Silicon dynamics

Silicon dynamics : 

Silicon dynamics Decision Trees

Case Facts : 

Case Facts Silicon Dynamics has developed a new computer chip It can sell the chip rights for $15 million It can produce & market computers itself Retail outlets guarantee sales of 10,000 units and up to 100,000 units if it becomes popular The cost of setting an assembly line is $6 million The difference between selling price and variable cost per unit is $600

Slide 3: 

Which alternative would you choose?

2 Choices : 

2 Choices Sell rights for $15 million Produce and market computers with the associated cost Since the decision maker has control over this decision, it is qualified as an act and represented by a square node.

Decision Tree 1 : 

Decision Tree 1

2 States of Nature : 

2 States of Nature If the rights are sold, the company receives $15 million, period. However, if the company decides to produce there are possible events the decision maker cannot control. Sales of 10,000 units Sales of 100,000 units

Decision Tree 2 : 

Decision Tree 2

Slide 8: 

If the company sells 10,000 units it would break even Profit = (10,000units*600profit/unit) – 6 million Profit = $0 If the company sells 100,000 units it would make a profit Profit = (100,000units*600profit/unit) – 6 million Profit = $54 million

Decision Tree 3 : 

Decision Tree 3

Slide 10: 

Which alternative would you choose now? Is there any other information you would like to have?

Probabilities : 

Probabilities Certainly your decision should be influenced by the probability of each state of nature happening. These probabilities are subjective In this case, assume the probabilities of the two levels of sales are: 0.6 for sales of 10,000 units 0.4 for sales of 100,000 units

Expected Monetary Value : 

Expected Monetary Value Is obtained by multiplying the values of the outcomes involved by their respective probability and the summing the products. If the company decides to produce & market: [ $0*0.6 ] + [ $54million*0.4 ] = $21.6 million If the company decides to sell the rights: $15million*1 = $15 million

Decision Tree 4 : 

Decision Tree 4

Slide 14: 

You may have noticed $21.6 million is NOT one of the possible payoffs. What does $21.6 million represent then? If the decision had to be taken a large number of times, with the same payoffs and probabilities, $21.6 million will be the average payoff you would expect.

Slide 15: 

Thank You