A cell phone manufacturer is investigating the probability of producing and marketing a new line
of phone. Undertaking this project will require either purchasing new equipment, upgrading
current equipment, or hiring and training additional engineers. The market for the new product
could be strongly favorable, favorable, and unfavorable. Do nothing is also an option.
With strongly favorable acceptance, the sales would be 25,000 phones for $110 each. With
favorable acceptance, the sales would be 15,000 phones for $100 each. With unfavorable
acceptance, the sales would be only 8,000 phones for $90 each. The cost of purchasing new
equipment is $500,000. Upgrading current equipment is $200,000. Hiring and training new
engineers will be $375,000. Manufacturing cost of each phone would drop from $60 to $40 if new
equipment is used (upgrading current equipment or hiring additional engineers will not change the
manufacturing cost).
The probability of strongly favorable acceptance is 0.2, and the probability of favorable acceptance
is 0.5. The probability of unfavorable acceptance is 0.3.
Draw the decision tree. Make your decision.
