Probability Analysis

 

 

 

A General Manger of Harley-Davidson has to decide on the size of a new facility. The GM has narrowed the choices to two: large facility or small facility. The company has collected information on
the payoffs. It now has to decide which option is the best using probability analysis, the decision tree model, and expected monetary value.Options:Facility Demand Options Probability Actions Expected Payoffs Large Low Demand 0.4 Do Nothing ($10) Low Demand 0.4 Reduce Prices $50 High Demand 0.6 $70 Small Low Demand 0.4 $40 High Demand 0.6 Do Nothing $40 High Demand 0.6 Overtime $50 High Demand 0.6 Expand $55
Determination of chance probability and respective payoffs:Build Small: Low Demand 0.4($40)=$16High Demand 0.6($55)=$33 Build Large: Low Demand 0.4($50)=$20High Demand 0.6($70)=$42Determination of Expected Value of each alternativeBuild Small: $16+$33=$49Build Large: $20+$42=$62