Question

LEASE CREATE A DECISION TREE WITH THIS INFORMATION. ALSO, PLEASE RECOMMEND THE MOST PROFITABLE CHOICE AND EXPLAIN WHY. THANK YOU!

Drink-At-Home, Inc. (DAH, Inc.), develops, processes, and markets mixes to be used in nonalcoholic cocktails and mixed drinks for home consumption. Mrs. Lee, who is in charge of research and development at DAH, Inc., this morning notified Mr. Jones, the president, that exciting developments in the research and development section indicate that a new beverage, an instant pina colada, should be possible because of a new way to process and preserve coconut. Mrs. Lee is recommending a major program to develop the pina colada. She estimates that expenditure on the development may be as much as $100,000 and that as much as a year's work may be required. In the discussion with Mr. Jones, she indicated that she thought the possibility of her outstanding people successfully developing such a drink now that she'd done all the really important work was in the neighborhood of 90 percent. She also felt that the likelihood of a competing company developing a similar product in 12 months was 80 percent.

Mr. Jones is strictly a bottom line guy and is concerned about the sales volume of such a beverage. Consequently, Mr. Jones talked to Mr. Besnette, his market research manager, whose specialty is new product evaluation, and was advised that a market existed for an instant pina colada, but was some-what dependent on acceptance by both grocery stores and retail liquor stores. Mr. Besnette also indicated that the sales reports indicate that other firms are considering a line of tropical drinks. If other firms should develop a competing beverage the market would, of course, be split among them. Mr. Jones pressed Mr. Besnette to make future sales estimates for various possibilities and to indicate the present (discounted value of future profits) value. Mr. Besnette provided Table 1.

Mr. Besnette's figures did not include (1) cost of research and development, (2) cost of new production equipment, or (3) cost of introducing the pina colada. The cost of the new production equipment is expected to be $ 100,000 because of the special way the coconut needs to be handled, and the cost of introducing the new product is expected to be about $150,000 because of the point-of purchase displays that would be necessary to introduce the new product.

Mrs. Lee has indicated that she does have alternative development proposals, which are:

1. A reduced research program to see someone else comes out with the product first and if not, then proceed with a crash program. The reduced program for the first eight months would cost $10,000 per month. One advantage of this is that if the effort was unsuccessful, then development costs would be held to the eight-month figure (8 months X $ 10,000 = $80,000). The likelihood of success under this approach is the same as the more orderly development. (The likelihood of a competing company developing a product in 8 months is 60 percent.) The crash development program would take place in months 9 through 12 and would cost an additional $60,000. It would proceed only if the eight-month study guaranteed a success.
2. Use a reduced research program and maintain an awareness of industry developments to see if someone else develops a product. If someone else has developed a product at the end of six months, it would cost only an additional $30,000 to analyze their product and duplicate it. The reduced development program would cost $10,000 per month.

Mr. Besnette, being the great marketer that he is, is of course reluctant to be second on the market with a new product. He says that the first product on the market will usually obtain a greater share of the market, and it will be difficult to win those customers back. Consequently, he indicates that only about 50 percent of the sales that he indicated in Table 1 could be expected if Drink-at-Home waited until competing brands were already on the market. Moreover, he suspects that there is only a 50/50 chance that the competitor will be out with a product within the next six months.

There are four options: (1) orderly development of the pina colada, (2) modest development effort followed by the crash program, (3) a modest development effort for the first six months to see if a competitive product comes on the market, and (4) do nothing.

TABLE 1 Sales and Profit Potentials

Consumer Acceptance	(Sales Potential) Probability Present Values	(Discounted Value of Future Profits)
Substantial	0.10	$800,000
Moderate	0.60	$600,000
Low	0.30	$500,000

Make a decision tree

Answer 1

solution:-

recommendation:-

according to the given information,it is recommended for drink-at-home,inc.to adopt the six months strategy,under which the company can perform a modest development for first six months to see if a competitive product comes on the market.since there are 50 per sent chances that there would be a competitor who would be out in the market with the same product,it is better for drink-at-home,inc.to wait until six months and work accordingly after that.if there is a product in the market interoduced by a competitor in the next six months ,then the company can simply consider a copy with their own brand name or proceed with research and development.the following decision tree diagrams would help understand better. the meanings of the abbrevirations and valves used in the decision trees are as follows:

• normal:continue with R&D at a normal speed
• 6 month:take up the six months option and if a product is introduced by a competitior in the next six months,then out for duplication,or continue with R&D
• 8 month;take up the six months option and carry on for 8 months ,if no computers respond at he end of 8 months, continue with the product or stop development
• "NO" means that the result of the development effort is finally a failure
• "YES' means that the result of the development effort is finally a success.
• S denotes ales revenue
• R stands for R&D
• E stands for equipment costs
• I stands for introducing market costs
• consider the following market size and revenues in the presence of competition and in the absence of competitions.

• C 6; competition after six months when P is 0.5
• no C 6 : competition after eight months when P is 0.6
• C 8: competition after eight months when P is 0.6
• no C 8:there is no competition in the eight months and P is 0.4
• C 12: competition after twelve months when P IS 0.8
• NO C12: there is no competition in the twelve months and P is 0.2

NOw, consider the following decision tree:

hence,it is recommended for Drink-At-Home ,inc.to adopt the six months strategy as it is the most optimal solution in the given scenario.

please give me thumb up.....