major repair, probability 0.1
minor repair, probability 0.5
no repair, probability 0.4
Finally, the costs
can be presented in a decision evaluation table in which each row is an
action and each column is a state. We assume that the extended warranty coverage costs $200.
Table 15-12 formally relates the cost of each action and possible future state.
Determine the cost of the extended warranty so that the expected costs of the actions to either
purchase the warranty or not are equal.
SOLUTION
Reserve Supplemental Exercises Chapter 15 Problem 10
The first decision is whether to develop a new product or contract with a supplier. This is
indicated by the box labeled Develop? If a new product is developed, it may be unique, but it
may be more typical of what is currently available on the market. This is indicated by the circle
labeled Unique? For either a new product or a contracted one, the price needs to be set. Here the
decision is indicated by Price? boxes. The choices are either high or low. Finally, the market
conditions when the product is available may be favorable or unfavorable to sales as indicated by
the circle labeled Sales. Favorable and unfavorable markets are indicated by the arcs labeled +
and –, respectively.