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Decision Making Under Uncertainty

This document contains 3 case studies on risk and uncertainty in decision making: 1) Calculating the expected annual profit of a new salon business given probabilities of different marketing campaign outcomes and cost percentages. 2) Preparing a decision tree to analyze options for a struggling business branch: shut down and sell, major renovation, or cheaper renovation. 3) Analyzing the impact on margin of safety of a 5% materials cost increase and the maximum percentage increase in fixed costs that allows the business to break even, given sales, costs, and production budget for a single product.

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Cle An
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392 views2 pages

Decision Making Under Uncertainty

This document contains 3 case studies on risk and uncertainty in decision making: 1) Calculating the expected annual profit of a new salon business given probabilities of different marketing campaign outcomes and cost percentages. 2) Preparing a decision tree to analyze options for a struggling business branch: shut down and sell, major renovation, or cheaper renovation. 3) Analyzing the impact on margin of safety of a 5% materials cost increase and the maximum percentage increase in fixed costs that allows the business to break even, given sales, costs, and production budget for a single product.

Uploaded by

Cle An
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

BM2108

NAME: DATE: SCORE:

RISK AND UNCERTAINTY IN DECISION MAKING – Part 2

Case 1: Joint Probabilities


Mr. X is planning to open a new salon. Annual revenue will depend on how successful the marketing campaign
is, and the potential outcomes are as follows:

Marketing Campaign p Revenue


High success 10% 1,000,000.00
Moderate success 70% 700,000.00
Low success 20% 500,000.00

Costs are difficult to predict as the price of hair products and the labor market are volatile. The best estimates
for the average costs are as follows:

Materials:
Percentage of revenue p
5 40%
10 50%
15 10%

Labor:
Percentage of revenue p
40 20%
45 50%
50 30%

The fixed overhead of the salon is expected to be P10,000 per month.

Required: What is the expected annual profit of the salon?

Case 2: Decision Trees


ABC Company has several branches within the city. One of its branches is suffering from declining sales, and
management has a range of options:

a. Shut down the branch and sell for P5M


b. Undertake a major renovation
c. Undertake a cheaper renovation

In the past, 2/3 of renovation have achieved good results, while 1/3 achieved poor results. The major renovation
will cost P4M. Estimates of outcomes are as follows:
a. Good results: P13.5M profit
b. Poor results: P6.5M profit

On the other hand, there is a more economical renovation option that costs P2M. Estimates of outcomes are
as follows:
a. Good results: P8.5M profit

07 Task Performance 2 *Property of STI


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BM2108

b. Poor results: P 4M

Required: Prepare a decision tree and recommend what action would be taken:
a. Shut down the branch and sell for P5M
b. Undertake a major renovation
c. Choose the economical option

Case 3: Margin of Safety


ABC makes and sells a single product, Product X.

The following information is available concerning this product:

Per unit
Selling price………………P120
Direct materials……………..30
Direct labor…………………..25
Fixed cost…………………….40

Budgeted sales and production are forecast at 750 units. Due to the pandemic, some uncertainty has now arisen
over the level of likely cost expected in the production of X.

Required:
1. What is the impact on the margin of safety if material costs increase by 5%?
2. What is the maximum percentage increase in fixed costs possible that will still allow ABC to break even?

Item Performance Indicators Points


Case 1 5 pts – solution 8
3 pts – correct answer
Case 2 5 pts – decision tree 8
3 pts – correct answer
Case 3 5 pts – solution x 2 14
2 pts – correct answer x 2
Total 30

07 Task Performance 2 *Property of STI


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