Decision tree assignment

In-Class Assignment #3

Montgomery Magazine publisher is thinking of launching a new fashion magazine for women in

the under 25 age group. Their original plans were to launch in April of next year, however

information has been received that a rival publisher is planning a similar magazine. Montgomery’s

accountant has estimated that a high circulation would generate a gross profit over the magazine’s

lifetime of $4 million. A low circulation would bring a gross profit of about $1 million. It is

important to note that these gross profits do not take into account additional expenditure caused

by bringing the launch forward or by increased advertising.

Montgomery now has to decide whether to bring the launch forward to January of next year,

though this would cost an additional $700,000. If the launch is brought forward it is estimated that

the chances of launching before the rival are about 80%.

For Simplicity, the management of Montgomery has assumed that the circulation of the magazine

throughout its life will be either high or low. If Montgomery launch before the rival, it is thought

that there is an 80% chance of a high circulation. However, if the rival launches first, this

probability is estimated to be only 55%.

If the rival does launch first, then Montgomery could try to boost sales by increasing their level of

advertising. This would cost an extra $300,000 and it is thought it would increase the probability

of a high circulation to 65%. This increased advertising expenditure would not be considered if

Montgomery’s magazine was launched first.

Sticking with the April launch, the rival could launch before Montgomery with a probability of

60%. If launched before the rival, high circulation is 70% probably. As noted above, if

Montgomery launches afterwards, they would consider additional advertising at a cost of

$300,000. In this scenario, the advertising is expected to boost the probability of high circulation

to 60%.

Marks Instructions

10 Draw a decision tree for this scenario

15 Update the decision tree to include Expected Values (EV)

5 If Montgomery’s objective is to maximize the expected profit, determine the policy

that they should choose.