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Practical Management Science

(5th Edition)
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The model in Example 93 has only two market outcomes, good and bad, and two corresponding Continue to post
predictions, good and bad. Modify the decision tree by allowing three outcomes and three 20 questions remaining
predictions, good, fair, and bad. You can change the inputs to the model (monetary values and
probabilities) in any reasonable way you like. Then you will also have to modify the Bayes' rule
calculations. You can decide whether it is easier to modify the existing tree or start from scratch
with a new tree. My Textbook Solutions

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Here Acme is trying to launch its new product. Before launching its product Acme wants to test
market. Therefore Acme set the net cost of the test market is $100000. If test market results are
good the Acme will decide to launch its product nationally with the fixed cost of $7 million.
Similarly, if Acme decides not to do market research then it will take decision to launch product
nationally without any further delay. Acme’s unit margin is $18 that will be computed by taking the
difference between the selling price and variable cost of the product. Acme categorized the
results of market research in three groups that are good, fair and bad. And these categories will
be divided according to the units sold in national market. It means, if sales volumes (in 1000s of
units) are 600 then it will come under good category, if 300 then fair category and if 90 then bad
category with the respective probabilities of 0.45, 0.35 and 0.20. Acme did have some
predictions of probabilities for checking accuracy. The excel sheet is shown below.

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To implement Bayes’ rule in the excel and to calculate the unconditional probabilities just enter
Chapter
the formula shown below 9, Problem 22P
in cell G16,
1 Bookmark Show all steps: ON

And drag the above formula till cell G18.

To calculate posterior probabilities, enter the below formula in cell G21,

And drag this formula in range G22:I24.

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Step 3 of 4

To draw precision tree in Excel, users have to keep some points in mind. These points are,

1. First, it is always necessary to document the problem in Excel worksheet and then proper
documentation in a decision/precision tree.

2. After documentation, assign probabilities of occurrence to all risk that user can take to make a
decision.

3. After assigning probabilities, there is always needed to assign monetary values to all risks so
that Excel can calculate values when any particular risk will occur.

4. In the end, the tree will calculate Expected Monetary Value for each decision path.

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Step 4 of 4

The decision tree for the above problem is shown below.

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Chapter 9, Problem 22P 1 Bookmark Show all steps: ON

From the decision tree shown above it can conclude that EMV for entire problem is calculated as

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