331-15 Carmen

331-15 Carmen - Chapter 8: Decision Analysis Example:...

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Chapter 8: Decision Analysis
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Example: Thompson Lumber Co. 1. Decision : Whether or not to make and sell storage sheds 2. Alternatives : Build a large plant to make the sheds Build a small plant to make the sheds Do not build a plant 3. Outcomes: Demand for sheds will be high, moderate, or low
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5. We need a decision analysis model to recommend a good solution Alternatives Outcomes (Demand) High Moderate Low Large plant $200,000 $100,000 -$120,000 Small plant $90,000 $50,000 -$20,000 No plant $0 $0 $0 4. Payoffs
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Five Steps in Decision Analysis 1. Clearly define the problem 2. List all possible alternatives 3. Identify all possible outcomes for each alternative 4. Identify the payoff for each alternative & outcome combination 5. Use a decision analysis model to recommend a decision
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Types of Decision Modeling Environments Type 1: Decision making under certainty Type 2: Decision making under uncertainty Type 3: Decision making under risk Decision Event Outcome Decision Event Outcome Decision Outcome
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Decision Making Under Uncertainty Probabilities of the possible outcomes are not known Decision analysis methods: 1. Maximax 2. Maximin 3. Criterion of realism 4. Equally likely 5. Minimax regret
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Maximax Criterion An optimistic approach Assume the best payoff will occur for each alternative Alternatives Outcomes (Demand) High Moderate Low Large plant $200,000 $100,000 -$120,000 Small plant $90,000 $50,000 -$20,000 No plant $0 $0 $0 Choose the large plant (best payoff)
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This note was uploaded on 08/29/2011 for the course ACCT 331 taught by Professor A during the Spring '11 term at Ohio State.

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331-15 Carmen - Chapter 8: Decision Analysis Example:...

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