Decision Trees. Atlanta Corporation has been supplying Raleigh Manufacturing, Inc. with electronic control systems, and Raleigh is satisfied with their performance. However, Raleigh has just received a competing bid from Brahmin, Inc., a firm that is aggressively marketing its products. Brahmin has offered to supply systems for a price of $237,500, or $12,500 below the $250,000 price for the Atlanta system. In addition to an attractive price, Brahmin offers a money-back guarantee. That is, if Brahmin's systems do not match Atlanta's quality, Raleigh can reject them and return them for a full refund. However, if it must reject the machines and return them to Brahmin, Raleigh will suffer a manufacturing delay costing the firm $50,000.
A. Construct a decision tree for this problem and determine the maximum probability Raleigh can assign to rejection of the Brahmin system before it would reject the offer, assuming it decides on the basis of minimizing expected costs.
B. Assume that Raleigh assigns a 40% probability of rejection of the Brahmin controls. Would Raleigh be willing to pay $5,000 for an assurance bond that would cover manufacturing delay costs if the Brahmin controls fail the quality check? (Use the same objective as in part A above.) Explain.

Question

Decision Trees. Atlanta Corporation has been supplying Raleigh Manufacturing, Inc. with electronic control systems, and Raleigh is satisfied with their performance. However, Raleigh has just received a competing bid from Brahmin, Inc., a firm that is aggressively marketing its products. Brahmin has offered to supply systems for a price of $237,500, or $12,500 below the $250,000 price for the Atlanta system. In addition to an attractive price, Brahmin offers a money-back guarantee. That is, if Brahmin's systems do not match Atlanta's quality, Raleigh can reject them and return them for a full refund. However, if it must reject the machines and return them to Brahmin, Raleigh will suffer a manufacturing delay costing the firm $50,000.
  A. Construct a decision tree for this problem and determine the maximum probability Raleigh can assign to rejection of the Brahmin system before it would reject the offer, assuming it decides on the basis of minimizing expected costs.
B. Assume that Raleigh assigns a 40% probability of rejection of the Brahmin controls. Would Raleigh be willing to pay $5,000 for an assurance bond that would cover manufacturing delay costs if the Brahmin controls fail the quality check? (Use the same objective as in part A above.) Explain.

Quizplus · Accepted Answer

The Answer of Decision Trees. Atlanta Corporation has been supplying Raleigh Manufacturing, Inc. with electronic control systems, and Raleigh is satisfied with their performance. However, Raleigh has just received a competing bid from Brahmin, Inc., a firm that is aggressively marketing its products. Brahmin has offered to supply systems for a price of $237,500, or $12,500 below the $250,000 price for the Atlanta system. In addition to an attractive price, Brahmin offers a money-back guarantee. That is, if Brahmin's systems do not match Atlanta's quality, Raleigh can reject them and return them for a full refund. However, if it must reject the machines and return them to Brahmin, Raleigh will suffer a manufacturing delay costing the firm $50,000.
  A. Construct a decision tree for this problem and determine the maximum probability Raleigh can assign to rejection of the Brahmin system before it would reject the offer, assuming it decides on the basis of minimizing expected costs.
B. Assume that Raleigh assigns a 40% probability of rejection of the Brahmin controls. Would Raleigh be willing to pay $5,000 for an assurance bond that would cover manufacturing delay costs if the Brahmin controls fail the quality check? (Use the same objective as in part A above.) Explain.