A luxury car import company, Collector’s Choice Inc. (CCI), has an old warehouse

Question

A luxury car import company, Collector’s Choice Inc. (CCI), has an old warehouse where it temporarily stores expensive sports cars and automotive parts that arrive from Europe. This summer, CCI has noticed that the termite infestation in the warehouse has escalated to a point where tenting cannot be postponed anymore. CCI’s pest control company’s contract specifies a to-do list of pre-tenting tasks, which include: The requirement of opening all windows is particularly worrisome to CCI because it means turning off the alarm system, leaving the warehouse vulnerable to burglary for 48 hours—the required amount of time for the poisonous gas to do its job. Therefore, Alex Ferrari, the warehouse manager, is thinking about hiring a security company to monitor the facility during that period. CCI’s property insurance deductible is $25,000, and Alex is assuming that if thieves are willing to enter a building full of poisonous gas to steal something, they would certainly take more than $25,000 worth of parts—or even an entire car! Alex gets in touch with ProGuard, a trustworthy local security company that charges $150 per hour to have a security guard stationed outside their warehouse. The city of Miami police records indicate that about 30% of businesses that left their facilities unattended during tenting reported stolen property in the past 3 years. Although Alex thinks ProGuard’s prices are reasonable, and having a guard outside the warehouse would certainly help, he is still not sure whether it is worth spending the extra money. After all, ProGuard’s contract does not guarantee the protection it provides is infallible. In fact, an analysis of the company’s records indicates that 3% of their clients were burglarized over the past 3 years. (Despite this figure, ProGuard is still the best security company in the area.

1. Create a decision tree analysis to help decide whether CCI should hire ProGuard’s services.

2. Come up with a simple rule of thumb that can be applied to decisions of this nature, given any deductible amount d, extra surveillance cost c, and burglary probabilities p1 (without surveillance) and p2 (with surveillance).

3.Does your decision based on the tree guarantee success? Why or why not?

Explanation / Answer

Here in this question the decision which the company has to take is whether they should hire the services of Pro Guard Services for manning their warehouse during the course of termide treatment. So there are 2 possibilities and these possibilities are : 1. They should hire the services the services of Pro Guard . Let us analyse what will be the cost impact here . Cost of Guard USD/Hour 150 A Number of hours guard will be required Hours 48 B Cost to be paid for services of guard USD 7200 C=A*B Probability that burglary will take place 0.03 D Probability that burglary will not take place with this decision 0.97 E=1-D Expected Monetary value here USD 6984 F=C*E Cost of insurance property deductible USD 25000 G Expected Monetary Value in case the burglary takes place USD 966 H=(C+G)*D Total Expected Monetary value of hiring a Security Guard USD 7950 I=F+H 2. They should not hire the services of Pro Guard . Let us analyse the cost impact here. Here the probablity that burglary will take place is 30% . Expected Monetary Value = 25000*0.3= 7500 USD as insurance property deductible will be payable only in case of burgalry. So if we compare 1 and 2 we have the following decision tree. Guard is hired Guard is not hired USD USD Expected Monetary Value 7950 7500 So based upon this decision tree decision is not hire a guard as cost is loss if guard is not hired. 2.Here the rule of thumb where p1 = burglary probability without serveylance p2= burglary probability with serveylance d= deductible amount c=cost of serveylance Here p1=d and p2 = d+c So p1

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