QAT1 Task 5 #258453 In the given scenario, a company is considering alternatives for improving profits by either developing new products, or consolidating existing products. There are 4 separate branches that split from the 2 main branches.
Develop new product:
1). Develop thoroughly: a) Good demand .47 $500,000 b) Moderate demand .38 $25,000 c) Poor demand .15 $1000 So, with the above given variables, to calculate the expected value, you multiply each probability times the corresponding payoff. Then add the results for each decision outcome.
Calculations:
a) .47 (500,000) = $235,000
b) .38 (25000) = $9500
c) .15 (1000) = $150
Branch 1 expected value = $244,650.

2). Develop rapidly: a) Good demand .06 $500,000 b) Moderate demand .16 $25000 c) Poor demand .78 $1000
Calculations:
a) .06 (500,000) = $30000 b) .16 (25,000) = $4000 c) .78 (1,000) = $780
Branch 2 expected value = $34780

Consolidate existing product:
3). Strengthen products: a) Good demand .69 $2,000 b) Moderate demand .27 $10,000 c) Poor demand .04 $3,000
Calculations:
a) .69 (2,000) = $1380 b) .27 (10,000) = $2700 c) .04 (3,000) = $120
Branch 3 expected value = $4200

4). Reap without investing: a) Good demand .32 $10,000 b) Poor demand .68 $1,000
Calculations:
a) .32 (10,000) = $3,200
b) .68 (1,000) = $680
Branch 4 expected value = $3880

The decision alternative with the most favorable expected value would be the choice to develop a new product, and specifically, to develop it thoroughly. This decision alternative has the highest and most favorable expected value at $244,650. This decision was confirmed by multiplying each of the probability amounts by the given corresponding payoff amounts, and adding the results for each decision outcome.