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The Super Cola Company must decide whether or not to introduce a new diet soft drink. Management...

Question:

The Super Cola Company must decide whether or not to introduce a new diet soft drink. Management feels that if it does introduce the diet soda it will yield a profit of $1.25 million if sales are 100 million, a profit of $300,000 if sales are 50 million, or it will lose $1.75 million if sales are only 1 million bottles. If Super Cola does not market the new soda diet soda idea, it will suffer a loss of $400,000. An internal marketing research study has found P(100 million in sales) = 1/2, P(50 million in sales) = 1/3, and P(1 million in sales) = 1/6.

a. What is the EVPI (expected value of perfect information)?

b. A consulting firm can perform a more thorough study for $350,000. Should management have this study performed?

c. If the conditional probabilities are .75, .15, and .10 for the three states what would be the expected value of sample information (EVSI)? *Please complete in excel and show all corresponding formulas.

Expected value of perfect information:

Expected value of perfect information (EVPI )is calculated by decision theory, the expected value of perfect information is that price which one would be willing to pay in order to get access to perfect information.

Answer and Explanation:

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a) EMV of decision to introduce the diet soda = 1.25*1/2 + 0.3*1/3 - 1.75*1/6 = $ 0.43 m

EMV of decision NOT to introduce the diet soda =...

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What Is a Decision Tree? - Examples, Advantages & Role in Management

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Chapter 2 / Lesson 12
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Clearly identifying all possible solutions for a given decision is an important part of successful management. In this lesson, you will learn how to use a decision tree to identify and select possible courses of action.


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