General Ford Motors Corporation (GFMC) is planning the introduction of a brand new SUV

the Vector. There are two options for production. ne is to build the Vector at the co!pan"#s
e$isting plant in %ndiana& sharing production ti!e with its line of !ini'ans that are currentl"
being produced there. %f sales of the Vector are (ust !oderate& this will wor) out well as there is
sufficient capacit" to produce both t"pes of 'ehicles at the sa!e plant. *owe'er& if sales of the
Vector are strong& this option would re+uire the operation of a third shift& which would lead to
significantl" higher costs.
, second option is to open a new plant in Georgia. This plant would ha'e sufficient
capacit" to !eet e'en the largest pro(ections for sales of the Vector. *owe'er& if sales are onl"
!oderate& the plant would be underutili-ed and therefore less efficient.
This is a new design& so sales are hard to predict. *owe'er& GFMC predicts that there
would be about a ./0 chance of strong sales (annual sales of 1//&///)& and a 2/0 chance of
!oderate sales (annual sales of 3/&///). The a'erage re'enue per Vector sold is 45/&///.
6roduction costs per 'ehicle for the two production options depend upon sales& as indicated in
the table below.
Moderate
Sales
Strong
Sales
Shared 6lant in %ndiana 1. 72
8edicated 6lant in Georgia 77 7/
The a!orti-ed annual cost of plant construction and other associated fi$ed costs for the
Georgia plant would total 42 !illion per "ear (regardless of sales 'olu!e). The fi$ed costs for
adding Vector production to the plant in %ndiana would total 47 !illion per "ear (regardless of
sales 'olu!e).
1
a. Construct a decision tree to deter!ine which production option !a$i!i-es the e$pected annual
profit& considering fi$ed costs& production costs& and sales re'enues.
The decision is whether to share the existing plant in Indiana (with a fixed cost of $2 million) or
build a new dedicated plant in Georgia (with a fixed cost of $4 million). This decision is
represented in the decision tree b a decision node with two branches. !or each decision" there are
two outcomes# strong sales ($%& probabilit) or moderate sales (4%& probabilit). This is
represented in the decision tree b e'ent nodes with two branches.
If the Indiana plant is used and sales are strong" the profit would be (1%%"%%% units)($(%"%%% )
$24"%%%) * $$ million ) $2 million (fixed cost) * $4 million.
If the Indiana plant is used and sales are moderate" the profit would be (+%"%%% units)($(%"%%% )
$1$"%%%) * $, million ) $2 million (fixed cost) * $+ million.
If the Georgia plant is used and sales are strong" the profit would be (1%%"%%% units)($(%"%%% )
$2%"%%%) * $1% million ) $4 million (fixed cost) * $$ million.
If the Indiana plant is used and sales are moderate" the profit would be (+%"%%% units)($(%"%%% )
$22"%%%) * $4 million ) $4 million (fixed cost) * $%.
The resulting sol'ed decision tree is shown below. The decision to share the plant in Indiana has a
higher expected profit of $4.4 million.
0.6
Strong Sales
4
Indiana (shared plant) 6 4
-2 4.4 0.4
Moderate Sales
5
7 5
1
4.4 0.6
Strong Sales
6
Georgia (dedicated) 10 6
-4 3.6 0.4
Moderate Sales
0
4 0
2
b. 8ue to the uncertaint" in e$pected sales for the Vector& GFMC is considering conducting a
!ar)eting sur'e" to deter!ine custo!er attitudes toward the Vector and better predict the
li)elihood of strong sales. The !ar)eting sur'e" would gi'e one of two resultsa positi'e
attitude or a negati'e attitude toward the design. GFMC has used this !ar)eting sur'e" for
other 'ehicles. For 'ehicles that e'entuall" had strong sales& the !ar)eting sur'e" indicated
positi'e attitudes toward the design 9/0 of the ti!e and negati'e attitudes 5/0 of the ti!e. For
'ehicles that e'entuall" had !oderate sales& the !ar)eting sur'e" indicated positi'e attitudes
toward the design 7/0 of the ti!e and negati'e attitudes :/0 of the ti!e. ,ssu!ing GFMC
conducts such a sur'e"& construct a decision tree to to deter!ine how the co!pan" should
proceed and what the e$pected annual profit would be (ignoring the cost of the sur'e").
!irst we must determine an estimate for the probabilit that the sur'e will indicate a positi'e
attitude or negati'e attitude toward the design. -econd" gi'en the sur'e indicates either a
positi'e or negati'e attitude" we must determine the posterior probabilit that sales will be either
strong or moderate. .oth of these calculations can be performed using the template for posterior
probabilities on the /0. These results are shown below.
Template for Posterior Probabilities
Data:
State of Prior
Nature Probability Positive Attitude Negative Attitude
Strong Sales 0.6 0.7 0.3
Moderate Sales 0.4 0.2 0.8
Posterior
Probabilities:
Finding PFinding! Strong Sales Moderate Sales
Positive Attitude 0." 0.84 0.#6
Negative Attitude 0." 0.36 0.64
PState $ Finding!
State of Nature
PFinding $ State!
Finding
Thus" there is a +%& chance that the sur'e will indicate a positi'e attitude and a +%& chance that
the sur'e will indicate a negati'e attitude toward the new car. Gi'en a positi'e attitude" the
probabilit of strong sales increases to 14&. Gi'en a negati'e attitude" the probabilit of strong
sales sin2s to ($&.
(
The re'ised decision tree is shown below. It begins with an e'ent node with two branches for the
two possible outcomes of the sur'e. 3fter the sur'e results are 2nown" there is a decision of
whether to share the plant in Indiana" or open a new plant in Georgia" represented b a pair of
branches. !inall" after the decision is made" there will either be strong or moderate sales. This is
represented b e'ent nodes with two branches" and uses the posterior probabilities gi'en the
results of the sur'e.
0.4
Strong Sales
4
Indiana (shared plant) 6 4
-2 4.16 0.16
Moderate Sales
0.5 5
!ositi"e #ttit$de 7 5
2
0 5.04 0.4
Strong Sales
6
Georgia (dedicated !lant) 10 6
-4 5.04 0.16
Moderate Sales
0
4 0
4.4 0.36
Strong Sales
4
Indiana (shared plant) 6 4
-2 4.64 0.64
Moderate Sales
0.5 5
%egati"e #ttit$de 7 5
1
0 4.64 0.36
Strong Sales
6
Georgia (dedicated !lant) 10 6
-4 2.16 0.64
Moderate Sales
0
4 0
If the sur'e indicates a positi'e attitude toward the car" the should open a dedicated plant in
Georgia. If the sur'e indicates a negati'e attitude toward the car" the should share the plant in
Indiana. The expected profit is $4.14 million.
4
c. ;hat is the e$pected 'alue of the sa!ple infor!ation in part b< ;hat does this sa" about how
large the cost of the !ar)eting sur'e" can be before it would no longer be worthwhile to conduct
the sur'e"<
The expected 'alue of sample information is the expected paoff with the information minus the
expected paoff without the information. 4ith the sur'e information" the expected paoff is
$4.14 million. 4ithout the sur'e information" the expected paoff is $4.4 million. Thus" the
expected 'alue of sample information in part b is $44% thousand. This is the most that the should
be willing to pa for the mar2eting sur'e before it would no longer be worthwhile to conduct.
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