Question 3

AB has developed two new products, Product A and Product B, but has insufficient resources to launch both products. The success of the products will depend on the extent of competitor reaction. There is a 30 percent chance that competitors will take no action, a 60 percent chance that they will launch a similar product and a 10 percent chance that they will launch a better product.

The profit/loss that will be earned by each of the products depending on the extent of competitor reaction is as follows:

Competitor reaction	Product A	Product B
No action	500,000	600,000
Launch a similar product	300,000	400,000
Launch a better product	(100,000)	(200,000)

Another option for AB would be to launch neither product. If it chooses this course of action there is a 50 percent chance that competitors will take no action and there will be no effect on the companys profit. There is a 50 percent chance that competitors will launch a new product and company profits will reduce by 150,000.

Required:

a) Demonstrate, using a decision tree and based on expected value, the best course of action for the company.

(12 Marks)

b) Discuss Maximin, Maximax and regret criteria with reference to numerical examples.

(6 Marks)

c) Decision tree is useful in decision-making, and budgeting also plays an important role in decision-making. Discuss the role of budgeting in decision-making, and also evaluate zero-based and incremental budgeting.

(7 Marks)

Total: 25 Marks

END OF QUESTION 3