Probability Analysis

Probability Analysis

A General Manger of Harley-Davidson must 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 must 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)=$16

High Demand 0.6($55)=$33

Build Large:

Low Demand 0.4($50)=$20

High Demand 0.6($70)=$42

Determination of Expected Value of each alternative

Build Small: $16+$33=$49

Build Large: $20+$42=$62

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