Question Tag: Business decision

Search 500 + past questions and counting.
Professional Bodies Filter
Program Filters
Subject Filters
More
Tags Filter
More
Check Box – Levels
Series Filter
More
Topics Filter
More
  • 20 Marks

QT – May 2019 – L1 – Q3 – Probability

Draw a decision tree and determine the optimal strategy for managing the cost of an art exhibition.

The Business Manager of Omaya Art Gallery has rented a hall to display the artworks of the artists of the gallery. She is considering organizing an exhibition of a number of rare painting masterpieces. In the past, only 70% of the paintings were sold in the first week. Moreover, if no painting is sold in the first five (5) days, the exhibition could be extended for another two (2) days but only 20% of the paintings would be sold.

The cost of the exhibition is GH¢500 per day. The manager estimated that in case she does not make any sales, she will have to pay GH¢15,000 to cover the costs of renting the exhibition hall for the same period.

Required: a) Draw a decision tree representing the Business Manager’s decision-making process. (8 marks)

b) Calculate the expected monetary cost of each decision node. (6 marks)

c) Determine the Business Manager’s optimal strategy. (6 marks)

  • 20 Marks

QT – Nov 2015 – L1 – Q2 – Probability

Construct a decision tree and calculate the expected monetary value for Jodoo Company Ltd’s expansion options.

Jodoo Company Ltd had a new, large order for its product and thinks this may herald an expansion of the market and thus its sales and profits. Jodoo Ltd could move the factory to a new and larger site (cost: GHS 1 million), expand the existing factory (cost: GHS 0.25 million), or meet the new order by overtime (cost: GHS 0.08 million).

Three likely sales increase scenarios were proposed:

  • 40% increase in sales with a probability of 0.2
  • 10% increase in sales with a probability of 0.6
  • 0% increase in sales with a probability of 0.2

The expected profits under each option are:

Sales Increase % New Factory (GHS million) Expanded Factory (GHS million) Overtime (GHS million)
40% 6 3.5 1.5
10% 2.5 2.5 1.5
0% 0 0 0

Required:
(i) Construct a decision tree to represent the various scenarios of expansion. (6 Marks)

(ii) Calculate the expected monetary value (EMV) of each node of your tree. (8 Marks)

(iii) Advise the company on how to react to this opportunity. (6 Marks)

(i) Decision Tree for Jodoo Company Ltd’s Expansion Scenarios:

The decision tree should represent the three potential decisions: moving to a new factory, expanding the current factory, or using overtime. Each decision branches into three possible sales increase outcomes (40%, 10%, 0%), with corresponding profits.

 

(ii) Expected Monetary Value (EMV) Calculation:

  • EMV (Move to new factory) = (0.2 × 6) + (0.6 × 2.5) + (0.2 × 0) = 1.2 + 1.5 + 0 = GHS 2.7 million
  • EMV (Expand existing factory) = (0.2 × 3.5) + (0.6 × 2.5) + (0.2 × 0) = 0.7 + 1.5 + 0 = GHS 2.2 million
  • EMV (Overtime) = (0.2 × 1.5) + (0.6 × 1.5) + (0.2 × 0) = 0.3 + 0.9 + 0 = GHS 1.2 million

(iii) Advice to Jodoo Company Ltd:

Based on the EMV calculations:

  • The move to a new factory results in an EMV of GHS 2.7 million, which is the highest EMV but requires a large initial investment of GHS 1 million.
  • The expanded factory has a slightly lower EMV of GHS 2.2 million, with a lower initial investment of GHS 0.25 million, leading to a higher net profit.
  • Overtime has the lowest EMV at GHS 1.2 million, and while it has minimal initial costs (GHS 0.08 million), it restricts future growth potential.

The company should choose to expand the existing factory, as it provides the highest net expected profit after costs (EMV of GHS 2.2 million with only GHS 0.25 million investment, yielding a net profit of GHS 1.95 million). This option balances profitability and cost-effectiveness while providing room for moderate growth.

Take control of your business data with insight and in-depth understanding by taking this course. 

Services

Contact Info

  • +233203701923
    +233543919232
  • info@noohrabusiness.com

Get In Touch

Follow us on our social media and get daily updates.

Facebook-f Twitter Linkedin-in Envelope