A General Manger of Harley-Davidson has to 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 has to decide which option is the best using probability analysis, the decision tree model, and expected monetary value.

 

 

Options:

 

 

FacilityDemand OptionsProbabilityActionsExpected PayoffsLargeLow Demand0.4Do Nothing($10)Low Demand0.4Reduce Prices$50High Demand0.6$70SmallLow Demand0.4$40High Demand0.6Do Nothing$40High Demand0.6Overtime$50High Demand0.6Expand$55

 

 

 

Decision Tree

 

 

Determination of chance probability and respective payoffs:

 

 

Build Small:Low Demand0.4($40)=$16High Demand0.6($55)=$33Build Large:Low Demand0.4($50)=$20High Demand0.6($70)=$42

 

 

Determination of Expected Value of each alternative

 

Build Small: $16+$33=$49

 

Build Large: $20+$42=$62