Abegail T. Valesco BS- Accountancy l-B Man. Econ.

– F(9:00-12:00)

2. ILY construction has been asked to submit a proposal for developing a new product the cost
of preparation is ₱12,000.00. It is estimated that if ILY submit a proposal the chance that it will
receive the contract is 50%. It is not certain that the product can actually be developed, but
there are three methods of development, of which one should be chosen. Method A will cost
₱120,000 and has 80% chance of success. Method B will cost ₱50,000 with a 60% probability of
success. Method C will cost ₱30,000 and the probability of success as 45%. If the company
receives the contract and supplies the product, it will receive ₱8,000,000. No penalty is charged
for failing to produce the product. Should ILY construction prepare the proposal? Explain why?

Answer:

Decision Tree Analysis

Failing lost cost

Cost ₱120,000 Method A

80% chance of success

Failing lost cost

Cost ₱50,000

Prepare proposal Method B Contract

Rewarded
50% acceptance 60% chance of success

Cost ₱12,000 ₱8,000,000 cash inflow

inflow
New Product
Development

Cost ₱30,000 Method C

45% chance of success

Do Nothing
Failing lost cost
Decision Making :

The chance of success and acceptance is very low. The company should not prepare
to proceed in the new product development where the risk is too high and the cost is material
if the end results is failure but the rewards is tempting.