is to expand during high demand and the value is at $49.

Hence the best option is to go for build large.

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