Republic of the Philippines

DON HONORIO VENTURA STATE UNIVERSITY

College of Engineering and Architecture
Villa de Bacolor, Pampanga
Department of Industrial Engineering

Activity 5:
Operation
Research
Decision Tree
Analysis

An Industrial Engineering On-the-Job/Student Internship Program

Submitted by:
Sarnicula, Sol-amor R.

Submitted to:
Engr. Roma De Jesus
OJT/SIP Adviser
DECISION TREE ANALYSIS

Consider the decision facing the Haris Publishing Company, which recently received a
manuscript written by the former government official about the private life of a very influential
member of the United States government. The author will grant Harris full rights to the book for
guaranteed up-front payment of $400, 000 plus a per copy royalty if the book is published. The basic
question facing Harris management is whether to sign the contract with this author or risk losing the
book to another publisher. Even if it signs, Harris will publish the book only if the manuscript receives
a favorable review from the editorial board. However, several uncertainties make the decision, has
outlined the following items for consideration:

1. There is an 80% chance that the content of the book is accurate. If the content is accurate, the
author will pay $2.00 per copy for each hardcover book sold and $0.80 per copy for each
paperback. No royalties will be paid if the manuscript is not accurate.
2. If the content is not accurate, there is a 0.90 chance that a libel suit will be filed: and if so,
experience indicates the publisher will settle out of court $1,800,000.
3. For hard copy publication, the following demand has been assessed:

Demand Probability

100,000 copies 0.40

1,000,000 copies 0.60

4. The fixed production cost for the hardcover book will be $700,000 before any copies are
printed, and the cos of printing and binding is $16.00 per copy. The number of copies to be
printed can match any projected demand. The wholesale selling price of the hardcover book
will be $24.00.
5. For paperback publication, the following demand distribution has been assessed:
Demand Probability

50,000 copies 0.30

1,500,000 copies 0.70

6. The fixed costs for paperback publication are $400,000. The printing and binding costs are
$2.00 per copy, and the wholesale selling price is $8.00 each.
7. The accuracy of the book’s content will be known only after the book has been published and
sold.
8. The editor has assessed the probability that the manuscript will get a favorable review from
the editorial board as 0.80.

The decision in this case is complicated by the many uncertainties involved. In situations such
as these, a decision tree can be used to provide a framework to help make the decision.
Harris Publishing Decision Tree: Phase 1
The initial decision to be made is whether to sign the contract:
Don't Sign

Sign Contract

Decision

Harris Publishing Decision Tree: Phase 2

Don't Sign

Unfavorable
Review (0.2)

Sign
Contract

Favorable
Review (0.8)

Decision Event
Harris Publishing Decision Tree: Phase 3

Don't Sign

Unfavorable
Review (0.2)

Hardcover
Sign
Contract

Favorable
Review (0.8)

Paperback
Decision Event Decision

Harris Publishing Decision Tree: Phase 4

Don't Sign

Unfavorable
Review (0.2)

Accurate (0.8)
100,000 copies
(0.40)
Suit (0.9)

Hardcover
Not accurate (0.2)
Sign Accurate (0.8) No Suit (0.1)
Suit (0.9)
Contract
1,000,000 copies
(0.60) Not accurate (0.2)
No Suit (0.1)

Favorable Review
(0.8) 50,000 copies
Accurate (0.8)
(0.30)
Suit (0.9)

Not accurate (0.2)

Paperback Accurate (0.8) No Suit (0.1)
Decision Event Decision Suit (0.9)
1,500,000
copies (0.70) Not accurate (0.2)
No Suit (0.1)
Harris Publishing Decision Tree: Phase 5

SOLUTION:

The expected value of the Accurate/Not Accurate event originating from the Hardcover 1,000,000 Copies Branch
is as follows:

EV = $4,584.40 (0.100) + $5,280 (0.20) = $4,976

The following is the expected value for the decision event originating from the Hardcover Branch is as follows:

EV = -$784 (0.40) + $4,976 (0.60) = $2,672

The following is the expected value for the decision event originating from the Paperback decision Branch:

EV = -$856 (0.30) + $6,916 (0.70) = $4,584.40

The following is the expected value for the revenue event, this will simplify the pay-off EV of the Sign Contract
Branch.

EV = -$400 (0.20) + $4,584.40 (0.90) = $3,587.52