Purchase Solution

Creating a Decision Tree: Understanding Risk Tolerance Levels

Not what you're looking for?

Ask Custom Question

BUYU Manufacturing has been contracted to provide SAEL Electronics with printed circuit and motherboards (PC) boards under the following terms:
• 100,000 PC boards will be delivered to SAEL in one month.
• In 3 months, SAEL has an option to take the delivery of an additional 100,000 boards by giving BUYU a 30-day notice.
• SAEL will pay $5 for each board it takes.
BUYU manufactures the PC boards through a process called batching, and manufacturing costs are as follows:
• The manufacturing batch run has a fixed setup cost of $250,000, regardless of the run size.
• The marginal manufacturing cost is $2.00 per board, regardless of the size of the batch run.
BUYU must decide whether it should manufacture all 200,000 PC boards now, or if it should manufacture 100,000 now and the other 100,000 boards only if SAEL decides to buy them. If BUYU manufactures 200,000 now and SAEL does not exercise its option, then BUYU will lose the manufacturing cost of the extra 100,000 boards. BUYU believes that there is a 50% chance that SAEL will exercise its option to buy the additional 100,000 PC boards.

1. Discuss the potential profit of manufacturing all 200,000 boards now.
2. Draw a decision tree for the decision that BUYU faces.

Purchase this Solution
Solution Summary

This solution illustrates how to compute the profit or loss under alternative decisions and how to create a decision tree (complete with expected values for each decision) in Excel.

Purchase this Solution
Free BrainMass Quizzes
Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Basics of corporate finance

These questions will test you on your knowledge of finance.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

View More Free Quizzes
Related BrainMass Solutions

  • Decision and Fault Trees

    490030 Decision and Fault Trees in Risk Management Why is a risk decision tree important? When is a list not the most effective manner to map out risk?

  • Risk Management: BUYU

    Assume now that BUYU is constantly risk averse with a risk tolerance of $100,000, and answer parts 3 and 4 again. Step 1.

  • Rsk tolerance levels of investors

    321141 What are the risk tolerance levels of investors? What is your risk tolerance level? What are the risk tolerance levels of investors? What is your risk tolerance level? Is it better to maximize return or minimize risk? Why?

  • Decision Tree

    A decision tree is a tool used to visually display a series of decisions and their associated outcomes. This will aid you in creating your contingency plan by displaying each of your plans components and the possible outcomes at each decision point.

  • Quantitative Methods

    approach c. is most useful when excessively large or small payoffs are possible d. requires a decision tree In a multicriteria decision problem: a. it is impossible to select a single decision alternative b. the decision maker must evaluate each

  • Decision Analysis : Benefits of a Decision Tree Plan that Displays Decision Alternatives

    A decision tree creates a model as either a graphical tree or a set of text rules that can predict (classify) each applicant as a good or bad credit risk (i.e. our expected values).

  • International negotiation: Effects of cultural differences

    Importance of Cultural Differences Cultural differences assist in determining the tolerance power of nations towards disputes by developing understanding regarding the decision making style, approach, assumptions, values and beliefs of other nations

  • Decision Tree Type Analysis

    529846 Decision Tree Type Analysis Many real-world decision problems consist of a sequence of dependent decisions. Develop a scenario that has a series/sequence of activities applicable to a "Decision Tree" type analysis.

  • Decision tree

    If the product is a success, the company will gain $300,000. If it is a failure, the company will lose $150,000. a. Construct a decision tree that you can use to solve the problem, assuming the president is risk neutral. b.

View More Related Solutions