Happy Jack is particularly cautious in launching new products and typically performs an extensive consumer acceptance test in several metropolitan areas before launching a new food product such as a salad line. Occasionally the company will take new food products directly to market without a consumer acceptance test, especially when the costs to do the consumer acceptance test are not warranted. The costs of such a test are usually about $2 million in total. The probability of a successful product launch is 0.70 when Happy Jack’s consumer acceptance test results indicate that consumers like the product, and 0.20 when they have little to no interest in the product. When Happy Jack goes to market without a consumer acceptance test, the likelihood of a successful product launch is 0.25. Usually about 30 percent of products put through a consumer acceptance test are successful, according to historical data. To help Happy Jack make decisions on new product launches, they have created a new business analysis team. The supervisor of this new group, Harry Seitz, decides to assign you to this new product opportunity. Conducting a preliminary analysis, Harry concludes that the value to the Happy Jack, should the new salad line be successful, is approximately $25 Million over the life of the product. If the line is not successful, the company will likely lose $5 Million. This $5 Million would be in addition to the $2 Million for any consumer acceptance test. All product development costs are considered “sunk costs” and are not included in these calculations of product success or loss.
1. Conduct a proper decision and risk analysis for this scenario. Do the following:
•List the decisions and the uncertainties and number the nodes in chronological order.
•Draw a schematic tree on the Schematic Tree tab that illustrates the order of decisions and uncertainties. Make sure to use the nomenclature found in the Bollywood Movies Case Study PowerPoint for all diagrams.
•Draw the decision tree on the Decision Tree Tab and add probabilities, outcomes, and values to complete it.
•Verify chronological order. Use Bayesian Revision on the tab below to reverse the order of the probabilities to ensure that the decisions and uncertainties are chronological in the tree.
•Rollback. Use the rollback procedure to compute expected monetary values of the tree. Do this on the Rollback tab.
2. Justify the two most important actions that you would recommend Happy Jack take based on your decision tree calculations in 1.
3. Calculate the maximum amount of money that Happy Jack should pay for perfect control. Show the calculation and explain your calculation process.
Show the changes that perfect control would look like on the decision tree you originally developed by showing those changes on a revised decision tree on the Revised Decision Tree spreadsheet.