Flashcards on Business Risk, Information Systems, Big Data
Business Risk, Information Systems, Big Data Explained
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Decision Analysis: Decision Trees & EV
81 cards
Card 1
Question: What is the expected value (EV) of monthly contribution when buying 1,000,000 packets given these demand probabilities: 800k (0.08), 900k (0.16), 1,00
Answer: Calculate weighted contributions: 1,600×0.08 + 1,900×0.16 + 2,200×0.32 + 2,200×0.32 + 2,200×0.12 = $2,104,000.
Card 2
Question: How do you interpret the expected value of $2,104,000 in this decision context?
Answer: It is the average monthly contribution expected if Kris buys 1 million packets each month, accounting for the probabilities of different demand levels
Card 3
Question: What is the expected value of monthly contribution if perfect forecast information lets Kris buy exactly the predicted sales volume, given contributio
Answer: EV = 1,760×0.08 + 1,980×0.16 + 2,200×0.32 + 2,420×0.32 + 2,640×0.12 = $2,252,800.
Card 4
Question: How much maximum should Kris pay for the additional forecast information per month?
Answer: The maximum payment equals the EV gain: $2,252,800 − $2,104,000 = $148,800 per month.
Card 5
Question: Why is the average monthly contribution (simple average of contribution figures) not the correct EV when assessing the buy-1,000,000 decision?
Answer: Because EV must weight each contribution by its probability of the corresponding demand level; a simple average ignores those probabilities.
Card 6
Question: When using additional information (forecast) in the decision tree, what changes in the analysis compared with the current position?
Answer: The sales pattern probabilities remain the same, but Kris can adjust purchase quantity to match predicted sales, eliminating waste/surplus and applyin
Card 7
Question: In a decision-tree comparison, what two expected values are compared to decide whether to pay for information?
Answer: Compare EV without additional information (current decision) and EV with additional information (optimal decision after forecast). The difference is t
Card 8
Question: What is the first step when creating a decision tree for an organisation's decisions?
Answer: Identify all decisions that need to be made and prioritise them in the most logical order from start to finish.
Card 9
Question: In a decision tree diagram, which symbol denotes a decision point and which denotes an outcome (chance) point?
Answer: A triangle denotes a decision point and a circle denotes an outcome (chance) point.
Card 10
Question: How should a decision tree be drawn directionally and why is this convention useful?
Answer: Draw the decision tree from left to right; this shows the sequence of decisions and outcomes clearly and supports backward evaluation.