C207 Task 2 A Peyton

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C207 Task 2 – Decision Tree Analysis Amanda Peyton, RN, BSN Western Governors University MJ Gallo September 19, 2023

A. Which is the more profitable possible outcome: introducing a new drug, using an existing drug for new purposes, or continuing with the current drug? B. The relevant data values required for your decision tree analysis, includes the following: Possible plan Develop new drug line Exploit the current drug line for new applications Continue with current line (Do nothing) Profits $0.63/ unit profit $0.48/ unit profit $0.84/ unit profit Probabilities (favorable market) 71% success 63% success 81% success Probabilities (unfavorable) 29% success 37% success 19% success Demand/ payoff (favorable market) 4341 units/ $2734.83 5475 units/ $2628.00 730 units/ $613.20 Demand/ payoff (unfavorable) 1205 units/ $759.15 1807 units/ $867.36 241 units/ $202.44 Payoff (Favorable) $1941.73 $1655.64 $496.69 Payoff (Unfavorable) $220.15 $320.92 $38.46 Expected Value $2161.88 $1976.56 $535.15 C. 1. Complete a decision tree diagram (Attached separately) Decision tree analysis is the appropriate analysis technique for this business because the decision tree analysis offers a comparison of the profitability of each of the plans the business in considering and considers the possibility of a favorable or unfavorable market. D. The role of probabilities is to help with necessary calculations of the profits possible for each option. It is the projected success of the choice. This cannot be considered alone, because there is a possibility that the choice with the highest probability of success might not be the most profitable option. In this scenario, the probability of success for each feasible option of the drug company is considered, in both a favorable and an unfavorable market: to develop a new drug, exploit the existing drug line for new applications, or continue with current drug line without changes. The role of demand for each branch is also necessary to calculate the anticipated profit. The demand is the expected quantity of sales in units for each possibility, in both a favorable and an unfavorable market The demand estimates will help to determine what choice will be the most profitable. They are limited because they cannot stand alone for decision making, because the product with the highest demand when considered individually may not be the

most profitable option. Both the demand and probabilities are gained from sales and marketing forecast reports. The total expected value of each node is determined based on payoffs. Overall EV for each option is calculated by adding together the values for favorable and an unfavorable market. To calculate the EV for an individual node, you multiply the price per unit times the anticipated demand in number of units. Then you multiply that number times the possibility of success in percent. A limitation of the data elements is the possibility of error in estimating demand or probability of success. An error in either of these would create false information, potentially leading to a poor business decision and maybe failure of the business, based on inaccurate calculations. This could be an error due to many reasons; transcription or data entry error, all the way up to intentional sabotage by providing incorrect information. A limitation of the decision tree analysis is the possibility of unexpected contingencies. In the scenario provided, the business is a drug manufacturer. An unexpected contingency for the scenario could be a natural disaster that destroys the plant where the new drug was made. This is one of many reasons why the business must be prepared for any eventuality. E. A course of action that addresses the business question from part A and is based on the results of the decision tree analysis would be that the most profitable option would be to develop a new drug line. (The business may need to determine if there are any new competitor drugs on the market as well as to evaluate the performance of the existing competition before beginning the process.)

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