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You are here: UK Essays » Essays » Business » Memo Providing Recommendations For Shuzworld Business Essay
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Memo Providing Recommendations For Shuzworld Business Essay
In order to find out the most cost-effectively decision, Shuzworld is considering the possibility of opening a new store on route 20, just outside of Auburn, referred to as the stand-alone option. The second option is ...view middle of the document...
Due to the high capital requirements when looking for the opening of a new store, decision tree analysis is of great relevance for the manufacturing business. Because of it, this attracted the attention of the manufacturing industry, who tried to support practical cost-effectively analysis by using the proper profitability models.
Now, we will analyzed, which one of the three options is the most cost effective and profitable, than the other two. To finally be able to make the proper recommendation. We need to find out, which one of the exact EMV, in which process (option), will become more cost-effective and profitable than another. To do this, we will use the decision tree graphic tool.
This is a decision tree based on the probabilities given in the Shuzworld case study. The decision tree was designed based on the figures showed about whether or not to build a stand-alone store, a mall store, or whether the company should do nothing in the present market based on the projected figures. With a 50% probability of an unfavorable and favorable markets, we should use the decision tree tool, to help analyze whether or not to proceed with a anyone of the proposed projects.
Shuzworld, is considering purchasing market research, which could have a positive impact or a negative impact on the market. They could also decide to not purchase market research, which would have no impact on the market. Purchasing market research would cost $20,000, and it has a 60% chance of showing a favorable market and a 40% chance of showing an unfavorable one. If the survey is positive, the chances of having a favorable market go up to 70%, and if it is negative, the chances of having an unfavorable market increase to 80%.
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Once we know the numbers from the states of natures, we can determine the expected monetary value, or EMV for the state of nature. This is determined by multiplying the probability by one state of nature, plus the product of the probability by the other state of nature. For the Auburn Stand Alone project, the probability is 50% and the favorable market is $700,000. The unfavorable market is a loss of $400,000. So the EMV is (.5)(700,000) + (.5)(-400,000) which is $320,000. The Auburn Mall Store’s EMV would be (.5)(300,000) + (.5)(-50,000) which is $125,000. The EMV of doing nothing is, of course 0. This all based on not doing any research survey. All of these changes contribute to the changes in the EMV which is what we are analyzing to determine which store to proceed with.
The top part of the decision tree is conducting a $20,000 dollar market survey and observing those probabilities change based on the new data. The best decision is to chose the project that produces the highest EMV, in this case, it is my recommendation conduct a market survey and chose the Auburn Stand Alone store. Based on the survey results, the probabilities have changed...