. ABC Toys Inc. is trying to determine whether to make significant alterations to their best selling product line.
ABC has hired a marketing research company to perform focus group analysis in order to get a better idea of the demand for the changes The marketing analysis is expected to show a 65% positive outlook and 35% negative outlook. Once they have the analysis, ABC may either adapt the existing product line or make no changes. Final payoffs will depend on market demand – either high or low. If the market analysis is positive and ABC goes with an adapted product line, high demand is expected with a probability of 0.70 and a payoff of $4M. Low demand (probability of 0.30) would result in a payoff of $2M. However, If no changes are made, high demand is expected with a probability of 0.30 and a payoff of $4.4M. Low demand would result in a payoff of $3.5M. If the market analysis is negative and ABC goes with an adapted product line, high demand is expected with a probability of 0.40 and a payoff of $4M, low demand would give a payoff of $3.5M. If no changes are made, high demand is expected to have a probability of 0.80 with a payoff of $4.4M and low demand would have a payoff of $2.8.
Draw a decision tree to illustrate this problem Solve the decision tree and make a recommendation to ABC