Question

Q6. Kay Medical Supplies (KMS Ltd) is a small company that manufactures nitrile and synthetic gloves. In the light of the ongoing pandemic, the company has expanded its production line by manufacturing a new type of latex gloves. The company is deciding whether or not to submit an Expression of Interest (Eol) for a governmental contract for hospital supplies. KMC Ltd has estimated that the preparation of the Eol has an associated cost of £35,000. If the company decides to submit an Eol for the governmental contract, the business analysis team has estimated that there is a 55% chance that their Eol will be short-listed and they will be invited to submit a full bid, otherwise the Eol will be rejected. If the Eol is short-listed, KMC Ltd will have to provide further information regarding the manufacturing process and quality assurance that will cost another £23,000. After the Eol stage, KMC Ltd. also needs to decide the bidding price. Once the bid is placed, it is either accepted or rejected. The business analysis team has come up with three possible bid prices and estimated the associated probabilities of acceptance for each. This information is presented in the table below. BID PRICE PROBABILITY OF BEING ACCEPTED 320,000 380,000 440,000 А B с 0.9 0.6 0.4 The manufacturing and labour costs required to deliver a successful bid are £250,000. These costs are constant for each of the three bids. (a) Construct a decision tree to represent the decision problem, including all of the relevant probabilities and outcomes. (16 marks) (b) Conduct analysis using your decision tree to explain what KMC Ltd should do. What is the expected consequence of your suggested course of action? (4 marks)

Answer 1

Profit -DDDD Given data: Answer, 09 SLEPIT Investment A 320 DODH of 2600 ON Ster I The TC=f52000 f 2300 D! 0.6 Investment 13500D 0.55 PDFC F2000 B 380 DDV + 20 DDV O TC-f5eppy D45 Net loss f 35 DOO 04 Cf440 000 Profit 13200 f 18DDD 0.6 FTC 452004 DCC Sion Toee given infomation Foom the Decision toce We get A > Profil - 320 000 - (35000+23000 +256000 - 12000 looly Poofit - 380 000 (35000 +23000 +250000) = 72000 given below poort (35000 + 23000 + 250D0D) = 13-2000 C s 44000D is shown as

(9) By using Decision tree KMS Lid should go for bid B as it will result in maximum inflow based on analysis given below: K Bida Net inflow = 12,000x0.90- (55,000*0.10) 5 2,600, Similooly 个 Bid B Net inflow 72,000X0-60-(58000X0.40) 20,000, Bidc Net inflow - 132,000 X 0.40- (58,00X060) 18,00D, -*