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George Tshirt Decision


Category: Business
Autor: 13 April 2012
Words: 1423 | Pages: 6
In George T-shirt case, George Lassiter faces a decision about the number of shirts to produce
for the rock concert staged in two months. He is faced with two uncertain events. First he does
not know the number of people attending the concert and secondly he does not know the
percentage of attendees who will buy the shirt. Tickets for standing area of 20,000 are sure to be
sold. However, the number of seat tickets to be sold is uncertain. It can range from high, medium
to low sales which could be 80,000, 50,000 to 20,000, respectively. Thus in total we can expect
attendees to be around 40,000, 70,000 or 100,000. Although, it is hard to determine the number
of people attending the concert, the concert is certain to be a huge success (as mentioned in
case). Hence, it is a possibility that more people will attend. So probability of high to medium
sales is larger than that of low sales. Furthermore, he expects the volume of sales to be
proportional to the number of attendees. This proportion can range from 5 to 15%.

Influence Diagram

George is currently facing a decision of how many shirts to order. The possible alternatives are
10,000, 7,500 and 5,000 shirts. The decision will affect the costs and revenues generated from
the sale of the number of shirts. The revenue will be affected by the sale price and sales volume.
The sales volume is in turn affected by the number of attendees at the concert. Finally, the profit
is a consequence of costs and revenues.

Expected Monetary Value

This EMV is calculated using all the probabilities, figures and outcome considerations. We
calculated this by considering the fact that if the demand is greater than the shirts produced then
all the shirts will be sold otherwise the excess shirts will be sold for a lesser price. The shirts,
while in demand, are sold for $8.3333 but the excess shirts will be sold for $1.5. Using the
Expected monetary value (EMV) criterion, we expect George to decide on the strategy leading to
the highest EMV which is producing 10,000 units. The decision tree in Exhibit 1 clearly depicts
that the EMV of the decision to produce 10,000 units is the highest.

Sensitivity Analysis

Input variable: Price per shirt (Exhibit A, B)

Sensitivity graph shows that EMV is highly sensitive to the change in price per shirt.

5,000 is not an option because of much lower EMV at any price. There is a little difference in the
EMVs of 7,500 shirts and 10,000 shirts if the price goes down. If the price per shirt goes as low
as $6.25, the 7,500 option looks more feasible because EMV is greater than 10,000 option, but
the difference in the EMVs at higher price per shirt for 10,000 option more than compensates for
the loss in EMV at such low price per shirt. So in the EMV terms, 10,000 shirts is the more
feasible option and is worth the risk.

Input variable: Cost of ordering shirts (Exhibit C, D)

EMV is also very sensitive to the cost. The variation of 25% in the cost also shows that 10,000 is
the more viable option because EMV is greater at almost all the points. At 20% increase in cost,
the EMV of 7500 shirts is a little greater than the EMV of 10,000 shirts. Keeping in view that the
cost is very unlikely to change because the quotations have already been obtained, so the 10,000
is the better option.

Input Variable: Probability of 10% attendees demanding the shirts (Exhibit E, F)

It is important to know that as the probability of 10% attendees changes the differential (1-
probability of 10% attendees) is distributed among the other two possible scenarios as follows:

75% to 5% attendees demanding shirt

25% to 15% attendees demanding shirt

Allocation is based on the judgment of George.

From the strategy graph, it is clear that the optimal strategy should be 10,000 shirts since its
EMV is higher at all points in the 25% range.

Probability links for sensitivity analysis

Shirts sold 15% of attendees 10% of attendees 5% of attendees

Probability 10% 60% 30%

=1- base value