Exercise on Decision Tree: London Pop Concert

a. Describe the company’s decision making

1. What is the problem?
This case shows about the company that operates in entertainment business,
which want to conduct an event. The problem is about how much they are going
to spend for London Concert event promotion, by considering demand estimation
of sold ticket

2. What are the decision node for the problem?

Decision node represents factors that control the decision making of some
problems. In this case, decision node means how much the company willing to
allocate their money to fund the promotion.

3. State of Nature for the problem

 Advertise only in the music press
 Advertise in the music press and the national press
 Advertise in the music press, national press, and commercial radio

4. What are the company’s payoff

Payoff in a company shows in the ticket demand, which tell how many profit that
the company will get from this event

b. Decision tree is constructed in Excel Spreadsheet

c. Determine the option which will lead to the highest expected profit
Based on the manual calculation that was conducted and also the decision tree that
was constructed with treeplan, it is concluded that the option that will generate more
profit is option 2 (advertise in the music press and national press), among other
options, with 36 profit.

d. Reservations about recommending this option to the company

This option can be chosen as a strategy to promote the event through publishing in
the music press and national press. However, this result is dependent also on the
variable factor, such as guest list of the concert. This factor will always be changing
over time.
 Exercise for Treeplan and Sensit: Westward Magazine Publishers

1. Decision tree is constructed in Excel Spreadsheet

2. The policy that will be taken is the one that can generate more profit, which happen if
the product is launched in April, before the rival. The profit that can be generated in
3,250,000.

3. In this case, to examine whether the policy that is taken is sensitive or not to the
change in probability, we will do an assumption through changing the probability of
option 1, becoming 0.8. The result is:

NPV 1: (0.8(0)+(0.2(0))-0) + (0.75(4,000,000-0) + (0.25(1,000,000) = 0 + 3,000,000 + 250,000

= 3,250,000

According to the result above, there is no difference in profit when probability is changed.
It means that the policy is not sensitive to the change in probabilities. It also might
happens because there is no cost involved when the product is launched before the
rival.