help to make a decision tree
November 20, 2009 at 12:33 am #25814
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can someone help make a decision tree for this:
The Eastern Trading Company (ETC) was set up by George Richards after he spent a summer vacation in Indonesia during his student days. The contacts he made during his time in Jakarta became the suppliers for his import business. George specialised initially in dress fabrics, but expanded later into rugs, furniture and household goods. He has sold most of his goods directly to three or four major retail chains, but on a few lines of products has dealt exclusively with one large Department store chain, Lewis John.
Two years ago, George entered into a partnership with an old friend of his (Ron Stevens) to form a direct trading company, Eastern Promise, which promoted both his and other goods in national newspapers and magazines. The direct selling operation had been slower to take off than George anticipated. It had required considerable capital to set up its two warehouses, but it was now slowly moving towards profitability. Even so, Eastern Promise had more debt than either of its owners would have liked.
This was one reason why George was undecided about the latest offer from one of his agents in Jakarta. His regular monthly import business gives him a guaranteed profit of £20,000 from the sale of furniture, fabrics and household goods. The prospective deal on the other hand, which was rather more risky, involves a shipment of 1000 hand-woven rugs, which had to be sold fast because other importers were also targeting this market. The quoted transportation costs (at £20 per rug) were higher than usual, but the unit price of the rugs to ETC (£50 per rug) was very low indeed, given their quality. If George sold the rugs through his normal retail channels his profit would be dependent on how well the merchandise sold. He reckoned that he could charge the retailers £120 for each rug; he calculated that if he sold all of them he would make a profit of £50,000. Normally, George would have checked with his contacts at Lewis John and other retail chains to see how attractive the rugs deal appeared to them, but the timescale involved did not allow him to sound out opinion fully. The only reaction he had received was from Lewis Johns chief buyer, who was not enthusiastic about the merchandise and suggested that the store would only take a small quantity initially (10% of the total shipment) to see how well they sold in their shops; if they sold well, they would take all 1000, if not, they would restrict their purchase to 100.
If the rugs did not sell well through Lewis John, an alternative outlet would be through Eastern Promise, the direct trading company, but this would mean expenditure of £10,000 to promote the merchandise. After talking with his partner, Ron, they estimated that there would be a 50% chance of selling all the rugs through the direct trading company, but the level of promotional expenditure and a lower selling price (£100 per rug) would obviously reduce the total profits on the deal. If however, the rugs did not sell at all they would have to sell them to the smaller discount stores for a substantially lower price (of £50 per rug) because of greater competition, which would result in a considerable loss. Alternatively, they could avoid some of this risk by immediately offloading the rugs onto the discount stores should they fail to sell via Lewis John, and not try promoting them through Eastern Promise at all. If they did this, George and Ron thought that they could get their losses down to £9,000.
George summed up his dilemma in the following way:
The decision I have to take almost immediately is do I take the whole shipment of rugs or do I politely decline the offer? The problem is that, although I normally have a pretty clear idea of how well merchandise will sell in the big retail chains, I am uncertain about this particular line of merchandise. I think I would have to say that there is less than a fifty-fifty chance of it selling well through Lewis John, and possibly as low as a 30 per cent chance. If that was correct it would mean that there is a 70 per cent chance of having to sell the rugs through our direct trading operation. And the last thing the company needs at the moment is potentially large losses on a deal!
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