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    Decision Making Tree

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    Regina Bengado
    The document discusses three decision making models: break-even analysis, make-or-buy decisions, and decision trees. Break-even analysis is used to determine profitability and whether to make or buy something. Make-or-buy decisions analyze the fixed and variable costs of making a product versus buying it. Decision trees show probabilities and outcomes to analyze decisions under uncertainty. Worked examples are provided for each model.

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    Decision Making Tree

    Uploaded by

    Regina Bengado
    36 views10 pages
    The document discusses three decision making models: break-even analysis, make-or-buy decisions, and decision trees. Break-even analysis is used to determine profitability and whether to make or buy something. Make-or-buy decisions analyze the fixed and variable costs of making a product versus buying it. Decision trees show probabilities and outcomes to analyze decisions under uncertainty. Worked examples are provided for each model.

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    The document discusses three decision making models: break-even analysis, make-or-buy decisions, and decision trees. Break-even analysis is used to determine profitability and whether to make or buy something. Make-or-buy decisions analyze the fixed and variable costs of making a product versus buying it. Decision trees show probabilities and outcomes to analyze decisions under uncertainty. Worked examples are provided for each model.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    36 views10 pages

    Decision Making Tree

    Uploaded by

    Regina Bengado
    The document discusses three decision making models: break-even analysis, make-or-buy decisions, and decision trees. Break-even analysis is used to determine profitability and whether to make or buy something. Make-or-buy decisions analyze the fixed and variable costs of making a product versus buying it. Decision trees show probabilities and outcomes to analyze decisions under uncertainty. Worked examples are provided for each model.

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    Decision Making

    Break-Even Analysis

    Make-or-Buy Decision

    Decision Tree

    In these Active Models we consider models that are useful for decision making. We use break-even analysis
    both to analyze profitability and to determine whether to make or buy.

    A decision tree, one of the models widely used for OM decisions, contains probabilities. Generally, probabilities
    are estimates (forecasts) and there is much uncertainty associated with them. We explore the effects of the
    probabilities on our decision.
    Decision Making

    Break-Even Analysis
    1. If the fixed costs increase by 10% to $110,000, does the break-even quantity increase or
    decrease? By what percentage?

    2. If the charge to patients increases by 10% to $220, does the break-even quantity increase or
    decrease? By what percentage?

    3. If the total variable costs increase by 10% to $110, does the break-even quantity increase or
    decrease? By what percentage?

    4. What would the procedure price need to be in order to have a break-even quantity of 800
    patients?

    Make-or-Buy Decision
    1. If the manager can decrease the fixed cost of making by 10% to $10,800, will the break-even
    quantity increase or decrease? By what percentage?

    2. If the manager can negotiate a 10% (20 cents) reduction in the price of pre-assembled salads,
    will the break-even quantity increase or decrease? By what percentage?

    3. If the fixed cost of buying could be eliminated, would the decision change based on the expected
    sales of 25,000 salads per year?

    Decision Tree
    1. If the probability of low demand increases, what happens to the total profit?
    will go down

    2. For what range of probabilities of low demand would the better decision be to build a large
    facility?

    3. If the probability of a modest response (rather than a sizable response) to advertising increases,
    what happens to the total profit?

    4. How is the final decision affected by the probability of the response to advertising?
    Break-Even Analysis

    Fixed cost PHP 100,000


    per year

    Variable costs PHP 100


    per patient $3

    Procedure price PHP 200)

    null
    Break-even quantity
    units (patients) 1,000
    Amount PHP 200,000

    Compared to 1,000 0%
    Make-or-Buy Decision

    Fixed Cost Variable Cost


    Make 12,000.00 1.50
    $76

    Buy 2400.00 2.00

    Point of Indifference
    Make vs. Buy 19,200 salads

    Compared to 19,200 0%
    Decision Tree

    0.40

    Small Facility Low demand

    (242.00) Don't expand

    0.6
    2
    null High demand (270.00) Expand

    2 null
    (544.00) Do nothing

    Decision: Large facility


    0.4
    2
    Low demand (160.00)
    Advertise

    Large Facility (160.00)

    (544.00)
    0.6

    High demand
    200

    223

    270

    40

    0.30
    Modest response
    20

    0.7
    Sizable response
    220

    800
    Breakeven graph
    Total
    Variable
    Volume Fixed Cost Cost TotalTotal
    Annual
    Annual
    Costs
    Revenues
    Total Profit
    0.00 100000.00 0.00 100000.00 0.00 -100000.00 1000.00 0.00
    3000.00 100000.00 300000.00 400000.00 600000.00 200000.00 1000.00 200000.00

    1000.00 0.00
    1000.00 200000.00

    0.00 200000.00
    1000.00 200000.00

    Graph
    Volume Make Buy
    0.00 12000.00 2400.00 19200.00 0.00
    57600.00 98400.00 117600.00 19200.00 40800.00
    Compatibility Report for Decision Tree Template for Excel.xls
    Run on 7/12/2020 11:24

    If the workbook is saved in an earlier file format or opened in an earlier


    version of Microsoft Excel, the listed features will not be available.

    Minor loss of fidelity # of occurrences

    Some cells or styles in this workbook contain formatting that is not supported 29
    by the selected file format. These formats will be converted to the closest
    format available.
    Version

    Excel 97-2003

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