DECISION TREE WORK SHEET

Mike Ashley of Sports Direct would like to satisfy a growing demand from Asia, but has to
choose from two options for the opening of his stores. These are: • offshoring by setting up
his own overseas branch in Asian country X or Y or Z • subcontracting by using an external
company already operating franchises in Asian country X or Y or Z.
He calls a meeting of all the partners. Three partners prefer subcontracting the recruitment
and training as it is cheaper, quicker and less risky. The three other partners prefer
offshoring. They believe that subcontracting will damage SP’s USP. They argue that the
higher costs of offshoring will be covered by the forecast high revenue.
Construct a Fully labelled Decision Tree and calculate the predicted outcome of each option
(show all your working). Identify the best option for Sports Direct

The forecast costs and revenues of offshoring are given below (all figures in US$ millions):
Option Forecast Forecast revenue Forecast revenue if
costs if successful not successful

Probability: 0.3 Probability: 0.7

 1. Offshore to country X
 Looking at opening new stores
in Asia. Rising costs / 4 19 2
Currency changes
 2. Offshore to country Y
 Very cheap labour / prefer 5 16 4
traditional products
 3. Offshore to country Z
 Currency stable / has had out
breaks of protesting for and 6.4 21 4.2
against Govt.

The forecast costs of subcontracting to the same Asian countries are given below:
Country X: US$1.5 million. Country Y: US$2.8 million. Country Z: US$4.2 million.
Remember that the tree starts with a trunk. No numbers.
These are called they identify the different options and possible outcomes. These
should
contain numbers
These signify the options that are NOT going to be used.

First you have to create the tree then you do the calculations. Complete the tree below with
the information given

Mr. Batchelor Business Management activity sheet 1001 - UNIT 1 Analysis Tools Decision Tree Work Sheet
 Mr, Batchelor's ACTIVITY TIME - Complete the Decision Tree
Add the Probability number found in title box success

This contains the forecasted revenues (Success/Op

1)

Option number Probability Forecast revenues

Success
Op1 Su
Option 1 Probability Su
1 Not Successful
£ 4m Probability Unsu Opt1 unsu

Option 2

Option 3

Extra inf given below table regarding Forecasted costs

EMV of Option 1( Op 1Su X Prob of option 1 / Success

You then add the result of this to Op UnSu X Prob of option 2 / Not succeful which will equal
?

take your answer and deduct the forecasted costs (4m) which will equal ?

Do the same for each of the other 2 options

EMV of Option 1 = (19 x 0.3) + (2 x 0.7) = 5.7 + 1.4 = 7.1m - 4m = 3.1m

EMV 0f Option 2 = ( )+( )= + = - =
EMV of Option 3 = ( )+( )= + = - =

Okay which is the best option. give your reasons below.

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Mr. Batchelor Business Management activity sheet 1001 - UNIT 1 Analysis Tools Decision Tree Work Sheet
Answers to activity
Probability Forecast revenues

Success
19
Option 1 0,3
1 Not Successful
£ 4m 0.7 2

Successful 0.3 16m

Option 2 2
£5m Not successful 0.7
4m
Option 3 Successful 0.3
21m
£ 6.4 3 Not successful
0.7 4.2m

EMV of Option 1 = (19 x 0.3) + (2 x 0.7) = 5.7 + 1.4 = 7.1m - 4m = 3.1m

EMV 0f Option 2 = (16 x 0.3) + (4 x 0.7) = 4.8 + 2.8 = 7.6m - 5m = 2.6m
EMV of Option 3 = (21 x 0.3) + (4.2x0.7) =6.3+2.94 = 9.24m -6.4m = 2.84m

Define the following words and terms:

Decision -
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Training -
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Investment -
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Node –
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Probability –
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Forecast -
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Mr. Batchelor Business Management activity sheet 1001 - UNIT 1 Analysis Tools Decision Tree Work Sheet