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Decision Tree Example Problem

A glass factory is experiencing a backlog and is considering three courses of action: subcontracting (A), constructing new facilities (B), or doing nothing (C). The best choice depends on demand, which is estimated to be low with 10% probability, medium with 50% probability, or high with 40% probability. The estimated profits in thousands of dollars for each action under the different demand levels are shown in a table. Management should build a decision tree to determine which choice to make based on the probabilities and profits.

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Ebtisam Hamed
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286 views1 page

Decision Tree Example Problem

A glass factory is experiencing a backlog and is considering three courses of action: subcontracting (A), constructing new facilities (B), or doing nothing (C). The best choice depends on demand, which is estimated to be low with 10% probability, medium with 50% probability, or high with 40% probability. The estimated profits in thousands of dollars for each action under the different demand levels are shown in a table. Management should build a decision tree to determine which choice to make based on the probabilities and profits.

Uploaded by

Ebtisam Hamed
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
Download as docx, pdf, or txt
Download as docx, pdf, or txt
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Decision Tree Example Problem

A glass factory specializing in crystal is experiencing


a substantial backlog, and the firm's management is
considering three courses of action:

A) Arrange for subcontracting


B) Construct new facilities
C) Do nothing (no change)

The correct choice depends largely upon demand,


which may be low, medium, or high. By consensus,
management estimates the respective demand
probabilities as 0.1, 0.5, and 0.4.

The management estimates the profits when choosing


from the three alternatives (A, B, and C) under the
differing probable levels of demand. These profits, in
thousands of dollars are presented in the table below:

0.1 0.5 0.4


Low Medium High
A 10 50 90
B -120 25 200
C 20 40 60
Which choice should management make? Build a
Decision Tree to solve the problem.

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