Assignment 2

Question 1: John has a factory capacity of 1,200 units per month. Units cost him $6 each to
make and his normal selling price is $11 each. However, the demand per month is uncertain and
is as follows:
Demand Probability
400 0.2
500 0.3
700 0.4
900 0.1
He has been approached by a customer who is prepared to contract to a fixed quantity per month
at a price of $9 per unit. The customer is prepared to sign a contract to purchase 300, 500, 700 or
800 units per month. All possible profits that could result are as follows:

Contract size / Demand 400 500 700 900

300 2900 3400 4400 5400
500 3500 4000 5000 5000
700 4100 4600 4600 4600
800 4400 4400 4400 4400

(a) Determine for what quantity John should sign the contract, under each of the following
criteria:
i) maximin ii) maximax) minimax. (Marks 5)

Question 2: A university is trying to decide whether or not to advertise a new post-graduate degree
programme.
The number of students starting the programme is dependent on economic conditions:
 If conditions are poor it is expected that the programme will attract 40 students without
advertising. There is a 60% chance that economic conditions will be poor.
  If economic conditions are good it is expected that the programme will attract only 20
students without advertising. There is a 40% chance that economic conditions will be
good.
If the programme is advertised and economic conditions are poor, there is a 65% chance that the
advertising will stimulate further demand and student numbers will increase to 50. If economic
conditions are good there is a 25% chance the advertising will stimulate further demand and
numbers will increase to 25 students.
The profit expected, before deducting the cost of advertising which is $15000, at different levels
of student numbers are as follows:

Required: Demonstrate, using a decision tree, whether the programme should be advertised.
(Marks 5)