Section 6

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P9-31

Carlisle Tire and Rubber 31. Carlisle Tire and Rubber, Inc., is considering expanding production to meet potential increases
in the demand for one of its tire products. Carlisle's alternatives are to construct a new plant, expand the
Payoffs for decisions existing plant, or do nothing in the short run. The market for this particular tire product may expan, remain
Expand Remain stable Contract stable, or contract. Carlisle's marketing department estimates the probabilities of these market outcomes to be
Construct a new plant $400,000 -$100,000 -$200,000 0.25, 0.35, and 0.40, respectively. The file P09_31.xlsx contains Carlisle's payoffs and costs for
Expand existing plant $250,000 -$50,000 -$75,000 the various combinations of decisions and outcomes.
Do nothing $50,000 $0 -$30,000
a. use Precision tree to identify the strategy that maximizes this tire manufacturer's expected profit
Probabilities of outcomes b. Perform a sensitivity analysis on the optimal decision, letting each
Expand of the monetary inputs vary one at a time plus or minus 10% from its base value, and summarize your findings.
Remain stable Which of the inputs appears to have the largest effect on the best solution?
Contract
Payoffs for decisions Construct a new plant Expand existing plant Do nothing
Expand
Remain stable
Contract
Decision Tree

P09_31.xlsx

Tire plant decisions
Decision\outcome Expand Remain stable Contract
Construct a new plant $400,000 -$100,000 -$200,000
Expand existing plant $250,000 -$50,000 -$75,000
Do nothing $50,000 $0 -$30,000

P9-33

Techware Incorporated 33. Techware Incorporated is considering the introcution of two new software products to the market. The
company has four options regarding these products: introduce neither product, introduce product 1 only,
Input Data Trend in national economy introduce product 2 only, or introduce both products. Research and development costs for products 1 and
R&D cost for Product 1 Strong Fair Weak 2 are $180,000 and $150,000, respectively. Note that the first option entails no costs because research
R&D cost for Product 2 Introduce neither product and development efforts have not yet begun. The success of these software products depends on the
Introduce Product 1 only national economy in the coming year. The company's revenues, depending on its decision and the state of the
Probability of strong economy Introduce Product 2 only economy, are given in the file P09_33.xlsx. The probabilities of a strong, fair, or weak economy in the coming
Probability of fair economy Introduce both products year are assessed to be 0.30, 0.50, and 0.20, respectively.
Probability of weak economy
a. use precision tree to identify the strategy that maximizes Techware's expected net revenue.
Payoff Table Trend in the National Economy
Decision Strong Fair Weak b. Perform a sensitivity analysis on the optimal decision, letting each of the inputs vary one at a time
Introduce neither product plus or minus 25% from its base value, and summarize your findings. Which of the inpits appears to have the
Introduce Product 1 only largest effect on the best solution?
Introduce Product 2 only
Introduce both products
Probability
Decision Tree

P09_33.xlsx

Introduction of new products
Trend in national economy
Decisions\outcomes Strong Fair Weak
Introduce neither product $0 $0 $0
Introduce Product 1 only $500,000 $260,000 $120,000
Introduce Product 2 only $420,000 $230,000 $110,000
Introduce both products $820,000 $390,000 $200,000