Question

Draw an influence diagram for ABC decision problem

ABC The executives of American Builders Company (ABC) have to decide which of three products to introduce, A, B, or C. Product Cis essentially a risk-free proposition, from which the company will obtain a net profit of $1 million. Product B is considerably more risky. Sales may be high, with a resulting profit of $8 million, medium with a net profit of $4 million, or low, in which case the company just breaks even. The probabilities for these outcomes are respectively, 0.38, 0.12, and 0.50. Product A poses something of a difficulty, a problem with the production system has not yet been solved. The engineering division has indicated its confidence in solving the problem, but there is a slight chance (5%) that devising a workable solution may take a long time. In this event, there will be a delay in introducing the product, and that delay will result in lower sales and profits. Another issue is the price for Product A. The options are to introduce it at either a high price or a low price; the price would not be set until just before the product is to be introduced. Both of these issues have an impact on the ultimate net profit. Finally, once the product is introduced, sales can be either high or low. If the company decides to set a low price, then low sales are just as likely as high sales. If the company sets a high price, the likelihood of low sales depends on whether the product was delayed by the production problem. If there was no delay and the company sets a high price, the probability is 0.40 that sales will be high. However, if there is a delay and the price is set high, the probability is only 0.30 that sales will be high. The table below shows the possible net profit figures in millions) for Product A:

Answer 1

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Decision Tree Sales High for A (0.30) $5 Million Price High $-0.5 Million Sales Low for A (0.70) Sales High for A (0.50) (0.05) PRODUCT A Price Low $ 1 Million Sales Low for A (0.50) Sales High for A (0.40) $8 Million Price High $0 Million No Delay (0.95) Sales Low for A (0.60) Sales High for A (0.50) $4.5 Million $8 Million PRODUCTB Price Low Sales Low for A (0.50) Sales High for B 1 (0.38) Sales Medium for B (0.12) Sales Low for B (0.50) $4 Million PRODUCT C $0 Million $1 Million

Sales A Sales B Product? - - Price? Influence Diagram PROFIT